Business Context and Reporting Period
Company: Schlumberger Limited (SLB)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2007
Business Overview: Schlumberger is the world's leading oilfield services company, operating in approximately 80 countries with roughly 80,000 employees. The company is organized into two primary segments: Schlumberger Oilfield Services (providing technology and project management for the oil and gas industry) and WesternGeco (providing surface seismic services). The company's functional currency is the US dollar, though approximately 76% of revenue is derived from non-US operations.
Key Financial Metrics
| Metric (in millions, except per share) | 2007 | 2006 | 2005 |
|---|---|---|---|
| Total Revenue | $23,277 | $19,230 | $14,309 |
| Net Income | $5,177 | $3,710 | $2,207 |
| Diluted EPS | $4.20 | $3.01 | $1.82 |
| Operating Cash Flow | $6,259 | $4,781 | $3,007 |
| Capital Expenditures | $3,191 | $2,637 | $1,652 |
| Net Debt | $1,857 | $2,834 | $532 |
| Working Capital | $3,551 | $2,731 | $3,121 |
| Stockholders' Equity | $14,876 | $10,420 | $7,592 |
Segment Performance (2007):
- Oilfield Services: Revenue of $20,306 million; Pretax Segment Income of $5,959 million.
- WesternGeco: Revenue of $2,963 million; Pretax Segment Income of $1,060 million.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 21% year-over-year, driven by strong international demand. Growth was led by the Middle East & Asia (31%), Europe/CIS/Africa (30%), and Latin America (29%) regions. North America revenue remained essentially flat.
- Profitability: Net income rose 40% to $5.18 billion. Pretax operating margins for Oilfield Services improved by 164 basis points to 29.3%, while WesternGeco margins increased by 299 basis points to 35.8%.
- Acquisitions: Schlumberger completed the acquisition of Eastern Echo Holding Plc for $838 million in cash to expand its marine seismic fleet. It also acquired a majority stake in Framo Engineering AS.
- Debt Reduction: Net debt decreased significantly from $2.83 billion in 2006 to $1.86 billion in 2007, aided by strong operating cash flows and the conversion of $656 million of convertible debentures into common stock.
- Dividends: The quarterly dividend was increased by 20% to $0.21 per share, effective April 2008.
Guidance, Outlook, and Risks
Outlook: Management expects continued strong growth in land activity outside North America and high demand for seismic exploration services. However, North American natural gas drilling is not expected to vary greatly absent severe weather. Capital expenditures are projected to approach $4.2 billion in 2008.
Key Risks:
- Commodity Prices: Demand is highly sensitive to oil and gas prices; a decline could reduce industry expenditures.
- Geopolitical Exposure: Approximately 76% of revenue comes from outside the US, exposing the company to political instability, expropriation, and sanctions in countries like Iran, Syria, and Sudan.
- Environmental & Liability: Operations involve hazardous materials and hostile environments, creating risks for environmental liabilities and substantial claims.
- Technology Leadership: Competitive advantage relies on maintaining technological leadership; failure to innovate could reduce revenue.
Unusual Items: In 2007, the company recorded a $25 million pretax gain on the sale of workover rigs. In 2006, significant charges included a $21 million in-process R&D charge related to the WesternGeco acquisition and a $9 million loss on liquidation of investments.
Investor Verification Checklist
- International Revenue Mix: Verify the sustainability of growth in the Middle East & Asia and Europe/CIS/Africa regions, which drove the majority of 2007 revenue increases.
- North America Pricing: Monitor the impact of pricing erosion in US land well stimulation activities, which negatively affected margins in the North America segment.
- Capital Allocation: Review the execution of the $4.2 billion capital expenditure plan for 2008, specifically regarding the delivery and utilization of the six new seismic vessels from Eastern Echo.
- Debt Structure: Assess the maturity profile of the $5.4 billion total debt, noting that $1.67 billion is due in 2008.
- Tax Liabilities: Note the $858 million liability recorded for uncertain tax positions across over 100 jurisdictions, which could fluctuate based on audit resolutions.