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Schlumberger Announces Third-Quarter 2015 Results

The following excerpt is from the company's SEC filing.

Revenue of $8.5 billion decreased 6% sequentially

EPS of $0.78 declined 11% sequentially

Free cash flow of $1.7 billion represented 170% of earnings

Sequential and year-over-year decremental operating margins were 35% and 31%, respectively

6.9 million shares repurchased for $545 million

Houston

, October 15, 2015 Schlumberger Limited (NYSE:SLB) today reported results for the third quarter of 2015.

(Stated in millions, except per share amounts)

Three Months Ended

Change

Sept. 30, 2015

Jun. 30, 2015

Sept. 30, 2014

Year-o n-year

12,646

Pretax operating income

SLB income from continuing operations*

Diluted EPS from continuing operations*

Pretax operating margin

North America revenue

North America pretax operating income

North America pretax operating margin

-1,051

International revenue

International pretax operating income

International pretax operating margin

There were no charges or credits recorded during the second and third quarters of 2015 or the third quarter of 2014.

Schlumberger Chairman and CEO Paal Kibsgaard commented, Schlumberger third-quarter revenue decreased 6% sequentially driven by a continuing decline in rig activity and persistent pricing pressure throughout our global operations. North America revenue fell 4% sequentially as we focused on balancing margins and market share, while International revenue dropped 7% due to customer budget cuts, activity disruptions, and service pricing erosion.

The business environment deteriorated further in the third quarter. However, the cost reduction actions we took in previous quarters and the acceleration of our transformation program enabled us to protect our financial performance in what is shaping up to be the most severe downturn in the industry for decades. As a result of our actions, we have been able to deliver pretax operating margins well above those seen in any previous downturn and we have continued to generate significant liquidity with free cash flow of $1.7 billion in the third quarter, representing 170% of earnings.

During the first nine months of 2015, our year-on-year revenue has dropped by 34% in North America, and 18% internationally. In spite of the size of these declines, our decremental operating margins over the same period have been limited to 34% in North America, and 23% internationally. These figures continue to be substantially better than those we delivered in the 2009 downturn.

Among the business segments, Drilling Group revenue fell 7% sequentially during the third quarter driven by weakening drilling activity and by persistent pricing pressure in both North America and the International Areas. Production Group and Reservoir Characterization Group revenues each declined 5% as activity and pricing for pressure pumping services on land in North America continued to drop and as demand for exploration-related products and services decreased further internationally.

As we enter the last quarter of the year, the oil market is still weighed down by fears of reduced growth in Chinese demand and the expectations regarding the timing and magnitude of additional Iranian supply. However, the fundamental balance of supply and demand continues to tighten, driven by both solid global macroeconomic growth and by weakening supply as the dramatic cuts in E&P investments are starting to take effect. We expect this trend to continue as the oil market further recognizes the magnitude of the industrys annual production replacement challenge.

However, for oilfield services, the market outlook for the coming quarters looks increasingly challenging with activity expected to be reduced further, as lack of available cash flow exhausts capital spending for a number of our customers, leading them to take a conservative view on 2016 E&P spending in spite of any gradual improvement in oil prices. In addition, the winter season will have the normal impact on activity in the fourth quarter, which this year is unlikely to be offset by the usual year-end sales of software, products and multiclient licenses.

In light of conservative customer budgets for next year, we are therefore entering another period during which we will continually adjust resources in line with activity, as the recovery now appears to be delayed. We remain focused on managing our cost base, and are further accelerating our transformation program to help offset the impact of lower service pricing. As we navigate the current commercial landscape, we still look to strike a balance between market share and operating margins, while continuing to seek opportunities to extend our portfolio through targeted M&A, such as our transaction with Cameron, where integration planning is already well advanced.

At Schlumberger, we remain confident in our capability to weather this downturn significantly better than our surroundings. Through our global reach, the strength of our technology offering, and our transformation program we are creating the leverage to increase market share, post superior earnings, and continue to deliver unmatched levels of free cash flow while bringing value for our customers through improving production, increasing recovery, and lowering cost per barrel.

Other Events

During the third quarter, Schlumberger repurchased 6.9 million shares of its common stock at an average price of $78.76 per share for a total purchase price of $545 million. As of September 30, 2015, Schlumberger had repurchased $8.2 billion of shares under the $10 billion share repurchase program authorized by the Board of Directors on July 18, 2013.

On August 26, 2015, Schlumberger and Cameron jointly announced that they had entered into a definitive merger agreement in which Cameron will merge with an indirect wholly-owned subsidiary of Schlumberger in a stock-and-cash transaction. The transaction was unanimously approved by the boards of directors of both companies. Under the terms of the agreement, Cameron shareholders will receive 0.716 shares of Schlumberger common stock and a cash payment of $14.44 in exchange for each Cameron share outstanding. Upon closing, Cameron shareholders will own approximately 10% of Schlumbergers outstanding shares of common stock.

On August 31, 2015, Schlumberger and IBM signed an agreement to provide integrated services to upstream oil and gas customers that will improve the business impact of production operations projects.

On September 2, 2015, Schlumberger announced the acquisition of Novatek Inc. and Novatek IP, LLC, both US-based companies that specialize in synthetic diamond technology primarily for the oil and gas industry.

On September 9, 2015, Schlumberger signed a non-binding letter of intent with a subsidiary of the Bauer Group, a German equipment supplier, to form a joint venture mainly related to the engineering and manufacturing of a new generation of land drilling rigs.

On September 30, 2015, Schlumberger acquired T&T Engineering Services, Inc., a US-based company specializing in land rig design. The acquisition plays a role in implementing Schlumbergers vision of combining its integrated downhole drilling technology with a new generation of highly efficient land rigs.

North America third-quarter revenue of $2.3 billion decreased 4% sequentially while outperforming the US land horizontal rig count decline of 7%. Revenue declined on land due to persistent pricing pressure, while Alaska revenue declined as exploration projects were completed. In the US Gulf of Mexico, revenue fell slightly on lower multiclient seismic sales while higher technology sales limited the impact of pricing concessions. However, the trend of exploration rigs transferring to drilling and completion activities continued.

North America pretax operating margin declined 136 basis points (bps) sequentially to 9%, mainly due to lower pricing across the basins, which led to more pressure pumping equipment being stacked and crews reassigned. In certain basins, hydraulic fracturing fleet deployment was maintained in pursuit of market share and new technology opportunities. This balanced approach to market share and margins will be maintained to preserve our lead in overall profitability levels in North America. Offshore margin also decreased as work shifted from deepwater exploration to completions and well intervention.

During the first nine months of 2015, year-on-year revenue has declined 34% in North America. In spite of this, the decremental operating margin was only 34%, which represents a marked improvement over the 58% posted for the same period in the previous downturn. Pretax operating margin during the first nine months of 2015 declined by 772 bps year-on-year, less than half the 1,589 bps decrease reported for the same period of 2009. The strength of this performance was underpinned by prompt cost and resource management, the growing positive effects of the transformation program, strong new technology sales, and efficient supply chain management.

In the third quarter, the transformation program enabled an increase in people productivity through the combination of multiskilling, remote operations and innovative technology deployment. In Alaska, by cross training logging-while-drilling engineers in directional drilling, and by assigning key responsibilities for the various phases of the operations that included one remote operations expert working in a Drilling Technology Integration Center, Drilling & Measurements reduced their rig crew from five to three. This reduction at the wellsite saved the customer $180,000 in annualized costs.

During the third quarter, new Schlumberger technologies helped increase production and operational efficiency in North America.

Well Services BroadBand* unconventional reservoir completion technology revenue passed the $1 billion milestone since its market introduction, establishing it as the fastest-growing new technology in Schlumberger history. Among fracturing treatments in North America during the quarter, 29% included BroadBand technology.

In Western Canada, Schlumberger StingBlade* conical diamond element technology enabled Progress Energy to improve both footage drilled and rate of penetration (ROP) in the Julienne field of the Montney Play.

Heterogeneous lithology characteristics in the subsurface typically result in excessive wear and vibration-induced damage to the drill bit, making drilling expensive and costs hard to predict. StingBlade technology helped the customer drill 181% more footage and increase ROP by 95% compared to offset wells, resulting in rig-time and bit-related savings of $178,500 on the well.

In US land, Wireline used StreamLINE* polymer-encapsulated wireline monocable for Encana Oil and Gas (USA), Inc. in the perforating of wells in the DJ Basin of Colorado that were in close proximity to town limits. Encanas commitment to environmental and social responsibility required a perforating solution that did not exceed strict noise limitations. The solution was an electric wireline unit using a StreamLINE cable, an electric crane, and an electric-powered perforating trailer. StreamLINE monocable technology uses greaseless pressure control to reduce footprint and increase efficiency.

Also in US land, Smith polycrystalline diamond compact (PDC) bit with ONYX 360* rolling PDC cutter technology was used for Chesapeake Energy Corporation to improve drilling performance in the Haynesville Shale and Colony Granite Wash plays. ONYX 360 technology increased drillbit durability and footage drilled as the entire diamond edge was used to drill the formations while it rotated 360°. As a result, the customer reduced drillbit usage 40 to 50% in the Haynesville Shale, and doubled the footage-drilled-per-bit compared to conventional fixed-cutter bits in the Colony Wash.

In Alaska, Drilling & Measurements deployed multiple technologies for ENI to optimize extended reach well placement and formation evaluation on the Spy Island and Oliktok Point locations. The PowerDrive Xceed* ruggedized rotary steerable system enabled accurate steering in a harsh environment while PeriScope HD* multilayer bed boundary and EcoScope* multifunction logging-while-drilling services provided advanced well placement. In addition, NeoScope* sourceless formation evaluation-while-drilling and adnVISION* azimuthal density neutron services helped characterize formation porosity and lithology in order to identity and quantify potential pay zones. As a result, the customer has now crossed the mark of one million feet drilled in the project with no unscheduled trips out of the hole due to Schlumberger over the past 18 months.

International Areas

Revenue for the International Areas of $6.1 billion decreased 7% sequentially due to customer budget cuts and continued pricing concessions.

Middle East & Asia Area

revenue of $2.4 billion declined 8% sequentially mainly due to lower activity in Australia and the Asia-Pacific region as a result of customer budget cuts and rig count declines. Revenue from the Middle East GeoMarkets, particularly in Saudi Arabia and Qatar, was also lower due to the effects of service pricing concessions, a less favorable revenue mix and project completions.

Europe/CIS/Africa Area

revenue of $2.3 billion decreased 6% sequentially. In Sub-Saharan Africa, exploration decreased, projects ended, and offshore rigs demobilizedparticularly in the Angola GeoMarket. Results were also affected by the completion of exploration projects in Chad, Equatorial Guinea and South & East Africa. North Sea revenue declined on lower rig count, project delays and cancellations as well as pricing discounts and currency weakness. These effects, however, were partially offset by increased activity in Russia, Kazakhstan and Uzbekistan as drilling activity seasonally peaked during the summer.

Revenue in the

Latin America Area

of $1.4 billion dropped 7%, mainly on significantly lower activity in Mexico and continued weakness in Brazil due to sustained customer budget cuts that led to rig count reductions. Reduced activity in Colombia also contributed to the decline. These reductions, however, were partially offset by steady activity in Venezuela and Ecuador.

International Area pretax operating margin of 23.7% decreased 72 bps sequentially due to the effects of pricing concessions and as the activity mix shifted from high-margin exploration to development and completion work. Middle East & Asia pretax operating margin decreased 171 bps to 27.0%, Latin America fell 159 bps to 20.7%, while Europe/CIS/Africa increased 92 bps to 22.2% on the peak summer drilling activity in Russia.

During the first nine months of 2015, year-on-year revenue has dropped 18% in the International Areas, which is more severe than the 9% decline in the same period during the 2009 downturn. In spite of this, the decremental operating margin was only 23%, which represents a marked improvement over the 61% posted for the corresponding period in the previous downturn. Pretax operating margin for the first nine months of 2015 expanded 29 bps, compared to the 358 bps fall in margin reported for the same period in 2009. The strength of this performance was a result of proactive cost and resource management, robust sales of new technology, and the acceleration of the transformation program focused on workforce productivity, asset utilization, and reductions in...


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