SLB Limited (Schlumberger) — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, with fourth-quarter results also discussed. Amounts are U.S. dollars unless stated otherwise.
Business context and reporting period
Schlumberger supplies technology, equipment and services to the oil and gas exploration and production industry, operating in about 85 countries. Its three reporting groups are Reservoir Characterization, Drilling and Production. The filing describes a severe industry downturn: lower oil prices drove customer budget cuts, reduced activity and pricing pressure. Non-U.S. operations generated approximately 76% of 2015 revenue.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $35.475 billion | $48.580 billion |
| Income from continuing operations attributable to Schlumberger | $2.072 billion | $5.643 billion |
| Diluted EPS from continuing operations | $1.63 | $4.31 |
| Cash provided by operating activities | $8.805 billion | $11.195 billion |
| Free cash flow (company-defined) | $4.956 billion | $6.158 billion |
| Capital expenditures | $2.410 billion | $3.976 billion |
| Year-end net debt | $5.547 billion | $5.387 billion |
| Working capital | $12.791 billion | $10.518 billion |
| Long-term debt | $14.442 billion | $10.565 billion |
Annual pretax operating income was $6.510 billion, down 38%; pretax operating margin fell 342 basis points to 18.4%. Gross profit, defined in the filing as revenue less cost of revenue, was $7.154 billion versus $11.182 billion. Interest expense was $346 million. Year-end cash and short-term investments were $13.034 billion; including held-to-maturity fixed-income investments, the amount was $13.452 billion. The company had $1.4 billion of available, unused committed credit facilities. Dividends declared were $2.00 per share, up from $1.60.
Fourth quarter: Revenue was $7.744 billion, down 9% sequentially and 39% from fourth-quarter 2014. Pretax operating income was $1.288 billion and margin was 16.6%. Schlumberger reported a net loss attributable to the company of $1.016 billion, or diluted EPS of negative $0.81, reflecting $1.835 billion of after-tax charges. The filing text does not provide a clear standalone fourth-quarter operating cash flow value.
Material changes versus the prior comparable period
- Revenue declined 27% year over year. North America fell 39%, reflecting sharply lower land activity and pricing; international revenue declined 21%, affected by customer cuts, currency weakness and concessions.
- Each business group recorded lower annual revenue: Reservoir Characterization fell 26%, Drilling 25% and Production 29%. North American land pressure pumping was particularly affected.
- Net income attributable to Schlumberger decreased to $2.072 billion from $5.438 billion. Results included $2.575 billion of pretax charges in 2015, compared with $1.773 billion in 2014.
- Operating cash flow and free cash flow declined, while net debt increased modestly. Capital expenditures were reduced by about 39%.
Outlook, commentary, risks and unusual items
- Management said it remained constructive on the medium-term market, expecting supply and demand to tighten as lower investment affects supply and demand grows. It also warned that near-term pricing recovery in North American land services showed no signs of improvement.
- Schlumberger expected 2016 capital expenditures of approximately $2.4 billion and anticipated about $350 million of pension contributions, subject to market and business conditions.
- 2015 charges included $920 million for workforce reductions, $776 million of fixed-asset impairments, $269 million of inventory write-downs, $182 million for an SPM project impairment and $177 million related to facility closures, among other items. Management noted further impairment charges could arise if industry conditions worsened.
- The proposed Cameron merger remained subject to regulatory approvals and other closing conditions; completion was anticipated in the first quarter of 2016. The announced consideration was 0.716 Schlumberger shares plus $14.44 cash per Cameron share, with approximately $2.8 billion cash consideration. The DOJ had cleared the transaction without conditions; litigation and other approvals remained relevant risks. Schlumberger issued debt during 2015 to help fund the transaction.
- Additional risks include sustained low commodity prices and customer payment delays, foreign exchange and geopolitical exposure, environmental and operational liabilities, and regulatory, cybersecurity and merger-integration risks. Venezuela was a notable receivables risk: the company reported payment delays and agreed to accept certain fixed assets for approximately $200 million of receivables.
- The company paid approximately $233 million in 2015 to resolve a U.S. investigation concerning historical sanctions violations involving Iran and Sudan; a non-U.S. subsidiary pleaded guilty to one count of conspiracy to violate U.S. sanctions law. The payment had been previously accrued and was reported in discontinued-operations cash flows.
Most important facts for investors to verify
- Whether the Cameron merger closed as anticipated, its final funding and share issuance, and realized integration benefits.
- Whether revenue, pricing and margins stabilized after the steep 2015 decline, particularly in North American land and pressure pumping.
- Cash conversion and the sustainability of dividends and repurchases relative to free cash flow, debt maturities and merger-related funding needs.
- Collection and recoverability of Venezuela-related receivables and the value of assets accepted in settlement.
- Whether significant impairment, restructuring or SPM project charges recur, and how management’s medium-term market outlook develops.