Business context and reporting period
Schlumberger Limited (identified in the filing as Schlumberger N.V.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company provides oilfield services and technology through Reservoir Characterization, Drilling, and Production. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $9,010 | $12,054 | $19,258 | $23,294 |
| Income before taxes | $1,436 | $2,327 | $2,730 | $4,404 |
| Net income attributable to Schlumberger | $1,124 | $1,595 | $2,099 | $3,187 |
| Diluted EPS | $0.88 | $1.21 | $1.64 | $2.42 |
| Operating margin before tax | 19.0% | 21.8% | 19.2% | 21.4% |
Q2 revenue declined 25% year over year and 12% sequentially; pretax operating income fell 35% year over year and 14% sequentially. The six-month revenue decline was 17%, and pretax operating income declined 26%. Q2 continuing-operations diluted EPS was $0.88 versus $1.37 in 2014; 2014 net income and EPS also included a $205 million discontinued-operations loss.
For the first six months, operating cash flow was $4.084 billion versus $4.219 billion. Free cash flow, as defined by management (operating cash flow less capital expenditures, SPM investments and multiclient seismic data), was $2.448 billion versus $1.902 billion. Capital expenditures were $1.193 billion, down from $1.786 billion.
At June 30, cash was $3.541 billion and short-term investments were $3.733 billion; together with $469 million of held-to-maturity fixed-income investments, these totaled $7.743 billion. Gross debt, including current maturities and short-term borrowings, was approximately $13.341 billion. Management-defined net debt was $5.598 billion, up from $5.387 billion at year-end 2014. Equity was $38.185 billion. Six-month dividends paid were $1.151 billion and share repurchases were $1.239 billion.
Material changes and operating trends
- Management attributed the downturn to lower oil prices, customer budget reductions, falling rig counts, pricing concessions and currency weakness. North America was especially pressured: Q2 revenue fell 39% year over year and pretax margin contracted 777 basis points to 10.2%.
- International Q2 revenue fell 19% year over year, while its pretax margin increased 44 basis points to 24.5%, supported by cost and resource management. Regional activity was comparatively robust in Gulf Cooperation Council countries; Asia-Pacific, Russia, parts of Africa, and Latin America faced weakness or currency effects.
- Q2 product-group revenue declined 25% year over year in both Reservoir Characterization and Drilling, and 26% in Production. Their pretax margins were 26.5%, 19.5%, and 12.8%, respectively; each was lower year over year.
- First-quarter restructuring and other charges totaled $439 million pretax: $390 million for workforce reductions and incentivized leave, and $49 million for Venezuelan currency devaluation. No such charges were recorded in Q2.
Outlook, commentary, risks and unusual items
- Management expected full-year 2015 capital expenditures of approximately $2.5 billion, versus $4.0 billion in 2014. The filing provides no specific revenue or earnings guidance. Management said cash and short-term investments, plus $2.9 billion of available committed facilities, were sufficient for business needs for at least 12 months.
- Schlumberger had repurchased $7.6 billion under its $10 billion authorization as of June 30, 2015, which was scheduled to be completed no later than June 30, 2018. A planned approximately 46% investment in Eurasia Drilling, with an option to acquire the remaining shares, was expected to cost approximately $1.7 billion in cash and close in the second half of 2015.
- During Q2, a non-U.S. subsidiary pleaded guilty to one count related to historical U.S. sanctions violations involving Iran and Sudan. The company paid approximately $233 million in fines and assessments, previously accrued; the payment appears in discontinued-operations cash flows and was not a current-period income-statement charge.
- Management identified risks including customer spending and exploration activity, pricing erosion, economic and political conditions (including Russia and Ukraine), currency movements, operational delays, regulation, weather and seasonal factors, and technology challenges. It noted past payment delays from Venezuela’s national oil company. Management considered material losses from other legal proceedings remote, while acknowledging litigation uncertainty.
- Management reported no material change in market-risk exposure or previously disclosed risk factors, and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether further oilfield activity and pricing declines, particularly in North America, pressure revenue and margins beyond the reported quarter.
- Whether planned cost actions and lower capital spending can sustain cash generation as customer activity contracts.
- The timing and funding of the Eurasia Drilling transaction, including the potential option to acquire remaining shares.
- Receivables and payment trends in Venezuela and other markets, and the implications of currency devaluations and restrictions.
- Debt maturities, commercial-paper refinancing, and the company’s capacity to maintain dividends and repurchases while net debt rises.
- The final consequences of the sanctions-related resolution and any material developments in other legal matters.