01—Abstract
Summary
Summary of the 10-K filed January 25, 2017. Cited figures are marked; the original filing is the authoritative source.
Schlumberger's 2016 10-K reports a sharp downturn-driven contraction alongside a transformational acquisition.
Revenue fell 22% to $27.8 billiona (from $35.5 billion), and excluding the Cameron Group, which contributed $4.2 billion over nine months, revenue declined 34%. The company swung to a loss from continuing operations of $1.7 billion ($1.24 per diluted share), driven by $3.8 billion in pretax impairments, workforce reductions and merger charges, versus $2.1 billion of income in 2015. Management describes 2016 as the deepest and longest industry crisis in more than 30 years, and says activity stabilized in Q3 2016 with a slight Q4 revenue uptick, suggesting the cycle bottom has been reached.
The balance sheet and cash flow picture weakened materially. Cash flow from operations fell to $6.3 billionb (from $8.8 billion), free cash flow dropped to $2.5 billion (from $5.0 billion), and dividends paid of $2.6 billion exceeded free cash flow. Net debt rose to $10.1 billion from $5.5 billion, and total debt reached $19.6 billion, largely due to the $3.0 billion of debt assumed in the Cameron deal and the $6.0 billion Senior Notes issued in late 2015.
Management is guiding to a roughly 30%c increase in North American E&P spending in 2017, led by land operators, with international recovery expected to lag and begin late in 2017 into 2018. Management also flagged elevated receivable exposure, with Venezuela approximately 12% and Ecuador approximately 12% of accounts receivable at year-end 2016.
For investors, the key tensions are the depth of earnings erosion, the leverage increase, and dividend coverage versus the expected cyclical recovery. The Cameron integration adds scale in subsea and surface equipment, a 2016 backlog of $3.1 billiond for OneSubsea and Drilling Systems, and a longer-term pore-to-pipeline strategy, but the near-term benefits depend on a sustained recovery in activity and pricing.
02—Key points
Key Highlights
- Revenue fell 22% to $27.8 billion in 2016; excluding Cameron (acquired April 1, 2016, contributing $4.2 billion), revenue declined 34%.
- Net loss attributable to Schlumberger of $1.7 billion (-$1.24 per diluted share) versus $2.1 billion net income in 2015, driven by $3.8 billion in pretax charges and impairments.
- Free cash flow fell to $2.5 billion from $5.0 billion, while dividends paid of $2.6 billion exceeded free cash flow.
- Net debt rose to $10.1 billion from $5.5 billion; total debt was $19.6 billion, including $3.0 billion of debt assumed with Cameron.
- Cameron acquisition: 138 million shares issued (valued at $9.9 billion) plus $2.8 billion cash, creating $9.0 billion of goodwill and $4.2 billion of intangible assets recognized.
- Management expects North American E&P spending to rise roughly 30% in 2017, with international recovery lagging and a potential supply deficit in the medium term.
- Dividend held at $0.50 per quarter ($2.00 annually); $10 billion buyback program authorized in January 2016, with $9.4 billion of the 2013 program already repurchased.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2016, SLB lost $0.06.
- Revenue$27.81B100.0%
- Cost of revenue−$7.06B25.4%
- Gross profit$20.75B74.6%
- Operating costs−$17.48B62.9%
- Operating income$3.27B11.8%
- Interest, other & tax−$4.96B17.8%
- Net income−$1.69B6.1%
Where FY2016 revenue went
$27.81B- Other operating costs: $16.47B, 59% of revenue
- Cost of revenue: $7.06B, 25% of revenue
- Operating income: $3.27B, 12% of revenue
- R&D: $1.01B, 3.6% of revenue
Kept 12% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed January 25, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $27.81B$35.48B | −21.6% |
| Cost of Revenue | $7.06B$28.32B | −75.1% |
| Gross Profit | $20.75B$7.15B | +190.1% |
| R&D Expenses | $1.01B$1.09B | −7.5% |
| Operating Income | $3.27B$6.51B | −49.7% |
| Interest Expense | $570.00M$346.00M | +64.7% |
| Net Income | -$1.69B$2.07B | −181.4% |
| EPS (Basic) | $-1.24$1.63 | −176.1% |
| EPS (Diluted) | $-1.24$1.63 | −176.1% |
| Shares Outstanding (Basic) | 1.36B1.27B | +7.1% |
| Shares Outstanding (Diluted) | 1.36B1.27B | +6.4% |
05—Questions
Frequently Asked Questions
Why did Schlumberger report a net loss in 2016 after profitable years?
The loss reflects a sharp decline in customer spending as oil and gas prices fell since 2014, causing revenue to drop 22% and pretax operating margins to fall to about 12%. The company also recorded $3.8 billion of pretax charges in 2016, including $3.2 billion of impairments and other charges (such as fixed asset, inventory and multiclient seismic write-downs, and workforce reduction costs) and $648 million of merger and integration costs related to Cameron.
Is the dividend at risk given the weaker cash flow?
Dividends paid of $2.6 billion in 2016 exceeded free cash flow of $2.5 billion, and net debt increased to $10.1 billion. Management stated that free cash flow covered its dividend commitments in the context of margins above 10%, but the filing does not explicitly guarantee future dividend levels. The dividend was held at $0.50 per quarter, and investors should monitor whether the 2017 recovery restores free cash flow coverage.
What does the Cameron acquisition add to Schlumberger's business?
Cameron adds wellhead, surface equipment, flow control and processing technology, and the OneSubsea subsea production systems business, which Schlumberger now owns 100%. The combined company positions itself as offering pore-to-pipeline solutions. Cameron's businesses contributed about $4.2 billion of revenue and roughly $0.7 billion of pretax operating income from April to December 2016, and the OneSubsea and Drilling Systems backlog was $3.1 billion at year-end, with about 60% expected to convert to revenue in 2017.
What are the main risks highlighted for investors?
Key risks include continued low oil and gas prices pressuring customer spending and pricing, with customer payment delays and project cancellations; exposure to non-US operations (about 80% of 2016 revenue) to political, currency, sanctions and expropriation risks; receivable concentration in Venezuela and Ecuador (about 12% each of receivables); and compliance with anti-corruption and sanctions laws. Environmental and climate-related regulation, including hydraulic fracturing rules, could also reduce demand.
Is management signaling that the downturn has bottomed?
Management said that after nine quarters of activity decline, the business environment stabilized in Q3 2016 and Q4 revenue rose 1% sequentially, suggesting the bottom of the cycle has been reached. However, management also expects a third successive year of underinvestment internationally, with the international recovery proceeding more slowly than in North America and benefits emerging largely in late 2017 and into 2018.
06—Continue