SLB Limited (Schlumberger Limited) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unless otherwise indicated, amounts are in U.S. dollars. The filing attributes the sharp deterioration in the outlook to the COVID-19 pandemic, collapsing oil demand and prices, and a simultaneous oil-supply shock.
Financial performance and position
| Metric | Q1 2020 | Comparable period |
|---|---|---|
| Revenue | $7.455 billion | $7.879 billion in Q1 2019; down 5%. Down 9% sequentially from Q4 2019. |
| Net income (loss) attributable to Schlumberger | $(7.376) billion; $(5.32) per diluted share | $421 million; $0.30 per diluted share in Q1 2019. |
| Operating cash flow | $784 million | $326 million in Q1 2019. |
| Free cash flow (company-defined, non-GAAP) | $179 million | $(283) million in Q1 2019. |
| Cash and short-term investments | $3.344 billion | $2.167 billion at Dec. 31, 2019. |
| Net debt (company-defined, non-GAAP) | $13.298 billion | $13.127 billion at Dec. 31, 2019. |
Gross debt was approximately $16.642 billion, including $1.233 billion of short-term borrowings and current debt. At quarter-end, $3.5 billion of $6.25 billion in committed credit facilities was unused. The company reported $48.594 billion in total assets and $15.983 billion in total equity.
Revenue from services declined to $5.426 billion from $5.906 billion; product sales rose to $2.029 billion from $1.973 billion. The reported pretax loss includes $8.523 billion of charges; the resulting net charge was $7.727 billion. The effective tax rate was 9%; the filing says the rate was affected almost entirely by these charges, primarily nondeductible goodwill impairment.
Changes versus prior periods
- North America revenue fell 17% year over year to $2.279 billion; international revenue increased 2% to $5.121 billion. Overall revenue declined 5% year over year.
- Segment pretax operating margins were 14% for Reservoir Characterization (down 525 basis points year over year), 12% for Drilling (down 42 bps), 8% for Production (up 32 bps), and 10% for Cameron (down 209 bps).
- Q1 2020 included $3.070 billion of goodwill impairment, $3.321 billion of intangible-asset impairment, $1.264 billion of APS investment impairment, $587 million of North American pressure-pumping impairment, $202 million of severance, $79 million of other charges, and a $164 million tax valuation allowance. No charges or credits were recorded in Q1 2019.
- Goodwill and intangible assets declined to $12.924 billion and $3.673 billion, respectively, from $16.042 billion and $7.089 billion at year-end 2019. Fixed assets fell to $8.550 billion from $9.270 billion.
Outlook, management commentary and risks
- Management reported that customer feedback and its analysis indicated 2020 global E&P capital spending could decline about 20%: approximately 40% in North America and 15% internationally. It expected final investment decision sanctions to fall to 2015 trough levels, potentially delaying projects into 2021 and beyond. These are expectations, not company revenue guidance.
- Management described Q2 as likely to be the industry’s most uncertain and disruptive quarter. It cited the pandemic’s duration and scope, government and business responses, oil demand, commodity prices, customer spending, and operating disruptions as significant uncertainties that could materially affect results, liquidity, and financial condition.
- Cost and cash actions included workforce and salary reductions, furloughs, facility closures, organizational restructuring, and a capital investment program reduced by more than 30%. Full-year 2020 capital expenditures were expected to be about $1.2 billion, approximately 30% below 2019.
- The Board reduced the dividend by 75%, effective with the July 2020 payment. Q1 dividends paid were $692 million; the declared quarterly dividend was $0.50 per share. Management said the reduction supported liquidity, investment-grade credit standing, and balance-sheet strength.
- The company issued €800 million of notes during Q1. After quarter-end it entered a €1.2 billion revolving credit facility, with no amount drawn as of April 22, 2020. It said available liquidity was sufficient for at least the next 12 months.
- The company expected to record a significant additional severance charge in Q2, but said the amount could not then be reasonably estimated. It also warned that changing market conditions could lead to further restructuring or impairment charges, including for inventory, fixed assets, and other assets. It expected impairment-related reductions in depreciation and amortization of about $95 million per quarter going forward.
- Management said the probability of a material loss from currently pending legal proceedings was remote, while noting litigation outcomes are inherently uncertain. It also cautioned that goodwill impairment estimates rely on judgment and volatile assumptions; further impairments could occur.
Important facts for investors to verify
- Whether oil demand, prices, customer spending, and activity develop in line with management’s stated downside assumptions, particularly during Q2 and across North America and international markets.
- Whether operating cash flow and liquidity remain adequate as working capital, customer collections, debt maturities, and commercial-paper funding evolve.
- The amount and timing of additional severance, restructuring, or impairment charges, and whether the impairment assumptions remain supportable.
- Execution of the reduced capital program and the 75% dividend reduction, including resulting cash preservation and any effects on investment or shareholder returns.
- That free cash flow and net debt are company-defined non-GAAP measures; compare them with the filing’s GAAP cash-flow and debt disclosures.