Schlumberger Limited (Schlumberger N.V.) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts are in millions. Comparisons are with the corresponding 2017 periods.
Business context and reporting period
Schlumberger provides oilfield services and products through Reservoir Characterization, Drilling, Production and Cameron. Management described a tightening global oil market, with less than 2% global spare capacity, and said it continued to see a need for a multiyear increase in international exploration and production investment. Q3 revenue growth was driven largely by North American land activity; international revenue increased only 1% year over year.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $8,504 | $7,905 | $24,636 | $22,261 |
| Income before taxes | $787 | $677 | $1,976 | $1,027 |
| Net income attributable to Schlumberger | $644 | $545 | $1,599 | $749 |
| Diluted EPS | $0.46 | $0.39 | $1.15 | $0.54 |
| Cash flow from operations | Not presented quarterly | Not presented quarterly | $3,382 | $3,412 |
| Free cash flow | Not presented quarterly | Not presented quarterly | $1,061 | $1,215 |
Q3 revenue rose 8%, while attributable net income and diluted EPS each rose about 18%. For the first nine months, revenue increased 11%, attributable net income increased about 113%, and diluted EPS rose from $0.54 to $1.15. The 2017 comparison included substantial charges, particularly a $460 million charge related to a Venezuelan customer promissory note and merger and integration costs; 2018 included a $184 million pretax headcount-reduction charge in Q2.
Q3 pretax operating income by segment was $373 million for Reservoir Characterization, $339 million for Drilling, $320 million for Production and $148 million for Cameron. Reported pretax operating margins were 22%, 14%, 10% and 11%, respectively. Cameron’s margin declined year over year, while Reservoir Characterization’s increased; Drilling declined slightly and Production was flat.
- Cash and liquidity: At September 30, cash was $1.493 billion and short-term investments were $1.361 billion. Current assets were $16.483 billion versus current liabilities of $14.600 billion.
- Debt: Current borrowings and current portion of long-term debt were $3.215 billion; long-term debt was $14.159 billion. Management’s non-GAAP net debt was $14.520 billion, up from $13.110 billion at December 31, 2017.
- Cash generation and uses: Nine-month operating cash flow was $3.382 billion. Capital expenditures, SPM investments and capitalized multiclient seismic costs totaled $2.321 billion, producing reported free cash flow of $1.061 billion. Dividends paid were $2.077 billion.
- Funding access: The company reported $6.5 billion of committed debt facilities supporting commercial paper programs, with $3.4 billion available and unused; commercial paper borrowings were $3.1 billion.
Material changes versus the prior comparable period
- Q3 North America revenue increased 23%, while international revenue increased 1%. For the first nine months, North America revenue increased 37%, while international revenue was essentially flat.
- Q3 segment revenue increased 15% in Drilling and 13% in Production, decreased 6% in Reservoir Characterization, and was flat in Cameron. Production growth benefited from added hydraulic fracturing capacity and market-share gains.
- Nine-month cash from operations was slightly lower than in 2017, and free cash flow declined from $1.215 billion to $1.061 billion. Working-capital investment remained significant.
- Net debt increased $1.410 billion during the first nine months. Share repurchases were $300 million, versus $868 million in the comparable 2017 period; dividends were broadly similar.
- The effective tax rate was 16.4% in Q3 2018 versus 17.9% in Q3 2017, and 17.6% for the first nine months versus 26.2%. Excluding charges and credits, the nine-month rates were 17.0% and 17.8%, respectively.
Outlook, management commentary, risks and unusual items
- Management said global economic growth and oil demand remained solid and expected a multiyear increase in international E&P investment. It stated Schlumberger was positioned to outgrow the market in the anticipated upcycle, but provided no specific revenue or earnings guidance in the supplied filing text.
- Full-year 2018 capital expenditures were expected to be approximately $2.0 billion, compared with $2.1 billion in 2017.
- Management said North American Permian takeaway constraints should be addressed within 12–18 months. It also reported softening activity and pricing in OneStim hydraulic fracturing during Q3 and expected pressure-pumping activity to remain under pressure until takeaway capacity constraints are resolved.
- Risks cited include changes in customer E&P spending, oil and gas prices, economic and political conditions, pricing pressure, foreign exchange, operational delays or cancellations, regulation and technology challenges. Management said market-risk exposure had not changed materially since year-end 2017.
- Management considered material losses from pending legal proceedings remote, while noting litigation outcomes are uncertain. No material changes to previously disclosed risk factors were reported.
- Adoption of the new lease accounting standard, effective January 1, 2019, was expected to add approximately $1.2 billion of assets and liabilities to the balance sheet.
- The filing disclosed residual dealings with Iranian banks and payments of taxes and other governmental charges following the 2013 wind-down of service operations in Iran. The company expected to discontinue dealings with the banks after collecting amounts owed for prior services.
Most important facts for investors to verify
- Whether OneStim pressure-pumping activity and pricing weakened further, and how quickly Permian takeaway constraints ease.
- Whether international activity and revenue begin to grow as management anticipates, given flat international revenue in the first nine months.
- Cash conversion, working-capital needs and the capacity of free cash flow to cover dividends, investment and debt obligations.
- Commercial paper exposure, available committed facilities and the trend in net debt.
- Potential effects of the expected $1.2 billion lease-accounting balance-sheet increase and any final 2018 tax-reform adjustments.
- Collection of amounts associated with prior Iranian services and the status of the disclosed bank accounts and residual dealings.