Business Context and Reporting Period
This Form 10-Q covers Schlumberger Limited (SLB) for the quarter and nine months ended September 30, 1999. The company operates primarily in Oilfield Services, Resource Management Services, and Test & Transactions. A significant strategic development during the period was the announcement of a spin-off and merger of its offshore contract drilling business (Sedco Forex Offshore) with Transocean Offshore Inc., expected to close by December 31, 1999.
Key Financial Metrics
| Metric | Q3 1999 | Q3 1998 | 9M 1999 | 9M 1998 |
|---|---|---|---|---|
| Operating Revenue ($ millions) | 2,249 | 2,932 | 6,730 | 9,040 |
| Net Income ($ millions) | 139 | (29) | 355 | 736 |
| Diluted EPS ($) | 0.25 | (0.05) | 0.64 | 1.31 |
| Operating Cash Flow ($ millions) | N/A | N/A | 991 | 1,448 |
| Cash and Short-term Investments ($ millions) | 4,022 | 3,957 | 4,022 | 3,957 |
| Total Debt ($ millions) | 4,305 | 4,094 | 4,305 | 4,094 |
| Gross Margin (Excl. Charges) | 22% | 27% | 23% | 28% |
Note: Q3 1998 Net Income included a $380 million after-tax charge. Q1 1999 included a $90 million after-tax charge. Total Debt includes bank loans, long-term debt due within one year, and long-term debt.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenue decreased 23% in Q3 and 26% for the nine months compared to the prior year, driven primarily by a 28% drop in Oilfield Services revenue and a 16% decline in the global rig count.
- Profitability Impact: Pretax operating income in Oilfield Services fell 63% year-over-year in Q3. Excluding one-time charges, consolidated net income was 60% lower than the prior year.
- Segment Performance:
- Oilfield Services: Revenue down 28% (Q3) and 29% (9M). Declines were broad across North America, Latin America, and Europe/CIS/West Africa.
- Resource Management Services: Revenue down 4% (Q3) and 5% (9M), impacted by weak markets in Europe and South America, though North America saw growth.
- Test & Transactions: Revenue increased 10% (Q3) and decreased 6% (9M). Growth was driven by Smart Cards and Automated Test Equipment (ATE), offset by declines in other areas.
- Cost Structure: Research & engineering expenses declined 2% (Q3) and 8% (9M). Interest expense increased due to higher debt balances related to the Camco merger.
Outlook, Risks, and Management Commentary
- Strategic Transactions: The company is proceeding with the spin-off of Sedco Forex Offshore to merge with Transocean. Schlumberger stockholders will own 52% of the new entity. Additionally, a joint venture for drilling fluids (M-I LLC) was completed with Smith International.
- Year 2000 Readiness: Management states the company reached Year 2000 readiness in all key areas by September 30, 1999. Estimated program costs are approximately $60 million, with $58 million spent to date. Contingency plans are in place for potential third-party disruptions.
- Legal Proceedings: The US Department of Justice filed petitions alleging the M-I drilling fluids joint venture violated a 1994 Consent Decree. The company is vigorously defending against claims that could result in fines or rescission of the transaction.
- Market Risks: Forward-looking statements highlight risks related to the duration of oil price recovery, customer commitment to key projects, and general economic conditions in key regions.
Investor Verification Checklist
- Verify the closing status and regulatory approvals for the Sedco Forex Offshore spin-off and merger with Transocean.
- Monitor the outcome of the US Department of Justice legal challenge regarding the M-I drilling fluids joint venture.
- Assess the impact of the global rig count decline on future Oilfield Services revenue recovery.
- Review the integration progress of the Camco merger and its effect on debt levels and interest expenses.
- Confirm the stability of the Test & Transactions segment, specifically the demand for RDRAM and SOC testers.