SLB Limited (Schlumberger) — Second-Quarter 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited consolidated results; amounts are in U.S. dollars. Schlumberger operates Oilfield Services and WesternGeco.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $5.937B | $5.528B | $11.534B | $11.528B |
| Income attributable to Schlumberger | $818M | $613M | $1.490B | $1.552B |
| Diluted EPS | $0.68 | $0.51 | $1.23 | $1.28 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.286B | $2.064B |
| Gross margin | 22.9% | 19.8% | 22.7% | 22.4% |
Q2 revenue rose 7% sequentially from $5.60B in Q1; income attributable to Schlumberger increased from $672M. Q2 Oilfield Services revenue increased 10% year over year to $5.436B, with pretax operating income up 5% to $1.074B and margin down 88 basis points to 19.8%. WesternGeco revenue declined 15% to $476M, pretax operating income fell 52% to $47M, and margin declined to 9.8%.
For the first half, revenue was essentially flat year over year, while attributable income declined about 4%. Oilfield Services pretax operating income fell 10% to $2.042B; WesternGeco fell 25% to $114M. The filing attributes pressure mainly to weaker activity and pricing in Europe/CIS/Africa and lower WesternGeco activity and pricing. Q2 2009 included $207M in after-tax workforce-reduction and postretirement curtailment charges; the first half of 2010 included $75M in net charges ($35M merger-related costs and a $40M tax charge tied to U.S. retiree drug-benefit tax changes).
Cash, debt and liquidity
- Operating cash flow was $2.286B for the first half, versus $2.064B a year earlier. Capital expenditures were $1.083B; cash dividends paid were $505M and share repurchases were $872M.
- At June 30, cash was $229M, short-term investments $2.849B and held-to-maturity fixed-income investments $652M. Current assets were $12.230B and current liabilities $6.776B.
- Total debt was approximately $4.4B, including $234M of commercial paper; debt decreased $1.0B from year-end 2009. Management’s net-debt measure was negative $766M, indicating net cash under its stated definition.
- Committed bank facilities totaled $3.4B, of which $2.8B was available and unused. Management said cash, investments and facilities were sufficient for business needs for at least 12 months.
- Full-year 2010 capital expenditure expectations: Oilfield Services about $2.8B and WesternGeco about $0.3B.
Business outlook, risks and notable items
- Management expected a gradual activity recovery in the second half, with continued strength anticipated in U.S. Land, Brazil, the North Sea and Russia, and growth across much of the Middle East and Asia. It expected lower Integrated Project Management activity in parts of Mexico.
- Schlumberger did not plan for U.S. Gulf of Mexico deepwater drilling to resume during 2010. The moratorium was expected to reduce second-half 2010 EPS by approximately $0.08–$0.12. Its effect on WesternGeco’s U.S. Gulf of Mexico multiclient market remained uncertain.
- Management described oil-demand recovery as reasonably robust but said natural-gas economics remained challenging, with supply continuing to outstrip demand recovery. It characterized the broader recovery as gradual and subject to uncertainty about the world economy.
- Restructuring charges were expected in Q3 related to reviews of North American Land operations and anticipated slower Mexican activity.
- Geoservices was acquired for approximately $915M cash on April 23. The Smith International stock-for-stock merger was pending shareholder approval and other conditions; the filing estimated a transaction value of about $9.8B and expected closing on August 27, 2010, subject to approval. The proposed exchange would issue about 176M shares; Schlumberger identified dilution, integration, execution and deal-completion risks.
- Contingencies include a U.S. DOJ inquiry concerning freight-forwarding/customs services and a grand-jury investigation and regulatory inquiry concerning operations in countries subject to U.S. sanctions. The company was cooperating and said outcomes could not be predicted; potential losses were not estimable. Management considered any liability from other proceedings not material to consolidated liquidity, financial position or future results.
- Other risks discussed include energy-market and customer-spending conditions, pricing pressure, merger-related risks, climate regulation and potential regulation of hydraulic fracturing. Management reported no material change in market-risk exposure since year-end and stated disclosure controls were effective.
Most important facts for investors to verify
- Whether the Smith merger received required approvals and closed as expected, and its final financing, share issuance, integration costs and earnings impact.
- The actual operational and financial effects of the U.S. Gulf of Mexico drilling moratorium, including the projected EPS impact and any Q3 restructuring charges.
- Whether activity and pricing improved or weakened in Europe/CIS/Africa and WesternGeco, where first-half operating income and margins were under pressure.
- Progress in converting operating cash flow into returns while funding projected capital spending, repurchases and dividends; confirm debt and liquidity after the Geoservices acquisition.
- Developments in the DOJ and sanctions-related investigations, and any subsequent estimates, accruals or disclosures concerning potential liabilities.