SLB

Business Context and Reporting Period

Company: Schlumberger Limited (Schlumberger N.V.)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2002
Business Overview: Schlumberger operates two primary reportable segments: Oilfield Services (OFS) and SchlumbergerSema (SLSEMA). The company provides technology and services for the energy industry and information technology solutions.

Key Financial Metrics

Note: Free Cash Flow calculated as Operating Cash Flow less Capital Expenditures ($368,161) and Multiclient seismic data ($84,025). Liquidity is defined by management as cash plus investments less debt.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 9.8% year-over-year to $3.31 billion, driven primarily by the SchlumbergerSema segment.
• Profit Decline: Net income decreased 27% to $172 million. This decline was significantly impacted by a $29 million after-tax charge related to the financial crisis in Argentina.
• Segment Performance:
  • Oilfield Services (OFS): Revenue was flat year-over-year ($2.42 billion) despite a 20% decline in the worldwide M-I rig count. Pretax operating income fell 12% to $370 million due to pricing pressure in North America and reduced multiclient seismic sales.
  • SchlumbergerSema (SLSEMA): Revenue surged 178% to $835 million compared to Q1 2001 (which excluded Sema plc). However, on a pro-forma basis including the acquisition, revenue was flat. Pretax operating income collapsed 83% to $1 million due to seasonal slowdowns and IT sector spending delays.
• Accounting Changes: The company adopted SFAS 142, ceasing goodwill amortization effective January 1, 2002. Additionally, revenue was restated to include reimbursable costs previously classified as contra-expenses, increasing OFS revenue by $130 million.

Guidance, Outlook, and Risks

• Argentina Crisis: A $29 million charge was recorded due to the conversion of US dollar contracts to pesos and subsequent devaluation. Management notes continued uncertainty regarding currency exposure and business conditions in Argentina.
• Market Outlook: Management anticipates a rebound in the economy and a reversal of the weak IT environment. However, risks include changes in exploration spending by major oil companies, deregulation impacts on the utility industry, and the timing of recovery in the telecommunications sector.
• Liquidity Management: Liquidity decreased by $347 million during the quarter. To manage debt, the company initiated a Euro commercial paper program ($1.4 billion outstanding) and issued $1 billion in 10-year senior unsecured notes in April 2002 to replace US commercial paper borrowings.
• Contingencies: The company faces potential environmental remediation costs and various legal proceedings, though management does not expect these to be material to financial position.

Investor Verification Checklist

• Argentina Exposure: Verify the extent of remaining receivables and operational exposure in Argentina following the currency devaluation and contract conversion.
• SchlumbergerSema Integration: Assess the sustainability of SLSEMA revenue growth given the 178% year-over-year increase is largely due to the prior year's lack of Sema plc results; pro-forma revenue was flat.
• Oilfield Rig Count Correlation: Monitor the divergence between flat OFS revenue and the 20% decline in the M-I rig count to evaluate pricing power and market share retention.
• Debt Refinancing: Confirm the successful replacement of short-term commercial paper with the newly issued long-term notes to assess interest rate risk and liquidity stability.
• Goodwill Impairment: Review future valuations under SFAS 142, as the cessation of amortization increases reliance on impairment testing for the $6.38 billion goodwill balance.