UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2012
Commission file No.: 1-4601
SCHLUMBERGER N.V.
(SCHLUMBERGER LIMITED)
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Registrant’s telephone number: (713) 375-3400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at June 30, 2012
SCHLUMBERGER LIMITED
Second Quarter 2012 Form 10-Q
Table of Contents
PART I
Financial Information
Item 1.
Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
PART II
Other Information
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
Certifications
2
PART I. FINANCIAL INFORMATION
SCHLUMBERGER LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Revenue
Interest & other income
Expenses
Cost of revenue
Research & engineering
General & administrative
Merger & integration
Interest
Income before taxes
Taxes on income
Income from continuing operations
Income from discontinued operations
Net income
Net income attributable to noncontrolling interests
Net income attributable to Schlumberger
Schlumberger amounts attributable to:
Basic earnings per share of Schlumberger:
Net income (1)
Diluted earnings per share of Schlumberger:
Average shares outstanding:
Basic
Assuming dilution
Amounts may not add due to rounding
See Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Currency translation adjustments
Unrealized net change arising during the period
Derivatives
Net derivatives (loss) gain on hedge transactions
Reclassification to net income of net realized loss (gain)
Pension and other postretirement benefit plans
Actuarial gain (loss)
Actuarial gain (loss) arising during the period
Amortization to net income of net actuarial loss
Prior service cost
Prior service credit arising during the period
Amortization to net income of net prior service cost
Income taxes on pension and other postretirement benefit plans
Comprehensive income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Schlumberger
4
CONSOLIDATED BALANCE SHEET
ASSETS
Current Assets
Cash
Short-term investments
Receivables less allowance for doubtful accounts (2012 - $169; 2011 - $177)
Inventories
Deferred taxes
Other current assets
Fixed Income Investments, held to maturity
Investments in Affiliated Companies
Fixed Assets less accumulated depreciation
Multiclient Seismic Data
Goodwill
Intangible Assets
Other Assets
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued liabilities
Long-term debt - current portion
Liability for taxes on income
Short-term borrowings
Dividends payable
Long-term Debt
Deferred Taxes
Postretirement Benefits
Other Liabilities
Equity
Common stock
Treasury stock
Retained earnings
Accumulated other comprehensive loss
Schlumberger stockholders’ equity
Noncontrolling interests
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CONSOLIDATED STATEMENT OF CASH FLOWS
Cash flows from operating activities:
Less: Income from discontinued operations
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization (1)
Earnings of companies carried at equity, less dividends received
Deferred income taxes
Stock-based compensation expense
Pension and other postretirement benefits expense
Pension and other postretirement benefits funding
Change in assets and liabilities: (2)
Increase in receivables
Increase in inventories
Increase in other current assets
(Decrease) increase in accounts payable and accrued liabilities
Decrease in liability for taxes on income
(Decrease) increase in other liabilities
Other - net
NET CASH PROVIDED BY OPERATING ACTIVITIES
Cash flows from investing activities:
Capital expenditures
Multiclient seismic data capitalized
Business acquisitions, net of cash acquired
Sale (purchase) of investments, net
Other
NET CASH USED IN INVESTING ACTIVITIES
Cash flows from financing activities:
Dividends paid
Proceeds from employee stock purchase plan
Proceeds from exercise of stock options
Tax benefit on stock options
Stock repurchase program
Proceeds from issuance of long-term debt
Repayment of long-term debt
Net increase (decrease) in short-term borrowings
NET CASH USED IN FINANCING ACTIVITIES
Cash flows from discontinued operations - operating activities
Cash flows from discontinued operations - investing activities
Cash flows from discontinued operations
Net decrease in cash before translation effect
Translation effect on cash
Cash, beginning of period
Cash, end of period
Includes multiclient seismic data costs.
Net of the effect of business acquisitions and divestitures.
6
CONSOLIDATED STATEMENT OF EQUITY
January 1, 2012 - June 30, 2012
Balance, January 1, 2012
Changes in fair value of derivatives
Deferred employee benefits liabilities
Shares sold to optionees, less shares exchanged
Shares granted to Directors
Vesting of restricted stock
Shares issued under employee stock purchase plan
Dividends declared ($0.55 per share)
Tax benefits on stock options
Balance, June 30, 2012
(Stated in millions)
January 1, 2011 - June 30, 2011
Balance, January 1, 2011
Dividends declared ($0.50 per share)
Balance, June 30, 2011
SHARES OF COMMON STOCK
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Schlumberger Limited and its subsidiaries (“Schlumberger”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Schlumberger management, all adjustments considered necessary for a fair statement have been included in the accompanying unaudited financial statements. All intercompany transactions and balances have been eliminated in consolidation. Operating results for the six-month period ended June 30, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012. The December 31, 2011 balance sheet information has been derived from the Schlumberger 2011 financial statements. For further information, refer to the Consolidated Financial Statements and notes thereto, included in the Schlumberger Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on February 1, 2012.
2. Charges and Credits
Schlumberger recorded the following charges and credits during the first six months of 2012 and 2011:
2012
Second quarter 2012:
Schlumberger recorded $22 million of pretax merger and integration-related charges ($21 million after-tax) primarily relating to its August 27, 2010 acquisition of Smith International, Inc. (“Smith”). This amount is classified in Merger & integration in the Consolidated Statement of Income.
First quarter 2012:
Schlumberger recorded $15 million of pretax merger and integration-related charges ($13 million after-tax) in connection with the acquisition of Smith. This amount is classified in Merger & integration in the Consolidated Statement of Income.
2011
Second quarter 2011:
Schlumberger made a $50 million grant to the Schlumberger Foundation to support the Foundation’s Faculty for the Future program. This program supports talented women scientists from the developing world by helping them pursue advanced graduate studies in scientific disciplines at leading universities worldwide. This $50 million charge ($40 million after-tax) is classified inGeneral & administrative in the Consolidated Statement of Income.
Schlumberger recorded $32 million of pretax merger and integration-related charges ($24 million after-tax) in connection with the acquisitions of Smith and Geoservices. This amount is classified in Merger & integration in the Consolidated Statement of Income.
First quarter 2011
Schlumberger recorded $33 million of pretax merger and integration-related charges ($28 million after-tax) in connection with the acquisitions of Smith and Geoservices. This amount is classified in Merger & integration in the Consolidated Statement of Income.
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The following is a summary of these 2011 charges:
Merger-related integration costs
Donation to the Schlumberger Foundation
3. Earnings Per Share
The following is a reconciliation from basic earnings per share of Schlumberger to diluted earnings per share of Schlumberger:
Second Quarter
Assumed exercise of stock options
Unvested restricted stock
Diluted
Six Months
The number of outstanding options to purchase shares of Schlumberger common stock which were not included in the computation of diluted earnings per share, because to do so would have had an antidilutive effect, was as follows:
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4. Inventories
A summary of inventories follows:
Raw materials & field materials
Work in process
Finished goods
5. Fixed Assets
A summary of fixed assets follows:
Property, plant & equipment
Less: Accumulated depreciation
Depreciation expense relating to fixed assets was as follows:
6. Multiclient Seismic Data
The change in the carrying amount of multiclient seismic data for the six months ended June 30, 2012 was as follows:
Balance at December 31, 2011
Capitalized in period
Charged to expense
Balance at June 30, 2012
7. Goodwill
The changes in the carrying amount of goodwill by reporting unit for the six months ended June 30, 2012 were as follows:
Balance at January 1, 2012
Acquisitions
Reallocation
Divestiture
Impact of changes in exchange rates
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8. Intangible Assets
The gross book value, accumulated amortization and net book value of intangible assets were as follows:
Technology/Technical Know-How
Tradenames
Customer Relationships
Amortization expense charged to income was as follows:
The weighted average amortization period for all intangible assets is approximately 20 years.
Based on the net book value of intangible assets at June 30, 2012, amortization charged to income for the subsequent five years is estimated to be: remainder of 2012 - $172 million; 2013 - $328 million; 2014 - $322 million; 2015 - $310 million; 2016 - $289 million; and 2017 - $282 million.
9. Long-term Debt
A summary of Long-term Debt follows:
3.300% Senior Notes due 2021
4.50% Guaranteed Notes due 2014
2.75% Guranteed Notes due 2015
1.950% Senior Notes due 2016
4.200% Senior Notes due 2021
5.25% Guaranteed Notes due 2013
2.650% Senior Notes due 2016
3.00% Guaranteed Notes due 2013
Floating Rate Senior Notes due 2014
Other variable rate debt
Fair value adjustment - hedging (1)
Represents changes in the fair value of the portion of Schlumberger’s fixed rate debt that is hedged through the use of interest rate swaps.
During the first quarter of 2011, Schlumberger issued $1.1 billion of 4.200% Senior Notes due 2021.
During the first quarter of 2011, Schlumberger issued $500 million of 2.650% Senior Notes due 2016. Schlumberger entered into agreements to swap these dollar notes for euros on the date of issue until maturity, effectively making this a euro denominated debt on which Schlumberger will pay interest in euros at a rate of 2.39%.
During the first quarter of 2011, Schlumberger repurchased all of the outstanding 9.75% Senior Notes due 2019, the 8.625% Senior Notes due 2014 and the 6.00% Senior Notes due 2016 for approximately $1.26 billion. These transactions did not result in any significant gains or losses.
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The estimated fair value of Schlumberger’s Long-term Debt at June 30, 2012 and December 31, 2011, based on quoted market prices, was $8.4 billion and $8.9 billion, respectively.
10. Derivative Instruments and Hedging Activities
Schlumberger is exposed to market risks related to fluctuations in foreign currency exchange rates, commodity prices and interest rates. To mitigate these risks, Schlumberger utilizes derivative instruments. Schlumberger does not enter into derivative transactions for speculative purposes.
Foreign Currency Exchange Rate Risk
As a multinational company, Schlumberger conducts business in approximately 85 countries. Schlumberger’s functional currency is primarily the US dollar, which is consistent with the oil and gas industry. However, outside the United States, a significant portion of Schlumberger’s expenses is incurred in foreign currencies. Therefore, when the US dollar weakens (strengthens) in relation to the foreign currencies of the countries in which Schlumberger conducts business, the US dollar–reported expenses will increase (decrease).
Schlumberger is exposed to risks on future cash flows to the extent that local currency expenses exceed revenues denominated in local currency that are other than the functional currency. Schlumberger uses foreign currency forward contracts and foreign currency options to provide a hedge against a portion of these cash flow risks. These contracts are accounted for as cash flow hedges, with the effective portion of changes in the fair value of the hedge recorded on the Consolidated Balance Sheet and in Accumulated Other Comprehensive Loss. Amounts recorded in Accumulated Other Comprehensive Loss are reclassified into earnings in the same period or periods that the hedged item is recognized in earnings. The ineffective portion of changes in the fair value of hedging instruments, if any, is recorded directly to earnings.
At June 30, 2012, Schlumberger recognized a cumulative net $52 million loss in Equity relating to revaluation of foreign currency forward contracts and foreign currency options designated as cash flow hedges, the majority of which is expected to be reclassified into earnings within the next twelve months.
Schlumberger is also exposed to changes in the fair value of assets and liabilities, including certain of its long-term debt, which are denominated in currencies other than the functional currency. Schlumberger uses foreign currency forward contracts and foreign currency options to hedge this exposure as it relates to certain currencies. These contracts are accounted for as fair value hedges with the fair value of the contracts recorded on theConsolidated Balance Sheet and changes in the fair value recognized in the Consolidated Statement of Income along with the change in fair value of the hedged item.
At June 30, 2012, contracts were outstanding for the US dollar equivalent of $6.9 billion in various foreign currencies, of which $3.9 billion relate to hedges of debt denominated in currencies other than the functional currency.
Commodity Price Risk
Schlumberger is exposed to the impact of market fluctuations in the price of certain commodities, such as metals and fuel. Schlumberger utilizes forward contracts to manage a small percentage of the price risk associated with forecasted metal purchases. The objective of these contracts is to reduce the variability of cash flows associated with the forecasted purchase of those commodities. These contracts do not qualify for hedge accounting treatment and therefore, changes in the fair value of the forward contracts are recorded directly to earnings.
The notional amount of outstanding commodity forward contracts was $23 million at June 30, 2012.
Interest Rate Risk
Schlumberger is subject to interest rate risk on its debt and its investment portfolio. Schlumberger maintains an interest rate risk management strategy that uses a mix of variable and fixed rate debt combined with its investment portfolio and occasionally interest rate swaps to mitigate the exposure to changes in interest rates.
Schlumberger has an outstanding interest rate swap for a notional amount of $450 million in order to hedge changes in the fair value of its $450 million 3.00% Notes due 2013. Under the terms of this swap, Schlumberger receives interest at a fixed rate of 3.0% annually and will pay interest quarterly at a floating rate of three-month LIBOR plus a spread of 0.765%. This interest rate swap is designated as a fair value hedge of the underlying debt. This derivative instrument is marked to market with gains and losses recognized currently in income to offset the respective losses and gains recognized on changes in the fair value of the hedged debt. This results in no net gain or loss being recognized in the Consolidated Statement of Income.
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At June 30, 2012, Schlumberger had fixed rate debt aggregating $7.4 billion and variable rate debt aggregating $3.1 billion, after taking into account the effects of the interest rate swaps.
Short-term investments and Fixed income investments, held to maturity, totaled $2.2 billion at June 30, 2012, and were comprised primarily of money market funds, eurodollar time deposits, certificates of deposit, commercial paper, euro notes and Eurobonds, and were substantially all denominated in US dollars. The carrying value of these investments approximated fair value, which was estimated using quoted market prices for those or similar investments.
The fair values of outstanding derivative instruments are summarized as follows:
Consolidated Balance Sheet Classification
Derivative Assets
Derivatives designated as hedges:
Foreign exchange contracts
Interest rate swaps
Derivatives not designated as hedges:
Derivative Liabilities
Commodity contacts
The fair value of all outstanding derivatives was determined using a model with inputs that are observable in the market or can be derived from or corroborated by observable data.
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The effect on the Consolidated Statement of Income of derivative instruments designated as fair value hedges and those not designated as hedges was as follows:
Consolidated Statement
of Income Classification
Derivatives designated as fair value hedges:
Commodity contracts
The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) was as follows:
11. Income Tax
Income before taxes which was subject to US and non-US income taxes was as follows:
United States
Outside United States
Schlumberger recorded pretax charges of $22 million ($11 million in the US and $11 million outside of the US) during the second quarter of 2012 and pretax charges of $82 million during the second quarter of 2011 ($44 million in the US and $38 million outside of the US).
Schlumberger recorded pretax charges of $37 million during the six months ended June 30, 2012 ($22 million in the US and $15 million outside of the US) and pretax charges of $115 million during the six months ended June 30, 2011 ($67 million in the US and $48 million outside of the US).
These charges are included in the table above and are more fully described in Note 2 – Charges and credits.
14
The components of net deferred tax assets (liabilities) were as follows:
Postretirement benefits, net
Intangible assets
Investments in non-US subsidiaries
Other, net
The above deferred tax balances at June 30, 2012 and December 31, 2011 were net of valuation allowances relating to net operating losses in certain countries of $249 million and $239 million, respectively.
The components of consolidated Taxes on incomewere as follows:
Current:
United States - Federal
United States - State
Deferred:
Valuation allowance
A reconciliation of the US statutory federal tax rate of 35% to the consolidated effective income tax rate follows:
US federal statutory rate
US state income taxes
Non-US income taxed at different rates
Effective income tax rate
12. Contingencies
In 2007, Schlumberger received an inquiry from the United States Department of Justice (“DOJ”) related to the DOJ’s investigation of whether certain freight forwarding and customs clearance services of Panalpina, Inc., and other companies provided to oil and oilfield service companies, including Schlumberger, violated the Foreign Corrupt Practices Act. Schlumberger is cooperating with the governmental authorities.
In 2009, Schlumberger learned that United States officials began a grand jury investigation and an associated regulatory inquiry, both related to certain Schlumberger operations in specified countries that are subject to United States trade and economic sanctions. Also in 2009, prior to being acquired by Schlumberger, Smith received an administrative subpoena with respect to its historical business practices in certain countries that are subject to United States trade and economic sanctions. Schlumberger is cooperating with the governmental authorities.
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On April 20, 2010, a fire and explosion occurred onboard the semisubmersible drilling rig Deepwater Horizon, owned by Transocean Ltd. and under contract to a subsidiary of BP plc. Pursuant to a contract between M-I SWACO and BP, M-I SWACO provided certain services under the direction of BP. A number of legal actions, certain of which name an M-I SWACO entity as a defendant, have been filed in connection with the Deepwater Horizon incident, and additional legal actions may be filed in the future. Based on information currently known, the amount of any potential loss attributable to M-I SWACO with respect to potential liabilities related to the incident would not be material to Schlumberger’s consolidated financial statements.
Schlumberger and its subsidiaries are party to various other legal proceedings from time to time. A liability is accrued when a loss is both probable and can be reasonably estimated. Management believes that the probability of a material loss is remote. However, litigation is inherently uncertain and it is not possible to predict the ultimate disposition of these proceedings.
13. Segment Information
Oilfield Services
Reservoir Characterization
Drilling (1)
Production (1)
Eliminations & other
Corporate & other
Interest income
Interest expense (2)
Charges and credits (see Note 2)
Effective January 1, 2012, a component of the Drilling Group has been reallocated to the Production Group. Historical segment information has been reclassified to conform to this new presentation.
Excludes interest expense included in the segment results ($2 million in 2012; $- million in 2011).
16
Excludes interest expense included in the segment results ($2 million in 2012; $2 million in 2011).
14. Pension and Other Postretirement Benefits
Net pension cost for the Schlumberger pension plans included the following components:
Service cost - benefits earned during period
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of prior service cost
Amortization of net loss
17
The net periodic benefit cost for the Schlumberger US postretirement medical plan included the following components:
Interest cost on accumulated postretirement benefit obligation
15. Discontinued Operations
During the second quarter of 2012, Schlumberger sold its Wilson distribution business to National Oilwell Varco Inc. (“NOV”) for $906 million in cash. A pretax gain of $137 million ($16 million after-tax) was recognized in connection with this transaction.
During July 2012, Schlumberger completed the sale of its 56% interest in CE Franklin Ltd. to NOV for $122 million in cash.
As Wilson and CE Franklin comprised Schlumberger’s Distribution segment, the results of this entire segment have been classified as discontinued operations in the Consolidated Statement of Income.
During the second quarter of 2011, Schlumberger completed the divestiture of its Global Connectivity Services business for approximately $385 million in cash. An after-tax gain of $220 million was recognized in connection with this transaction, and is classified in Income from discontinued operations in the Consolidated Statement of Income. The historical results of this business were not significant to Schlumberger’s consolidated financial statements and, as such, have not been reclassified to discontinued operations.
The following table summarizes the results of these discontinued operations (in millions):
Tax expense
Gain on divestiture, net of tax
18
Second Quarter 2012 Compared to First Quarter 2012
Product Groups
Interest income (2)
Charges and credits
Geographic Areas
North America
Latin America
Europe/CIS/Africa
Middle East & Asia
Excludes interest included in the Product Group and Geographical Area results.
Pretax operating income represents the segments’ income before taxes and noncontrolling interests. The pretax operating income excludes such items as corporate expenses and interest income and interest expense not allocated to the segments as well as the charges and credits described in detail in Note 2 to the Consolidated Financial Statements, interest on postretirement medical benefits, stock-based compensation costs and amortization expense associated with intangible assets recorded as a result of the acquisition of Smith International, Inc. (“Smith”).
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OILFIELD SERVICES
Second-quarter revenue of $10.45 billion increased 5% sequentially. Revenue increased in all Groups as higher exploration offshore and in key land markets, together with strong deepwater activities, continued to benefit the Reservoir Characterization and Drilling Groups. Higher sales of Artificial Lift and Completions products combined with increased Schlumberger Production Management (SPM) project activity helped the Production Group post a sequential increase despite lower Well Services revenue in North America land. All Geographical Areas grew sequentially with the exception of North America as a result of the seasonal spring break-up in Western Canada and continued pricing pressure in the US land hydraulic fracturing market. Excluding Western Canada, North America grew sequentially on increased offshore activity, particularly in the US Gulf of Mexico. Internationally, revenue grew sequentially by 9% following a seasonal rebound of activity in Russia, the North Sea and China; more project-related revenues, robust product sales and higher offshore activity in the Mexico & Central America GeoMarket*; the commencement of an SPM project in the Ecuador GeoMarket; and increased offshore rig activity in the Australia & Papua New Guinea GeoMarket.
Increased Reservoir Characterization Group revenue was driven primarily by a rebound in Schlumberger Information Solutions (SIS) software sales together with strong Testing Services and Wireline activity on deepwater exploration projects in Africa, and in the North Sea and Australia & Papua New Guinea GeoMarkets. WesternGeco grew slightly as higher UniQ* land seismic productivity in the Saudi Arabia & Bahrain GeoMarket more than offset lower Marine vessel utilization from planned transits and dry-docks during the quarter. Drilling Group revenue expanded on robust international and offshore demand for Drilling & Measurements and M-I SWACO technologies. Integrated Project Management (IPM) operations in Latin America and in the North Africa and Australia & Papua New Guinea GeoMarkets were also stronger. Production Group revenue grew as increased sales of Artificial Lift and Completions products across all Areas in addition to the start of an SPM project in Ecuador more than compensated for lower Well Services revenue on land in North America.
On a geographical basis, North America Area revenue decreased due to the seasonal spring break-up in Western Canada and the weaker US land hydraulic fracturing market. Revenue in North America however, excluding Western Canada, improved sequentially due to increased offshore activity—particularly in deepwater US Gulf of Mexico operations. In the Latin America Area, the increase in revenue came mainly from the Mexico & Central America GeoMarket—driven by IPM land activity, SIS software sales, and demand for Drilling Group technologies offshore. The Ecuador GeoMarket was also up significantly with the start of an SPM production incentive contract. In the Europe/CIS/Africa Area, revenue increased from the strong seasonal rebound of exploration and development activity in the North Sea GeoMarket while the seasonal pick-up of activity in Russia—particularly in Sakhalin, the Caspian and Western Siberia—also contributed to the sequential improvement. Sub-Sahara Africa also grew due to high exploration activity in Tanzania and Mozambique as well as strong exploration and development activity in the Nigeria & the Gulf of Guinea GeoMarket. In the Middle East & Asia Area, the revenue increase was led by the Australia & Papua New Guinea GeoMarket as a result of strong offshore drilling activity. The China GeoMarket also posted a strong seasonal pick-up in onshore activity while the Saudi Arabia & Bahrain GeoMarket continued to register growth in both rig and rig-less operations.
Second-quarter pretax operating income of $2.1 billion increased 8% sequentially. Pretax operating margin increased 50 basis points (bps) sequentially. International pretax operating margin expanded 161 bps sequentially to 20.8% due to the seasonal rebounds of activity in Russia, the North Sea and China combined with strong results in Europe and Africa, and in other GeoMarkets in the Asia-Pacific countries and Latin America Area. The continued shift to higher-margin exploration and deepwater activities helped sustain international margins. In North America, pretax operating margin decreased 208 bps sequentially to 20.8% as a result of the spring break-up in Canada and continued cost inflation and pricing pressure in the US land hydraulic fracturing market.
Reservoir Characterization Group
Second-quarter revenue of $2.78 billion increased 7% sequentially. Pretax operating income of $784 million was 17% higher than the first quarter.
Sequentially, the revenue increase was driven primarily by a rebound in SIS software sales. Strong performances by Testing Services and Wireline Technologies on deepwater exploration projects in Africa, the North Sea and the Australia & Papua New Guinea GeoMarkets also contributed to growth. WesternGeco was slightly higher as increased productivity from the land seismic UniQ crew in the Saudi Arabia & Bahrain GeoMarket more than offset lower Marine vessel utilization resulting from planned transits and dry-docks during the quarter.
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Pretax operating margin increased 223 bps sequentially to 28.2% primarily due to strong SIS software sales combined with the more favorable revenue mix that resulted from higher deepwater and exploration activity.
Drilling Group
Second-quarter revenue of $4.00 billion increased 6% sequentially. Pretax operating income of $738 million was 12% higher compared to the prior quarter.
Sequentially, revenue increased primarily on strong international and offshore activity for Drilling & Measurements and M-I SWACO technologies. In particular, Drilling & Measurements performance was driven by both stronger activity and an improved technology revenue mix that led to some pricing gains. In addition, M-I SWACO also posted strong results from deepwater operations in the US Gulf of Mexico as M-I SWACO activity returned to pre-Macondo levels. IPM operations in Latin America, and the North Africa and Australia & Papua New Guinea GeoMarkets were also higher with the start of several new projects.
Sequentially, pretax operating margin increased 107 bps to 18.4% due to increasing high-margin deepwater activity both in North America and internationally. Margin expansion was also the result of a favorable revenue mix that led to selected pricing gains—particularly for Drilling & Measurements services.
Production Group
Second-quarter revenue of $3.74 billion increased 6% sequentially. Pretax operating income of $612 million was 1% lower sequentially.
Sequentially, revenue grew as increased sales of Artificial Lift and Completions products across all Areas and the start of an SPM project in Ecuador more than compensated for lower Well Services revenue on land in North America. Well Services revenue from offshore and international activities also grew sequentially to further offset the lower Well Services land activity due to the Canadian spring break-up and the downward pricing trend.
Second-quarter pretax operating margin decreased 117 bps to 16.4%. This decline was largely attributable to the North American land hydraulic fracturing market as a result of the spring break-up in Canada and the continued cost inflation and pricing pressure in US land. This was offset in part by better margins posted by the other Production Group Technologies.
Second Quarter 2012 Compared to Second Quarter 2011
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Second-quarter 2012 revenue of $10.45 billion was 16% higher than the same period last year largely due to the significantly improved exploration and development activities of M-I SWACO, Drilling & Measurements, Wireline and Well Services Technologies in a number of international GeoMarkets and in North America offshore, particularly in the US Gulf of Mexico. Geographically, the increase was led by the Europe/CIS/Africa Area, primarily in Russia and in the Nigeria & Gulf of Guinea, Angola, the North Sea and East Africa GeoMarkets. Latin America was also higher, mainly in the Mexico & Central America Geomarket driven by strong IPM activity on land and robust offshore activity for Wireline and Drilling technologies.
Second-quarter 2012 pretax operating margin increased 63 bps to 20.1% due to the robust contributions from the Reservoir Characterization and Drilling Groups as both benefited from higher-margin exploration activities in North America offshore and in the international markets. However, this increase was partially offset by a decline in margins for Well Services technologies, primarily in North America, as a result of pricing pressure and cost inflation.
Second-quarter 2012 revenue of $2.78 billion was 13% higher than the same period last year led by Wireline and Testing Services driven by improved offshore exploration activities across all Areas, namely in North America offshore, Latin America, and in Europe/CIS/Africa. SIS was also higher on strong software sales while WesternGeco decreased on lower Marine vessel utilization from planned transits and dry-docks during the quarter.
Year-on-year, pretax operating margin increased 377 basis points to 28.2% largely due to the higher-margin exploration activities that benefited Wireline and Testing Services and higher software sales of SIS.
Second-quarter 2012 revenue of $4.00 billion was 19% higher than the previous year primarily due to the significantly improved exploration and development activities of Drilling & Measurements and M-I SWACO in North America offshore and in the international markets.
Year-on-year, pretax operating margin increased 253 basis points to 18.4% primarily due to the improved revenue mix of Drilling & Measurements and M-I SWACO.
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Second-quarter 2012 revenue of $3.74 billion increased 19% year-on-year primarily attributable to Well Services technologies. Well Services grew equally in North America and internationally, with international growth led by Latin America and by Europe/CIS/Africa. Well Intervention, Artificial Lift and Completions Technologies also contributed to the strong growth.
Year-on-year, pretax operating margin decreased 313 basis points to 16.4% as a result of the decline in margins for Well Services technologies, primarily in North America as a result of pricing pressure and cost inflation.
Six Months 2012 Compared to Six Months 2011
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Six-months 2012 revenue of $20.4 billion increased 19% versus the same period last year with the North America Area 24% higher and International Areas 17% higher. The increase in North America was led by strong growth offshore, particularly in the US Gulf of Mexico with robust deepwater and exploration activity benefiting the Reservoir Characterization and Drilling Groups Technologies. The Production Group also experienced significant improvement in activity in North America land. Internationally, higher exploration and development activities in a number of GeoMarkets both offshore and in key land markets contributed to the increase. The increase is led by the Europe/CIS/Africa Area, mainly in Russia and in the Nigeria & Gulf of Guinea, Angola, the North Sea and East Africa GeoMarkets. Latin America was also higher, mainly in the Mexico & Central America and Venezuela, Trinidad & Tobago GeoMarkets driven by strong IPM activity on land and robust offshore activity for Wireline and Drilling technologies.
On a Product Group basis, Reservoir Characterization and Drilling Group revenues were strong as a result of robust exploration and development activities in a number of international GeoMarkets and in North America offshore, particularly in the US Gulf of Mexico. Reservoir Production revenue increased mostly from Well Services.
Year-to-date pretax operating margin increased 111 basis points to 19.8% due to the robust contribution from the Reservoir Characterization and Drilling Groups as both benefited from higher-margin exploration activities in North America offshore and in the international markets. However, this increase was partially offset by a decline in margins for Well Services technologies, primarily in North America, as a result of pricing pressure and cost inflation.
Six-month 2012 revenue of $5.36 billion was 15.3% higher than the same period last year led by Wireline and Testing Services driven by improved offshore exploration activities across all Areas, namely in North America offshore, Latin America, and in Europe/CIS/Africa. Strong SIS software sales also contributed to the growth.
Year-on-year, pretax operating margin increased 434 basis points to 27.2% largely due to the higher-margin exploration activities that benefited Wireline and Testing Services and higher software sales of SIS.
Six-months 2012 revenue of $7.79 billion was 20% higher than the previous year primarily due to the significantly improved exploration and development activities of M-I SWACO, Drilling & Measurements, and the other Smith technologies in North America offshore and in the international markets.
Year-on-year, pretax operating margin increased 248 basis points to 17.9% primarily due to the increase in higher-margin activities of Drilling & Measurements, M-I SWACO and Drilling Tools and Remedial Technologies that benefited from higher-margin exploration activities in North America offshore and in the international markets, mainly in the Europe/CIS/Africa Area.
Six-months 2012 revenue of $7.28 billion increased 22% year-on-year. Well Services grew both in North America and internationally, with international growth led by Latin America and by Europe/CIS/Africa. Well Intervention, Artificial Lift and Completions Technologies posted strong growth also across all Areas.
Year-on-year, pretax operating margin decreased 227 basis points to 17.0% mainly due to decline in margins for Well Services technologies, primarily in North America, as a result of pricing pressure and cost inflation. This was mitigated in part by the margin expansion experienced in Well Intervention and Completions technologies.
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INTEREST & OTHER INCOME
Interest & other income consisted of the following for the second quarter and six months ended June 30, 2012 and 2011:
Equity in net earnings of affiliated companies
OTHER
Research & engineering and General & administrative expenses, as a percentage of Revenue, for the second quarter and six months ended June 30, 2012 and 2011 were as follows:
General & administrative decreased as a percentage of revenue, in both the second quarter and six months compared to the prior year primarily as a result of the $50 million donation to the Schlumberger Foundation in the second quarter of 2011 (see discussion of Charges and Credits below).
The effective tax rate for the second quarter of 2012 was 24.2% compared to 24.8% for the same period in 2011 and 24.0% for the six months ended June 30, 2012 as compared to 24.3% for the same period in 2011.
CHARGES AND CREDITS
Schlumberger recorded the following charges during the second quarter and the first six months of 2012 and 2011.
2012:
In the second quarter of 2012, Schlumberger recorded $22 million of pretax merger and integration-related charges ($21 million after-tax) primarily relating to its August 27, 2010 acquisition of Smith. This amount is classified in Merger & integration in the Consolidated Statement of Income.
In the first quarter of 2012, Schlumberger recorded $15 million of pretax merger and integration-related charges ($13 million after-tax) in connection with the acquisition of Smith. This amount is classified in Merger & integration in the Consolidated Statement of Income.
2011:
The following is a summary of the second quarter of 2011 charges:
Consolidated Statementof Income Classification
The following is a summary of the charges recorded during the first six months of 2011:
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CASH FLOW
Net Debt represents gross debt less cash, short-term investments and fixed income investments, held to maturity. Management believes that Net Debt provides useful information regarding the level of Schlumberger indebtedness by reflecting cash and investments that could be used to repay debt.
Details of Net Debt follow:
Net Debt, beginning of year
Excess of equity income over dividends received
Increase in working capital
Proceeds from employee stock plans
Business acquisitions
Proceeds from divestiture of Wilson distribution business
Proceeds from divestiture of Global Connectivity Services business
Currency effect on net debt
Net Debt, end of period
Components of Net Debt
Fixed income investments, held to maturity
Short-term borrowings and current portion of long-term debt
Long-term debt
Key liquidity events during the first six months of 2012 and 2011 included:
On April 17, 2008, the Schlumberger Board of Directors approved an $8 billion share repurchase program for shares of Schlumberger common stock, to be acquired in the open market before December 31, 2011, of which $7.0 billion had been repurchased as of June 30, 2012. On July 21, 2011, the Schlumberger Board of Directors approved an extension of this repurchase program to December 31, 2013.
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The following table summarizes the activity, during the six months ended June 30, under the April 17, 2008 share repurchase program:
Six months ended June 30, 2012
Six months ended June 30, 2011
Cash flow provided by operations was $1.5 billion in the first six months of 2012 compared to $2.1 billion in the first six months of 2011 with an increase in working capital requirements offset in part by an increase in earnings before depreciation and amortization expense.
Capital expenditures were $2.1 billion in the first six months of 2012 compared to $1.7 billion during the first six months of 2011. Capital expenditures for the full year of 2012 are expected to be approximately $4.5 billion as compared to $4.0 billion in 2011.
During the second quarter of 2012, Schlumberger completed the divestiture of its Wilson distribution business for $906 million in cash.
During the second quarter of 2011, Schlumberger completed the divestiture of its Global Connectivity Services business for $385 million in cash.
During the first quarter of 2011, Schlumberger issued $1.1 billion of 4.20% Senior Notes due 2021 and $500 million of 2.65% Senior Notes due 2016.
During the first quarter of 2011, Schlumberger repurchased all of its outstanding 9.75% Senior Notes due 2019, 8.625% Senior Notes due 2014 and 6.00% Senior Notes due 2016 for approximately $1.26 billion.
At times, Schlumberger experiences delays in payments from certain of its customers. Schlumberger operates in approximately 85 countries. At June 30, 2012, only five of those countries individually accounted for greater than 5% of Schlumberger’s accounts receivable balance of which only one, the United States, represented greater than 10%. A delay in payment or the nonpayment of amounts that are owed to Schlumberger could have a material adverse effect on Schlumberger’s results of operations and cash flows.
As of June 30, 2012 Schlumberger had $3.5 billion of cash and short-term investments on hand. Schlumberger had separate committed debt facility agreements aggregating $4.1 billion with commercial banks, of which $2.3 billion was available and unused as of June 30, 2012. This included $3.5 billion of committed facilities which support commercial paper programs in the United States and Europe. Schlumberger believes that these amounts are sufficient to meet future business requirements for at least the next twelve months.
Schlumberger had $1.4 billion of commercial paper outstanding as of June 30, 2012.
FORWARD-LOOKING STATEMENTS
This Form 10-Q, and other statements we make contain “forward-looking statements” within the meaning of the federal securities laws, which include any statements that are not historical facts, such as our forecasts or expectations regarding business outlook; growth for Schlumberger as a whole and for each of its segments (and for specified products or geographic areas within each segment); oil and natural gas demand and production growth; oil and natural gas prices; Schlumberger’s effective tax rate; improvements in operating procedures and technology; capital expenditures by Schlumberger and the oil and gas industry; the business strategies of Schlumberger’s customers; future global economic conditions; and future results of operations. These statements are subject to risks and uncertainties, including, but not limited to, global economic conditions; changes in exploration and production spending by Schlumberger’s customers and changes in the level of oil and natural gas exploration and development; general economic, political and business conditions in key regions of the world; pricing erosion; weather and seasonal factors; the ability to respond to increased activity levels; changes in government regulations and regulatory requirements, including those related to offshore oil and gas exploration, radioactive sources, explosives, chemicals, hydraulic fracturing services and climate-related initiatives; the inability of technology to meet new challenges in exploration; and other risks and uncertainties detailed in our second-quarter 2012 earnings release, our most recent Form 10-K and other filings that we make with the Securities and Exchange Commission. If one or more of these or other risks or uncertainties materialize (or the consequences of such a development changes), or should our underlying
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assumptions prove incorrect, actual outcomes may vary materially from those reflected in our forward-looking statements. Schlumberger disclaims any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise.
For quantitative and qualitative disclosures about market risk affecting Schlumberger, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” of the Schlumberger Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Schlumberger’s exposure to market risk has not changed materially since December 31, 2011.
Schlumberger has carried out an evaluation under the supervision and with the participation of Schlumberger’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of Schlumberger’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the CEO and the CFO have concluded that, as of the end of the period covered by this report, Schlumberger’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that Schlumberger files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Schlumberger’s disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to its management, including the CEO and the CFO, as appropriate, to allow timely decisions regarding required disclosure. There has been no change in Schlumberger’s internal control over financial reporting that occurred during the quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, Schlumberger’s internal control over financial reporting.
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PART II. OTHER INFORMATION
The information with respect to Item 1 is set forth under Note 12 - Contingencies, in the Consolidated Financial Statements.
As of the date of this filing, there have been no material changes from the risk factors previously disclosed in Part 1, Item 1A, of Schlumberger’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Unregistered Sales of Equity Securities
None.
Issuer Repurchases of Equity Securities
On April 17, 2008, the Schlumberger Board of Directors (the “Board”) approved an $8 billion share repurchase program for Schlumberger common stock, which may be acquired in the open market or in negotiated transactions. On July 21, 2011, the Board approved an extension of this repurchase program to December 31, 2013. As of June 30, 2012, $1.0 billion remained available for repurchase under the existing repurchase authorization.
Schlumberger’s common stock repurchase program activity for the three months ended June 30, 2012 was as follows:
April 1 through April 30, 2012
May 1 through May 31, 2012
June 1 through June 30, 2012
In connection with the exercise of stock options under Schlumberger’s incentive compensation plans, Schlumberger routinely receives shares of its common stock from optionholders in consideration of the exercise price of the stock options. Schlumberger does not view these transactions as requiring disclosure under this Item as the number of shares of Schlumberger common stock received from optionholders is not material.
The barite and bentonite mining operations of M-I LLC, which, following our acquisition of Smith, became an indirect wholly-owned subsidiary, are subject to regulation by the federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. Information concerning mine safety violations or other regulatory matters required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Report.
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Exhibit 3.1 - Articles of Incorporation of Schlumberger Limited (Schlumberger N.V.) (incorporated by reference to Exhibit 3 to Schlumberger’s Current Report on Form 8-K filed on April 7, 2011).
Exhibit 3.2 - Amended and Restated By-laws of Schlumberger Limited (Schlumberger N.V.) (incorporated by reference to Exhibit 3.1 to Schlumberger’s Current Report on Form 8-K filed on July 20, 2012).
* Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
** Exhibit 32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
** Exhibit 32.2 - Certification Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Exhibit 95 - Mine Safety Disclosures.
* Exhibit 101 - The following materials from Schlumberger Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income; (ii) Consolidated Statement of Comprehensive Income; (iii) Consolidated Balance Sheet; (iv) Consolidated Statement of Cash Flows; (v) Consolidated Statement of Equity, and (vi) Notes to Consolidated Financial Statements.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in his capacity as Chief Accounting Officer.
/S/ HOWARDGUILD
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