Schlumberger Limited Q2 2010 Earnings Call Transcript

Schlumberger Limited (SLB)

Q2 2010 Earnings Call

July 23, 2010 9:00 am ET

Executives

Simon Ayat - Chief Financial Officer and Executive Vice President

Malcolm Theobald - Vice President of Investor Relations

Andrew Gould - Chairman and Chief Executive Officer

Analysts

William Sanchez - Howard Weil

Alan Laws - BMO Capital Markets U.S.

David Anderson - Palo Alto Investors

William Herbert - Simmons

Geoff Kieburtz - Weeden & Co. Research

Daniel Pickering - Pickering Energy Partners

James Crandell - Barclays Capital

Kurt Hallead - RBC Capital Markets Corporation

Robin Shoemaker - Citigroup Inc

Michael LaMotte - Guggenheim Securities, LLC

Angie Sedita - UBS Investment Bank

Daniel Boyd - Goldman Sachs Group Inc.

Ole Slorer - Morgan Stanley

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Schlumberger earnings conference call. [Operator Instructions] I would now like to turn the conference over to our host, Mr. Malcolm Theobald, Vice President of Investor Relations. Please go ahead.

Malcolm Theobald

Thank you, Julie. Good morning, and welcome to the Schlumberger Limited Second Quarter 2010 Results Conference Call. Today's call is being hosted from Paris, where the Schlumberger Limited Board meeting took place yesterday. Joining me for today's call are Andrew Gould, Chairman and Chief Executive Officer; and Simon Ayat, Chief Financial Officer. Prior to Andrew's overview of the results and his comments on the outlook, Simon will first review the quarter's financial results. After the prepared statements, we will welcome your questions.

However, before we begin with the opening remarks, I'd 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. And now I will turn the call over to Simon.

Simon Ayat

Thank you, Malcolm. Ladies and gentlemen, thank you for participating in this conference call. Second quarter income was $0.68 per share. Excluding the charges in prior periods, this is an increase of $0.06 sequentially and flat as compared to the same quarter of last year. During the quarter, we began to see the early effects of the deepwater drilling moratorium in the U.S. Gulf of Mexico. The impact of the moratorium on Oilfield Services resulted in a reduction of Schlumberger's Q2 earnings of approximately $0.02 per share. We anticipate the moratorium earnings impact for the second half of 2010 to be approximately $0.08 to $0.12 per share.

Turning to the business segments. Oilfield Services second quarter revenue increased 7% sequentially, while WesternGeco revenue increased 1%. The growth in Oilfield Services revenue was largely attributable to a surge in activity and increased pricing in U.S. Land, the post-winter seasonal rebound in Russia and increased activity in Mexico/Central America and the North Sea. The acquisition of Geoservices during the quarter also added to revenue. These increases were partially offset by the impact of the spring breakup in Canada, the previously mentioned early effects of the deepwater drilling moratorium in the Gulf of Mexico and reduced activity in the North Africa GeoMarket.

Oilfield Services pretax operating income of $1.07 billion increased 11% compared to the prior quarter, while pretax operating margin increased 75 basis points to 19.8%. The increase in margin was primarily driven by a strong performance in North America. International margins increased slightly to 22.4%.

By area, Oilfield Services sequential pretax operating margin highlights were as follows: In North America, pretax operating margin improved 237 basis points to 10.4%. Within North America, U.S. Land margin improved significantly by 15 percentage points as a result of higher activity and pricing for Well Services technologies. However, this increase was tempered by lower margin in the U.S. Gulf of Mexico from the early effects of the deepwater drilling moratorium and reduced margins in the Canada due to spring breakup.

Latin America margin increased 35 basis points to 17.9%, primarily due to the increased activity in the Mexico/Central America and Argentina/Bolivia/Chile GeoMarkets. However, as noted in the press release, we anticipate a slowdown of activity in Mexico, and we will subsequently have an associated charge in Q3. Europe/CIS/Africa margin increased 29 basis points to 18.4%, as the positive impact of the seasonal rebound in activity in Russia and a more favorable revenue mix in the North Sea offset the impact of reduced revenue in the Western South Africa and North Africa GeoMarkets. Middle East/Asia margin remains strong at 31.1%.

Sequentially, WesternGeco pretax operating income decreased 31% to $47 million, and pretax operating margins slipped 447 basis points to 9.8%, primarily due to a decrease in monthly client sales and lower revenue combined with the startup costs for Land. These decreases were partially offset by improved productivity in Marine.

Now turning to Schlumberger as a whole. The effective tax rate was 17.8%. This was lower than last quarter, primarily due to a more favorable geographic earnings mix in WesternGeco. As you are aware, the ETR is very sensitive to the geographic earnings mix and as such, we do experience some volatility on a quarterly basis.

Net debt was $766 million at the end of the quarter as compared to $75 million at the end of the first quarter. We ended the quarter with $3.7 billion of cash and investments on hand and short-term debt of only $719 million. Significant liquidity events during the quarter included $1 billion relating to the acquisition of Geoservices, $634 million of CapEx, $535 million of stock repurchases and the conversion of $297 million of outstanding debentures into 7.4 million shares of common stock. During the quarter, we repurchased 8.4 million shares at an average price of $63.33. We repurchased the maximum number of shares we could under the SEC Safe Harbor provisions in light of the pending merger with Smith. Oilfield Services CapEx is still expected to reach approximately $2.8 billion for 2010, while WesternGeco CapEx is expected to be approximately $335 million.

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