Business context and reporting period
Schlumberger Limited (SLB) filed this unaudited Form 10-Q for the quarter ended September 30, 2019. The company provides oilfield services, equipment and related technologies globally. Financial amounts below are in U.S. dollars; unless noted, they are in millions.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $8,541 | $8,504 | $24,689 | $24,636 |
| Net income (loss) attributable to SLB | $(11,383) | $644 | $(10,470) | $1,599 |
| Diluted EPS | $(8.22) | $0.46 | $(7.56) | $1.15 |
| Operating cash flow | Not separately provided for the quarter | $3,179 | $3,382 | |
| Free cash flow | Not separately provided for the quarter | $1,242 | $1,061 |
Q3 revenue was nearly flat year over year. The reported loss primarily reflected $12.692 billion of pretax impairments and other charges, including $8.828 billion of goodwill impairment. The charges reduced net income by $11.979 billion after tax; substantially all were not expected to result in future cash outflows. The filing does not provide a clear consolidated operating-margin figure excluding these charges. Q3 segment pretax operating margins were 22% for Reservoir Characterization, 12% for Drilling, 9% for Production and 13% for Cameron.
At September 30, cash was $1.183 billion and short-term investments were $1.109 billion. Total debt was approximately $16.673 billion, including current debt; reported net debt was $14.381 billion, versus $13.274 billion at December 31, 2018. The company had $6.5 billion of committed credit facilities, of which $4.1 billion was available and unused. Management said cash, investments and facilities were sufficient for business requirements for at least 12 months. Total assets were $57.990 billion and equity was $24.327 billion.
Material changes versus comparable periods
- Nine-month revenue increased 0.2% year over year, while net loss replaced the prior-year profit because of the Q3 impairment charges. Goodwill fell from $24.931 billion at year-end 2018 to $16.112 billion at September 30, 2019.
- Q3 revenue reflected an 11% North America decline and an 8% increase internationally year over year. For the first nine months, North America revenue decreased 8% and international revenue increased 6%.
- By segment, Q3 revenue rose 4% at Reservoir Characterization and 2% at Drilling, but fell 3% at Production and 2% at Cameron year over year. Segment margins weakened at Reservoir Characterization, Drilling and Production; Cameron’s margin improved.
- Nine-month operating cash flow declined to $3.179 billion from $3.382 billion, while free cash flow increased to $1.242 billion from $1.061 billion, reflecting lower capital expenditures and investments.
- Cash dividends paid were $2.077 billion in the first nine months, unchanged from 2018. Debt issuance and repayments were substantial; debt rose overall from year-end 2018.
Outlook, commentary and risks
- Management expected full-year 2019 capital expenditures of approximately $1.6–$1.7 billion, compared with $2.2 billion in 2018.
- Management cited disciplined customer spending and reduced drilling and fracturing activity in North America, including OneStim programs deferred or cancelled amid customer budget and cash-flow constraints. It expected a usual Q4 winter slowdown in international activity, particularly in the Northern Hemisphere.
- Management noted uncertainty around future oil demand amid trade concerns and risks to global economic growth. Recent production shut-ins in Ecuador could affect Q4 revenue; lower activity in Argentina and Mexico weighed on Latin American results.
- The impairments followed a significant decline in SLB’s market capitalization and deteriorating North American conditions. Management cautioned that further industry deterioration, valuation assumptions or the new CEO’s strategy could lead to additional impairments or restructuring charges.
- In October 2019, Sensia, a joint venture with Rockwell Automation, closed; Rockwell owns 53% and SLB 47%, and Rockwell paid SLB $250 million at closing.
- Management said material loss in pending legal proceedings was remote, while noting litigation is uncertain. The filing identifies broader risks including customer spending, pricing pressure, economic and political conditions, foreign exchange, seasonality, operational delays and regulatory changes.
Important facts for investors to verify
- Whether operating performance and cash generation can sustain the dividend and reduce net debt, particularly given nine-month free cash flow below dividends paid.
- How much North American pressure-pumping weakness persists, and whether international growth and segment margins offset it.
- Whether further asset impairments or restructuring charges arise; review the assumptions behind the $8.8 billion goodwill impairment and other write-downs.
- Progress against the stated 2019 capital expenditure range and management’s ability to meet liquidity needs as debt maturities approach.
- Potential Q4 effects from seasonal activity, Ecuador production shut-ins, and activity in Argentina and Mexico.