SLB Limited (Schlumberger Limited) — Q2 2020 Form 10-Q
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2020. Schlumberger provides oilfield services, equipment and technology through Reservoir Characterization, Drilling, Production and Cameron. Management described Q2 as one of the most challenging quarters in decades, amid COVID-19 disruption, sharply lower oil demand and customer spending cuts. Unless indicated otherwise, amounts are U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2020 | Comparable period |
|---|---|---|
| Revenue | $5.356 billion | $8.269 billion in Q2 2019; down 35% |
| Net income (loss) attributable to Schlumberger | $(3.434) billion | $492 million in Q2 2019 |
| Diluted earnings (loss) per share | $(2.47) | $0.35 in Q2 2019 |
| Impairments and other charges | $3.724 billion | None in Q2 2019 |
- Sequentially, revenue fell 28%. North America revenue was down 48% and international revenue down 19% versus Q1. Year over year, North America revenue fell 58% and international revenue fell 24%.
- Q2 segment pretax operating margins were Reservoir Characterization 18%, Drilling 10%, Production 2% and Cameron 8%. Each was lower year over year; Production had the steepest revenue decline, down 48%.
- For the six months, revenue was $12.811 billion, down 21% year over year; net loss attributable to Schlumberger was $10.810 billion and diluted loss per share was $7.79. The six-month impairment and other charges totaled $12.247 billion.
- Six-month operating cash flow was $1.587 billion and company-defined free cash flow was $644 million, versus $1.434 billion and $176 million, respectively, in the first half of 2019. Free cash flow is a non-GAAP measure.
- At June 30, cash and short-term investments totaled $3.589 billion. Total debt was approximately $17.366 billion, including current debt; reported net debt was $13.777 billion, compared with $13.127 billion at year-end 2019.
- Committed credit facilities totaled $7.98 billion, of which $6.17 billion was available and unused. Commercial paper borrowings were $1.81 billion. Management said liquidity was sufficient for business requirements for at least the next 12 months.
- Stockholders’ equity fell to $12.456 billion from $24.176 billion at year-end, largely reflecting the accumulated losses. The quarterly dividend was reduced 75% to $0.125 per share; Q2 dividends declared were $174 million.
Material changes, outlook and risks
- The $12.247 billion of first-half charges included a $3.070 billion goodwill impairment and $3.321 billion intangible-asset impairment in Q1. Q2 charges included $1.021 billion of workforce-reduction costs, $730 million of APS project impairments, $666 million of fixed-asset impairments, $603 million of inventory write-downs and $311 million of right-of-use asset impairments.
- The workforce actions were expected to reduce headcount by more than 21,000; most of the related Q2 severance charge was expected to be paid in the second half of 2020. Management targeted $1.5 billion of annual structural cost reductions. The Q2 results did not yet reflect the expected recurring expense reductions from Q2 restructuring and impairment actions.
- Management anticipated flat sequential revenue in Q3 2020, with pretax segment operating income and margin expected to expand. It noted a possible modest North American frac-completion recovery from a very low base. The outlook was subject to downside risks from renewed COVID-19 disruption and a slower recovery in oil demand.
- Full-year 2020 capital expenditures were expected to be approximately $1.1 billion, down 35% from 2019. Backlog was $2.8 billion at quarter-end, with about half expected to be recognized as revenue over the next 12 months; the company noted that it does not have significant backlog overall.
- Management cited an Ecuador pipeline rupture and related APS production interruption, pandemic-related operating restrictions, lower oil prices and customer budget reductions. It warned that volatile market assumptions could lead to further impairments or restructuring charges. Management considered material losses from pending legal proceedings remote, while noting litigation uncertainty.
- Other key exposures include customer spending and commodity-price weakness, pandemic developments, foreign-currency movements, pricing pressure, operational disruption and the execution of restructuring and cost-reduction plans. The filing reported no material change in market-risk exposure since year-end 2019.
Important facts for investors to verify
- Whether Q3 revenue and margin expectations were achieved, and whether the $1.5 billion annual structural-cost reduction target was realized.
- Cash generation, working-capital movements, severance payments and whether liquidity remained adequate as conditions changed.
- Debt maturities, refinancing needs and the cost and availability of credit facilities and commercial-paper support.
- Whether impaired assets or goodwill required additional write-downs, and whether the expected expense reductions followed restructuring.
- The continuation and effect of the reduced dividend, alongside capital-spending and investment needs.