SLB Limited (Schlumberger) — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial amounts are in U.S. dollars; income and cash-flow statement amounts are in millions unless noted.
Business context and results
Schlumberger provides oilfield services and technology across Reservoir Characterization, Drilling and Production. Results reflected lower customer spending in response to low oil prices, falling activity and rig counts, service-price concessions, and adverse currency effects.
- Q3 revenue: $8.472 billion, down 33% year over year and 6% sequentially. Pretax operating income was $1.521 billion, down 46% year over year; pretax operating margin was 18.0%, down 424 basis points year over year and 101 basis points sequentially.
- Q3 earnings: Net income attributable to Schlumberger was $989 million versus $1.949 billion; diluted EPS was $0.78 versus $1.49.
- Nine-month revenue and earnings: Revenue was $27.731 billion versus $35.939 billion. Net income attributable to Schlumberger was $3.088 billion versus $5.136 billion; diluted EPS was $2.42 versus $3.91.
- Segment trends: Q3 revenue fell year over year by 31% in Reservoir Characterization, 32% in Drilling and 35% in Production. North America revenue declined 47%, with pretax operating margin falling to 8.9%. International revenue declined 27%; international margin was 23.7%.
- Cash flow: Nine-month operating cash flow was $6.627 billion, down from $7.282 billion. Management-defined free cash flow was $4.158 billion, up from $3.735 billion.
- Liquidity and debt: At September 30, cash and short-term investments totaled $6.605 billion; total debt was approximately $12.248 billion and reported net debt was $5.204 billion, compared with $5.387 billion at year-end 2014. The company had $3.3 billion of committed facilities available and unused, and said liquidity was sufficient for at least 12 months.
- Capital returns and investment: Nine-month dividends paid were $1.786 billion and share repurchases were $1.784 billion. Capital expenditures were $1.783 billion; full-year 2015 capex was expected to be approximately $2.5 billion, versus $4.0 billion in 2014.
Material changes versus comparable periods
The downturn materially reduced revenue and earnings across all product groups and geographies. Pricing pressure, customer budget cuts and lower North American land activity weighed especially heavily on Production and North America. Cost and resource management helped limit some margin erosion; nine-month international pretax operating margin increased 29 basis points year over year to 24.1%, despite lower revenue.
First-quarter charges totaled $439 million pretax: $390 million for workforce reductions and $49 million for Venezuela currency devaluation. No charges or credits were recorded in Q2 or Q3. Nine-month 2014 results included a $205 million discontinued-operations loss related to the sanctions investigation; the corresponding 2015 period had no discontinued-operations loss.
Outlook, risks and unusual items
- Management described the coming quarters’ oilfield-services outlook as challenging despite expected oil-price improvement. It expected further activity declines and pricing pressure as customers conserve cash and take a conservative view of 2016 budgets.
- Schlumberger planned another headcount reduction and a global manufacturing and distribution network restructuring, both expected to result in Q4 2015 charges. The filing did not provide a clear estimate or range for those charges.
- The Cameron merger agreement provided for each Cameron share to be exchanged for 0.716 Schlumberger shares plus $14.44 cash. Schlumberger estimated issuing approximately 137 million shares and paying approximately $2.8 billion; closing was anticipated in Q1 2016, subject to shareholder, regulatory and other conditions. Risks included delay or failure to close, litigation, integration costs, dilution and failure to realize expected synergies. Schlumberger expected the merger to be accretive by the end of the first year after closing, while acknowledging potential near-term dilution.
- Schlumberger paid approximately $233 million in Q2 under a resolution of a U.S. sanctions investigation concerning historical operations in Iran and Sudan; the amount had been previously accrued and was reported in discontinued-operations cash flows. Management considered material loss in currently pending legal proceedings remote.
- Payment delays from Venezuela’s national oil company were reported. Currency, customer spending, pricing, geopolitical and regulatory conditions, and merger execution were among the stated risks.
Important facts for investors to verify
- Whether activity, pricing and customer budgets worsened or stabilized after quarter-end, especially in North America and international markets.
- The timing, amount and expected savings of the announced workforce and manufacturing/distribution restructurings.
- Progress on Cameron merger approvals and litigation, final financing and share issuance, integration costs, and realized synergies.
- Cash conversion and working-capital trends, debt maturities, and the company’s capacity to maintain dividends and repurchases while funding the merger.
- Further developments in Venezuela receivables and currency exposure, and any new material legal or regulatory contingencies.