SLB Limited (Schlumberger) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Financial statements are unaudited. Comparisons below are with Q1 2010 unless noted; sequential comparisons are with Q4 2010.
Financial results and liquidity
| Metric | Q1 2011 | Comparable period |
|---|---|---|
| Revenue | $8.716 billion | $5.598 billion in Q1 2010 |
| Income before taxes | $1.238 billion | $888 million in Q1 2010 |
| Net income attributable to Schlumberger | $944 million | $672 million in Q1 2010 |
| Diluted EPS | $0.69 | $0.56 in Q1 2010 |
| Cash provided by operating activities | $836 million | $989 million in Q1 2010 |
| Capital expenditures | $770 million | $449 million in Q1 2010 |
- Revenue increased about 56% year over year, substantially reflecting the Smith International and Geoservices acquisitions and the addition of Distribution revenue. Net income attributable to Schlumberger rose about 40%.
- Operating cash flow less capital expenditures was approximately $66 million, versus approximately $540 million in Q1 2010. Management attributed lower operating cash flow chiefly to increased working-capital needs, especially receivables after strong collections in Q4 2010.
- Oilfield Services revenue was $8.122 billion, up 45% year over year but down 4% sequentially. Its pretax operating margin was 17.9%, down 59 basis points year over year and 206 basis points sequentially. Distribution contributed $601 million of revenue and $22 million of pretax operating income.
- At March 31, cash was $1.475 billion, short-term investments $2.688 billion, and held-to-maturity fixed-income investments $458 million. Current assets were $18.211 billion and current liabilities $10.399 billion.
- Total debt was approximately $8.6 billion; management reported net debt of $3.990 billion, up from $2.638 billion at December 31, 2010. Cash and short-term investments totaled $4.2 billion, and $3.7 billion of committed credit facilities was available and unused.
- Q1 financing included $844 million of share repurchases and $291 million of dividends paid. The company repurchased 9.7 million shares at an average $87.18 per share.
Material changes and unusual items
- The company adopted product-group reporting in Q1 2011, with prior segment disclosures recast. The groups are Reservoir Characterization, Drilling, and Reservoir Production; Distribution is reported separately.
- The Smith acquisition closed in August 2010 and Geoservices was acquired in April 2010. These transactions materially affect year-over-year comparisons, particularly Drilling revenue, which increased 120%, and Reservoir Production revenue, which increased 44%.
- Q1 2011 included $34 million of pretax merger and integration charges ($28 million after tax). Q1 2010 included $35 million of merger costs and a $40 million tax charge related to the loss of a Medicare Part D subsidy deduction.
- During Q1, Schlumberger issued $1.1 billion of 4.20% notes due 2021 and $500 million of 2.65% notes due 2016, and repurchased higher-coupon notes for approximately $1.26 billion. It reported no significant gains or losses on the repurchases.
- On April 5, 2011, after quarter-end, the company completed the sale of Global Connectivity Services for $397.5 million in cash.
Outlook, commentary, and risks
- Management expected full-year 2011 capital expenditures to approach $4.0 billion, compared with $2.9 billion in 2010. The filing provides no specific earnings or revenue guidance.
- Management cited recovering demand, high oil prices, growing activity in North American liquid-rich plays, a visible deepwater upturn, and increasing activity in the Middle East, particularly Saudi Arabia and Iraq. It expected activity increases to mobilize over the next six months and warned that resources could become constrained; Schlumberger said it was preparing with technology, equipment, and personnel.
- Political unrest in North Africa and the Middle East and severe weather in the United States and Australia reduced Q1 activity and revenue. The company did not expect a near-term return to activity in Libya. Its Libyan assets had a carrying value of approximately $340 million, and recovery depends on how the situation evolves.
- Contingencies include U.S. investigations concerning possible Foreign Corrupt Practices Act violations associated with freight-forwarding services and operations in countries subject to U.S. sanctions. Schlumberger said it was cooperating and could not predict outcomes. Certain Deepwater Horizon-related actions name an M-I SWACO entity; the company said any potential M-I SWACO liability would not be material to consolidated financial position based on information then known.
- Forward-looking risks include economic and geopolitical conditions, customer spending, pricing pressure, weather and seasonality, regulatory changes, offshore permitting and operational delays, and technology execution. Management reported no material change in market-risk exposure or previously disclosed risk factors.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying activity, pricing, and organic performance, using the recast product-group disclosures.
- Track working-capital needs, cash conversion, capital spending, and whether the planned investment level is supported by operating cash flow.
- Monitor debt, commercial-paper borrowings, refinancing, and progress against the share-repurchase authorization.
- Assess exposure to Libya and developments in the FCPA, sanctions, and Deepwater Horizon matters; the filing does not establish their ultimate outcomes.
- Compare management’s activity outlook with actual mobilization, resource availability, and geopolitical or weather-related disruptions. Management cautioned that Q1 results are not necessarily indicative of full-year results.