Business context and reporting period
Schlumberger Limited (the registrant named in the filing; metadata identifies the company as SLB Limited) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. Its principal business is oilfield services, reported across Reservoir Characterization, Drilling and Production groups. Unless noted otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $10,448 | $8,990 | $20,366 | $17,112 |
| Income from continuing operations | $1,394 | $1,109 | $2,680 | $2,039 |
| Net income attributable to Schlumberger | $1,403 | $1,339 | $2,703 | $2,283 |
| Diluted EPS from continuing operations | $1.03 | $0.81 | $1.99 | $1.49 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $1,490 | $2,067 |
- Q2 revenue rose 16% year over year; six-month revenue rose 19%. Q2 income from continuing operations increased 26%, while net income attributable to Schlumberger rose 5%. The smaller increase in net income reflects the prior-year period’s larger discontinued-operations gain.
- Q2 oilfield-services pretax operating margin was 20.1%, up 63 basis points year over year. For the first six months it was 19.8%, up 111 basis points. Reservoir Characterization and Drilling margins improved; Production margins declined amid North American pricing pressure and cost inflation.
- The effective income tax rate was 24% for both Q2 and the first six months of 2012, versus 25% and 24%, respectively, in the comparable 2011 periods.
- Cash from operations fell to $1.49 billion from $2.07 billion for the first six months. Working-capital requirements used $2.72 billion, versus $1.98 billion in the prior-year period. Capital expenditures were $2.08 billion, up from $1.72 billion.
- At June 30, cash was $1.52 billion and short-term investments were $1.97 billion. Gross debt was approximately $10.47 billion, including short-term borrowings and current and long-term debt; the company’s stated net debt was $6.72 billion.
- Current assets were $21.04 billion and current liabilities $11.53 billion. The company reported $3.5 billion of cash and short-term investments, $2.3 billion of unused committed credit facilities, and $1.4 billion of commercial paper outstanding.
Material changes and notable items
- Sequentially, Q2 revenue increased 5% from Q1 2012 and pretax operating income increased 8%. All product groups grew revenue; North America was the exception to geographic sequential growth, reflecting seasonal spring break-up in Western Canada and weakness in U.S. land hydraulic fracturing.
- International revenue increased 9% sequentially. Management cited seasonal activity rebounds in Russia, the North Sea and China, as well as stronger offshore and project activity in several markets.
- Schlumberger sold its Wilson distribution business in Q2 for $906 million in cash and classified the Distribution segment as discontinued operations. The filing reports a $137 million pretax gain and a $16 million after-tax gain. It completed the sale of its 56% interest in CE Franklin for $122 million in July 2012.
- Q2 2012 included $22 million of pretax merger and integration charges; first-half charges totaled $37 million. In Q2 2011, charges included a $50 million Foundation donation and $32 million of merger and integration costs.
- First-half share repurchases were $823 million, compared with $1.55 billion in the prior-year period. The repurchase authorization had $1.0 billion remaining at June 30, 2012.
Outlook, risks and contingencies
- Management expected full-year 2012 capital expenditures of approximately $4.5 billion, compared with $4.0 billion in 2011. No specific revenue or earnings forecast is provided in the supplied filing text.
- Management believed cash, investments and available credit facilities were sufficient for business requirements for at least the next 12 months. It cautioned that delayed or unpaid customer receivables could materially affect results and cash flows.
- Risks identified include changes in customer exploration and production spending, pricing erosion, global economic and political conditions, seasonal and weather factors, capacity constraints, regulation, and technology challenges. Management stated market-risk exposure had not changed materially since year-end 2011.
- The company was cooperating with U.S. authorities in investigations concerning possible Foreign Corrupt Practices Act issues involving freight-forwarding/customs services and operations in countries subject to U.S. sanctions. The filing does not quantify potential losses from these matters.
- Legal actions related to the Deepwater Horizon incident include an M-I SWACO entity. Based on information then known, management said any potential loss attributable to M-I SWACO would not be material. Management characterized the probability of a material loss from other proceedings as remote, while noting litigation uncertainty.
Most important facts for investors to verify
- Whether working-capital outflows and the decline in operating cash flow persisted after the first half.
- Whether the North American land pricing pressure and cost inflation continued to weigh on Production margins.
- Execution of the approximately $4.5 billion capital expenditure plan and the effect on net debt and liquidity.
- Final proceeds, gains, tax effects and cash-flow treatment of the Wilson and CE Franklin divestitures.
- Developments in the government investigations and Deepwater Horizon litigation, including any change in the company’s loss assessments.