SCHLUMBERGER LIMITED Second Quarter 2020 Compared to First Quarter 2020
(Stated in millions)
Second Quarter 2020 First Quarter 2020
Income (Loss) Income (Loss)
Before Before
Revenue Taxes Revenue Taxes
Reservoir Characterization $ 1,052 $ 185 $ 1,311 $ 184
Drilling 1,731 165 2,289 285
Production 1,615 25 2,703 212
Cameron 1,015 80 1,254 121
Eliminations & other (57 ) (59 ) (102 ) (26 )
396 776
Corporate & other (1) (169 ) (228 )
Interest income (2) 7 15
Interest expense (3) (137 ) (129 )
Charges and credits (4) (3,724 ) (8,523 )
$ 5,356 $ (3,627 ) $ 7,455 $ (8,089 ) (1) Comprised principally of certain corporate expenses not allocated to the
segments, stock-based compensation costs, amortization expense associated
with certain intangible assets, certain centrally managed initiatives and
other nonoperating items.
(2) Interest income excludes amounts which are included in the segments' income
($- million in Q2 2020; $- million in Q1 2020).
(3) Interest expense excludes amounts which are included in the segments' income
(
(4) Charges and credits are described in detail in Note 2 to the Consolidated
Financial Statements.
The second quarter of 2020 was probably the most challenging quarter in past
decades. Second-quarter revenue of $5.4 billion declined 28% sequentially,
caused by the significant decrease in North America activity, and international
activity drop due to downward revisions to customer budgets accentuated by
COVID-19 disruptions. The entire oil and gas industry was confronted with
historic oil demand and supply imbalances caused by demand destruction from the
global COVID-19 containment effort.
North America revenue declined 48% sequentially with land revenue falling 60% as
customers dramatically cut back spending. International revenue declined 19%
sequentially with Latin America and Africa experiencing the largest revenue
declines due to COVID-19-related restrictions and the drop in deepwater
activity. In addition, there was a production interruption in the Asset
Performance Solutions ("APS") projects in Ecuador caused by a major landslide
that led to the rupture of the main pipeline.
Schlumberger has worked to protect its liquidity and cash positions and sustained resilient international margins while navigating the trough of this downcycle.
Despite the severe drop in international revenue and the effect of the APS production interruption inEcuador , international margin was essentially flat compared to the previous quarter, due to Schlumberger's swift and decisive actions to reduce operating costs, restructure, and rationalize its asset base. Schlumberger is working to permanently remove$1.5 billion of structural costs annually by reorganizing into a leaner and more responsive company that is better aligned with its customers' workflows. Looking at the macro view in the near-term, during the beginning of the third quarter of 2020 oil demand slowly started to normalize and is expected to continue to improve as government measures support consumption. However, subsequent waves of potential COVID-19 resurgence pose a negative risk to this outlook. The conditions are set in the third quarter for a modest frac completion activity increase inNorth America , though from a very low base. Internationally, markets may continue to be disrupted by the pandemic and will continue to adjust to budget levels set during the second quarter, but this is expected to be mostly offset if there is a seasonal return of activity in the Northern Hemisphere and a rebound ofLatin America from its second-quarter weakness. However, any further material COVID-19 disruption or significant setback in oil demand arising from a slower economic recovery could present downside risks to this outlook. Absent these risks, Schlumberger anticipates flat sequential revenue in the third quarter. Schlumberger expects its third quarter pretax segment operating income and margin to expand as a result of its restructuring efforts, improved activity mix, and sustained benefits from technology adoption, including digital. 21
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Reservoir Characterization
Reservoir Characterization revenue of$1.1 billion decreased 20% sequentially. This was mainly due to lower Wireline activity inNorth America land and theEastern Middle East and Sub-Sahara Africa GeoMarkets. Testing Services revenue was also lower mainly in the Sub-Sahara Africa GeoMarket as a result of projects that were completed in the prior quarter, as well as delayed and cancelled activities due to COVID-19. Reservoir Characterization pretax operating margin of 18% rebounded 357 bps sequentially despite the significant revenue decline. This margin expansion was driven by prompt cost reduction measures through headcount rationalization and furloughs. Drilling Drilling revenue of$1.7 billion decreased 24% sequentially. This was primarily due to the activity decline in US land as rig count dropped more than 50%, while COVID-19 disruptions caused drilling activities to be cancelled or suspended in several international GeoMarkets. Drilling pretax operating margin of 10% contracted by 289 bps sequentially. Drilling & Measurements andM-I SWACO accounted for most of the margin decline and experienced the largest drop in activity due to their sizeable footprint inNorth America land. Production Production revenue of$1.6 billion decreased 40% sequentially. This was driven by the sharp drop in OneStim® pressure-pumping activity inNorth America land, lower APS revenue due primarily to the significant production interruption inEcuador and COVID-19 disruptions. Production pretax operating margin of 2% contracted by 630 bps sequentially. The margin decline was due to reduced profitability inNorth America land from the dramatic fall in activity, which mostly impacted the OneStim margin, as well as the drop in APS revenue inEcuador .
Cameron
Cameron revenue of
Cameron pretax operating margin of 8% declined by 180 bps sequentially primarily due to the significant revenue decline.
22
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Second Quarter 2020 Compared to Second Quarter 2019
(Stated in millions)
Second Quarter 2020 Second Quarter 2019
Income (Loss) Income (Loss)
Before Before
Revenue Taxes Revenue TaxesReservoir Characterization$ 1,052 $ 185$ 1,558 $ 317 Drilling 1,731 165 2,420 301 Production 1,615 25 3,077 235 Cameron 1,015 80 1,328 165 Eliminations & other (57 ) (59 ) (114 ) (50 ) 396 968 Corporate & other (1) (169 ) (238 ) Interest income (2) 7 9 Interest expense (3) (137 ) (146 ) Charges and credits (4) (3,724 ) -$ 5,356 $ (3,627 ) $ 8,269 $ 593
(1) Comprised principally of certain corporate expenses not allocated to the
segments, stock-based compensation costs, amortization expense associated
with certain intangible assets, certain centrally managed initiatives and
other nonoperating items.
(2) Interest income excludes amounts which are included in the segments' income
($- million in 2020;
(3) Interest expense excludes amounts which are included in the segments' income
(
(4) Charges and credits are described in detail in Note 2 to the Consolidated
Financial Statements.
Second-quarter 2020 revenue of$5.4 billion was 35% lower compared to the same period last year due to the significant fall inNorth America activity, well as the international activity drop due to downward revisions to customer budgets accentuated by COVID-19 disruptions. With market uncertainty weighing on demand outlook,North America revenue declined 58% reflecting the continued capital discipline ofNorth America operators, who reduced drilling and frac activity. International revenue decreased 24%. This decline was most prominent inLatin America andAfrica due to COVID-19-related restrictions and the drop in deepwater activity, as well as the effect of the APS production interruption inEcuador . Reservoir Characterization Second-quarter 2020 revenue of$1.1 billion decreased 32% year-on-year. This was mainly due to lower Wireline andWesternGeco revenue as customers pulled back activity due to COVID-19 and cut discretionary spending and exploration in several international GeoMarkets.
Year-on-year, pretax operating margin decreased 273 bps to 18% due to reduced
profitability, largely in Wireline and
Drilling
Second-quarter 2020 revenue of$1.7 billion decreased 28% year-on-year. This was primarily due to the activity decline in US land as rig count significantly decreased, while COVID-19 disruptions caused drilling activities to be cancelled or suspended in several international GeoMarkets. Revenue was also lower due to the divestiture of the Drilling Tools businesses at the end of the fourth quarter of 2019.
Year-on-year, pretax operating margin decreased 288 bps to 10% due to the
significant reduction in activity in
Production
Second-quarter 2020 revenue of
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Year-on-year, pretax operating margin decreased 612 bps to 2% due primarily to
reduced profitability in OneStim in
Cameron
Second-quarter 2020 revenue of
Year-on-year, pretax operating margin decreased 453 bps to 8% due to the significant revenue decline.
Six Months 2020 Compared to Six Months 2019
(Stated in millions)
Six Months 2020 Six Months 2019
Income (Loss) Income (Loss)
Before Before
Revenue Taxes Revenue Taxes
Reservoir Characterization $ 2,363 $ 369 $ 3,017 $ 598
Drilling 4,020 450 4,806 608
Production 4,318 237 5,967 453
Cameron 2,270 201 2,586 313
Eliminations & other (160 ) (85 ) (227 ) (96 )
1,172 1,876
Corporate & other (1) (397 ) (511 )
Interest income (2) 22 18
Interest expense (3) (266 ) (282 )
Charges and credits (4) (12,247 ) -
$ 12,811 $ (11,716 ) $ 16,149 $ 1,101
(1) Comprised principally of certain corporate expenses not allocated to the
segments, stock-based compensation costs, amortization expense associated
with certain intangible assets, certain centrally managed initiatives and
other nonoperating items.
(2) Interest income excludes amounts which are included in the segments' income
(
(3) Interest expense excludes amounts which are included in the segments' income
(
(4) Charges and credits are described in detail in Note 2 to the Consolidated Financial Statements.
Six-month 2020 revenue of$12.8 billion was 21% lower compared to the same period last year due to the significant fall inNorth America activity, as well as the international activity drop due to downward revisions to customer budgets accentuated by COVID-19 disruptions. With market uncertainty weighing on demand outlook,North America revenue declined 37% reflecting the continued capital discipline ofNorth America operators, who reduced drilling and frac activity. International revenue decreased 12%. The decline was most prominent inLatin America andAfrica due to COVID-19 related restrictions and the drop in deepwater activity, as well as the effect of the APS production interruption inEcuador . Reservoir Characterization
Six-month 2020 revenue of
Year-on-year, pretax operating margin decreased 421 bps to 16% due to reduced
profitability largely in Wireline and
Drilling
Six-month 2020 revenue of
24
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international GeoMarkets. Revenue was also lower due to the divestiture of the Drilling Tools businesses at the end of the fourth quarter of 2019.
Year-on-year, pretax operating margin decreased 145 bps to 11%. Margins were lower due to the decrease in revenue and COVID-19-related disruptions.
Production
Six-month 2020 revenue of
Year-on-year, pretax operating margin decreased 211 bps to 5% due primarily to
reduced profitability in OneStim in
Cameron
Six-month 2020 revenue of
Year-on-year, pretax operating margin decreased 322 bps to 9% due to the significant revenue decline.
Interest and Other Income
Interest & other income consisted of the following:
(Stated in millions)
Second Quarter Six Months
2020 2019 2020 2019
Equity in net earnings of affiliated companies $ 26 $ 14 $ 49 $ 16
Interest income 7 11 23 23
$ 33 $ 25 $ 72 $ 39 The increases in earnings from equity method investments primarily relates to higher income associated with Schlumberger's equity investments in rig- and seismic-related businesses.
Other Research & engineering and General & administrative expenses, as a percentage of Revenue, for the second quarter and six months endedJune 30, 2020 and 2019 were as follows: Second Quarter Six Months 2020 2019 2020 2019 Research & engineering 2.6 % 2.2 % 2.5 % 2.2 % General & administrative 1.5 % 1.4 % 1.6 % 1.4 % The effective tax rate for the second quarter of 2020 was 6%, as compared to 17% for the same period of 2019. The charges described in Note 2 to the Consolidated Financial Statements reduced the effective tax rate for the second quarter of 2020 by 17 percentage points as a significant portion of these charges were not tax-effective. Changes in the geographic mix of pretax earnings increased the effective tax rate for the second quarter of 2020 by six percentage points as compared to the same period of 2019. The effective tax rate for first six months of 2020 was 8% as compared to 16% for the same period of 2019. The charges described in Note 2 to the Consolidated Financial Statements reduced the effective tax rate for the first six months of 2020 by 10 percentage points as a significant portion of these charges were not tax-effective. 25
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Charges and Credits
Schlumberger recorded the following charges and credits during 2020, which are fully described in Note 2 to the Consolidated Financial Statements:
(Stated in millions)
Pretax Tax Net
First quarter:
Goodwill $ 3,070 $ - $ 3,070
Intangible asset impairments 3,321 (815 ) 2,506
Asset Performance Solutions investments 1,264 4 1,268
North America pressure pumping impairment 587 (133 ) 454 Workforce reductions 202 (7 ) 195 Other 79 (9 ) 70 Valuation allowance - 164 164 Second quarter: Workforce reductions 1,021 (71 ) 950 Asset Performance Solutions investments 730 (15 ) 715 Fixed asset impairments 666 (52 ) 614 Inventory write-downs 603 (49 ) 554 Right-of-use asset impairments 311 (67 )
244
Costs associated with exiting certain activities 205 25
230
Multiclient seismic data impairment 156 (2 )
154
Repurchase of bonds 40 (2 )
38
Postretirement benefits curtailment gain (69 ) 16 (53 )
Other 61 (4 ) 57
$ 12,247 $ (1,017 ) $ 11,230
The first quarter 2020 results did not include any benefit from reduced
depreciation and amortization expense as a result of the first quarter
impairment charges. However, commencing with the second quarter of 2020,
depreciation and amortization expense was reduced by approximately $95 million
on a quarterly basis as a result of the first quarter impairment
charges. Approximately $45 million of this quarterly reduction is reflected in
the Production segment, with the remaining $50 million reflected in the
"Corporate & other" line item.
The second quarter 2020 results did not include any benefit from reduced
expenses associated with the second quarter restructuring and impairment
charges. However, going forward depreciation and amortization expense will be
reduced by approximately $80 million and lease expense will be reduced by $25
million , on a quarterly basis. Approximately $70 million of this quarterly
reduction will be reflected in the Production Segment, with the remaining $35
million reflected amongst the Reservoir Characterization, Drilling and Cameron
segments.
There were no charges or credits recorded during the first six months of 2019.
Liquidity and Capital Resources
The effects of the COVID-19 pandemic have resulted in a significant and swift reduction in international andU.S. economic activity. These effects have adversely affected the demand for oil and natural gas, as well as for Schlumberger's products and services, and caused significant volatility and disruption of the financial markets. This period of extreme economic disruption, low oil prices and reduced demand for Schlumberger's products and services has had, and is likely to continue to have, a material adverse impact on Schlumberger's business, results of operations, financial condition and, at times, access to sources of liquidity. In view of the uncertainty of the depth and extent of the contraction in oil demand due to the COVID-19 pandemic combined with the weaker commodity price environment, Schlumberger has turned its strategic focus to cash conservation and protecting its balance sheet. As a result, inApril 2020 Schlumberger announced a 75% reduction to its quarterly dividend. The revised dividend supports Schlumberger's value proposition through a balanced approach of shareholder distributions and organic investment, while providing the flexibility to weather the uncertain environment. This decision reflects the Company's focus on its capital stewardship program as well as its commitment to maintain both a strong liquidity position and a strong investment grade credit rating that provides privileged access to the financial markets. 26
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Details of the components of liquidity as well as changes in liquidity follow:
(Stated in millions)
Jun. 30, Jun. 30, Dec. 31,
Components of Liquidity: 2020 2019 2019
Cash $ 1,462 $ 1,466 $ 1,137
Short-term investments 2,127 882 1,030
Short-term borrowings and current portion of
long-term debt (603 ) (98 ) (524 )
Long-term debt (16,763 ) (16,978 ) (14,770 )
Net debt (1) $ (13,777 ) $ (14,728 ) $ (13,127 )
Changes in Liquidity: Six Months Ended Jun. 30,
2020 2019
Net income (loss) $ (10,796 ) $ 923
Impairment and other charges 12,247 -
Depreciation and amortization (2) 1,396 1,841
Earnings of equity method investments, less dividends received
(26 ) -
Deferred taxes (1,050 ) (101 )
Stock-based compensation expense 213 194
Increase in working capital (3) (423 ) (1,460 ) Other 26 37 Cash flow from operations 1,587 1,434 Capital expenditures (658 ) (817 ) APS investments (224 ) (332 ) Multiclient seismic data costs capitalized (61 ) (109 ) Free cash flow (4) 644 176 Dividends paid (1,386 ) (1,385 ) Proceeds from employee stock plans 69
106
Stock repurchase program (26 ) (199 ) Net proceeds from asset divestitures 298 - Business acquisitions and investments, net of cash acquired plus debt assumed (20 ) (17 ) Other (229 ) (135 ) Increase in net debt (650 ) (1,454 ) Net debt, beginning of period (13,127 ) (13,274 ) Net debt, end of period$ (13,777 ) $ (14,728 )
(1) "Net debt" represents gross debt less cash and short-term
investments. Management believes that Net debt provides useful information
regarding the level of Schlumberger's indebtedness by reflecting cash and
investments that could be used to repay debt. Net debt is a non-GAAP
financial measure that should be considered in addition to, not as a
substitute for or superior to, total debt.
(2) Includes depreciation of property, plant and equipment and amortization of
intangible assets, multiclient seismic data costs, and APS investments.
(3) Includes severance payments of approximately
during the six months ended
(4) "Free cash flow" represents cash flow from operations less capital
expenditures, APS investments and multiclient seismic data costs capitalized.
Management believes that free cash flow is an important liquidity measure for
the company and that it is useful to investors and management as a measure of
our ability to generate cash. Once business needs and obligations are met,
this cash can be used to reinvest in the company for future growth or to
return to shareholders through dividend payments or share repurchases. Free
cash flow does not represent the residual cash flow available for
discretionary expenditures. Free cash flow is a non-GAAP financial measure
that should be considered in addition to, not as substitute for or superior
to, cash flow from operations.
Key liquidity events during the first six months of 2020 and 2019 included:
• On
program for Schlumberger common stock. Schlumberger hadrepurchased
$1.0 billion of Schlumberger common stock under this program as ofJune 30, 2020 . The Company did not repurchase any Schlumberger common stock during the second quarter of 2020. 27
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The following table summarizes the activity under the share repurchase program:
(Stated in millions, except per share amounts)
Total cost Total number Average price
of shares of shares paid per
purchased purchased share
Six months ended June 30, 2020 $ 26 0.8 $ 33.81
Six months ended June 30, 2019$ 199 4.8 $ 41.40
• Capital expenditures were
compared to
respectively. Capital expenditures for full-year 2020 are expected to be
approximately
• During the second quarter of 2020, Schlumberger issued €1.0 billion of
1.375% Guaranteed Notes due 2026, $900 million of 2.650% Senior Notes due
2030 and €1.0 billion of 2.00% Guaranteed Notes due 2032.
• During the second quarter of 2020, Schlumberger repurchased all
of its 4.20% Senior Notes due 2021 and
Notes due 2021. Schlumberger paid a premium of approximately
connection with these repurchases. This premium was classified in
Impairments & other in the Consolidated Statement of Income (Loss). See
Note 2 - Charge and Credits.
• During the second quarter of 2020, Schlumberger established a €5.0 billion
Guaranteed Euro Medium Term Note program that provides for the issuance of
various types of debt instruments such as fixed or floating rate notes in
euro, US dollar or other currencies. Schlumberger has not issued any debt
under this program.
• During the first quarter of 2020, Schlumberger issued €400 million of 0.25%
Notes due 2027 and €400 million of 0.50% Notes due 2031.
• During the first quarter of 2020, Schlumberger completed the sale of its 49%
interest in the Bandurria Sur Block in
from this transaction, combined with the proceeds received from the
divestiture of a smaller APS project, amounted to $298 million .
• During the first quarter of 2019, Schlumberger issued
Senior Notes due 2024 and
Schlumberger recorded a$1.0 billion charge relating to severance during the second quarter of 2020. The vast majority of this charge is expected to be paid during the second half of 2020.
Schlumberger generates revenue in more than 120 countries. As of
As ofJune 30, 2020 , Schlumberger had$3.6 billion of cash and short-term investments on hand. Schlumberger had separate committed debt facility agreements aggregating$8.0 billion that support commercial paper programs, of which$6.2 billion was available and unused. Schlumberger believes these amounts are sufficient to meet future business requirements for at least the next 12 months.
Borrowings under the commercial paper programs at
FORWARD-LOOKING STATEMENTS
This second-quarter 2020 Form 10-Q, as well as 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; pricing; Schlumberger's response to, and
preparedness for, the COVID-19 pandemic; access to raw materials; improvements
in operating procedures and technology; capital expenditures by Schlumberger and
the oil and gas industry; the business strategies of Schlumberger and
Schlumberger's customers; Schlumberger's digital strategy; Schlumberger's
restructuring efforts and charges recorded as a result of such efforts; our
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effective tax rate; Schlumberger's APS projects, joint ventures, and alliances; future global economic and geopolitical conditions; and future results of operations. These statements are subject to risks and uncertainties, including, but not limited to, changing 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; the results of operations and financial condition of Schlumberger's customers and suppliers, particularly during extended periods of low prices for crude oil and natural gas; Schlumberger's inability to sufficiently monetize assets; the extent of future charges; general economic, geopolitical, and business conditions in key regions of the world; foreign currency risk; pricing pressure; weather and seasonal factors; unfavorable effects of health pandemics; availability and cost of raw materials; operational modifications, delays or cancellations; challenges in Schlumberger's supply chain; production declines; Schlumberger's inability to recognize intended benefits from its business strategies and initiatives, such as digital or new energy, as well as our restructuring and structural cost reduction plans; 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; the competitiveness of alternative energy sources or product substitutes; and other risks and uncertainties detailed in this Form 10-Q and our most recent Form 10-K and Forms 8-K filed with or furnished to theSEC . If one or more of these or other risks or uncertainties materialize (or the consequences of any such development changes), or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those reflected in our forward-looking statements. Statements in this second-quarter 2020 Form 10-Q are made as ofJuly 29, 2020 , and Schlumberger disclaims any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise.
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