SCHLUMBERGER LIMITED Due to the cyclical nature of the industry in which Schlumberger operates and in order to provide a more meaningful analysis relevant to Schlumberger's business, this section of the Form 10-Q discusses second-quarter 2021 results of operations and comparisons to first-quarter 2021, as well as the first six months of 2021 results of operations and comparisons to the first six months of 2020. Detailed financial information with respect to first-quarter 2021 can be found in Part I, Item 1, "Financial Statements" of Schlumberger's Quarterly Report on Form 10-Q for the fiscal quarter endedMarch 31, 2021 . Second Quarter 2021 Compared to First Quarter 2021 (Stated in millions) Second Quarter 2021 First Quarter 2021 Income Before Income Before Revenue Taxes Revenue Taxes Digital & Integration$ 817 $ 274$ 773 $ 247 Reservoir Performance 1,117 156 1,002 102 Well Construction 2,110 272 1,935 209 Production Systems 1,681 171 1,590 138 Eliminations & other (91 ) (66 ) (77 ) (32 ) 807 664 Corporate & other (1) (138 ) (150 ) Interest income (2) 5 4 Interest expense (3) (132 ) (132 )$ 5,634 $ 542$ 5,223 $ 386
(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 million in Q2 2021; $4 million in Q1 2021).
Second-quarter global revenue grew 8% sequentially, outperforming the rig count
growth in both North America and the international markets. All four Divisions
grew resulting in the highest sequential quarterly revenue growth rate since the
second quarter of 2017.
In North America , revenue grew 11% sequentially, representing the highest
sequential quarterly growth rate for this area since the third quarter of 2017.
This performance was driven by US land revenue, which increased 19% due to
higher drilling activity and increased sales of well and surface production
systems. Well Construction revenue in US land grew more than 30% sequentially,
significantly outperforming the rig count growth of 16%. In addition, Canada
land revenue increased despite the spring breakup, due to higher Asset
Performance Solutions ("APS") project revenue, while North America offshore
revenue was slightly higher due to sales of subsea production systems.
International revenue grew 7% sequentially with all four Divisions registering growth. The revenue growth outpaced the international rig count increase as activity surpassed the impact of the seasonal recovery in the Northern Hemisphere.
Globally, the second-quarter revenue growth was led byReservoir Performance and Well Construction , where activity intensified beyond the seasonal recovery. Reservoir Performance revenue increased 12% sequentially due to the seasonal activity rebound in the Northern Hemisphere, in addition to higher exploration and appraisal activity.Well Construction revenue increased 9% sequentially from increased drilling activity in US land and broadly across the international markets, particularly offshore. Digital & Integration revenue increased 6% sequentially due to higher sales of digital solutions and higher APS project revenue. Production Systems revenue grew 6%, primarily due to higher sales of well, surface, and subsea production systems.
Sequentially, second-quarter pretax segment operating income increased 22%. Pretax segment operating margin expanded by 162 basis points ("bps") to 14%, the highest margin since 2015.
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While the rise of the COVID-19 Delta variant and resurgence of related
disruptions could impact the pace of economic reopening, industry projections of
oil demand reflect the anticipation of a wider vaccine-enabled recovery,
improving road mobility, and the impact of various economic stimulus programs.
Under this scenario, Schlumberger believes the momentum of international
activity growth experienced in the second quarter will continue as the cyclical
recovery unfolds. This view is supported by rig count trends, capital spending
signals, and customer feedback. In North America , Schlumberger anticipates the
growth rate to moderate; however, drilling activity could still surprise to the
upside due to private E&P operator spending.
Consequently, absent any further setback in the recovery, Schlumberger continues
to see its international revenue growing in the second half of 2021 by
double-digits when compared to the second half of last year. This translates
into full-year 2021 international revenue growth, setting the stage for a strong
baseline moving into 2022 and beyond.
Digital & Integration
Digital & Integration revenue of
Digital & Integration pretax operating margin of 33% expanded 147 bps sequentially due to increased high-margin digital solutions sales and improved profitability from APS projects.
Reservoir Performance
Reservoir Performance revenue of
Reservoir Performance pretax operating margin of 14% expanded 373 bps sequentially. Profitability was boosted by the seasonal recovery in the Northern Hemisphere, higher offshore and exploration activity, and favorable technology mix in wireline activity inAfrica and in theMiddle East .
Well Construction revenue of$2.1 billion increased 9% sequentially.Stronger North America and international activity beyond the seasonal rebound in the Northern Hemisphere was supported by the rig count increase.North America revenue growth was driven by US land revenue growth of more than 30%, outpacing the US land rig count increase of 16%. Sequentially,Well Construction pretax operating margin of 13% improved by 209 bps due to higher drilling activity following the seasonal recovery in the Northern Hemisphere, higher drilling in US land, increased volume of activity inEurope &Africa and theMiddle East and increased higher-margin offshore exploration activity inAfrica .
Production Systems
Production Systems revenue of
Sequentially, Production Systems pretax operating margin of 10% expanded 146 bps as a result of higher sales of surface, well, and subsea production systems.
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Six Months 2021 Compared to Six Months 2020
(Stated in millions)
Six Months 2021 Six Months 2020
Income Income (Loss)
Before Before
Revenue Taxes Revenue Taxes
Digital & Integration $ 1,590 $ 521 $ 1,503 $ 259
Reservoir Performance 2,119 258 3,139 156
Well Construction 4,045 482 4,904 511
Production Systems 3,271 309 3,469 336
Eliminations & other (168 ) (99 ) (204 ) (90 )
1,471 1,172
Corporate & other (1) (288 ) (397 )
Interest income (2) 9 22
Interest expense (3) (264 ) (266 )
Charges and credits (4) - (12,247 )
$ 10,857 $ 928 $ 12,811 $ (11,716 ) (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 2021 revenue of $10.9 billion decreased 15% year-on-year reflecting
the significant fall in activity following the historic demand destruction
driven by the COVID-19 pandemic that commenced in early 2020. More than a year
after the unprecedented global health and economic crisis sparked by the
pandemic began, customers have gradually increased their spending. Revenue also
declined year-on-year, particularly in North America , following the divestitures
of the OneStim® pressure pumping business and the low-flow artificial lift
business during the fourth quarter 2020. These divestitures were consistent with
Schlumberger's strategy to focus on high-grading and rationalizing its business
portfolio to expand margins, minimize earnings volatility, and focus on more
capital efficient businesses. Excluding the impact of these divestitures, which
generated $818 million of revenue (all of which was in North America ) during the
first six months of 2020, global revenue declined 9% year-on-year.
In North America revenue declined 37% year-on-year; however, excluding the
impact of the previously described divestitures, six-month revenue only declined
16%. International revenue declined 8% driven by significant activity decreases
in Europe /CIS/Africa and the Middle East & Asia .
Six-month 2021 pretax operating margin of 14% was 440 bps higher compared to the
same period last year despite the 15% decline in revenue, due to the divestiture
of certain businesses in North America , which were previously dilutive to
margins, combined with reduced depreciation and amortization expense following
the asset impairment charges recorded during 2020 and the effects of cost
reduction measures.
Digital & Integration
Six-month 2021 revenue of$1.6 billion increased 6% year-on-year primarily driven by higher APS project revenue from higher production and improved oil prices, as well as the absence of production interruptions in the APS projects inEcuador that were caused by a major land slide in the second quarter of 2020. Year-on-year, pretax operating margin increased 16 percentage points to 33%. Operating margin increased due to improved profitability from APS projects as a result of higher oil prices and reduced amortization following the asset impairment charges that were recorded during the first six months of 2020 relating to certain APS investments inNorth America andLatin America . 22 --------------------------------------------------------------------------------
Reservoir Performance
Six-month 2021 revenue of$2.1 billion decreased 32% year-on-year largely due to the effects of the pandemic. The revenue decline also reflected the effects of the OneStim divestiture, which generated$741 million of revenue during the first six months of 2020. Excluding the impact of the OneStim divestiture, revenue declined 12% year-on-year. Year-on-year, pretax operating margin increased by 721 bps to 12% despite the significant drop in revenue, primarily due to the divestiture of the OneStim business, which was previously dilutive to margins.
Six-month 2021 revenue of$4.0 billion decreased 18% year-on-year due to the significant drop in rig count inNorth America and internationally due to the effects of the pandemic.
Year-on-year, pretax operating margin increased 147 bps to 12% despite the significant drop in revenue. Margin expanded largely as a result of the implementation of cost control measures.
Production Systems
Six-month 2021 revenue of
Year-on-year, pretax operating margin decreased 23 bps to 9% due to reduced profitability in midstream and subsea production systems.
Interest and Other Income
Interest & other income consisted of the following:
(Stated in millions)
Second Quarter First Quarter Six Months
2021 2021 2021 2020
Equity in net earnings of affiliated
companies $ 10 $ 14 $ 25 $ 49
Interest income 6 5 10 23
$ 16 $ 19 $ 35 $ 72
Other
Research & engineering and General & administrative expenses, as a percentage of
Revenue, for the second quarter and first quarter of 2021 and six months ended
June 30, 2021 and 2020 were as follows:
Second Quarter First Quarter Six Months
2021 2021 2021 2020
Research & engineering 2.4 % 2.6 % 2.5 % 2.5 %
General & administrative 1.2 % 1.5 % 1.4 % 1.6 %
The effective tax rate for the second quarter of 2021 was 18%, as compared to 19% for the first quarter of 2021.
The effective tax rate for the first six months of 2021 was 19%, as compared to
8% for the same period of 2020. The increase in the effective tax rate was
primarily due to the charges and credits described in Note 2 to the Consolidated
Financial Statements which 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.
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Charges and Credits
Schlumberger did not record any charges or credits during the first six months of 2021.
During the first six months of 2020 Schlumberger recorded the following charges
and credits 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 assets 3,321 815 2,506
Asset Performance Solutions investments 1,264 (4 ) 1,268
North American pressure pumping 587 133 454 Severance 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 Liquidity and Capital Resources
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: 2021 2020 2020
Cash $ 1,439 $ 1,462 $ 844
Short-term investments 1,243 2,127 2,162
Short-term borrowings and current portion of
long-term debt (36 ) (603 ) (850 )
Long-term debt (15,687 ) (16,763 ) (16,036 )
Net debt (1) $ (13,041 ) $ (13,777 ) $ (13,880 )
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Six Months Ended Jun. 30,
Changes in Liquidity: 2021 2020
Net income (loss) $ 755 $ (10,796 )
Impairment and other charges - 12,247
Depreciation and amortization (2) 1,058
1,396
Earnings of equity method investments, less dividends received
(15 ) (26 )
Deferred taxes (18 ) (1,050 )
Stock-based compensation expense 156 213
Increase in working capital (3) (758 ) (423 ) US Federal tax refund 477 - Other (6 ) 26 Cash flow from operations 1,649 1,587 Capital expenditures (421 ) (658 ) APS investments (188 ) (224 ) Multiclient seismic data costs capitalized (12 ) (61 ) Free cash flow (4) 1,028 644 Dividends paid (349 ) (1,386 ) Proceeds from employee stock plans 62
69
Stock repurchase program -
(26 ) Business acquisitions and investments, net of cash acquired plus debt assumed
(35 ) (20 )
Net proceeds from asset divestitures - 298
Other (30 )
(130 ) Change in net debt before impact of changes in foreign exchange rates on net debt
676 (551 ) Impact of changes in foreign exchange rates on net debt
163 (99 )
Decrease (increase) in net debt 839 (650 )
Net debt, beginning of period (1) (13,880 ) (13,127 )
Net debt, end of period (1) $ (13,041 ) $ (13,777 ) (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.
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 at the time, inApril 2020 Schlumberger announced a 75% reduction to its quarterly cash dividend. The revised dividend supports Schlumberger's value proposition through a balanced approach of shareholder distributions and organic investment, while providing flexibility to address the uncertain environment. This decision reflected 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.
Key liquidity events during the first six months of 2021 and 2020 included:
• On
for Schlumberger common stock. Schlumberger had repurchased
Schlumberger common stock under this program as of
did not repurchase any of its common stock during the first six months of
2021. Schlumberger repurchased$26 million of its common stock during the first six months of 2020. 25
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•Capital investments (consisting of capital expenditures, APS investments and
multiclient seismic data capitalized) were
months of 2021 compared to
2020. Capital investments during the full year of 2021 are expected to be
between
year 2020.
• During the second quarter of 2021, Schlumberger repurchased all
of its 3.30% Senior Notes due 2021.
• During the second quarter of 2021, Schlumberger received a federal tax refund
of
to the Coronavirus Aid, Relief and Economy Security Act.
• 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
this transaction, combined with the proceeds received from the divestiture of
a smaller APS project, amounted to$298 million .
• During the second quarter of 2020, Schlumberger issued €1.0 billion of 1.375%
Guaranteed Notes due 2026,
€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
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 - Charges
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.
As of
Borrowings under the commercial paper programs at
Schlumberger maintains an allowance for doubtful accounts in order to record accounts receivable at their net realizable value. Judgment is involved in recording and making adjustments to this reserve. Allowances have been recorded for receivables believed to be uncollectible, including amounts for the resolution of potential credit and other collection issues such as disputed invoices. Adjustments to the allowance may be required in future periods depending on how such potential issues are resolved, or if the financial condition of Schlumberger's customers were to deteriorate resulting in an impairment of their ability to make payments. As a large multinational company with a long history of operating in a cyclical industry, Schlumberger has extensive experience in working with its customers during difficult times to manage its accounts receivable. Schlumberger generates revenue in more than 120 countries. As ofJune 30, 2021 , only five of those countries individually accounted for greater than 5% of Schlumberger's net receivable balance, of which only two (the United States andMexico ) accounted for greater than 10% of such receivables. At times in recent periods, Schlumberger has experienced delays in payments from its primary customer inMexico . Included in Receivables, less allowance for doubtful accounts in the Consolidated Balance Sheet as ofJune 30, 2021 is approximately$0.7 billion of receivables relating toMexico . Schlumberger's receivables from its primary customer inMexico are not in dispute and Schlumberger has not historically had any material write-offs due to uncollectible accounts receivable relating to this customer.
FORWARD-LOOKING STATEMENTS
This second-quarter 2021 Form 10-Q, as well as other statements we make,
contains "forward-looking statements" within the meaning of the federal
securities laws, which include any statements that are not historical facts.
Such statements often contain words such as "expect," "may," "can," "believe,"
"predict," "plan," "potential," "projected," "projections," "forecast,"
"estimate," "intend," "anticipate," "ambition," "goal," "target," "think,"
"should," "could," "would," "will," "see," "likely," and other similar words.
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Forward-looking statements address matters that are, to varying degrees, uncertain, such as statements about Schlumberger's financial and performance targets and other forecasts or expectations regarding, or dependent on, its business outlook; growth for Schlumberger as a whole and for each of its Divisions (and for specified business lines, geographic areas or technologies within each Division); oil and natural gas demand and production growth; oil and natural gas prices; forecasts or expectations regarding the energy transition and global climate change; improvements in operating procedures and technology; capital expenditures by Schlumberger and the oil and gas industry; the business strategies of Schlumberger, including digital and "fit for basin," as well as the strategies of Schlumberger's customers; Schlumberger's effective tax rate; Schlumberger's APS projects, joint ventures, and other alliances; Schlumberger's response to the COVID-19 pandemic and its preparedness for other widespread health emergencies; access to raw materials; future global economic and geopolitical conditions; future liquidity; and future results of operations, such as margin levels. 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; Schlumberger's inability to achieve its financial and performance targets and other forecasts and expectations; Schlumberger's inability to achieve net-zero carbon emissions goals or interim emissions reduction goals; general economic, geopolitical and business conditions in key regions of the world; foreign currency risk; pricing pressure; inflation; 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 efficiencies and other intended benefits from its business strategies and initiatives, such as digital or Schlumberger New Energy, as well as its 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 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 2021 Form 10-Q are made as ofJuly 28, 2021 , 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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