SLB Limited (Schlumberger Limited) — Q1 2012 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2012, compared primarily with Q1 2011; management also discusses sequential changes from Q4 2011. Schlumberger provides oilfield services and distribution. The filing states that quarterly results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $10.611 billion | $8.716 billion | Up 22% |
| Income before taxes | $1.721 billion | $1.238 billion | Up 39% |
| Net income attributable to Schlumberger | $1.301 billion | $944 million | Up 38% |
| Diluted EPS | $0.97 | $0.69 | Up 41% |
| Cash provided by operations | $732 million | $836 million | Down $104 million |
| Capital expenditures | $961 million | $770 million | Up $191 million |
- Oilfield Services revenue was $9.918 billion, up 22%; Distribution revenue was $693 million, up 17%.
- Consolidated pretax margin was approximately 16.2%, compared with 14.2% a year earlier. Oilfield Services pretax operating margin was 19.6%, up 167 basis points year over year.
- Operating cash flow less capital expenditures was negative $229 million, before multiclient seismic investment and other investing activity. Management attributed lower operating cash flow to increased working-capital requirements, including receivables and inventory.
- At March 31, cash was $1.346 billion, short-term investments $2.739 billion, and held-to-maturity fixed-income investments $281 million. Current assets were $21.292 billion and current liabilities $10.802 billion.
- Gross debt was approximately $10.167 billion, including current debt and short-term borrowings; reported net debt was $5.801 billion, versus $4.850 billion at December 31, 2011. The filing separately reports $1.0 billion of commercial paper outstanding and $2.8 billion of unused committed facilities.
Changes and operating trends
- Year over year, growth reflected stronger activity across the Oilfield Services groups, notably North American Well Services, M-I SWACO, Wireline, and Drilling & Measurements. Revenue increased in all four reported geographic areas.
- Sequentially, total revenue declined 3% from Q4 2011 to $10.611 billion, primarily because Q4 benefited from seasonal product, software, and multiclient sales. Oilfield Services revenue fell 4%, and its pretax operating income declined 10%; margin decreased 147 basis points to 19.6%.
- Production Group margin faced North American Well Services pricing pressure, lower fleet utilization, and cost inflation. Management also cited new pressure-pumping capacity and seasonal softness in equipment sales.
- Net income included $15 million of pretax merger and integration charges in Q1 2012, versus $34 million in Q1 2011. Interest expense rose to $80 million from $73 million, primarily reflecting debt issued in 2011.
Outlook, risks, and notable items
- Management expected 2012 capital expenditures to approach $4.5 billion, compared with $4.0 billion in 2011. The filing provides no specific full-year revenue or earnings guidance.
- Management said cash and short-term investments, together with available committed facilities, were sufficient for business requirements for at least the next twelve months. It cautioned that customer payment delays or nonpayment could adversely affect results and cash flows.
- On April 10, 2012, after quarter-end, Schlumberger agreed to sell its Wilson distribution business to National Oilwell Varco for approximately $0.8 billion in cash, subject to customary regulatory approvals. The business generated approximately $2.1 billion in 2011 revenue; the transaction excludes Schlumberger’s interest in CE Franklin Ltd.
- Risks highlighted include customer spending and activity levels, pricing erosion, cost inflation, geopolitical and economic conditions, seasonality and weather, regulatory changes, and foreign-exchange, commodity-price, and interest-rate exposures. Management said market-risk exposure had not materially changed since year-end.
- Contingencies include U.S. inquiries concerning alleged Foreign Corrupt Practices Act issues involving freight-forwarding services and investigations relating to operations in sanctioned countries. Schlumberger said it was cooperating. Certain Deepwater Horizon-related actions name an M-I SWACO entity; based on information then known, the company said potential loss attributable to M-I SWACO would not be material. Management considered a material loss from other legal proceedings remote, while noting litigation uncertainty.
Key facts for investors to verify
- Whether working-capital growth converts into stronger operating cash flow, given Q1 operating cash flow below capital expenditures.
- Whether North American Well Services pricing, utilization, and cost pressures persist, and how they affect Production margins.
- Actual 2012 capital spending relative to the approximately $4.5 billion expectation and the resulting net-debt trajectory.
- Completion and proceeds of the Wilson business sale, including the required regulatory approvals and subsequent reporting treatment.
- Developments in the FCPA, sanctions-related, and Deepwater Horizon matters, and any change in the company’s assessment of potential losses.