Business Context and Reporting Period
Company: Schlumberger Limited (SLB)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Third Quarter and Nine Months ended September 30, 2007
Business Overview: Schlumberger operates two primary business segments: Oilfield Services and WesternGeco. The company provides technology and services for the exploration, development, and production of oil and natural gas reserves globally.
Key Financial Metrics
| Metric (in millions) | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Revenue | $5,926 | $4,955 | $17,029 | $13,881 |
| Net Income | $1,354 | $1,000 | $3,793 | $2,579 |
| Diluted EPS | $1.09 | $0.81 | $3.08 | $2.09 |
| Operating Cash Flow (9M) | $4,111 (2007) vs $3,124 (2006) | |||
| Gross Margin | 34.1% | 32.2% | 33.9% | 30.8% |
| Effective Tax Rate | 20.8% | 24.1% | 22.3% | 24.5% |
| Net Debt (Sept 30, 2007) | $(1,683) (Net Cash Position) |
Material Changes vs. Prior Period
- Revenue Growth: Q3 2007 revenue increased 19.6% year-over-year (YoY) to $5.93 billion. Nine-month revenue grew 22.7% YoY to $17.03 billion.
- Profitability: Net income for Q3 2007 rose 35.4% YoY. Pretax operating income for Oilfield Services increased 23% YoY, while WesternGeco pretax operating income increased 32% YoY.
- Segment Performance:
- Oilfield Services: Revenue grew 19% in Q3, driven by higher activity in Latin America, Middle East & Asia, and Europe/CIS/Africa. North America revenue declined 3% YoY due to weather impacts in the US Gulf of Mexico and pricing erosion in pressure-pumping services.
- WesternGeco: Revenue grew 20% in Q3, driven by higher vessel utilization, improved pricing for Q-Marine and conventional surveys, and increased Data Processing sales.
- Working Capital: Cash flow from operations was partially offset by an increase in working capital requirements, specifically a $1.03 billion increase in receivables and a $321 million increase in inventories over the nine-month period.
- Debt Conversions: During the first nine months of 2007, holders converted approximately $490 million of convertible debentures into common stock, reducing debt obligations.
Guidance, Outlook, and Risks
- Outlook: Management expects continued growth driven by higher oil and gas exploration and production spending. The company anticipates stock-based compensation expense for fiscal 2007 to be approximately $135 million.
- Capital Allocation: The company continues its share repurchase program (approved for up to 40 million shares) and paid dividends of $562 million in the first nine months of 2007. Capital expenditures for the nine months totaled $2.01 billion for fixed assets.
- Risk Factors:
- Commodity Prices: Demand is highly sensitive to oil and gas prices; a decline could reduce customer expenditures.
- Geopolitical Risks: Approximately 75% of revenue is derived from non-US operations, exposing the company to political instability, expropriation, and currency fluctuations in ~80 countries.
- Legal/Regulatory: Ongoing DOJ inquiry regarding freight forwarding services (Panalpina investigation) and historical visa compliance issues (resolved in June 2007 with a $18 million penalty).
- Environmental & Safety: Risks associated with hazardous materials, strict liability for environmental damage, and potential accidents in hostile operating environments.
- Unusual Items: No significant charges or credits were recorded in the first nine months of 2007. In contrast, the first nine months of 2006 included $46 million in pretax charges related to the WesternGeco acquisition and visa settlements.
Investor Verification Checklist
- Verify the sustainability of the 34.1% gross margin given the noted pricing erosion in US land pressure-pumping services.
- Monitor the resolution of the DOJ inquiry regarding Panalpina freight forwarding services and potential future liabilities.
- Assess the impact of the $1.03 billion increase in receivables on future cash conversion cycles.
- Review the status of the share repurchase program, noting 15.9 million shares remain available for purchase under the current authorization.
- Confirm the effective tax rate stability, which dropped to 20.8% in Q3 2007 due to the geographic mix of earnings.