SLB Limited (Schlumberger) — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Comparisons are with the corresponding 2010 periods unless noted. Schlumberger recast prior segment disclosures after changing its primary reporting structure to product groups in 2011.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $10,229 | $6,845 | $28,566 | $18,379 |
| Income from continuing operations | $1,307 | $1,731 | $3,374 | $3,222 |
| Net income attributable to Schlumberger | $1,301 | $1,734 | $3,584 | $3,224 |
| Diluted EPS, continuing operations | $0.96 | $1.38 | $2.46 | $2.63 |
| Diluted EPS, net income | $0.96 | $1.38 | $2.62 | $2.63 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $3,744 | $3,096 |
- Q3 revenue rose about 49% year over year, largely reflecting the Smith acquisition and stronger oilfield activity. Oilfield Services revenue increased 44%; Distribution revenue was $683 million versus $199 million, also reflecting the acquisition comparison.
- Q3 net income fell about 25% year over year. The 2010 quarter included a $1.27 billion pretax gain from remeasuring Schlumberger’s previously held M-I SWACO interest and substantial restructuring and merger-related credits. Q3 2011 included $27 million of pretax merger and integration costs.
- Nine-month net income increased about 11%, but comparisons include unusual items: 2011 included a $220 million after-tax gain on the Global Connectivity Services divestiture; 2010 included the M-I SWACO gain. Continuing-operations income increased about 5%.
- Q3 Oilfield Services pretax operating margin was 20.2%, up 190 basis points year over year and 77 basis points sequentially. Nine-month margin increased 71 basis points to 19.3%. Management cited higher-margin exploration work, improved Well Services pricing and utilization, and the Gulf of Mexico activity recovery.
- Nine-month operating cash flow was $3.744 billion. Investing cash outflow was $3.752 billion and financing cash outflow was $407 million. Capital expenditures were $2.763 billion; multiclient seismic data capitalization was $206 million. Working capital increased by $2.438 billion, with receivables and inventories among the main uses of cash.
Balance sheet, debt and liquidity
- At September 30, cash was $1.732 billion, short-term investments $4.332 billion, and held-to-maturity fixed-income investments $255 million. Current assets were $21.260 billion and current liabilities $11.307 billion.
- Total debt, including current maturities and short-term borrowings, was approximately $11.483 billion. Schlumberger’s stated net debt was $5.164 billion, compared with $2.638 billion at December 31, 2010.
- During the first nine months, the company issued $6.825 billion of long-term debt and repaid $3.600 billion. Q3 issuances included $1.1 billion of 1.95% notes due 2016, $1.6 billion of 3.30% notes due 2021, and $300 million of floating-rate notes due 2014.
- Schlumberger reported $2.0 billion of commercial paper outstanding and $3.4 billion of unused committed debt facilities. Management said cash, investments and available facilities were sufficient for expected requirements for at least the next 12 months.
- Share repurchases were $2.362 billion in the first nine months; dividends paid were $968 million. The company extended its $8 billion repurchase authorization through December 31, 2013.
Business trends, outlook and risks
- Sequentially, Q3 Oilfield Services revenue rose 6%, with growth in all product groups and geographic areas except Middle East and Asia. North America benefited from Canada’s seasonal rebound, stronger U.S. land activity and increased Gulf of Mexico work. Management attributed international growth to exploration, deepwater and drilling activity.
- Management described the service-industry outlook as positive, citing reserve-renewal needs and a tight cushion of excess oil supply. It acknowledged that financial-market turmoil had lowered the outlook for 2012 oil-demand growth and could create near-term activity uncertainty; management expected any resulting reductions to be short-lived. This is forward-looking commentary, not a quantified company earnings forecast.
- Full-year 2011 capital expenditures were expected to approach $4.2 billion, compared with $2.9 billion in 2010.
- Schlumberger held approximately $0.3 billion of assets in Libya, mainly receivables, inventory and fixed assets; recovery depends on how conditions develop. The filing also identifies foreign-exchange, commodity-price and interest-rate exposures. Management said market-risk exposure had not changed materially since year-end 2010.
- Contingencies include U.S. government inquiries concerning freight-forwarding and customs services under the Foreign Corrupt Practices Act, and investigations concerning operations in countries subject to U.S. sanctions. Schlumberger said it was cooperating and could not predict outcomes. Legal actions related to Deepwater Horizon name an M-I SWACO entity; based on information then known, management did not expect the potential loss attributable to M-I SWACO to be material.
- Other unusual items included a $50 million pretax Schlumberger Foundation grant in Q2 and $93 million of nine-month merger and integration costs. The company completed the Global Connectivity Services divestiture in Q2 for approximately $385 million in cash.
Important facts for investors to verify
- How much reported growth reflects acquisitions, particularly Smith and Geoservices, versus organic activity, pricing and utilization improvements.
- Whether receivables and inventory growth reverses and operating cash flow keeps pace with earnings and planned capital spending.
- Debt issuance, maturities, commercial-paper refinancing needs, and the trend in net debt after repurchases and dividends.
- Whether management’s expected $4.2 billion 2011 capital-spending level and positive activity outlook are borne out.
- Developments in Libya asset recovery, government investigations and Deepwater Horizon-related litigation.
- The effect of the 2010 M-I SWACO gain and other unusual items when assessing comparable earnings and margins.