Business context and reporting period
Schlumberger Limited (Schlumberger N.V.) filed this Form 10-K for the fiscal year ended December 31, 2014. The company supplies oilfield technology, services and project-management solutions globally. This summary covers full-year 2014 and the fourth quarter where specified; amounts are U.S. dollars.
Financial performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $48.580 billion | $45.266 billion | +7% |
| Income from continuing operations attributable to Schlumberger | $5.643 billion | $6.801 billion | −17% |
| Net income attributable to Schlumberger | $5.438 billion | $6.732 billion | −19% |
| Diluted EPS from continuing operations | $4.31 | $5.10 | −15% |
| Operating cash flow | $11.195 billion | $10.690 billion | +5% |
| Free cash flow, as defined by management | $6.158 billion | $5.451 billion | +13% |
| Net debt | $5.387 billion | $4.443 billion | Up $944 million |
| Working capital | $10.518 billion | $12.700 billion | Down $2.182 billion |
Full-year gross margin was $11.182 billion, approximately 23.0% of revenue, versus $9.935 billion, approximately 21.9%, in 2013. Pretax operating income increased 13% to $10.576 billion, and pretax operating margin rose to 21.8% from 20.6%. The effective tax rate was 25.2%, compared with 21.3%; excluding charges and credits, it was 21.9% versus 22.9%.
Cash and short-term investments were $7.501 billion at year-end; including held-to-maturity fixed-income investments, liquid investments totaled approximately $7.943 billion. Total debt was $13.330 billion. Committed credit facilities totaled $3.9 billion, with $2.3 billion available and unused. Capital expenditures were $3.976 billion. Dividends declared were $1.60 per share, versus $1.25 in 2013; $4.678 billion was spent on share repurchases.
Fourth quarter
Revenue was $12.641 billion, essentially flat sequentially from $12.646 billion in Q3. Fourth-quarter net income attributable to Schlumberger was $302 million, or diluted EPS of $0.23, including $1.639 billion of after-tax charges. Pretax operating income was $2.781 billion and pretax operating margin was 22.0%. Production Group revenue rose 5% sequentially; Reservoir Characterization and Drilling revenue each fell 3%.
Material changes and management commentary
- North America revenue grew 16% for the year to $16.151 billion, led by land activity, pressure-pumping market-share gains, efficiency and new technology. International revenue rose 4% to $32.1 billion; Middle East and Asia grew 10%, while Latin America declined 1%.
- Drilling revenue rose 8% and Production revenue 14%; Reservoir Characterization revenue declined 2%, reflecting lower seismic vessel utilization and multiclient sales. Saxon Rig Services, acquired in May, contributed to Drilling growth.
- Oil prices fell more than 40% late in 2014. Management described the 2015 outlook as challenging and uncertain, citing expected customer spending and activity reductions. It said the business had been restructured and resized to align with anticipated activity. Management also argued that weaker exploration and natural production declines could tighten supply over the longer term and support renewed investment.
- Management expected 2015 capital expenditures to approach $3.4 billion. On January 15, 2015, the board approved a 25% quarterly dividend increase to $0.50. On January 20, 2015, Schlumberger announced an agreement to acquire approximately 45% of Russia’s Eurasia Drilling for about $1.7 billion in cash, with closing expected in Q1 2015.
Unusual items, risks and contingencies
- 2014 continuing-operations charges totaled $1.773 billion pretax: $806 million for WesternGeco restructuring, $472 million for Venezuela currency devaluation, $296 million for workforce reductions and $199 million for an SPM project impairment. The WesternGeco vessel-related charges were reported as noncash in the filing. Management said further workforce actions could be necessary depending on market conditions.
- Schlumberger began applying Venezuela’s SICAD II rate, approximately 50 bolivars per U.S. dollar at year-end, to local-currency balances. The resulting $472 million charge reflects a material currency exposure; management estimated applying that rate throughout 2014 would have reduced earnings by about $0.08 per share.
- A $205 million charge was recorded in discontinued operations for a U.S. government investigation into historical operations in sanctioned countries. The filing says settlement discussions continued, but no settlement or ultimate loss amount was certain; the final loss could differ from the accrual.
- Other significant risks include reduced customer spending following lower oil prices, pricing pressure, geopolitical and sanctions exposure, currency movements, environmental and safety liabilities, regulation of hydraulic fracturing, litigation, cybersecurity threats and collection delays. Venezuela was less than 5% of receivables at year-end; the company reported historical payment delays from its Venezuelan national oil company customer.
- U.S. pension plans were 86% funded and international defined-benefit plans 94% funded at year-end, down from 96% and 104%, respectively, in 2013. The filing anticipates approximately $400 million of 2015 benefit-plan contributions, subject to conditions. Uncertain tax-position liabilities were approximately $1.4 billion, excluding accrued interest and penalties.
Most important facts for investors to verify
- How quickly oilfield-service demand, pricing and margins respond to lower oil prices, and whether management’s resizing actions are sufficient.
- The drivers of the gap between revenue growth and declines in continuing-operations income and EPS, including the $1.773 billion charges and higher reported effective tax rate.
- Venezuela currency treatment, customer collections and any further exposure to devaluation or restrictions.
- The final outcome and potential additional cost of the sanctions-related investigation and other material contingencies.
- Liquidity and capital allocation after repurchases, the higher dividend, planned 2015 capital spending and the proposed Eurasia Drilling investment.
- Whether reduced pension funding ratios, SPM project cash flows and seismic-library assumptions could lead to additional funding needs or impairments.