Business Context and Reporting Period
Company: Schlumberger Limited (SLB)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: Schlumberger operates two primary reportable segments: Oilfield Services and WesternGeco. The company provides technology and services for the exploration, development, and production of oil and gas. Non-US operations accounted for approximately 77% of consolidated revenues in the third quarter of 2005.
Key Financial Metrics
| Metric (in millions) | Q3 2005 | Q3 2004 | 9 Months 2005 | 9 Months 2004 |
|---|---|---|---|---|
| Operating Revenue | $3,698 | $2,906 | $10,286 | $8,412 |
| Net Income | $541 | $318 | $1,546 | $894 |
| Diluted EPS (Continuing Ops) | $0.89 | $0.50 | $2.54 | $1.12 |
| Operating Cash Flow (9 Mo) | $1,897 (2005) vs $1,196 (2004) | |||
| Gross Margin | 25.4% | 20.8% | 25.0% (9 Mo) | 20.9% (9 Mo) |
| Effective Tax Rate | 23.6% | 19.5% | 22.9% (9 Mo) | 22.3% (9 Mo) |
| Net Debt | $(1,036) | $(1,459) | (Negative indicates net cash position) |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 27% year-over-year in Q3 2005 and 22% for the nine-month period. Growth was driven by record activity levels in Oilfield Services and improved pricing across all geographic regions.
- Profitability: Net income from continuing operations rose significantly, with Q3 2005 income reaching $541 million compared to $298 million in Q3 2004. Pretax operating income for Oilfield Services increased 64% year-over-year.
- Segment Performance:
- Oilfield Services: Revenue grew 25% in Q3. Strong growth was seen in Europe/CIS/West Africa and Middle East & Asia. North America faced a sequential decline in operating income due to hurricane disruptions in the Gulf of Mexico.
- WesternGeco: Revenue grew 45% in Q3, driven by improved vessel utilization (92%) and better contractual terms.
- Unusual Items:
- 2005 Credits: Included a $146 million gain from the sale of the Montrouge, France facility (Q1) and an $18 million gain from the resolution of a related contingency (Q3).
- 2004 Charges: Included $115 million in debt extinguishment costs and $73 million in charges related to US interest-rate swaps.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes strong results to robust exploration and production activity, favorable pricing, and capacity constraints in key regions. Gross margins expanded due to these factors.
- Capital Allocation: The company continued its share repurchase program, spending $408 million in the first nine months of 2005. Dividends paid totaled $358 million for the same period.
- Acquisitions: Schlumberger acquired an additional 25% stake in PetroAlliance Services in Q2 2005, bringing total ownership to 51% and consolidating its results.
- Risks and Contingencies:
- Weather Events: Hurricanes Katrina and Rita caused an estimated $60 million in lost revenue and $44 million in lost operating income in the North America segment during Q3.
- Legal/Regulatory: The company is responding to a grand jury subpoena regarding potential visa fraud involving crewmembers on vessels in the Gulf of Mexico. The outcome is currently undeterminable.
- Geopolitical: Significant exposure to non-US operations (77% of revenue) introduces risks related to political instability, expropriation, and trade sanctions in countries such as Iran, Syria, and Sudan.
Investor Verification Checklist
- Hurricane Impact: Verify the extent of operational recovery in the Gulf of Mexico and the accuracy of the $104 million total estimated financial impact (lost revenue and income).
- Discontinued Operations: Note that 2004 net income included $231 million from discontinued operations (divestitures), whereas 2005 included only $8 million. Compare continuing operations metrics for a fair year-over-year assessment.
- Montrouge Facility Gain: Confirm the sustainability of earnings excluding the $163 million total gain (pretax) from the sale of the Montrouge facility and related tax benefits.
- Debt and Liquidity: Review the "Net Debt" calculation, which includes cash and short-term investments offsetting gross debt, to assess true leverage levels.
- Stock Repurchases: Monitor the remaining capacity under the share buyback program (approx. 4.35 million shares remaining as of Sept 30, 2005) and future capital return plans.