SCHLUMBERGER LIMITED This section of the Form 10-Q discusses third-quarter 2021 results of operations and comparisons to second-quarter 2021, as well as the first nine months of 2021 results of operations and comparisons to the first nine months of 2020. Detailed financial information with respect to second-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 endedJune 30, 2021 . Third Quarter 2021 Compared to Second Quarter 2021 (Stated in millions) Third Quarter 2021 Second Quarter 2021 Income Before Income Before Revenue Taxes Revenue Taxes Digital & Integration$ 812 $ 284$ 817 $ 274 Reservoir Performance 1,192 190 1,117 156 Well Construction 2,273 345 2,110 272 Production Systems 1,674 166 1,681 171 Eliminations & other (104 ) (77 ) (91 ) (66 ) 908 807 Corporate & other (1) (145 ) (138 ) Interest income (2) 8 5 Interest expense (3) (127 ) (132 ) Charges and credits (4) 47 -$ 5,847 $ 691$ 5,634 $ 542
(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 Q3 2021;
(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.
Third-quarter revenue grew 4% sequentially led byWell Construction and Reservoir Performance. The revenue growth in these Divisions more than offset the impact of transitory global supply and logistics constraints in Production Systems. Geographically, international revenue of$4.68 billion grew 4% sequentially and 11% year-on-year and is on track to meet our double-digit revenue growth ambition for the second half of 2021 compared to the same period last year. The international sequential revenue increase was led by double-digit growth inLatin America complemented by sustained activity in theEurope /CIS/Africa andMiddle East &Asia areas. InNorth America , revenue of$1.13 billion grew 4% sequentially mainly driven by a strong seasonal rebound in land drilling, higher Asset Performance Solutions ("APS") revenue inCanada , and an increase in drilling revenue inNorth America offshore. Among the Divisions,Well Construction continued its growth momentum, with revenue increasing 8% sequentially due to higher international andNorth America drilling activity both on land and offshore. Similarly, Reservoir Performance revenue increased 7% sequentially from higher exploration and appraisal activity across the international markets. Revenue from Digital & Integration and Production Systems was essentially flat. Sequentially, third-quarter pretax segment operating margin expanded by 120 basis points ("bps") to 16%, representing its highest level since 2015 and a fifth consecutive quarter of margin expansion. This growth was driven by theWell Construction and Reservoir Performance Divisions. Looking ahead, the fourth quarter of 2021 is anticipated to be another quarter of growth, and Schlumberger expects to close 2021 with strong momentum that will set the foundation for an exceptional growth cycle. 20 -------------------------------------------------------------------------------- The industry macro fundamentals have visibly strengthened this year, particularly in recent weeks-with demand recovery, oil and gas commodity prices at recent highs, low inventory levels, and encouraging trends in pandemic containment efforts. Absent a recession or pandemic-related setback, these favorable conditions are expected to materially drive investment over the next few years- particularly internationally-and result in exceptional multiyear capital spending growth globally, both on land and offshore.
Digital & Integration
Digital & Integration revenue of
Digital & Integration pretax operating margin of 35% expanded 154 bps sequentially, primarily due to increased profitability from APS projects.
Reservoir Performance
Reservoir Performance revenue of
Reservoir Performance pretax operating margin of 16% expanded 202 bps
sequentially. Profitability was boosted by higher offshore and exploration
activity and a favorable technology mix, particularly in
Well Construction revenue of$2.27 billion increased 8% sequentially due to higher land and offshore drilling across the international markets and increased rig activity inNorth America .North America revenue growth was driven by strong seasonal rebound on land drilling inCanada and higher offshore drilling in theGulf of Mexico , notwithstanding the hurricane effects during the quarter. International revenue was driven by double-digit growth inLatin America ,Africa , andRussia &Central Asia from the combination of increased offshore exploration activity and the peak of summer land drilling campaigns.Well Construction pretax operating margin of 15% improved sequentially by 230 bps due to higher drilling revenue, boosted by the favorable mix of activity and new technology. Production Systems Production Systems revenue of$1.67 billion was essentially flat sequentially, as revenue increases in subsea and well production systems were offset by a revenue decline in midstream production systems. Revenue was partially impacted by transitory global supply and logistics constraints.
Production Systems pretax operating margin of 10% was essentially flat sequentially.
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Nine Months 2021 Compared to Nine Months 2020
(Stated in millions)
Nine Months 2021 Nine Months 2020
Income Income (Loss)
Before Before
Revenue Taxes Revenue Taxes
Digital & Integration $ 2,401 $ 805 $ 2,235 $ 458
Reservoir Performance 3,312 448 4,354 259
Well Construction 6,319 827 6,747 687
Production Systems 4,946 475 5,001 467
Eliminations & other (274 ) (176 ) (268 ) (124 )
2,379 1,747
Corporate & other (1) (434 ) (548 )
Interest income (2) 17 25
Interest expense (3) (391 ) (397 )
Charges and credits (4) 47 (12,596 )
$ 16,704 $ 1,618 $ 18,069 $ (11,769 ) (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.
Nine-month 2021 revenue of $16.7 billion decreased 8% year-on-year. Revenue
declined 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 $1.1 billion of revenue (all of which was in North America ) during the
first nine months of 2020, global revenue declined 2% 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.
In
Nine-month 2021 pretax operating margin of 14% was 458 bps higher compared to the same period last year despite the 8% decline in revenue, due to the divestiture of certain businesses inNorth 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 Nine-month 2021 revenue of$2.4 billion increased 7% 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 13 percentage points to 34%. 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 nine months of 2020 relating to certain APS investments inNorth America andLatin America . 22 --------------------------------------------------------------------------------
Reservoir Performance Nine-month 2021 revenue of$3.3 billion decreased 24% year-on-year largely reflecting the effects of the OneStim divestiture, which generated$959 million of revenue during the first nine months of 2020. Excluding the impact of the OneStim divestiture, revenue declined 2% year-on-year, largely due to the effects of the pandemic. Year-on-year, pretax operating margin increased by 760 bps to 14% despite the significant drop in revenue, primarily due to the divestiture of the OneStim business, which was previously dilutive to margins.
Nine-month 2021 revenue of$6.3 billion decreased 6% year-on-year due to the drop in rig count inNorth America and internationally due to the effects of the pandemic. Year-on-year, pretax operating margin increased 291 bps to 13% despite the drop in revenue. Margin expanded largely as a result of the implementation of cost control measures. Production Systems Nine-month 2021 revenue of$4.9 billion decreased 1% year-on-year, primarily driven by theNorth America short-cycle business due to the significant decline in completions activity as a result of the pandemic.
Year-on-year, pretax operating margin increased 25 bps to 10% due to improved profitability in surface and midstream production systems.
Interest and Other Income
Interest & other income consisted of the following:
(Stated in millions)
Third Second
Quarter Quarter Nine Months
2021 2021 2021 2020
Earnings of equity method investments $ 1
26 $ 66
Interest income 8 6 18 28
Unrealized gain on marketable securities
(see Note 2) 47 - 47 -
$ 56 $ 16 $ 91 $ 94
The decrease in earnings of equity method investments is primarily attributable
to Schlumberger's share of net losses associated with Schlumberger's equity
investment in Liberty Oilfield Services, Inc. ("Liberty"). On December 31,
2020 , Schlumberger contributed its onshore hydraulic fracturing business in the
United States and Canada to Liberty in exchange for a 37% equity interest in
Liberty. Schlumberger records its share of Liberty's net income or loss on a
one-quarter lag.
Other
Research & engineering and General & administrative expenses, as a percentage of
Revenue, for the third quarter and second quarter of 2021 and nine months ended
September 30, 2021 and 2020 were as follows:
Third Second
Quarter Quarter Nine Months
2021 2021 2021 2020
Research & engineering 2.4 % 2.4 % 2.4 % 2.5 %
General & administrative 1.4 % 1.2 % 1.4 % 1.6 %
The effective tax rate for the third quarter of 2021 was 19%, as compared to 18% for the second quarter of 2021.
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The effective tax rate for the first nine 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. These charges and credits reduced the effective tax rate
for the first nine months of 2020 by 11 percentage points as a significant
portion of these charges were not tax-effective.
Charges and Credits
During the third quarter of 2021, a start-up company that Schlumberger previously invested in was acquired. As a result of this transaction, Schlumberger's ownership interest was converted into shares of a publicly traded company. Schlumberger recognized an unrealized pretax gain of$47 million ($36 million after-tax) to increase the carrying value of this investment to its estimated fair value of approximately$55 million . This unrealized gain is reflected in Interest & other income in the Consolidated Statement of Income (Loss). During the first nine months of 2020 Schlumberger recorded the following charges and credits, which are fully described in Note 2 to the Consolidated Financial Statements: (Stated in millions) Pretax Tax Net First quarter: Goodwill$ 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 60 4 56
Third quarter:
Facility exit charges 254 39 215
Workforce reductions 63 - 63
Other 33 1 32
$ 12,596 $ 1,057 $ 11,539
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Liquidity and Capital Resources
Details of the components of liquidity as well as changes in liquidity follow:
(Stated in millions)
Sept. 30, Sept. 30, Dec. 31,
Components of Liquidity: 2021 2020 2020
Cash $ 1,569 $ 1,219 $ 844
Short-term investments 1,373 2,618 2,162
Short-term borrowings and current portion of
long-term debt (1,025 ) (1,292 ) (850 )
Long-term debt (14,370 ) (16,471 ) (16,036 )
Net debt (1) $ (12,453 ) $ (13,926 ) $ (13,880 )
Nine Months Ended Sept. 30,
Changes in Liquidity: 2021 2020
Net income (loss) $ 1,317 $ (10,868 )
Impairment and other charges & credits (47 ) 12,596
Depreciation and amortization (2) 1,588
1,983
Earnings of equity method investments, less dividends received
6 (18 )
Deferred taxes (33 ) (1,147 )
Stock-based compensation expense 229 318
Increase in working capital (3) (798 ) (822 )
US Federal tax refund 477 -
Other (20 ) 24
Cash flow from operations 2,719 2,066
Capital expenditures (694 ) (858 )
APS investments (305 ) (252 )
Multiclient seismic data costs capitalized (21 ) (86 )
Free cash flow (4) 1,699 870
Dividends paid (524 ) (1,560 )
Proceeds from employee stock plans 137 146
Stock repurchase program - (26 )
Business acquisitions and investments, net of cash acquired plus debt assumed
(98 ) (33 )
Net proceeds from asset divestitures - 325
Other (79 ) (149 ) Change in net debt before impact of changes in foreign exchange rates on net debt
1,135 (427 ) Impact of changes in foreign exchange rates on net debt
292 (372 )
Decrease (increase) in net debt 1,427 (799 )
Net debt, beginning of period (1) (13,880 ) (13,127 )
Net debt, end of period (1) $ (12,453 ) $ (13,926 )
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(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
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 a 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 nine months of 2021 and 2020 included:
• On
for Schlumberger common stock. Schlumberger had repurchased
Schlumberger common stock under this program as of
2021. Schlumberger did not repurchase any of its common stock during the first
nine months of 2021. Schlumberger repurchased
during the first nine months of 2020.
•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
approximately
• 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 Economic 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.
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• During the third quarter of 2020, Schlumberger issued
Senior Notes due 2025 and
As ofSeptember 30, 2021 , Schlumberger had$2.94 billion of cash and short-term investments on hand. Schlumberger had committed debt facility agreements aggregating$6.63 billion , all of which was available and unused. Schlumberger believes these amounts are sufficient to meet future business requirements for at least the next 12 months.
There were no 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 ofSeptember 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 ofSeptember 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 third-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. 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 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 third-quarter 2021 Form 10-Q are made as ofOctober 27, 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. 27
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