Business Context and Reporting Period
Company: Schlumberger Limited (SLB)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Second Quarter and Six Months ended June 30, 2004
Business Overview: Schlumberger operates primarily through two reportable segments: Oilfield Services and WesternGeco. The period was characterized by significant divestitures of non-core businesses (SchlumbergerSema, Axalto, Infodata, etc.) and a strategic shift to focus on oilfield services. The company also executed a major deleveraging program, retiring significant portions of its debt.
Key Financial Metrics
| Metric (in millions, except per share) | Q2 2004 | Q2 2003 | 6 Months 2004 | 6 Months 2003 |
|---|---|---|---|---|
| Operating Revenue | $2,856 | $2,541 | $5,551 | $4,930 |
| Net Income | $356 | $112 | $576 | $261 |
| Diluted EPS (Net Income) | $0.59 | $0.19 | $0.96 | $0.45 |
| Income from Continuing Ops | $255 | $146 | $359 | $294 |
| Operating Cash Flow (6 Mo) | $591 (6 Mo 2004) vs $612 (6 Mo 2003) | |||
| Net Debt (End of Period) | $1,767 (6 Mo 2004) vs $4,176 (Dec 31, 2003) | |||
| Cash & Short-term Investments | $2,559 (June 30, 2004) |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 12% year-over-year in Q2 2004 and 13% for the six-month period. Oilfield Services revenue grew 15% year-over-year, driven by strong demand in North America, Latin America, and the Middle East/Asia. WesternGeco revenue declined slightly (5% in Q2, 1% for six months) due to lower land activity.
- Profitability Surge: Net income more than tripled in Q2 2004 compared to Q2 2003. This was driven by higher operating income in Oilfield Services and significant gains from discontinued operations ($101 million in Q2, $217 million for six months).
- Debt Reduction: The company aggressively reduced its debt load. Net debt decreased from $4.2 billion at year-end 2003 to $1.8 billion by June 30, 2004. This was achieved through debt extinguishment costs of $115 million (pretax) and proceeds from business sales.
- Discontinued Operations: The company completed the sale of SchlumbergerSema, Axalto, Infodata, and other non-core units. These transactions generated substantial cash proceeds and one-time gains, significantly impacting net income.
Guidance, Outlook, and Management Commentary
- Share Buyback: On July 22, 2004, the Board approved a share repurchase program of up to 15 million shares to be executed before December 2006.
- Segment Outlook:
- Oilfield Services: Management highlighted strong demand for technology segments, particularly Drilling & Measurements (PowerDrive, PowerV) and Well Services. Growth is expected to continue in key GeoMarkets including India, Caspian, and Mexico.
- WesternGeco: Backlog increased 24% sequentially to $594 million. Marine activity is expected to improve with the start of the North Sea season, though land activity remains soft in certain regions.
- Charges and Unusual Items:
- Debt Extinguishment: Recorded $37 million (Q2) and $115 million (6 Mo) in pretax charges for buying back debt.
- Interest Rate Swaps: Recorded a $73 million charge in Q1 and a $10 million gain in Q2 related to the settlement of US interest rate swaps.
- Restructuring: Incurred $24 million in pretax restructuring charges over the six months.
- Risks: Management noted exposure to global economic conditions, oil and gas exploration spending, and political instability in key operating regions (e.g., Nigeria, Venezuela). Currency fluctuations also impacted results.
Investor Verification Checklist
- Quality of Earnings: Verify the sustainability of earnings by excluding the $217 million gain from discontinued operations and the impact of debt extinguishment charges to assess core operating performance.
- Debt Profile: Confirm the details of the remaining long-term debt ($3.7 billion) and the terms of the new share buyback program.
- WesternGeco Backlog: Monitor the conversion of the $594 million backlog into revenue, given the sequential decline in revenue.
- Divestiture Proceeds: Track the deployment of the ~$2.7 billion in cash generated from investing activities (sales of Axalto, Atos Origin shares, etc.) to ensure it aligns with the stated deleveraging and buyback strategy.
- Non-GAAP Reconciliations: Review the reconciliation of "Income from continuing operations before charges" to understand management's view of underlying operational trends versus GAAP results.