Business context and reporting period
Schlumberger Limited (SLB) filed this Form 10-K for the fiscal year ended December 31, 2010. The company supplies oilfield technology, services, integrated project management and seismic solutions worldwide. Its five reported businesses at year-end were Oilfield Services, WesternGeco, M-I SWACO, Smith Oilfield and Distribution.
On August 27, 2010, Schlumberger acquired Smith International for approximately $9.8 billion in stock, issuing 176 million shares. It also acquired Geoservices in April 2010 for $915 million in cash. 2010 results include four months of Smith activity; third-quarter results include only one month, limiting period-to-period comparability.
Financial performance and condition
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $27.447 billion | $22.702 billion |
| Income from continuing operations | $4.266 billion | $3.164 billion |
| Diluted EPS from continuing operations | $3.38 | $2.61 |
| Cash flow from operations | $5.494 billion | $5.311 billion |
| Capital expenditures | $2.914 billion | $2.395 billion |
| Gross margin | 21.7% | 24.0% |
| Working capital | $7.233 billion | $6.391 billion |
| Total assets | $51.767 billion | $33.465 billion |
| Net debt | $2.638 billion | $126 million |
For fourth-quarter 2010, revenue was $9.067 billion and net income attributable to Schlumberger was $1.043 billion, or $0.76 diluted EPS. Fourth-quarter revenue included a full quarter of Smith businesses; third-quarter revenue included one month. Fourth-quarter results included $121 million of after-tax charges.
Year-end total debt was $8.112 billion, including approximately $1.9 billion of commercial paper. Cash, short-term investments and fixed-income investments held to maturity totaled approximately $5.474 billion; management separately described cash and short-term investments as approximately $5.0 billion. Schlumberger had $3.7 billion of unused committed credit facilities. The company reported $5.5 billion of operating cash flow and paid $1.040 billion in dividends during 2010.
Material changes and unusual items
- Revenue increased about 21% and continuing-operations income about 35% year over year, with growth reflecting market recovery and acquired businesses.
- Oilfield Services revenue rose 8% to $22.079 billion. North America revenue grew 35%, supported by stronger land activity and pricing; Europe/CIS/Africa revenue fell 4%, with lower activity and pricing. WesternGeco revenue declined 6% to $1.987 billion, mainly from weaker marine activity and pricing.
- Gross margin declined from 24.0% to 21.7%, which management attributed principally to the acquired Smith businesses and Oilfield Services pricing pressure, partly offset by improved North American activity and pricing.
- Reported 2010 earnings included a $1.270 billion pretax gain from remeasuring Schlumberger’s existing 40% M-I SWACO interest when it gained control. The gain is non-recurring. Restructuring and merger-related charges totaled $649 million pretax; the company also recorded a $40 million charge related to the U.S. Medicare Part D tax change.
- Smith contributed $3.3 billion of revenue and $160 million of net income from closing through year-end. Acquisition accounting and the timing of consolidation materially affect comparisons; the Smith purchase-price allocation remained preliminary.
Outlook, commentary and risks
Management expected 2011 to be stronger, citing increased exploration, development and production-enhancement activity and higher technology requirements. It anticipated limited recovery in deepwater activity in the U.S. Gulf of Mexico, but expected a marked increase in deepwater activity elsewhere. U.S. natural-gas activity was expected to remain strong at least through the first half of 2011, while added service capacity could pressure pricing. Planned 2011 capital expenditures were expected to approach $4.0 billion; anticipated postretirement benefit contributions were $600–$650 million.
Key risks include oil and gas price volatility and changes in customer spending; international political, currency, tax and sanctions-related exposures; ongoing U.S. investigations concerning operations in sanctioned countries and historical Smith practices; offshore drilling restrictions following Deepwater Horizon; environmental and hydraulic-fracturing regulation; operational, product-liability and insurance risks; and failure to integrate Smith and Geoservices or realize expected synergies. M-I SWACO was named in Deepwater Horizon-related actions; management stated the potential loss attributable to it was not expected to be material, based on information then known. The filing said outcomes of the government inquiries could not be predicted.
Important facts for investors to verify
- Separate underlying operating performance from acquisition effects, the $1.270 billion M-I SWACO gain and other charges; review pro forma results with their stated limitations.
- Track integration progress, expected synergies and potential near-term EPS dilution from the Smith merger.
- Monitor debt, commercial-paper reliance, available credit, cash conversion and planned 2011 capital spending.
- Assess exposure to U.S. Gulf of Mexico regulation and activity, pricing pressure, and the cited sanctions-related investigations and legal contingencies.
- Confirm final acquisition accounting and monitor goodwill, intangible assets and impairment assumptions.