01—Abstract
Summary
Summary of the 10-K filed March 30, 2000. Cited figures are marked; the original filing is the authoritative source.
Schlumberger's 1999 results were weak as the oilfield downturn hit its core business.
Total operating revenue fell 22% to $8.4 billiona from $10.7 billion, and operating income dropped 58% to $546 million. Net income fell to $367 million ($0.65 diluted EPS) from $1.01 billion ($1.81) in 1998. Income from continuing operations was $329 million ($0.58 diluted), after charges of about $129 million after tax in 1999.
Oilfield Services, the largest segment, drove the decline: revenue fell 25%b in line with a roughly 22% drop in the average rig count and a sharp cut in E&P spending. Resource Management Services and Test & Transactions were also weaker, with operating income down 82% and 46%, respectively, in terms of operating net income. The company's balance sheet and strategic position shifted during the year.
The December 1999 spin-off of its offshore drilling unit, Sedco Forex, reduced total assets to $15.1 billionc from $16.1 billion and removed a large fixed-asset base. Liquidity (cash and investments net of debt) rose to $1.23 billion from $731 million, helped by a $450 million warrant exercise by Dow Chemical and $204 million from the sale of financial instruments. Capital spending fell to $792 million from $1.46 billion, and operating cash flow was $1.52 billion.
Long-term debt was steady at about $3.18 billiond, and stockholders' equity was $7.7 billion. The quarterly dividend was held at $0.1875 per share ($0.75 annually). For investors, the key questions are the pace of the oil industry recovery and whether the cost cuts and portfolio moves, including the drilling fluids joint venture with Smith International, the Merak and Secure Oil Tools acquisitions, and the IndigoPool e-business launch, can restore margins.
Return on equity from continuing operations fell to 6% from 13%. The filing notes that current liquidity and expected operating cash flow should cover business requirements, and management described the Year 2000 transition as successful, at a cost of about $60 million.
02—Key points
Key Highlights
- Revenue fell 22% to $8.39 billion, and operating income fell 58% to $546 million, reflecting a sharp downturn in E&P spending and a 22% drop in the average rig count.
- Diluted EPS was $0.65 on net income of $367 million, versus $1.81 in 1998; continuing operations earned $0.58 per diluted share versus $1.10.
- The December 1999 spin-off of Sedco Forex, which merged with Transocean Offshore, removed the offshore drilling business. Schlumberger holders own about 52% of Transocean Sedco Forex and retained no stake in the combined company.
- Liquidity rose to $1.23 billion from $731 million, supported by a $450 million warrant exercise and $204 million from the sale of financial instruments, despite $792 million of capital spending.
- Operating cash flow was $1.52 billion, and long-term debt was $3.18 billion against stockholders' equity of $7.72 billion.
- Strategic moves included a 40% stake in the drilling fluids joint venture with Smith International ($325 million cash), acquisitions of Merak, Secure Oil Tools and Panther Software, and the IndigoPool e-business launch.
- Dividends were held at $0.75 per share, and the company had about 55,000 employees at year-end. Restructuring charges in 1998 and 1999 totaled roughly $432 million and $120 million, respectively.
03—Questions
Frequently Asked Questions
Why did Schlumberger's earnings decline so sharply in 1999?
The decline came mainly from the oilfield services downturn. Oil companies cut exploration and production spending by about 23% after lower oil prices, which reduced the average rig count by 22%. Oilfield Services revenue fell 25%, and its operating net income dropped 58%. The seismic services segment had a particularly severe downturn. Restructuring and asset impairment charges also reduced 1999 results.
What happened to the Sedco Forex offshore drilling business?
On December 30, 1999, Schlumberger spun off Sedco Forex to its stockholders. On December 31, Sedco Forex merged with Transocean Offshore Inc., which was renamed Transocean Sedco Forex Inc. Schlumberger stockholders own about 52% of the combined company, and Schlumberger retains no ownership. Sedco Forex results are reported as discontinued operations for all periods.
Is Schlumberger's balance sheet and liquidity position sound?
Liquidity improved to $1.23 billion at year-end 1999 from $731 million, and the company says current liquidity plus expected operating cash flow should meet future business needs. Long-term debt was $3.18 billion, and total assets were $15.08 billion. Most debt carries variable interest rates, with a weighted-average rate of 5.9%. The company had about $1 billion in an available US revolving credit facility, of which $375 million was drawn.
Did Schlumberger face any material legal or environmental liabilities?
The company settled a Department of Justice contempt matter relating to the drilling fluids joint venture with Smith International. Schlumberger was fined $750,000 for criminal contempt, and its share of the disgorgement payment under the civil settlement was $6.34 million. Management does not consider environmental remediation accruals or other legal proceedings material to its financial position or results.
What is the outlook for Schlumberger's business?
The 10-K does not give a numeric forecast. Management said North American activity started to improve in the third quarter of 1999, with more gas development work in the fourth quarter. Its forward-looking statements depend on the recovery in oil prices, E&P spending by major oil companies, utility investment in integrated solutions, and demand for smart cards and RDRAM test equipment. Schlumberger also pointed to new technology launches, multilateral completion orders, and its e-business initiatives as growth drivers.
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