Business context and reporting period
Schlumberger Limited (Schlumberger N.V.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company provides oilfield services and reports Reservoir Characterization, Drilling, and Production segments. Unless noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $12.054bn | $11.182bn | $23.294bn | $21.752bn |
| Income from continuing operations | $1.821bn | $2.224bn | $3.429bn | $3.436bn |
| Net income attributable to Schlumberger | $1.595bn | $2.095bn | $3.187bn | $3.354bn |
| Diluted EPS, continuing operations | $1.37 | $1.66 | $2.58 | $2.56 |
| Diluted EPS, total | $1.21 | $1.57 | $2.42 | $2.51 |
- Q2 revenue grew 8% year over year and 7% sequentially. Pretax operating income was $2.62bn, up 15% year over year; pretax operating margin was 21.7%, up 137 basis points year over year and 67 basis points sequentially.
- For the first six months, revenue rose 7% and pretax operating income rose 18% year over year. Pretax operating margin was 21.4%, up 191 basis points.
- Six-month operating cash flow was $4.219bn, versus $3.795bn. Management-defined free cash flow was $1.902bn, versus $1.406bn. Working-capital increases used $1.090bn of cash.
- At June 30, cash was $2.267bn, short-term investments $4.432bn, and held-to-maturity fixed-income investments $480m. Management reported $6.7bn of cash and short-term investments and $2.0bn of unused committed facilities. It stated liquidity was sufficient for business requirements for at least 12 months.
- Management-defined net debt was $6.066bn at June 30, compared with $4.443bn at December 31, 2013. Total reported debt, including current debt and short-term borrowings, was approximately $13.2bn at both dates. Long-term debt was $11.740bn, including commercial paper borrowings.
- Capital expenditures were $1.786bn for the first half. The company expected full-year 2014 capital expenditures of approximately $3.8bn, compared with $3.9bn in 2013.
Material changes versus comparable periods
- Year-over-year Q2 revenue growth was strongest in North America (+16%) and the Middle East and Asia (+12%); Latin America revenue declined 3%. For the first half, North America grew 14%, Middle East and Asia 15%, while Latin America declined 5%.
- Q2 segment revenue increased year over year in Drilling (+10%) and Production (+11%); Reservoir Characterization grew 1%. Drilling and Production margins improved year over year, while Reservoir Characterization margin was flat.
- Q2 net income and EPS declined year over year in part because 2013 included a $1.028bn pretax gain on forming OneSubsea. Q2 2014 also included a $205m loss in discontinued operations related to a sanctions matter. Continuing-operations income was lower year over year.
- There were no charges or credits in continuing operations in the first half of 2014. The comparable 2013 period included the OneSubsea gain, investment impairments, and a Venezuela currency loss.
- Share repurchases were $2.074bn in the first half, compared with $692m in the prior-year period. The company said it was accelerating its $10bn repurchase program, aiming to complete it in 2.5 years rather than the original five-year target; $3.8bn had been repurchased under the program by June 30, 2014.
Outlook, management commentary, risks and unusual items
- Management attributed growth to stronger international activity, higher-margin exploration and deepwater work, market-share gains, operational efficiency, and technology adoption. North American pressure-pumping commodity inflation weighed on margins; the Canadian spring breakup also reduced activity and margins sequentially.
- Venezuela remained a significant currency risk. The company had approximately $410m of net monetary assets denominated in bolivares and continued using the official rate of 6.3 bolivares per U.S. dollar. It estimated that applying a rate of 50 throughout the first half would have reduced earnings by about $0.04 per share; changing to that rate on June 30 would have produced a one-time charge of about $360m, or $0.27 per share.
- A U.S. government investigation and regulatory inquiry concerning historical operations in sanctioned countries continued. Schlumberger accrued a $205m charge in discontinued operations after discussions progressed, but stated that settlement was uncertain and the ultimate loss could be higher or lower.
- Other disclosed risks include customer spending changes, pricing pressure, geopolitical and economic conditions including Russia and Ukraine, seasonal and weather effects, operational delays, regulation, and technology challenges. Management said market-risk exposure had not materially changed since year-end 2013.
- The company had completed the wind-down of its Iran service operations in 2013; residual dealings related to taxes and collection of amounts owed for prior services. Management did not expect the new revenue-recognition standard, required from 2017, to have a material financial-statement impact.
Important facts for investors to verify
- Underlying earnings trends excluding the prior-year OneSubsea gain and the current-period discontinued-operations charge.
- Collection of receivables and cash exposure in Venezuela, including the applicable exchange rate and any resulting impairment or currency charge.
- Ultimate resolution and financial exposure from the sanctions investigation.
- Whether international activity and margin gains can offset North American commodity inflation and Latin American weakness.
- Debt and liquidity developments as buybacks, dividends, acquisitions, and capital spending continue; confirm the precise composition of commercial-paper and current-debt balances.