01—Abstract
Summary
Summary of the 10-K filed January 29, 2015. Cited figures are marked; the original filing is the authoritative source.
Schlumberger (SLB) closed 2014 with record revenue of $48.6 billiona, up 7% and the fifth consecutive year of growth, driven by a 16% surge in North America (land up 22%, led by pressure pumping share gains) and a 4% rise in International revenue.
Pretax operating income reached $10.6 billionb (up 13%) and pretax operating margin expanded 113 bps to 21.8%. However, reported results were heavily affected by $1.77 billion in pretax charges taken mainly in Q4 2014 (WesternGeco vessel restructuring, a Venezuela currency devaluation, a workforce reduction and an SPM project impairment). Diluted EPS from continuing operations fell to $4.31 from $5.10 in 2013, and net income attributable to Schlumberger declined to $5.4 billion from $6.7 billion, which also reflected a $205 million loss from discontinued operations tied to a sanctions-related legal contingency.
Cash generation remained strong, with operating cash flow of $11.2 billionc and free cash flow of $6.2 billion, which funded $4.7 billion of share repurchases and $2.0 billion of dividends. Management reported that the board raised the quarterly dividend 25% to $0.50 in January 2015. Management also warned that falling oil prices, which declined more than 40% late in 2014, create short-term uncertainty for 2015 customer spending.
In response, the company restructured and resized the business, and capital expenditures are expected to fall to about $3.4 billiond in 2015 from $4.0 billion. Balance sheet leverage increased modestly, with net debt rising to $5.4 billion from $4.4 billion. Gross debt was $13.3 billion against $7.5 billion of cash and short-term investments.
Growth prospects in 2015 include a planned $1.7 billion acquisition of a roughly 45% stake in Eurasia Drilling Company, expected to close in Q1 2015. Investors should weigh the strong 2014 franchise and cash returns against the sharp downside risk from the commodity-price cycle and the one-time charges.
02—Key points
Key Highlights
- Record 2014 revenue of $48.6 billion (up 7%); North America revenue up 16% to $16.2 billion, while International revenue rose 4% to $32.1 billion.
- Pretax operating income of $10.6 billion (up 13%), with pretax operating margin up 113 bps to 21.8%.
- Reported diluted EPS from continuing operations fell to $4.31 from $5.10, primarily due to $1.77 billion in pretax charges, mostly in Q4 2014.
- Operating cash flow of $11.2 billion and free cash flow of $6.2 billion, funding $4.7 billion in share buybacks and $2.0 billion in dividends.
- Quarterly dividend raised 25% to $0.50 (announced January 15, 2015), following a 28% increase in January 2014.
- Net debt increased to $5.4 billion from $4.4 billion; cash and short-term investments totaled $7.5 billion against $13.3 billion of gross debt.
- 2015 outlook is cautious: capital expenditures expected to fall to about $3.4 billion, the company resized its cost base, and it is acquiring a ~45% stake in Eurasia Drilling for ~$1.7 billion.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, SLB kept $0.11.
- Revenue$48.58B100.0%
- Cost of revenue−$37.40B77.0%
- Gross profit$11.18B23.0%
- Operating costs−$606.0M1.2%
- Operating income$10.58B21.8%
- Interest, other & tax−$5.14B10.6%
- Net income$5.44B11.2%
04—Financials
Financial Highlights
Figures from 10-KFY2014filed January 29, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $48.58B$45.27B | +7.3% |
| Cost of Revenue | $37.40B$35.33B | +5.9% |
| Gross Profit | $11.18B$9.94B | +12.6% |
| R&D Expenses | $1.22B$1.17B | +3.7% |
| Operating Income | $10.58B$9.34B | +13.2% |
| Interest Expense | $369.00M$391.00M | −5.6% |
| Net Income | $5.44B$6.73B | −19.2% |
| EPS (Basic) | $4.20$5.09 | −17.5% |
| EPS (Diluted) | $4.16$5.05 | −17.6% |
| Shares Outstanding (Basic) | 1.29B1.32B | −2.1% |
| Shares Outstanding (Diluted) | 1.31B1.33B | −1.9% |
05—Questions
Frequently Asked Questions
Why did Schlumberger's earnings per share decline in 2014 even though revenue hit a record?
Diluted EPS from continuing operations fell to $4.31 from $5.10 mainly because of $1.77 billion in pretax charges recorded largely in Q4 2014. These included a $590 million impairment of six vessels and $216 million of related WesternGeco charges, a $472 million Venezuela currency devaluation charge tied to adopting the SICAD II rate, a $296 million workforce reduction, and a $199 million impairment of an SPM project in the Eagle Ford Shale. Operating performance improved, but these non-recurring items drove the reported decline.
How is the company's exposure to the oil price decline and 2015 activity outlook described?
Management said oil prices fell more than 40% late in 2014 to their lowest levels since 2009, which creates short-term uncertainty for customer spending and activity in 2015. The company believes the oil market is relatively well balanced over the longer term. It has already restructured and resized the business, has reduced capital expenditures, and expects to contribute about $400 million to postretirement plans in 2015. Risk factors also note that demand for most services depends heavily on oil and gas industry expenditures.
How strong is Schlumberger's balance sheet and liquidity?
At December 31, 2014, the company had $7.5 billion of cash and short-term investments and $3.9 billion of committed credit facilities, of which $2.3 billion was undrawn. Gross debt was $13.3 billion, and net debt rose to $5.4 billion. Management believes these resources are sufficient for at least the next 12 months. Total stockholders' equity attributable to Schlumberger was $37.9 billion, and total assets were $66.9 billion.
How much did Schlumberger return to shareholders, and what buyback capacity remains?
In 2014 the company repurchased about 47.5 million shares for $4.7 billion, at an average price of $98.38. It paid $2.0 billion in dividends. The $10 billion repurchase program approved in July 2013 had $3.6 billion remaining as of December 31, 2014, and the company is accelerating completion to 2.5 years versus the original five-year target.
What is the significance of the Eurasia Drilling acquisition and the Venezuela charge?
Schlumberger agreed in January 2015 to acquire about a 45% stake in Eurasia Drilling Company, Russia's largest onshore drilling services provider, for approximately $1.7 billion in cash, with an option to buy the remaining shares later. The deal is expected to close in Q1 2015. The Venezuela charge of $472 million reflects a change to the SICAD II exchange rate for local-currency transactions, which will reduce reported US dollar revenue and earnings going forward. Management estimated that applying a 50-bolivar rate for all of 2014 would have reduced earnings by about $0.08 per share.
06—Continue