Schlumberger Limited (Schlumberger N.V.) — FY 2012 Form 10-K
Filing and period: The supplied filing identifies the registrant as Schlumberger Limited, not “SLB Limited.” It is the annual report for the fiscal year ended December 31, 2012; fourth-quarter figures are included below where relevant. Unless stated otherwise, amounts are U.S. dollars.
Business context and reporting period
Schlumberger supplies technology, products, and services to the oil and gas exploration and production industry, operating in approximately 85 countries. Its three reporting groups are Reservoir Characterization, Drilling, and Production. The 2012 environment featured robust offshore and international activity, while North American land activity was pressured by weakness in hydraulic fracturing.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $42.149 billion | $36.959 billion |
| Income from continuing operations | $5.468 billion | $4.730 billion |
| Net income attributable to Schlumberger | $5.490 billion | $4.997 billion |
| Diluted EPS from continuing operations | $4.06 | $3.47 |
| Cash provided by operating activities | $6.814 billion | $6.115 billion |
| Capital expenditures | $4.695 billion | $4.008 billion |
| Working capital at year-end | $11.788 billion | $10.001 billion |
| Net debt at year-end | $5.111 billion | $4.850 billion |
FY 2012 pretax income was $7.191 billion and the effective tax rate was 24.0%. Cash and short-term investments totaled $6.274 billion; unused committed credit facilities were $3.8 billion. Gross debt was $11.630 billion, including $2.121 billion due in 2013. Operating cash flow less capital expenditures was approximately $2.119 billion, before $351 million of capitalized multiclient seismic data. Working capital increased in part because of higher receivables and other operating investment.
Oilfield Services revenue increased 14% and pretax operating income increased 14%; its pretax operating margin was essentially flat at 19.8%. By group, revenue and pretax operating margin were: Reservoir Characterization, $11.424 billion and 28.1%; Drilling, $15.971 billion and 17.7%; Production, $14.875 billion and 15.9%. Quarterly dividends declared totaled $1.10 per share in 2012. In January 2013, the board raised the quarterly dividend 13.6% to $0.3125.
Fourth quarter: Revenue was $11.174 billion, up 5% sequentially. Oilfield Services pretax operating income was $2.164 billion, while consolidated income before taxes was $1.807 billion after corporate costs, interest, and charges. Oilfield Services pretax operating margin was 19.4%, down 83 basis points sequentially. Year-end product and software sales and multiclient sales supported revenue; seasonal slowdowns, contractual delays, and North American land pricing pressure weighed on margins.
Material changes versus the prior comparable period
- Revenue rose 14% year over year, with international revenue up 16% and North America up 9%. Europe/CIS/Africa grew 18%, Latin America 17%, and Middle East & Asia 13%.
- Continuing-operations income increased to $5.468 billion from $4.730 billion; diluted continuing-operations EPS rose to $4.06 from $3.47.
- International pretax operating income rose 31%, while North America pretax operating income fell 10%. North America margin declined 448 basis points to 20.3%, reflecting Well Services pricing pressure and cost inflation.
- Production Group margin fell 414 basis points to 15.9%, principally because of North American Well Services pricing pressure and cost inflation. Reservoir Characterization and Drilling margins expanded.
- Operating cash flow increased, but capital expenditures also rose. Net debt increased by $261 million year over year.
- Schlumberger sold its Wilson distribution business and its 56% interest in CE Franklin for cash proceeds of $906 million and $122 million, respectively; both were reported as discontinued operations. FY 2012 discontinued-operations income was $51 million, including net gains on divestitures.
Outlook, management commentary, risks, and unusual items
- Outlook: Management described the 2013 macroeconomic outlook as uncertain, but expected global oil demand growth at levels similar to 2011–2012 and oil prices to remain within the range seen since 2011, absent unexpected macroeconomic or geopolitical events. No specific revenue or earnings guidance is provided in the supplied filing text. Capital expenditures were expected to approach $3.9 billion in 2013; anticipated postretirement plan contributions were approximately $650 million, subject to conditions.
- OneSubsea: Schlumberger and Cameron announced a subsea joint venture, with Schlumberger to own 40% and contribute its subsea businesses plus $600 million cash. Closing was expected by the second quarter of 2013, subject to approvals. Schlumberger estimated a pretax gain in excess of $1.2 billion upon closing; this was a prospective estimate, not a 2012 realized gain.
- Iran and sanctions: Certain non-U.S. subsidiaries generated $418 million of 2012 revenue and $208 million of net income from services in Iran, including $92 million of fourth-quarter revenue and $48 million of fourth-quarter net income. Schlumberger said it intended to discontinue the activity in 2013 and was winding it down. A U.S. grand jury investigation and regulatory inquiry concerning operations in sanctioned countries were ongoing; the company was cooperating. Potential penalties or other remedial measures could affect earnings and cash flows.
- Other contingencies: The company reported approximately $1.45 billion of liabilities for uncertain tax positions, plus $250 million of accrued interest and penalties; the timing of related cash outflows was not reliably estimable. The DOJ closed its separate inquiry concerning Panalpina-related matters as to Schlumberger in October 2012. The company said potential Deepwater Horizon-related loss attributable to M-I SWACO was not expected to be material based on information then known; other legal proceedings remained subject to uncertainty.
- Operating and market risks: Results depend substantially on customer spending, oil and gas prices, and exploration and production activity. Risks include international political and currency exposure, regulatory changes affecting hydraulic fracturing or fossil fuels, pricing erosion, severe weather, safety and environmental liabilities, and the ability to retain skilled personnel and maintain technology leadership. Venezuela payment delays were noted; five countries each represented more than 5% of receivables, but only the United States exceeded 10%.
- Other unusual matters: FY 2012 included $161 million of pretax charges, comprising merger integration costs and workforce-reduction charges. The company disclosed that 2,197,151 discounted stock purchase plan shares were sold unregistered during the six-month period ended June 30, 2012 before the shares were registered; it said potential rescission liability was believed immaterial.
Most important facts for investors to verify
- Whether the planned Iran wind-down was completed and whether sanctions-related investigations resulted in penalties, restrictions, or additional costs.
- Whether OneSubsea closed on expected terms and how the transaction, cash payment, and estimated gain were ultimately recognized.
- Whether North American Well Services pricing and margins stabilized, given the 2012 decline in regional pretax income and Production Group margin.
- Cash conversion and receivables quality, particularly collection delays in Venezuela, alongside the increase in working capital and capital spending.
- Debt maturities, pension funding requirements, and the timing and resolution of uncertain tax positions.
- The outcome of any rescission claims related to the unregistered discounted stock purchase plan shares.