Schlumberger Limited's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Schlumberger Limited (SLB)

Q1 2012 Earnings Call

April 20, 2012 9:00 am ET

Executives

Malcolm Theobald - Vice President of Investor Relations

Simon Ayat - Chief Financial Officer and Executive Vice President

Paal Kibsgaard - Chief Executive Officer and Director

Analysts

James C. West - Barclays Capital, Research Division

John David Anderson - JP Morgan Chase & Co, Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

William Sanchez - Howard Weil Incorporated, Research Division

William A. Herbert - Simmons & Company International, Research Division

Michael K. LaMotte - Guggenheim Securities, LLC, Research Division

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Douglas L. Becker - BofA Merrill Lynch, Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Angeline M. Sedita - UBS Investment Bank, Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Mr. Malcolm Theobald, Vice President of Investor Relations. Please go ahead, sir.

Malcolm Theobald

Thank you, Keeley. Good morning, and welcome to the Schlumberger Limited First Quarter 2012 Results Conference Call. Joining us on the call from Paris 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'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. We will welcome your questions after the prepared statements. [Operator Instructions] And now I'll turn the call over to Simon.

Simon Ayat

Thank you, Malcolm. Ladies and gentlemen, thank you for participating in this conference call. First quarter earnings per share, excluding charges and credits, was $0.98. This is a decrease of $0.13 sequentially and an increase of $0.27 compared to the same quarter last year.

Oilfield Services first quarter revenue of $9.9 billion decreased 4% sequentially. This decrease is largely attributable to the effect of the traditional year-end surge in product, software and multiclient sales that we experienced in the Q4, as well as the previously announced lower reutilization and downward pricing trend in our North America hydraulic fracturing business.

Oilfield Services pretax income of $1.9 billion decreased 10.4% sequentially while pretax operating margins declined 147 basis points. Sequential revenue and pretax margin highlights by product group were as follows: First quarter Reservoir Characterization revenue of $2.6 billion decreased 7% sequentially, and margin declined 189 basis points to 26%. These decreases were due to the seasonally strong WesternGeco market client sales, robust year -- end of year SIS software sales that we experienced in the Q4.

Drilling Group first quarter revenue of $3.8 billion was flat sequentially, while margins improved 28 basis points to 17.4%. First quarter Production Group revenue of $3.5 billion decreased 4.4% sequentially, while pretax margin fell 338 basis points to 17.6%. These decreases were primarily attributable to the pricing pressure, lower utilization and cost inflation in Well Services North America, as well as the effect of the seasonally strong completion and Artificial Lift Q4 product sales.

From a geographic perspective, North America margins declined 409 basis points to 22.8%, while international margins were essentially flat at 19.1%, despite the significant impact of the Q4 product and software sales and the seasonal drop in activity in Russia, China and the North Sea during Q1.

The Distribution segment contributed $713 million in revenue and $35 million in pretax operating income. Last week, we announced that we reached an agreement to sell Wilson. We will, therefore, report our entire Distribution segment as a discontinued operation in the second quarter.

Now turning to Schlumberger as a whole. The effective tax rate, excluding charges and credits, was 23.8% in the first quarter, consistent with the previous quarter. We still expect the effective tax rate for the full year 2012 to be in the mid-20s. However, this can vary on a quarterly basis due to the geographical mix of earnings. Net debt at the end of the quarter was $5.8 billion as compared to $4.85 billion at the end of Q4, representing a $951 million increase, resulting from the seasonal deterioration in working capital we typically see during Q1.

Other significant liquidity events during the quarter included $961 million of CapEx and $324 million of stock repurchases. During the quarter, we repurchased 4.38 million shares at an average price of $74. CapEx is still expected to be approximately $4.5 billion in 2012 as compared to the $4 billion we spent in 2011. And now I turn the conference over to Paal.

Paal Kibsgaard

Thank you, Simon. Our first quarter results showed good progress as we continued our strong focus on execution and operational excellence. In terms of activity, we saw growth in exploration and deepwater markets in line with our outlook for the year, while we experienced the normal seasonal slowdown in multiclient and product sales, as well as in activity levels in some areas of the northern hemisphere.

In North America, we executed well in all parts of the business during the quarter. Sequential revenue was down 3.5%, and margins were down 409 basis points, driven by lower multiclient sales and the dynamics in the hydraulic fracturing market. We have, over the past 2 quarters, signaled that hydraulic fracturing pricing is starting to come under pressure. And during the first quarter, the downwards pricing trend seen in the gas basins also reached the liquids-rich basins. So far, the pricing impact varies by basin as excess capacity is moved around, but we expect to see lower pricing reaching all basins in the coming quarters. In addition, the continued movement of rigs and frac capacity adds costs and lowers utilization, which together with the pricing impact, puts pressure on margins.

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