SLB Limited (Schlumberger Limited) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Amounts are in U.S. dollars; financial figures are in millions unless noted. Results are unaudited. Comparisons are affected by the Smith and Geoservices acquisitions and the addition of Distribution; prior segment results were recast under a new product-group structure.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $9,621 | $5,937 | $18,337 | $11,534 |
| Income from continuing operations attributable to Schlumberger | $1,119 | $818 | $2,063 | $1,490 |
| Net income attributable to Schlumberger | $1,339 | $818 | $2,283 | $1,490 |
| Diluted EPS from continuing operations | $0.82 | $0.68 | $1.51 | $1.23 |
| Diluted EPS, including discontinued operations | $0.98 | $0.68 | $1.67 | $1.23 |
- Q2 revenue increased 62% year over year, including $631 million from Distribution, which was acquired with Smith. Oilfield Services revenue rose 51% year over year and 11% sequentially.
- Q2 continuing-operations pretax income was $1,498 million, versus $993 million; the effective tax rate was 25%, versus 18%.
- Oilfield Services pretax operating margin was 19.5% in Q2, up 61 basis points year over year and 155 basis points sequentially. Sequentially, Reservoir Characterization, Drilling, and Reservoir Production margins were 24.5%, 15.6%, and 20.0%, respectively.
- Six-month cash from operations was $2,086 million, down from $2,286 million. Increased working-capital needs—particularly receivables and inventories—and higher tax payments offset earnings growth. Investing cash outflow was $1,882 million, including $1,720 million in capital expenditures; financing cash outflow was $983 million.
- At June 30, cash was $1,378 million, short-term investments $3,555 million, and held-to-maturity fixed-income investments $318 million. Reported net debt was $4,311 million, compared with $2,638 million at December 31, 2010. Debt included $2,573 million of current long-term debt, $1,244 million of short-term borrowings, and $5,745 million of long-term debt.
Material changes and notable items
- Smith and Geoservices acquisitions materially increased revenue, particularly in Drilling, but acquisition-related activities were dilutive to margins in that group. The Distribution business contributed $637 million of Q2 revenue and $24 million of pretax segment income.
- Q2 net income included a $220 million after-tax gain from the sale of Global Connectivity Services for approximately $385 million in cash. The business’s historical results were not significant and were not reclassified to discontinued operations.
- Q2 included $82 million of pretax charges: $50 million for a Schlumberger Foundation grant and $32 million of acquisition-related integration costs. Six-month pretax charges totaled $116 million.
- Q2 Oilfield Services growth reflected stronger activity and pricing, including North American land services, deepwater and exploration activity, and higher seismic sales. International activity accelerated; management expected the ramp-up to continue through the second half of 2011 and into 2012.
- Geographic and operating disruptions included Libya’s shutdown, the measured recovery in the U.S. Gulf of Mexico, seasonal Canadian spring break-up, and adverse weather in the Williston basin. Management cited industry equipment and staffing constraints as activity grows concurrently in North America and international markets.
Outlook, liquidity, and risks
- Management expected 2011 capital expenditures to approach $4.2 billion, compared with $2.9 billion in 2010.
- At June 30, the company reported $4.9 billion of cash and short-term investments, $2.8 billion of available and unused committed debt facilities, and $2.6 billion of commercial paper outstanding. Management stated these resources were sufficient for business requirements for at least the next 12 months.
- The board extended the $8 billion share-repurchase program through December 31, 2013. Approximately $4.7 billion had been repurchased by June 30; first-half repurchases totaled $1,551 million.
- Schlumberger reported approximately $300 million in carrying value of assets in Libya and said recovery depends on how the political situation evolves; it did not expect a near-term return of activity there.
- Contingencies include U.S. government inquiries concerning freight forwarding/customs services and operations in countries subject to U.S. sanctions. The company said it was cooperating and could not predict the outcomes. In Deepwater Horizon-related litigation, management said any potential M-I SWACO loss, based on information then known, would not be material to the consolidated financial position.
- Forward-looking risks include customer spending and commodity-market changes, pricing pressure, geopolitical and economic conditions, weather, regulatory changes, Gulf of Mexico operating delays, and the industry’s ability to supply equipment and personnel. Management said market-risk exposure had not changed materially since year-end; disclosure controls were considered effective.
Most important facts to verify
- How much of reported growth and earnings improvement reflects acquired businesses versus underlying activity, pricing, and integration effects.
- Whether operating cash flow improves as receivables, inventories, and tax payments affect working capital, while planned capital spending rises.
- Whether activity growth and service-industry capacity constraints support continued margin improvement, especially in international markets and North American unconventional plays.
- The effect of Libya-related asset recoverability and the outcomes of the disclosed government inquiries and litigation.
- How much reported net income and EPS depend on the one-time Global Connectivity Services divestiture gain and the disclosed charges.