Schlumberger Limited. (SLB) Q2 2013 Earnings Call July 19, 2013 9:00 AM ET
Malcolm Theobald - Vice President of Investor Relations
Simon Ayat - Chief Financial Officer, Executive Vice President
Paal Kibsgaard - Chief Executive Officer, Director
Kurt Hallead - RBC Capital Markets
James West - Barclays
David Anderson - JPMorgan
Judson Bailey - ISI Group
Bill Herbert - Simmons & Company
Scott Gruber - Bernstein
Ole Slorer - Morgan Stanley
Michael LaMotte - Guggenheim
Bill Sanchez - Howard Weil
Angie Sedita - UBS
Jim Crandell - Cohen
Jeff Tillery - Tudor, Pickering
Ladies and gentlemen, thank you for standing by, and welcome to the Schlumberger earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Malcolm Theobald, Please go ahead.
Thank you, Greg. Good afternoon and good morning, and welcome to the Schlumberger Limited second quarter 2013 results conference call. Today's call is being hosted from Paris where the Schlumberger Limited Board meeting took place yesterday.
Joining us on the call today are Paal Kibsgaard, Chief Executive Officer and Simon Ayat, Chief Financial Officer. Our prepared comments will be provided by Simon and Paal. Simon will first review the financial results and Paal will discuss the operational and technical highlights.
However, before we begin with the opening remarks, I would like to remind the participants that some of the information in today's call may include forward-looking statements as well as non-GAAP financial measures. A detailed disclaimer and other important information are included in the FAQ document, which is available on our website or upon request. We will welcome your questions after the prepared statements.
Now, I will turn the call over to Simon.
Thank you, Malcolm. Ladies and gentlemen, thank you for participating in this conference call. Second quarter earnings per share from continuing operations, excluding charges and credits was $1.15. This is an increase of $0.18 sequentially and is $0.14 higher when compared to the same quarter last year.
During the quarter, we completed the wind down of our operations in Iran and as a result we have now classified this business as a discontinued operations. All prior period amounts have been restated. As previously disclosed, we completed the formation of our OneSubsea joint venture with Cameron prior to the end of the quarter.
We recognized $1 billion gain in connection with this transaction which equates to $0.77 in terms of EPS. We also recorded $0.26 of charges relating to the impairment of drilling related equity investments. From an operational perspective, we had a very strong quarter. Oilfield services second quarter revenue of $11.2 billion increased 5.8% sequentially, pretax operating income increased 15.9% sequentially while the pretax operating margin improved 178 basis points to 20.4%.
Sequential highlights by product group were as follows. Reservoir Characterization revenue of $3 billion increased 9.6% and pretax income grew by over 25%. This resulted in margins improving by 380 basis points to 30.1%. This growth was driven by very strong performance in both Wireline and WesternGeco combined with the seasonal rebound in SIS software sales and maintenance. Drilling group revenue of $4.3 billion increased 4.4% and margins improved by 97 basis points to 18.7%. These increases were largely attributable to the Drilling and Measurements and M-I SWACO on robust international activity. Production group revenue of $3.9 billion increased 4.4% while the pretax income increased 12.6%. This resulted in margin expansion of 116 basis points to 15.9%. Growth was led by Well Services as a strong performance internationally and in US land more than compensation for the impact of the spring break-up in Canada.
Completions and one intervention were also significant contributors to the growth. Now, turning to Schlumberger as a whole, the effective tax rate excluding charges and credits was 23.3% in the second quarter compared to 23.8% in the previous quarter. We continue to expect the effective tax rate for the full year of 2013 to be in the mid 20s, hwoever, this can vary on a quarterly basis due to the geographic mix of business. Yesterday, our board of directors approved the new $10 billion share repurchase program to be completed at the latest June 30, 2018.
Our strong projected cash flow over the next five years allows us to increase the level of share buybacks while also maintaining enough flexibility to continue to take advantage of growth opportunities.
Let me take this opportunity to remind you how we manage our cash flow. Our first priority is to reinvest into the business to drive growth. We do this through CapEx and the investment we make in R&D and future revenue streams.
From a dividend perspective, over the past 10 years, we have increased our dividend on average by 13% per year. We will continue to review this on an annual basis with our board. After that, we will continue to be strategic when it comes to M&A, then the balance will be spent on stock buybacks.
For the first six months of this year, we have generated $3.4 billion of cash flow from operations. Net debt at the end of the quarter was $5.6 billion as compared to $5.3 billion at the end of the first quarter.
Significant liquidity events during the quarter included $906 million of CapEx, $600 million payment to Cameron for the OneSubsea transaction and $500 million of stock repurchases.
During the quarter, we repurchased $6.84 million shares at an average price of $73.7. CapEx is still expected to be approximately $3.9 billion as compared to the $4.7 billion we spent in 2012.
Now, I will turn the conference call over to Paal.
Thank you, Simon. Our second quarter results were strong as international activity recorded significant progress and North American results benefitted from solid execution in land and increasing deployment of new technology in deepwater areas.
Sequentially, revenue was up 6%. Margins expanded by 178 basis points, which together yielded a 16% growth in operating income. Compared to the same quarter last year, operating income was up 12%. The results were driven by solid activity levels in all our main markets as well market share gains for a number of our product lines on the back of new technology sales and our strong execution and integration capabilities.
I am pleased with the overall results and even more so with the consistency in our business performance throughout the company seen, for instance, in the margin levels of our four main operating areas, which are all at or above 20%.
The focus on the quality and efficiency of our execution is also reflected in our incremental margins, which were north of 50%, sequentially, as well as the cash flow from operations which was $2.3 billion driven by both, improving asset utilization and reduction in the use of working capital.
The strength in our international business was again evident in the second quarter with year-over-year revenue growth of 12% and margin expansion of 173 basis points to reach 22%, making up over 70% of the operating income of the quarter.
Activity and customer plans confirmed our expectations for the year in all our major growth markets, while revenue per rig continued to steadily increase as a function of new technology sales, increased integration related activity and a favorable business mix.
Our ability to consistently execute remains critical in the international market and is a driver for both, our market share gains and superior margin performance. While we continue to replace competition on contracts where they are unable to deliver, we are becoming more and more selective in terms of where and when we do so.
In Latin America, the revenue was flat, sequentially, despite a 2% drop in rig count, while margins increased 107 basis points to 20.6%. On a year-over-year basis, revenues increased 3%, while margin expanded 153 basis points.
Our Latin America business showed commendable resiliency this quarter by maintaining laser focus on execution, technology sales and cost control overcoming both, activity headwinds and new contract mobilizations and startups.
In Mexico with the third big round for production intensive contracts was concluded where we ended up bidding for only one of the six blocks. Drilling activity remained soft in the North and East regions of the country following the budget shifts announced in the first quarter.
In Venezuela we signed a new agreement with PDVSA and we are now in the process of ramping up our activity in the country while payments are on plan. Elsewhere in Latin America, the Shushufindi SCM project in Ecuador is progressing well with production levels well above the agreed targets. While, in Argentina, we continue to be active in reservoir studies and well side operations relating to Vaca Muerta shale development.
In Brazil, we continued to mobilize resources during the quarter for the new contract signed with Petrobras although overall activity levels were down sequentially. We have several new IPM projects starting in the second half of the year, however the overall activity level is expected to remain flat to slightly down for the rest of the year. Overall, our outlook for Latin America remains unchanged with 2013 being a transition year in terms of activity for the region and we remain comfortable with our position, our plans as well as the actions we have taken to handle the somewhat challenging business environment.
In the Middle East and Asia, revenue grew 11% sequentially on a 3% rig count increase while margins increased 178 basis points to 24.6%. On a year-over-year basis, revenues increased 28% while margins were up by 330 basis points. In the Middle East growth was again spearheaded by Saudi Arabia and Iraq but our United Arab Emirates and Oman geo markets also posted strong results. Common to all there markets is that we have gained noticeable share in the past quarters. Our business in Saudi Arabia continues to grow through a diverse portfolio of projects on both land and offshore and driven by both drilling and rigless activity.
In Iraq, we have on the back on an unmatched execution track record built up a significant business that is now starting to yield excellent results. Activity levels continue to increase both in the North and in the South of the country and with our business footprint and contract portfolio, we have clear leadership in what is shaping up to be a very interesting market for us.
Asia also contributed strongly to the area results by delivering a record revenue in four geo markets driven by robust market share and new technology sales. China led the Asia growth on a rebound from seasonally low land drilling and simulation activity in the previous quarter and also helped by an upswing in offshore activities. We also posted very strong in Australia, driven by continued growth in unconventional activity on land as well as offshore and deepwater activity in the Northwest and Papa New Guinea.
In Europe, CIS and Africa, revenue was up 10% sequentially and margins increased 275 basis points. On a year-over-year basis, revenues increased 7% while margins increased 33 basis points. As expected, Russia led the growth in the second quarter as the high volume land as well as the offshore business entered the most active phase of the calendar year.
EMP investments and activity levels in the country remained very strong in terms of offshore and land activity as well as for exploration and development and Russia will be one of our fastest growing markets in 2013. In the North Sea, WesternGeco saw strong activity as the seismic acquisition season started while the offshore drilling rig count stayed more or less flat.
In North Africa, rig activity in Nigeria started to rebound following the security incident in the first quarter while rig activity in Libya remained flat due to delays and ongoing security challenges.
In Sub-Saharan Africa, activity in the Gulf of Guinea as well as in East Africa was robust. On the other hand, activity in Angola was subdued in the second quarter due to project delays. However, the activity outlook for the second half of the year remained strong driven by both exploration and development projects.
In North America, revenue was up 2% sequentially while margins increased 65 basis points to reach 19.7%. On a year-over-year basis, revenues were flat while margins were down 83 basis. In the North America land market, the rig count dropped 14% sequentially driven by the Canada breakup and also impacted by the June flooding in Alberta. While the downwards pricing trend in U.S. land continued in the areas of drilling, simulation and wireline, although this slowed in pace during the quarter. However, continued strong drilling efficiency, resulting in solid growth in horizontal wells and frac stages completed partly offset these headwinds.
Looking at our land performance we continue to execute very well in our product lines and we also see a gradual improvement in the uptake of our new shale technologies throughout the characterization, drilling and production groups. In the U.S. Gulf of Mexico, the deepwater rig count is now 17% above pre-Macondo levels and on a year-over-year basis activity has increased by 30%. The call for reliable and efficient service delivery in addition to risk mitigation technologies continues in this growing market and is yielding very strong result for a number of a higher margin and higher market share product lines. In addition to the Dual Coil fleet operating in the Gulf of Mexico, WesternGeco also started isometrics operation in Eastern Canada during the quarter.
Turning next to technology. During the quarter, we closed the OneSubsea joint venture with Cameron and the JC is now operational. Cameron, with its long history of innovation and firsts in the subsea market is an industry leader in design capability, manufacturing excellence and successful installations. In addition to this, Schlumberger brings a deep understanding of the reservoir as well as industry-leading well completions, subsea processing and integration capabilities. Through the combination of these strengths, OneSubsea will offer best-in-class subsea solutions optimizing the complete subsea production system and helping our customers improve production and recovery from their subsea development.
In other areas, we saw growing customer interest in a number of our new or recently commercialized technologies. In Wireline, the Saturn 3D fluid sampling probe is enjoying one of the most rapidly growing deployments of new formation of our technology for a number of years. Its ability to acquire reliable pressures and high quality samples in difficult reservoirs has been impressive.
Reservoir Characterization, the SIS Studio Manager software, which went from concept to market release in only eight months is enabling and increasing number of customer geoscientists to access data, collaborate with peers and share best practices within [partout] workflows.
Within the Drilling Group, new and innovative drillbit technologies recorded significant progress. Drillbits equipped with Stinger conical diamond elements that add stability and improved drilling speed have now made more than 650 runs in North America alone since their introduction in the first quarter and have achieved an average improvement of 15% in rates of penetration.
In the second quarter, we commercialized the ONYX 360 rotating cutters that we believe will lead to dramatic improvements in different lengths in abrasive formations. Lastly, at the Production Group, joint deployment of LIVE slickline with ACTive coiled-tubing services demonstrated clear benefits in the efficiency and effectiveness of our well intervention services both, on land and offshore, and units were active in the quarter in both, Latin America and the Middle East.
Let's now turn to the macro environment, where the business outlook for 2013 has remained largely unchanged since April as expansion in the global economy remained soft. In summary, the U.S. has shown little or no impact of the financial sequester. The Eurozone is still in a two-year recession although the risk of any concrete to leave the monitor union appears reduced. And, recent Chinese data have been mixed with the outlook for long and progressive soft landing remaining unchanged.
The oil market picture is also largely unchanged. The market is more comfortably supplied than it was in 2012, but spare capacity remains below pre- Libya conflict levels. The year-on-year increase in North American supply is enough to face both, increasing global demand and the production declined in other non-OPEC producing countries. The call on OPEC remains unchanged and is in line with the group's production target of 30 million barrels per day. Overall, the market continues to support Brent prices over $100 per barrel.
For natural gas, the apparent rebalancing of the U.S. market is still fragile as gas production remained steady and as the power sector has already switched back to coal in some regions on higher gas prices.
Internationally, Asian LME prices eased on weaker Chinese demand trends, but remained close to oil parity. While in Europe regional supply declined from the North Sea and very cold weather supported highest spot prices.
Despite the overall slow progress in the economic environment, the latest releases of the third-party E&P spending surveys, so offer durations of upstream CapEx estimates making 2013 the fourth consecutive year of double-digit worldwide gains driven by the international and offshore investments notably in the Middle East and Asia regions, while the North American spending remained flat to slightly up.
These estimates are further confirmed by the recon outlook that shows double-digit growth in a number of both shallow water and deepwater rigs active worldwide and a 6% growth in the international land rig count in 2013.
In this market, we continue to focus on [key] control, which is the quality, efficiency and integration aspects of our operational execution. Through this focus, which permeates our entire organization, we continue to demonstrate our ability to deliver tangible results today as can be seen by our revenue market share gains, unmatched operating margins, strong cash flow and consistent double-digit growth in earnings per share.
We also remain confident in the outlook of the industry, in our strategic position within the markets we operate in an in our ability to further improve all aspects of our performance going forward, which remains the overarching objective of the entire Schlumberger team.
That concludes my remarks. I will now hand the call back to Malcolm.
Thank you, Paal. Greg, we will now open the call for questions.
Earnings Call Part 2: