Schlumberger Limited (Schlumberger N.V.) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unless otherwise noted, amounts are U.S. dollars. Results are unaudited and the company cautions that the quarter is not necessarily indicative of full-year results.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $10.248 billion | $11.239 billion | Down 9% |
| Income before taxes | $1.294 billion | $2.077 billion | Down 38% |
| Net income attributable to Schlumberger | $975 million | $1.592 billion | Down 39% |
| Diluted earnings per share | $0.76 | $1.21 | Down 37% |
| Pretax operating margin | 19.4% | 21.0% | Down 162 basis points |
| Cash flow from operations | $1.770 billion | $1.837 billion | Down $67 million |
| Free cash flow | $954 million | $689 million | Up $265 million |
Free cash flow is the company-defined measure of operating cash flow less capital expenditures, SPM investments, and capitalized multiclient seismic data.
- Margins and segments: Pretax operating income was $1.993 billion, down 16% year over year. North America revenue declined 13% and its pretax operating margin fell 561 basis points to 12.9%. International revenue declined 8%, while its margin increased 131 basis points to 24.1%.
- Balance sheet and liquidity: Cash was $2.121 billion and short-term investments were $4.682 billion at March 31, 2015. The company reported $6.8 billion of cash and short-term investments and $1.8 billion of available, unused committed facilities. Current assets were $23.394 billion and current liabilities were $14.572 billion.
- Debt: Balance-sheet debt comprised $3.180 billion of current long-term debt, $648 million of short-term borrowings, and $8.898 billion of long-term debt. The company’s defined Net Debt was negative $5.487 billion—equivalent to net cash of $5.487 billion under its definition, which subtracts cash and specified investments from gross debt.
- Shareholder returns and investment: Dividends paid were $512 million and share repurchases were $719 million. The quarterly dividend declared was $0.50 per share. Capital expenditures were $606 million.
Material changes and operating context
- Compared with Q4 2014, revenue fell 19%, pretax operating income fell 28%, and pretax operating margin declined 255 basis points. The company attributed the deterioration principally to customer budget cuts following lower oil prices, seasonal declines, reduced activity and pricing pressure in North America, and adverse currency movements.
- North America land was particularly weak: declining rig counts, reduced pressure-pumping activity, and pricing pressure weighed on revenue and margins. International revenue was affected by lower activity and currencies including the Russian ruble and Venezuelan bolivar.
- Year over year, Reservoir Characterization revenue declined 14%, Drilling declined 8%, and Production declined 6%. Production margin fell 359 basis points to 14.6%; Reservoir Characterization margin was 25.7% and Drilling margin was 19.9%.
- Q1 2015 included $439 million of pretax charges: $390 million for workforce reductions and an incentivized leave program, and $49 million for Venezuelan currency devaluation. The workforce action followed a severe fall in North American activity and lower international activity.
Outlook, risks, contingencies, and unusual items
- Capital spending: Management expected full-year 2015 capital expenditures of approximately $2.5 billion, compared with $4.0 billion in 2014. No specific revenue or earnings guidance is provided in the filing text.
- Management commentary: The company said prompt variable-cost management and local cost structures helped limit margin pressure despite falling revenue and an unfavorable mix. It expected available cash, investments, and committed facilities to meet business requirements for at least the next 12 months.
- Venezuela: Following adoption of the SIMADI exchange rate, approximately 192 bolivars per U.S. dollar at quarter-end, the company recorded a $49 million devaluation charge. It noted that currency changes reduce the U.S.-dollar reported value of local-currency revenues, expenses, and earnings. Management also disclosed historical delays in payments by its Venezuelan national oil company customer.
- Legal matter: A non-U.S. subsidiary agreed to plead guilty to one count relating to historical U.S. sanctions violations involving Iran and Sudan. The company expects to pay approximately $233 million in fines, penalties, and assessments in Q2 2015; the amount was previously accrued and the plea terms remained subject to judicial approval.
- Planned acquisition: Schlumberger had agreed to acquire approximately 46% of Eurasia Drilling Company for an estimated total cash cost of $1.7 billion, including an option to acquire the remaining shares. Closing was expected in Q2 2015.
- Principal risks cited: Further changes in customer exploration and production spending, oil and gas activity and prices, pricing erosion, foreign exchange movements, geopolitical and economic conditions including Russia and Ukraine, and operational, regulatory, weather, and seasonal factors. The filing said market-risk exposure had not changed materially since year-end 2014, and there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the sharp activity and pricing declines, especially in North America land, continued and how they affected segment margins.
- Whether management’s approximately $2.5 billion full-year capital expenditure expectation was maintained and achieved.
- The timing and final judicial approval of the approximately $233 million sanctions-related payment.
- Completion, final cost, and terms of the proposed Eurasia Drilling investment and associated option.
- Collections from Venezuela and the effects of further bolivar exchange-rate changes on reported results and cash flows.
- Debt maturities and commercial-paper funding: the filing reports $2.0 billion of commercial-paper borrowings in its debt note, while balance-sheet debt classifications are presented separately.