Schlumberger Limited (Schlumberger N.V.) — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Unaudited consolidated results; amounts are in U.S. dollars unless stated otherwise. The filing identifies the registrant as Schlumberger Limited, not “SLB Limited.”
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $5.598 billion | $6.000 billion | Down about 7% |
| Income before taxes | $888 million | $1.192 billion | Down 26% |
| Net income attributable to Schlumberger | $672 million | $938 million | Down 28% |
| Diluted earnings per share | $0.56 | $0.78 | Down 28% |
| Gross margin | 22.4% | 24.8% | Down 2.4 percentage points |
| Cash provided by operating activities | $989 million | $551 million | Up $438 million |
| Capital expenditures | $449 million | $748 million | Down $299 million |
Q1 revenue was $5.60 billion, compared with $5.74 billion in Q4 2009; income attributable to Schlumberger was $672 million, versus $817 million sequentially. Oilfield Services revenue fell 6% year over year and pretax operating income fell 23%; WesternGeco revenue fell 14%, while pretax operating income rose 23%. Oilfield Services pretax operating margin was 19.0%, down from 23.1% a year earlier. WesternGeco margin was 14.3%, up from 9.9% a year earlier.
Balance sheet, debt and liquidity
- At March 31, cash was $271 million, short-term investments $3.932 billion, and held-to-maturity fixed-income investments $708 million.
- Total outstanding debt was approximately $5.0 billion, including $299 million of convertible debentures classified as current. Debt declined approximately $0.5 billion from December 31, 2009.
- Management-defined net debt was negative $75 million, representing a net cash position under the company’s definition; it was negative $126 million at December 31, 2009.
- Committed debt facilities totaled $3.8 billion, of which $2.9 billion was available and unused. Management said cash and available facilities were sufficient for anticipated business requirements for at least the next 12 months.
- Operating cash flow benefited from improved working-capital requirements and lower pension contributions, partly offset by reduced net income. The company paid $254 million in dividends and repurchased $337 million of shares during the quarter.
Material changes and operating drivers
- Management attributed the year-over-year revenue and margin declines mainly to lower activity and pricing pressure, particularly in Europe/CIS/Africa, North America, and Middle East & Asia. Research and engineering expense increased to $207 million from $190 million.
- North America Oilfield Services revenue declined 13% year over year, reflecting low natural-gas prices, weaker activity, and lower pricing. Latin America revenue increased 3%, supported by Integrated Project Management activity, while Europe/CIS/Africa revenue declined 10% and Middle East & Asia declined 4%.
- Q1 included $35 million of pretax merger-related costs and a $40 million tax charge from the loss of future tax deductions for retiree prescription-drug benefits. The combined net charge was $75 million; there were no comparable charges in Q1 2009.
- Venezuela devalued its currency and adopted a dual exchange-rate system in January 2010. Schlumberger began using an exchange rate of 4.3 bolivares fuertes per U.S. dollar for local-currency transactions; the company reported no immediate material consolidated impact.
Outlook, transactions and risks
- Management reiterated optimism for the remainder of 2010. It expected North American activity to hold through Q2, while noting uncertainty beyond that because of natural-gas prices and market fundamentals. Higher oil prices were prompting customers to consider increased international activity.
- WesternGeco reported a $940 million revenue backlog at March 31, down from $1.0 billion at year-end. Strong Marine tendering improved visibility for the remainder of 2010, but new market capacity could constrain pricing gains until later in the year.
- Planned 2010 capital expenditures were approximately $2.8 billion for Oilfield Services and $0.3 billion for WesternGeco, compared with $1.9 billion and $0.5 billion, respectively, in 2009.
- The proposed Smith International merger was a stock-for-stock transaction at 0.6966 Schlumberger shares per Smith share. Schlumberger estimated issuing approximately 177 million shares; the transaction’s stated value at the end-of-March share price was approximately $11.2 billion, excluding Smith net debt. Closing was anticipated in the second half of 2010, subject to shareholder and regulatory approvals. The filing highlights completion, integration, dilution, customer, employee, and regulatory risks, including a possible $615 million termination fee under specified circumstances if the merger fails.
- Schlumberger announced the approximately $0.9 billion Geoservices acquisition, excluding approximately $0.1 billion of assumed net debt. It closed April 23, 2010, after the reporting period.
- The company was cooperating with U.S. authorities regarding a DOJ inquiry into freight-forwarding and customs-clearance services and a separate grand-jury and regulatory investigation concerning operations in countries subject to U.S. sanctions. Outcomes were not predictable; the filing said potential losses could not be estimated, while management did not expect other proceedings to be material to the company’s financial position or results.
- Other disclosed risks include the global downturn, customer spending and pricing, merger execution, climate-related regulation and physical impacts, and proposed federal or state regulation of hydraulic fracturing. Management reported no material change in market-risk exposure since year-end and said disclosure controls were effective.
Important facts for investors to verify
- Whether operating activity and pricing recover, especially in North America and Europe/CIS/Africa, and whether the stated 2010 outlook and capital-spending plans remain current.
- Smith merger approval status, final terms and any regulatory conditions; assess dilution, integration risks, and the potential termination fee.
- Geoservices post-acquisition results and integration costs, given that the acquisition closed after quarter-end.
- Developments in the DOJ matters, sanctions-related investigation, and proposed climate and hydraulic-fracturing regulations.
- Cash conversion and liquidity, including working-capital trends, pension funding, debt maturities, and the company’s net-debt calculation.