SLB Limited (Schlumberger Limited) — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 30, 2012; results are unaudited. Financial figures are in U.S. dollars. Comparisons are with Q3 or the first nine months of 2011, unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $10.61B | $9.55B | $30.97B | $26.66B |
| Income before taxes | $1.86B | $1.69B | $5.38B | $4.38B |
| Net income attributable to Schlumberger | $1.42B | $1.30B | $4.13B | $3.58B |
| Diluted EPS | $1.07 | $0.96 | $3.08 | $2.62 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3.61B | $3.72B |
Q3 revenue grew 11% year over year and Schlumberger-attributable net income grew about 9%. For the nine months, revenue rose 16% and attributable net income rose about 15%. Q3 diluted EPS was $1.07, versus $0.96. The nine-month comparison includes materially lower discontinued-operations income in 2012 ($51M versus $261M); continuing-operations diluted EPS was $3.04 versus $2.43.
Q3 Oilfield Services pretax operating margin was 20.2%, essentially flat year over year. International margin improved to 21.5%, while North America declined to 18.6%. For the nine months, Oilfield Services margin rose 70 basis points to 20.0%. Production Group margins weakened year over year, reflecting North American pressure-pumping pricing pressure and cost inflation; Reservoir Characterization and Drilling margins improved.
Cash, debt and liquidity
- At September 30, cash was $1.85B, short-term investments $2.91B and held-to-maturity fixed-income investments $246M.
- Gross debt was approximately $11.19B, including current maturities and short-term borrowings. Management-defined net debt was $6.18B, up from $4.85B at December 31, 2011.
- Nine-month operating cash flow was $3.61B, down from $3.72B. Increased working-capital requirements, including receivables and inventories, weighed on cash generation. Capital expenditures were $3.16B, versus $2.76B.
- The company reported $4.1B in committed bank facilities, of which $3.8B was available and unused, and no commercial paper outstanding. Management said liquidity was sufficient for business requirements for at least the next 12 months.
- Capital expenditures for full-year 2012 were expected to be approximately $4.5B, compared with $4.0B in 2011.
Material changes and operating commentary
- International activity drove most growth: Q3 international revenue rose 3% sequentially, while North American revenue fell 2%. Year over year, Europe/CIS/Africa and Middle East/Asia were particularly strong.
- North American revenue and margins were affected by a lower U.S. land rig count, excess hydraulic-fracturing capacity, pricing pressure, raw-material cost inflation and Hurricane Isaac-related Gulf of Mexico shutdowns.
- Q3 revenue increased 2% sequentially, but segment performance diverged: Reservoir Characterization revenue rose 5%, Drilling rose 1%, and Production fell 2%.
- Schlumberger issued $2B of senior notes during Q3: $1B of 1.25% notes due 2017 and $1B of 2.40% notes due 2022. Long-term debt at September 30 was $9.40B, compared with $8.56B at year-end 2011.
- The company sold its Wilson distribution business for $906M in cash and its 56% interest in CE Franklin for $122M. Distribution results were classified as discontinued operations. Q3 discontinued-operations income was $12M, including a divestiture gain.
- Nine-month merger and integration charges were $68M pretax, down from $91M in 2011. The prior-year period also included a $50M donation to the Schlumberger Foundation.
Risks, contingencies and other disclosures
- Management cited risks including customer spending and exploration activity, pricing erosion, global economic and political conditions, weather and seasonality, operational delays, regulation and technology challenges. The filing reported no material changes to previously disclosed risk factors.
- In October 2012, the Department of Justice advised that it had closed its inquiry into Schlumberger relating to freight-forwarding and customs-clearance services and potential Foreign Corrupt Practices Act issues. Separate U.S. investigations concerning operations in countries subject to trade sanctions remained ongoing; Schlumberger said it was cooperating.
- Regarding Deepwater Horizon litigation, management said any potential loss attributable to M-I SWACO was not expected to be material based on information then available. Management stated that material loss from other proceedings was remote, while noting litigation uncertainty.
- Management said market-risk exposure had not changed materially since year-end 2011. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether working-capital absorption, particularly receivables growth, eases and operating cash flow catches up with earnings.
- Whether North American pressure-pumping pricing and cost pressures persist, and how they affect Production Group profitability.
- Whether the $4.5B full-year capital-expenditure expectation and stated liquidity outlook are maintained.
- The continuing impact of divestitures and discontinued operations on reported earnings and cash flows, and the status of the ongoing sanctions-related investigations.