Schlumberger's 3Q Profit Soars on Investment Gain

Schlumberger reported third-quarter 2010 revenue of $6.85 billion versus $5.94 billion in the second quarter of 2010, and $5.43 billion in the third quarter of 2009.

Net income attributable to Schlumberger, excluding charges and credits, was $875 million—an increase of 7% sequentially and 11% year-on-year. Diluted earnings-per-share, excluding charges and credits, was $0.70 versus $0.68 in the previous quarter, and $0.65 in the third quarter of 2009.

During the third quarter of 2010, Schlumberger recorded a gain of $0.98 per share on its investment in M-I SWACO as a result of the merger with Smith International, Inc. (Smith), which was offset in part by restructuring and merger-related charges of $0.30 per share. These items resulted in a net after-tax credit of $859 million. Diluted earnings-per-share, including charges and credits, was $1.38 versus $0.68 in the previous quarter, and $0.65 in the third quarter of 2009.

Oilfield Services revenue of $5.54 billion increased 2% sequentially and 12% year-on-year. Pretax segment operating income of $1.10 billion was up 3% sequentially and 6% year-on-year.

WesternGeco revenue of $478 million increased 1% sequentially and 3% year-on-year. Pretax segment operating income of $40 million decreased 14% sequentially and 34% year-on-year.

The third-quarter 2010 results reflect one month of activity from the acquired Smith businesses which contributed revenue of $810 million and pretax operating income of $84 million. The merger was dilutive to the third-quarter 2010 earnings-per-share by just under $0.02.

Schlumberger Chairman and CEO Andrew Gould commented, "The sequential revenue increase was largely driven by strong improvements in US land and Canada, which more than offset a sharp decline in the US Gulf of Mexico as the deepwater drilling moratorium took full effect. Favorable activity, coupled with robust pricing power for pressure pumping and the effects of our restructuring efforts led to a major improvement in margins.

"Outside North America activity was mixed. Solid improvements were recorded in Asia, Russia, the North Sea, and West & South Africa, which offset continued weakness in North Africa and the Gulf of Guinea. Latin America performed well in all GeoMarkets except Mexico where budget constraints, weather and security concerns led to major reductions in IPM project activity.

"At the end of the quarter, WesternGeco began a marine seismic acquisition and processing contract to acquire both wide-azimuth and conventional 3D surveys utilizing four vessels to explore for deep subsalt oil and gas reservoirs in the Red Sea.

"We expect the fourth quarter to show continued strong activity in North America on land, but we do not expect any rapid return to deepwater drilling in the US Gulf of Mexico despite the lifting of the moratorium. Further clarification of the new rules and liabilities under which activity will be conducted will be necessary before any major increase takes place. Our restructuring efforts will continue to deliver margin improvements.

"Outside North America, the delays induced by the knock-on effect of the Macondo well are now being reabsorbed. This and the recent strength in oil prices give us some optimism that the rate of recovery overseas will accelerate slightly. The normal seasonal declines in Russia will be present in the fourth quarter and the future of operations in Mexico will remain uncertain until next year.

"WesternGeco will show improvement in the fourth quarter due to increased US Gulf of Mexico multiclient sales.

"We are very pleased with the rapid progress that is being made on the integration of Smith and M-I SWACO. The integration teams and Area coordinators are rapidly identifying both revenue and cost synergy opportunities that augur well for 2011. The enthusiasm of the employees of all the companies is obvious and constructive.

"Recent robust demand increases as well as predictions of higher demand in 2011 will continue to support oil prices and activity—absent any further deterioration of the world economy. Further demand increases for natural gas will be necessary to sustain the current level of North American gas drilling activity beyond a certain point in time."

Other Events:

  • On August 27, 2010, Schlumberger closed its merger with Smith. Each Smith stockholder received 0.6966 shares of Schlumberger common stock in exchange for each Smith share, with cash paid in lieu of any fractional shares of Schlumberger common stock. Schlumberger has issued approximately 176 million shares pursuant to the merger, representing a transaction value of over $11 billion.
  • During the quarter, Schlumberger repurchased 6.8 million shares of its common stock at an average price of $57.91 for a total purchase price of $396 million under the stock repurchase program approved by the Schlumberger Board of Directors on April 17, 2008.
  • The impact of the deepwater drilling moratorium in the US Gulf of Mexico on Schlumberger third-quarter earnings-per-share was approximately $0.02 to $0.03.
  • Oilfield Services

Third-quarter revenue of $5.54 billion was 2% higher sequentially and 12% higher year-on-year. Sequentially, North America Area revenue increased on strong activity and increased pricing in US land and on the seasonal rig count recovery in Canada. These effects were partially offset by the impact of the deepwater drilling moratorium in the US Gulf of Mexico. In the Middle East & Asia Area, revenue grew from strong exploration-related services and drilling activity in the Qatar and East Asia GeoMarkets. Europe/CIS/Africa Area revenue was sequentially flat as increased activity in the West & South Africa and North Sea GeoMarkets and the inclusion of a full quarter of Geoservices activity was offset by weakness in the North Africa and Nigeria & Gulf of Guinea GeoMarkets. These increases were partially offset by a decrease in Latin America Area revenue due to client budget constraints and poor weather conditions in the Mexico/Central America GeoMarket, which severely impacted Integrated Project Management (IPM) activity.

Among the Technologies, revenue growth was driven by strong demand for Well Services products and services—particularly in North America. The quarter's results also benefited from the inclusion of a full quarter of Geoservices activity.

Third-quarter pretax operating income of $1.10 billion increased 3% sequentially and 6% year-on-year. Pretax operating margin of 19.9% was flat sequentially as strong performance in North America from land activity offset the combined impacts of the drilling moratorium in the US Gulf of Mexico and the severe slowdown in Mexico/Central America.

Schlumberger unveiled a number of new technologies and services at the Society of Petroleum Engineers Annual Technical Conference and Exposition in Florence, Italy, in September 2010. Among these, the unique Wireline Dielectric Scanner multifrequency dielectric dispersion service, which has already run 250 jobs in 20 countries during its introductory phase, enables the determination of residual oil saturation in carbonate reservoirs, hydrocarbon volume in low-resistivity or low-contrast shaly and laminated sand formations, and hydrocarbon volume and mobility in heavy oil reservoirs. A second new technology, the Testing Services Quartet high-performance downhole reservoir testing system allows clients to isolate, control, measure and sample reservoir tests in a single run using a downhole assembly one-fourth the length of conventional technology configurations. Schlumberger also announced the release of Merak Peep 2010 software, the cornerstone of the Merak suite of best-in-class economics, planning and reserves management software. The 2010 release, which delivers a complete refresh of the application allowing clients to proactively respond to complex operational conditions and rapidly answer business challenges, was developed in collaboration with 15 oil and gas companies, majors, nationals and independents.

On October 5, 2010, Eurasia Drilling Company Limited (Eurasia) and Schlumberger announced the signing of a Letter of Intent to sell and purchase each other's drilling and service assets. Schlumberger will sell all drilling, sidetrack and workover rigs mainly operating in West Siberia to Eurasia, while Eurasia will sell its drilling services businesses to Schlumberger. These businesses include the directional drilling, measurement-while-drilling, cementing, and drilling fluids services to support 80 rigs. In addition, Schlumberger and Eurasia have agreed to enter a strategic alliance upon completion of the transaction whereby Schlumberger becomes the preferred supplier of drilling services to Eurasia for up to 200 rigs for a 5-year period.

In China, Husky Oil China Ltd. has awarded the lower sandface completions, pumping services, upper completions and subsea landing strings on the Liwan field to Schlumberger as well as the completion fluids contract to M-I SWACO under three-year contracts. This is the first deepwater development project in China. The Liwan natural gas field, discovered in 2006 in the South China Sea, presented several development challenges with multiple Schlumberger services including wireline logging, measurement- and logging-while-drilling, tubing-conveyed perforating, drill-stem testing and coiled-tubing services together with M-I SWACO drilling fluids and Geoservices mud logging being deployed. During field appraisal, design reviews between Husky and Schlumberger determined the best completion methodology for the field and collaboration between Schlumberger Completions, Well Services, Testing Services and M-I SWACO led to a cost-effective and optimized design that met customer requirements.

In northeast Brazil, independent operator OGX awarded Schlumberger and Smith an integrated drilling services contract to drill two exploration wells in a new frontier in the Parnaiba Basin. Efficient timing in addition to synergies between Schlumberger, Smith and OGX on the ongoing integrated drilling services contract were important considerations in the award. The contract includes project coordination, well engineering, round-the-clock real-time monitoring, cementing, logging, directional drilling, measurement-while-drilling, drill bits, well testing and drilling fluids. The mobilization for the first well, in a remote area, was completed on schedule and the well was spud on time.

Offshore Greenland, Schlumberger Drilling & Measurements seismicVISION seismic-while-drilling technology was deployed on an exploration well for Cairn Energy. The technology ensured real-time streaming of the position of the bit on the seismic section for use in the Schlumberger Petrel workflow process via InterACT connectivity, collaboration and information technology for round-the-clock updates without additional rig time. The availability of the look-ahead vertical seismic profile image enabled Cairn to see key formation tops more than 300 m ahead of the bit with significantly higher resolution than existing 2D surface seismic. This allowed Cairn to meet their objective of removing a depth uncertainty of more than 100 m and detect the formation bottom that determined the 9 5/8-in casing setting depth.

North America

Third-quarter revenue of $1.26 billion was 13% higher sequentially and 53% higher year-on-year. Pretax operating income of $219 million was 90% higher sequentially and 693% higher year-on-year.

Sequentially, revenue growth was strongest in US land which expanded by 22% versus a 10% rig count increase on high service intensity as well as on improved pricing and equipment utilization that benefited Well Services, Wireline and Drilling & Measurement technologies. Canada revenue also increased significantly as the result of the seasonal recovery in rig count. These increases were partially offset by a 52% drop in US Gulf of Mexico revenue as a consequence of the deepwater drilling moratorium.

Pretax operating margin for the Area increased 704 basis points (bps) sequentially to 17.4%. The US land margin improved 885 bps on the combination of higher activity, stronger pricing and greater equipment utilization while Canada pretax operating margin increased sharply on the post spring-break-up recovery. These increases were partially offset by a 1,365 bps drop in the US Gulf of Mexico margin due to the impact of the drilling moratorium.

Latin America

Third-quarter revenue of $1.07 billion was 6% lower sequentially but flat with the prior year. Pretax operating income of $159 million decreased 22% sequentially and 19% year-on-year.

Sequentially, revenue in the Mexico/Central America GeoMarket decreased significantly as the combination of client budgetary constraints, poor weather conditions and continuing security issues severely impacted IPM activity. This decrease was partially offset by higher revenue from increased drilling in the Peru/Colombia/Ecuador GeoMarket, improved production on an IPM project in Colombia, increased offshore exploration activity in Brazil, and higher IPM activity and Completions equipment sales in Venezuela/Trinidad & Tobago.

Pretax operating margin fell 302 bps sequentially to 14.9% due mainly to the lower activity in Mexico/Central America and a less favorable revenue mix in Venezuela/Trinidad & Tobago.

Europe/CIS/Africa

Third-quarter revenue of $1.73 billion was flat sequentially but 3% lower year-on-year. Pretax operating income of $317 million decreased 1% sequentially and 25% year-on-year.

Sequentially, revenue grew in the West & South Africa GeoMarket primarily due to increased activity that resulted in stronger demand for Drilling & Measurements services as well as in the North Sea GeoMarket on higher exploration activity that benefited Wireline and Well Services technologies. The inclusion of the first full quarter of Geoservices activity also increased Area revenue. These increases were offset primarily by decreased activity in the North Africa GeoMarket, lower exploration activity in the Nigeria & Gulf of Guinea GeoMarket, and reduced Framo revenue.

Pretax operating margin of 18.3% was flat sequentially as a more favorable revenue mix in Russia was offset by the impact of lower activity in the North Africa and Nigeria & Gulf of Guinea GeoMarkets.

Middle East & Asia

Third-quarter revenue of $1.40 billion was 2% higher sequentially and 14% higher year-on-year. Pretax operating income of $425 million was flat sequentially but 9% higher year-on-year.

Sequentially, revenue increased in the Qatar GeoMarket on higher exploration and development drilling activity that resulted in stronger demand for Wireline and Drilling & Measurements services. The East Asia GeoMarket revenue was higher on stronger exploration activity that benefited Wireline and Well Services technologies, while inclusion of a full quarter of Geoservices activity also contributed to the increase in Area revenue. These increases, however, were partially offset by the impact of poor weather conditions in the Pakistan GeoMarket, activity delays in the Indonesia GeoMarket, and lower Well Services product sales.

Pretax operating margin was down 84 bps sequentially to 30.3% as the more favorable exploration activity in the Qatar and East Asia GeoMarkets was insufficient to offset the impacts of start-up costs in Iraq, the activity delays in the Indonesia GeoMarket, and the lower Well Services product sales.

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