Schlumberger Limited (Schlumberger N.V.) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unless stated otherwise, amounts are in U.S. dollars; financial statement amounts are in millions.
Business context and results
Schlumberger provides oilfield services through Reservoir Characterization, Drilling and Production groups. Q3 revenue growth reflected stronger international exploration and development activity and higher offshore activity, with North America also improving sequentially. Results compare with 2012 unless otherwise noted.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $11,608 | $10,498 | $33,360 | $30,648 |
| Income before taxes | $2,231 | $1,798 | $6,521 | $5,204 |
| Income from continuing operations | $1,725 | $1,362 | $5,160 | $3,936 |
| Net income attributable to Schlumberger | $1,715 | $1,424 | $5,068 | $4,127 |
| Diluted EPS | $1.29 | $1.07 | $3.79 | $3.08 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $5,938 | $3,436 |
- Q3 revenue increased 11% year over year; net income attributable to Schlumberger increased 20%. Nine-month revenue rose 9% and attributable net income rose 23%; the latter comparison includes significant 2013 special items.
- Q3 Oilfield Services pretax operating margin was 21.5%, up 166 basis points year over year and 114 basis points sequentially. The filing reports this segment measure, not a consolidated operating margin.
- Cash and short-term investments were $6.4 billion at September 30; adding $363 million of held-to-maturity fixed-income investments brings the reported investment and cash total to about $6.8 billion. Current assets were $25.1 billion and current liabilities $12.8 billion.
- Gross debt was approximately $12.4 billion: $9.9 billion long-term debt, $1.9 billion current portion of long-term debt, and $622 million short-term borrowings. Management-defined net debt was $5.6 billion, compared with $5.1 billion at December 31, 2012 and $6.2 billion a year earlier.
- Nine-month capital expenditures were $2.8 billion, versus $3.2 billion in 2012. The company paid $1.2 billion in dividends and repurchased $1.5 billion of shares during the period.
Material changes and unusual items
- On June 30, Schlumberger and Cameron formed OneSubsea. Schlumberger contributed its subsea business, paid Cameron $600 million, and retained a 40% equity-method interest. The transaction generated a $1.028 billion pretax and after-tax gain in Q2; it did not recur in Q3.
- Other 2013 nine-month special items included $364 million of impairments on equity-method investments and a $92 million foreign-currency loss following Venezuela’s currency devaluation. Together with the OneSubsea gain, these produced net pretax credits of $572 million. No charges or credits were recorded in Q3.
- Schlumberger completed the wind-down of its Iran service operations in Q2 2013 and classified the historical business as discontinued operations. Nine-month discontinued operations recorded a $69 million loss; prior periods were restated. The company said it expected to discontinue residual dealings with two Iranian banks after collecting amounts owed for prior services.
- International Oilfield Services revenue grew 12% in Q3, while North America rose 9%. Middle East & Asia was a key growth area. North America land continued to face pricing weakness, although efficiency, utilization and technology gains supported margins.
Outlook, risks and contingencies
- Management expected full-year 2013 capital expenditures of approximately $3.9 billion, compared with $4.7 billion in 2012. It stated that cash and committed facilities were sufficient for business needs for at least the next 12 months.
- Schlumberger had $1.8 billion available and unused under $4.0 billion of committed debt facilities and $1.9 billion of commercial paper outstanding at quarter-end.
- OGX, a Brazilian customer experiencing liquidity problems, owed approximately $195 million at September 30. Schlumberger warned that some or all of these receivables might require write-off; the outcome was uncertain. The company also noted payment delays from its Venezuelan national oil company customer.
- Other stated risks include customer spending and exploration activity, pricing erosion, geopolitical and economic conditions, operational delays, seasonal factors and regulatory changes. A U.S. grand jury investigation and regulatory inquiry into operations in countries subject to U.S. sanctions remained unresolved; Schlumberger said it could not predict the outcome or estimate the potential impact.
- Claims against M-I SWACO consolidated in the Deepwater Horizon multidistrict litigation were dismissed in Q1 2013. Schlumberger reported other legal proceedings and said management considered the probability of a material loss remote, while noting litigation uncertainty.
Investor verification priorities
- Assess the sustainability of revenue and margin growth, particularly whether international strength can offset North American land pricing pressure.
- Separate recurring earnings and cash generation from the OneSubsea gain, investment impairments and Venezuela currency loss; review the related segment and cash-flow disclosures.
- Track collection of the $195 million OGX receivable and payment timing in Venezuela, including any subsequent impairment or cash-flow effects.
- Monitor net debt, commercial paper, share repurchases and dividends against operating cash flow and planned capital expenditures.
- Follow developments in the sanctions investigation and confirm the status of residual Iran-related collections and banking arrangements.