Business Context and Reporting Period
Company: Schlumberger Limited (Schlumberger N.V.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2005
Business Overview: Schlumberger operates two primary reportable segments: Oilfield Services and WesternGeco. The company provides technology and integrated project management services to the oil and gas industry globally. Approximately 74% of consolidated revenues are derived from non-US operations.
Key Financial Metrics
| Metric (in millions) | Q2 2005 | Q2 2004 | 6 Months 2005 | 6 Months 2004 |
|---|---|---|---|---|
| Operating Revenue | $3,429 | $2,834 | $6,588 | $5,507 |
| Net Income | $482 | $356 | $1,006 | $576 |
| Diluted EPS (Net Income) | $0.80 | $0.59 | $1.66 | $0.96 |
| Income from Continuing Ops (Pre-tax) | $651 | $336 | $1,330 | $497 |
| Operating Cash Flow (6 Months) | $1,081 | $586 | $1,081 | $586 |
| Net Debt (End of Period) | $(1,244) | $(1,459) | $(1,244) | $(1,459) |
| Long-Term Debt | $3,779 | $3,944 | $3,779 | $3,944 |
| Cash & Short-Term Investments | $2,913 | $2,997 | $2,913 | $2,997 |
Note: Net Debt is defined as gross debt less cash, short-term investments, and fixed income investments held to maturity. Negative values indicate a net cash position.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 21% year-over-year in Q2 2005 and 20% for the six-month period. Growth was driven by record activity levels in Oilfield Services and pricing improvements across both segments.
- Profitability: Net income rose 35% in Q2 2005 compared to Q2 2004. Income from continuing operations before taxes more than doubled (94% increase) in Q2 2005, largely due to higher operating leverage and the absence of significant charges present in 2004.
- Segment Performance:
- Oilfield Services: Revenue increased 20% (Q2) and 19% (6 months). Pretax operating income grew 48% (Q2) and 40% (6 months).
- WesternGeco: Revenue increased 31% (Q2) and 26% (6 months). Pretax operating income surged 297% (Q2) and 152% (6 months) due to improved vessel utilization and pricing.
- Discontinued Operations: Income from discontinued operations dropped significantly from $98 million in Q2 2004 to $9 million in Q2 2005, as 2004 included large gains from the divestiture of businesses like SchlumbergerSema and Axalto.
- Cash Flow: Net cash provided by operating activities for the six months ended June 30, 2005, was $1.08 billion, a substantial increase from $586 million in the prior year period.
Guidance, Outlook, and Unusual Items
Unusual Items and Credits/Charges
- 2005 Credits: The company recorded a pretax gain of approximately $146 million from the sale of its Montrouge, France facility. This gain is classified in "Interest and other income." Additionally, there were net pretax credits of $134 million for the six-month period.
- 2004 Charges: The prior year period included significant pretax charges totaling $229 million, including $115 million in debt extinguishment costs, $24 million in restructuring charges, and losses on the sale of Atos Origin shares. These charges significantly depressed 2004 comparables.
- Acquisitions: Schlumberger acquired an additional 25% stake in PetroAlliance Services in Q2 2005, bringing total ownership to 51% and triggering consolidation of results. The company also acquired Diamould Limited for approximately $14 million.
Outlook and Risks
- Forward-Looking Statements: Management expects continued growth driven by oil and natural gas demand and production growth. However, results are subject to risks including global economic conditions, political instability in key regions (e.g., Middle East, Russia), and fluctuations in commodity prices.
- Non-US Operations: With 74% of revenue from outside the US, the company faces risks related to expropriation, currency fluctuations, and trade sanctions in countries such as Iran, Syria, and Sudan.
- Legal Contingencies: The company is responding to a grand jury subpoena regarding visa fraud allegations involving crewmembers on vessels in the Gulf of Mexico. Management cannot determine the outcome or financial impact at this time.
- Accounting Changes: The adoption of SFAS 123R (Share-Based Payment) effective January 1, 2006, is expected to reduce earnings by approximately $20 million in 2006.
Investor Verification Checklist
- Quality of Earnings: Verify the sustainability of the $146 million gain from the Montrouge facility sale, which significantly boosted 2005 income.
- Discontinued Operations: Confirm that the sharp decline in income from discontinued operations is due to the completion of major divestitures in 2004 and is not indicative of ongoing operational issues.
- Debt Management: Review the "Net Debt" calculation and the company's deleveraging strategy, noting the reduction in net debt from $(1,459) million to $(1,244) million.
- Acquisition Integration: Assess the financial impact of consolidating PetroAlliance Services (51% ownership) and the potential for future goodwill adjustments.
- Legal Exposure: Monitor the status of the US Attorney's office investigation regarding visa fraud and any potential financial liabilities.
- Stock Repurchases: Note the active share buyback program, with $262 million spent on repurchases in the first six months of 2005.