SLB (Schlumberger Limited) Q2 2016 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. The filing identifies the registrant as Schlumberger Limited (Schlumberger N.V.); the request metadata names SLB Limited.
Business context and results
Schlumberger provides oilfield services, products and technology. Results reflected a severe industry downturn, lower customer spending, falling rig counts and pricing pressure. The April 1 acquisition of Cameron added a new business segment and materially affected year-over-year comparisons.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $7.164 billion | $9.010 billion | $13.684 billion | $19.258 billion |
| Net income (loss) attributable to Schlumberger | $(2.160) billion | $1.124 billion | $(1.659) billion | $2.099 billion |
| Diluted EPS | $(1.56) | $0.88 | $(1.26) | $1.64 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $2.842 billion | $4.084 billion |
| Free cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $782 million | $2.448 billion |
Q2 revenue rose 10% sequentially, including $1.5 billion from Cameron; excluding Cameron, it fell 14% sequentially. Year over year, revenue declined 21%, or 38% excluding Cameron. Q2 pretax operating margin was 10%, down 155 basis points sequentially and 854 basis points year over year. Six-month margin was 12%, down 718 basis points year over year. Segment margins in Q2 were Reservoir Characterization 17%, Drilling 8%, Production 4%, and Cameron 16%.
Cash, debt and liquidity
- At June 30, cash was $2.947 billion and short-term investments were $8.245 billion; together they totaled $11.2 billion. The company also reported $386 million of held-to-maturity fixed-income investments.
- Gross borrowings included $18.252 billion of long-term debt, $2.385 billion of current long-term debt and $986 million of short-term borrowings. Net debt was approximately $10.045 billion, up from $5.547 billion at December 31, 2015.
- Committed debt facilities totaled $6.8 billion, with $3.6 billion available and unused. Commercial-paper borrowings were $3.2 billion. Management said liquidity was sufficient for business requirements for at least the next 12 months.
- Six-month capital expenditures were $998 million. Full-year 2016 capital expenditures were expected to be approximately $2.2 billion, compared with $2.4 billion in 2015.
- The company paid $1.255 billion in dividends and repurchased $506 million of shares in the first half. It had completed $9.1 billion of the prior $10 billion repurchase authorization by June 30.
Material changes and unusual items
- Q2 included $2.908 billion of pretax charges: $2.573 billion of impairments and other charges, plus $335 million of Cameron merger and integration costs. The charges reduced net income by $2.476 billion after tax. Items included workforce reductions, equipment and facility impairments, inventory write-downs, and seismic-data impairments. Management said further charges could be required if industry conditions worsened.
- Schlumberger acquired Cameron for total fair-value consideration of approximately $12.8 billion, comprising about $9.9 billion in stock and $2.8 billion in cash. Cameron contributed $1.5 billion of Q2 revenue and $243 million of pretax operating income. Purchase-price allocation was preliminary; goodwill recorded was $8.837 billion.
- Venezuela activity was reduced to align operations with cash collections amid insufficient customer payments and no progress establishing new payment mechanisms. Venezuelan receivables were approximately $1.2 billion at quarter-end; Venezuela was the only country representing more than 10% of receivables.
- Operating cash flow was lower year over year, while free cash flow fell to $782 million from $2.448 billion. Investing cash flows included $2.220 billion of net acquisition spending; financing cash flows included dividends, share repurchases and debt issuance and repayment.
Management commentary, outlook and risks
Management attributed the downturn to customer budget cuts, lower activity and persistent pricing concessions. Excluding Cameron, international revenue declined 12% sequentially; North America revenue declined 20%, including the effects of Canadian spring break-up and a 25% decline in the U.S. land rig count. Management cited expected technology and product integration benefits from Cameron, but the filing does not quantify expected synergies or provide specific revenue or earnings guidance.
Key stated risks include continued weakness in oil and gas spending, pricing pressure, regional political and economic conditions, delayed customer payments, foreign-exchange exposure, operational delays or cancellations, and challenges integrating Cameron or retaining key employees. Management considered material loss from currently pending legal proceedings remote, while noting litigation uncertainty. The filing reported no material change in market-risk exposure since year-end 2015.
Important facts for investors to verify
- How much of future reported growth and margin performance comes from Cameron versus Schlumberger’s legacy operations, and whether expected integration benefits are realized.
- Whether severe industry conditions lead to additional impairments, workforce costs or further declines in segment margins.
- Collections on the approximately $1.2 billion Venezuela receivable balance and the potential effects of reduced activity there.
- Debt and liquidity trends after the acquisition, including commercial-paper refinancing needs, available committed facilities and cash generation.
- Whether the approximately $2.2 billion full-year 2016 capital-expenditure expectation and shareholder distributions remain supportable by cash flow.