filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contains forward-looking statements, including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and resources. Such forward-looking statements should be read in conjunction with our disclosures under “Item 1A. Risk Factors” of this Form 10-K.
2020 Executive Overview
Global demand for oil dropped precipitously from January through April of 2020, in parallel with the expansion of the COVID-19 coronavirus outbreak, as governments around the world responded with lockdowns and travel decreased significantly. Global stocks of crude and refined products increased as oil supply could not respond quickly enough to balance the market.
As a result, Brent crude oil experienced its highest price of the year—$70 per barrel—in January, with a low of $9 per barrel in mid-April. Collaboration between OPEC and non-OPEC suppliers, including Russia, led to extraordinary supply intervention, resulting in the removal of more than eight million barrels per day (“bbl/d”) of oil supply from the markets between April and June. This eased pressure on oil storage capacity and allowed the Brent price to stabilize in the $40 range until gaining strength in December, where it closed at $52 per barrel.
The OPEC-led supply alliance maintained production within an agreed quota and helped to maintain a relatively stable oil price, despite oil demand in the second half of 2020 being more than five million bbl/d lower than same period of 2019. Demand for refined products, other than jet fuel, returned to within two million bbl/d of pre-crisis levels by end of 2020.
Oil price volatility in the first half of the year, compounded by uncertainty over the pace of COVID-19 recovery, caused producers to lay down more than 40% of the world’s drilling rigs in just six months. This suggests that $40 oil is insufficient to stimulate meaningful drilling activity growth. However, even with massive demand reduction, the drilling activity necessary to maintain supply is still significant.
In the US, operators laid down nearly 70% of active rigs between the first and third quarters of 2020, before adding a modest number of rigs in the fourth quarter. As a result, US crude production fell by nearly two million bbl/d by the end of 2020. However, the remaining rigs continued to drill in the highest quality reservoirs, which resulted in supply remaining flat over the second half of the year.
Though global gas demand also suffered in response to the pandemic’s effect on economic activity, its use for power generation, heating, and as a chemical feedstock made it more resilient than oil demand as the pandemic spread. Gas demand for 2020 was down only approximately 5% as compared to 2019.
US Henry Hub natural gas price averaged $2.03 per million British thermal units (“mmbtu”) for the year, having also fallen in the first half of 2020. Prices recovered in the second half on decreased tight-oil associated production in line with the reduction of active rigs. International gas hub prices were more volatile.
Against this backdrop, Schlumberger’s full-year 2020 revenue of $23.6 billion declined 28% year-on-year. North American revenue fell sharply by 48% to $5.5 billion. This decrease was largely driven by weakness in the land market as operators reacted to oversupplied markets by making deep cuts to activity. North America operators dropped drilling and pressure pumping activity quickly in the first quarter due to the effects of the pandemic on demand, adding a modest volume of completion activity toward the end of the year. International revenue was more resilient, declining only 19% year-on-year. This decline was most prominent in Latin America, Europe, and Africa due to downward revisions to customer budgets and COVID-19 disruptions.
Additionally, during the fourth quarter of 2020, Schlumberger completed two transactions: the contribution of its OneStim business in North America to Liberty Oilfield Services (“Liberty”) in exchange for a 37% stake in Liberty, and the divestiture of the North America low-flow rod-lift business in a cash transaction. These businesses accounted for approximately 25% of Schlumberger’s North America revenue in 2020. Consequently, the percentage of Schlumberger’s revenue that it generates in the international markets will increase significantly going forward. The combination of Schlumberger’s fit-for-basin strategy, digital technology innovation, and scale puts the company in the best position to leverage the anticipated shift of spending growth toward the international markets.
From a macro perspective, oil prices have risen, buoyed by recent supply-led OPEC+ policy, the ongoing COVID-19 vaccine rollout, and multinational economic stimulus actions—driving optimism for a meaningful oil demand recovery throughout 2021. We believe that this sets the stage for oil demand to recover to 2019 levels no later than 2023, or earlier as per recent industry analysts’ reports, reinforcing a multiyear cycle recovery as the global economy strengthens. Absent a change to these macro assumptions, this will translate into meaningful activity increases both in North America and internationally.
In North America, spending and activity momentum is expected to continue in the first half of 2021 towards maintenance levels, albeit moderated by capital discipline and industry consolidation. Internationally, following the seasonal effects of the first quarter of 2021, and as OPEC+ responds to strengthening oil demand, higher spending is expected from the second quarter onwards. Accelerated
activity is not expected to extend beyond the short-cycle markets and will be broad, including offshore, as witnessed during the fourth quarter.
The quality of Schlumberger’s results in the fourth quarter of 2020 validates the progress of our performance strategy and the reinvention of Schlumberger in this new chapter for the industry. Building from the swift execution and scale of our cost-out program, we exited the year with quarterly margins reset to 2019 levels as the upcycle begins. Leveraging our high-graded and restructured business portfolio, we see a clear path to achieve double-digit margins in North America and visible international margin improvement in 2021. Given the depth, diversity, and executional capability of our international business, we believe we are uniquely positioned to benefit as international spending accelerates in the near- and mid-term.
By leveraging our new structure, Schlumberger is fully prepared to capitalize on the growth drivers of the future of our industry, particularly as we accelerate our digital growth ambition and lead in the production and recovery market. Finally, to meet our long-term ambition to bring lower carbon and carbon-neutral energy sources and technology to market, we are visibly expanding our New Energy portfolio, to contribute to the transformation of a more resilient, sustainable, and investable energy services industry.
Fourth Quarter 2020 Results
| (Stated in millions) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fourth Quarter 2020 | Third Quarter 2020 | ||||||||||||||
| Income | Income (Loss) | ||||||||||||||
| Before | Before | ||||||||||||||
| Revenue | Taxes | Revenue | Taxes | ||||||||||||
| Digital & Integration | $ | 833 | $ | 270 | $ | 740 | $ | 202 | |||||||
| Reservoir Performance | 1,247 | 95 | 1,215 | 103 | |||||||||||
| Well Construction | 1,866 | 183 | 1,835 | 172 | |||||||||||
| Production Systems | 1,649 | 155 | 1,532 | 132 | |||||||||||
| Eliminations & other | (63 | ) | (49 | ) | (64 | ) | (34 | ) | |||||||
| 654 | 575 | ||||||||||||||
| Corporate & other (1) | (132 | ) | (151 | ) | |||||||||||
| Interest income (2) | 5 | 3 | |||||||||||||
| Interest expense (3) | (137 | ) | (131 | ) | |||||||||||
| Charges & credits (4) | 81 | (350 | ) | ||||||||||||
| $ | 5,532 | $ | 471 | $ | 5,258 | $ | (54 | ) |
| (1) | Comprised principally of certain corporate expenses not allocated to the segments, stock-based compensation costs, amortization expense associated with certain intangible assets, certain centrally managed initiatives and other nonoperating items. |
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| (2) | Excludes interest income included in the segments’ income (fourth quarter 2020: $- million; third quarter 2020: $- million). |
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| (3) | Excludes interest expense included in the segments’ income (fourth quarter 2020: $7 million; third quarter 2020: $7 million). |
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| (4) | Charges and credits are described in detail in Note 3 to the Consolidated Financial Statements. |
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Fourth-quarter revenue grew 5% sequentially, driven by strong activity and solid execution both in North America and in the international markets. International revenue of $4.3 billion grew 3% while North America revenue of $1.2 billion increased 13%. Despite seasonality, revenue grew sequentially in all four Divisions for the first time since the third quarter of 2019.
Sequentially, international revenue growth outpaced rig count and was led by Latin America and by a global rebound of activity in most offshore deepwater markets. In the Middle East & Asia, growth was mostly in China, India, and Oman while Saudi Arabia remained resilient. In Europe/CIS/Africa, activity increased significantly in the offshore markets of Africa and several countries in Europe, offset by the seasonal winter slowdown in Russia. In North America, offshore activity in the US Gulf of Mexico grew, and on land, increased horizontal drilling and pressure pumping activity contributed to the higher revenue.
Digital & Integration
Fourth-quarter revenue of $833 million, 83% of which came from the international markets, increased 13% sequentially. International revenue increased by 14% and North America revenue increased by 6% sequentially. The Digital & Integration revenue increase was primarily driven by APS projects.
Digital & Integration pretax operating margin of 32% expanded by 507 basis points (“bps”) sequentially. The margin expansion was primarily in the international markets and was largely driven by improved profitability across APS projects.
Reservoir Performance
Fourth-quarter revenue of $1.2 billion, 73% of which came from the international markets, increased 3% sequentially. International revenue declined 3% while North America revenue increased 23% sequentially. The revenue increase was primarily driven by higher OneStim activity in North America. OneStim fourth-quarter revenue of $274 million increased 25% sequentially. This increase, however, was partially offset by seasonality in Russia and reduced activity in the Middle East & Asia.
Reservoir Performance pretax operating margin of 8% decreased 84 bps sequentially driven by seasonality in Russia, despite improved North American activity.
Well Construction
Fourth-quarter revenue of $1.9 billion, 84% of which came from the international markets, increased 2% sequentially. International and North America revenue increased 1% and 7%, respectively. The revenue increase was due to higher activity in North America, Latin America, and the Middle East & Asia, partially offset by seasonality in Russia.
Well Construction pretax operating margin of 10% improved by 42 bps sequentially. North America margin improved due to higher drilling activity on land while international margin was essentially flat.
Production Systems
Fourth-quarter revenue of $1.6 billion, 74% of which came from the international markets, increased 8% sequentially. International and North America revenue increased 7% and 11%, respectively, due to higher activity across all areas.
Production Systems pretax operating margin of 9% increased by 82 bps sequentially due to a higher contribution from the long-cycle business of subsea, and improved profitability in surface production systems due to cost reduction measures and higher activity.
Full-Year 2020 Results
| (Stated in millions) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | ||||||||||||||
| Income (Loss) | Income (Loss) | ||||||||||||||
| Before | Before | ||||||||||||||
| Revenue | Taxes | Revenue | Taxes | ||||||||||||
| Digital & Integration | $ | 3,076 | $ | 731 | $ | 4,145 | $ | 882 | |||||||
| Reservoir Performance | 5,602 | 353 | 9,299 | 992 | |||||||||||
| Well Construction | 8,605 | 866 | 11,880 | 1,429 | |||||||||||
| Production Systems | 6,650 | 623 | 8,167 | 847 | |||||||||||
| Eliminations & other | (332 | ) | (172 | ) | (574 | ) | (172 | ) | |||||||
| 2,401 | 3,978 | ||||||||||||||
| Corporate & other (1) | (681 | ) | (957 | ) | |||||||||||
| Interest income (2) | 31 | 33 | |||||||||||||
| Interest expense (3) | (534 | ) | (571 | ) | |||||||||||
| Charges & credits (4) | (12,515 | ) | (12,901 | ) | |||||||||||
| $ | 23,601 | $ | (11,298 | ) | $ | 32,917 | $ | (10,418 | ) |
| (1) | Comprised principally of certain corporate expenses not allocated to the segments, stock-based compensation costs, amortization expense associated with certain intangible assets, certain centrally managed initiatives and other nonoperating items. |
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| (2) | Excludes interest income included in the segments’ income (2020: $2 million; 2019: $8 million). |
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| (3) | Excludes interest expense included in the segments’ income (2020: $28 million; 2019: $38 million). |
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| (4) | Charges and credits are described in detail in Note 3 to the Consolidated Financial Statements. |
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Full-year 2020 revenue of $23.6 billion decreased 28% year-on-year. North America revenue declined 48% year-on-year reflecting the continued capital discipline of North America operators, who reduced drilling and hydraulic fracturing activity due to the pandemic. International revenue decreased 19% year-on-year, due to COVID-19-related disruptions, the drop in offshore activity, and reduced customer discretionary spending.
Digital & Integration
Full-year 2020 revenue of $3.1 billion decreased 26% year-on-year primarily due to lower multiclient and software sales as customers reduced activity due to COVID-19 and cut discretionary spending.
Year-on-year pretax operating margin increased 249 bps to 24% largely due to improved APS margins as a result of reduced amortization expense following the asset impairment charges that were recorded in the second quarter of 2020 and the effects of cost cutting efforts.
Reservoir Performance
Full-year 2020 revenue of $5.6 billion decreased 40% year-on-year. A little more than half of this revenue decrease was attributable to the sharp drop in OneStim pressure pumping activity in North America land. The remaining portion of the revenue decline resulted from COVID-19 disruptions that caused international activity to be cancelled or suspended.
Year-on-year pretax operating margin decreased 435 bps to 6% due to the steep revenue decline.
Well Construction
Full-year 2020 revenue of $8.6 billion decreased 28% year-on-year primarily due to the activity decline in US land as the rig count decreased significantly, while COVID-19 disruptions caused drilling activities to be cancelled or suspended in several international markets.
Year-on-year pretax operating margin only decreased 196 bps to 10% as the effects of the revenue decline were partially mitigated by prompt cost cutting measures.
Production Systems
Full-year 2020 revenue of $6.7 billion decreased 19% year-on-year primarily driven by lower sales of valves and surface systems in North America.
Year-on-year pretax operating margin decreased 101 bps to 9% due to the revenue decline.
Full-Year 2019 Results
| (Stated in millions) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | ||||||||||||||
| Income (Loss) | Income | ||||||||||||||
| Before | Before | ||||||||||||||
| Revenue | Taxes | Revenue | Taxes | ||||||||||||
| Digital & Integration | $ | 4,145 | $ | 882 | $ | 3,820 | $ | 882 | |||||||
| Reservoir Performance | 9,299 | 992 | 10,050 | 1,169 | |||||||||||
| Well Construction | 11,880 | 1,429 | 11,310 | 1,465 | |||||||||||
| Production Systems | 8,167 | 847 | 8,168 | 843 | |||||||||||
| Eliminations & other | (574 | ) | (172 | ) | (533 | ) | (172 | ) | |||||||
| 3,978 | 4,187 | ||||||||||||||
| Corporate & other (1) | (957 | ) | (937 | ) | |||||||||||
| Interest income (2) | 33 | 52 | |||||||||||||
| Interest expense (3) | (571 | ) | (537 | ) | |||||||||||
| Charges & credits (4) | (12,901 | ) | (141 | ) | |||||||||||
| $ | 32,917 | $ | (10,418 | ) | $ | 32,815 | $ | 2,624 |
| (1) | Comprised principally of certain corporate expenses not allocated to the segments, stock-based compensation costs, amortization expense associated with certain intangible assets, certain centrally managed initiatives and other nonoperating items. |
|---|
| (2) | Excludes interest income included in the segments’ income (2019: $8 million; 2018: $8 million). |
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| (3) | Excludes interest expense included in the segments’ income (2019: $38 million; 2018: $38 million). |
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| (4) | Charges and credits are described in detail in Note 3 to the Consolidated Financial Statements. |
|---|
Full-year 2019 revenue of $32.9 billion was essentially flat year-on-year with North America revenue decreasing 11% and international revenue increasing 7%. The international results were underpinned by increased investment levels. In contrast, the North America result reflected a slowing production growth rate on land as operators maintained capital discipline and reduced drilling and hydraulic fracturing activity.
Digital & Integration
Full-year 2019 revenue of $4.1 billion increased 9% year-on-year primarily driven by increased APS activity.
Year-on-year pretax operating margin decreased 181 bps to 21% primarily as a result of a less favorable revenue mix.
Reservoir Performance
Full-year 2019 revenue of $9.3 billion decreased 7% year-on-year primarily driven by lower OneStim activity in North America as customers reduced spending due to higher cost of capital, lower borrowing capacity and expectations of better return from their shareholders.
Year-on-year pretax operating margin decreased 97 bps to 11% primarily due to reduced profitability in OneStim in North America.
Well Construction
Full-year 2019 revenue of $11.9 billion increased 5% year-on-year primarily due to higher demand for drilling services, largely in the international markets.
Year-on-year pretax operating margin decreased 93 bps to 12% despite higher revenue as margins were affected by competitive pricing and higher costs associated with a number of integrated drilling contracts internationally.
Production Systems
Full-year 2019 revenue of $8.2 billion was essentially flat year-on-year as lower revenue for OneSubsea and valves and process systems was offset by higher surface system and completion sales.
Year-on-year pretax operating margin was essentially unchanged at 10.4%.
Interest and Other Income
Interest & other income consisted of the following:
| (Stated in millions) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | |||||||||
| Earnings of equity method investments | $ | 91 | $ | 45 | $ | 89 | |||||
| Interest income | 33 | 41 | 60 | ||||||||
| Unrealized gain on marketable securities | 39 | - | - | ||||||||
| $ | 163 | $ | 86 | $ | 149 |
The increase in earnings of equity method investments in 2020 as compared to 2019 is primarily related to higher income associated with Schlumberger’s equity investments in rig- and seismic-related businesses, while the decrease in 2019 as compared to 2018 was primarily related to lower income from those same businesses.
The decrease in interest income in 2019 compared to 2018 is primarily attributable to lower cash and short-term investment balances.
The unrealized gain on marketable securities in 2020 relates to an investment in a start-up company that Schlumberger previously invested in that completed an initial public offering during the fourth quarter of 2020. As a result, Schlumberger recognized an unrealized gain of $39 million to increase the carrying value of this investment to its fair value of $43 million as of December 31, 2020. See Note 3 to the Consolidated Financial Statements.
Interest Expense
Interest expense of $563 million in 2020 decreased $46 million compared to 2019. This decrease was primarily due to certain debt being refinanced with lower interest rate debt. Interest expense of $609 million in 2019 increased $34 million compared to 2018. This increase is primarily due to an increase in the weighted average debt balance during 2019 as compared to 2018.
Other
Research & engineering and General & administrative expenses, as a percentage of Revenue, were as follows:
| 2020 | 2019 | 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Research & engineering | 2.5 | % | 2.2 | % | 2.1 | % | |||||
| General & administrative | 1.5 | % | 1.4 | % | 1.4 | % |
Income Taxes
The Schlumberger effective tax rate is sensitive to the geographic mix of earnings. When the percentage of pretax earnings generated outside of North America increases, the Schlumberger effective tax rate generally decreases. Conversely, when the percentage of pretax earnings generated outside of North America decreases, the Schlumberger effective tax rate generally increases.
The Schlumberger effective tax rate was 7% in 2020 as compared to 3% in 2019. The charges and credits described in Note 3 to the Consolidated Financial Statements, reduced the effective tax rate by approximately 12 and 13 points in 2020 and 2019, respectively, as a significant portion of these charges were not tax effective. Changes in the geographic mix of pretax earnings accounted for the remaining increase in the effective tax rate in 2020 as compared to 2019.
The Schlumberger effective tax rate was 3% in 2019 as compared to 17% in 2018. The lower effective tax rate was almost entirely due to the 2019 charges and credits described in Note 3 to the Consolidated Financial Statements, which primarily related to non-deductible goodwill.
Charges and Credits
Schlumberger recorded significant charges and credits during 2020, 2019 and 2018. These charges and credits, which are summarized below, are more fully described in Note 3 to the Consolidated Financial Statements.
The following is a summary of the 2020 charges and credits.
| (Stated in millions) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Pretax | Tax | Net | |||||||||
| First quarter: | |||||||||||
| Goodwill | $ | 3,070 | $ | - | $ | 3,070 | |||||
| Intangible assets impairments | 3,321 | 815 | 2,506 | ||||||||
| Asset Performance Solutions investments | 1,264 | (4 | ) | 1,268 | |||||||
| North America pressure pumping impairment | 587 | 133 | 454 | ||||||||
| Workforce reductions | 202 | 7 | 195 | ||||||||
| Other | 79 | 9 | 70 | ||||||||
| Valuation allowance | - | (164 | ) | 164 | |||||||
| Second quarter: | |||||||||||
| Workforce reductions | 1,021 | 71 | 950 | ||||||||
| Asset Performance Solutions investments | 730 | 15 | 715 | ||||||||
| Fixed asset impairments | 666 | 52 | 614 | ||||||||
| Inventory write-downs | 603 | 49 | 554 | ||||||||
| Right-of-use asset impairments | 311 | 67 | 244 | ||||||||
| Costs associated with exiting certain activities | 205 | (25 | ) | 230 | |||||||
| Multiclient seismic data impairment | 156 | 2 | 154 | ||||||||
| Repurchase of bonds | 40 | 2 | 38 | ||||||||
| Postretirement benefits curtailment gain | (69 | ) | (16 | ) | (53 | ) | |||||
| Other | 60 | 4 | 56 | ||||||||
| Third quarter: | |||||||||||
| Facility exit charges | 254 | 39 | 215 | ||||||||
| Workforce reductions | 63 | - | 63 | ||||||||
| Other | 33 | 1 | 32 | ||||||||
| Fourth quarter: | |||||||||||
| Gain on sale of OneStim | (104 | ) | (11 | ) | (93 | ) | |||||
| Unrealized gain on marketable securities | (39 | ) | (9 | ) | (30 | ) | |||||
| Other | 62 | 4 | 58 | ||||||||
| $ | 12,515 | $ | 1,041 | $ | 11,474 |
As a result of the first quarter 2020 impairment charges, commencing with the second quarter of 2020, depreciation and amortization expense was reduced by approximately $95 million on a quarterly basis. Approximately $33 million of this quarterly reduction is reflected in the Digital & Integration Division and $12 million is reflected in the Reservoir Performance Division. The remaining $50 million is reflected in the “Corporate & other” line item.
As a result of the second quarter 2020 restructuring and impairment charges, commencing with the third quarter of 2020, depreciation and amortization expense was reduced by approximately $80 million and lease expense was reduced by $25 million on a quarterly basis. Approximately $51 million of this quarterly reduction is reflected in the Digital & Integration Division and $31 million is reflected in the Reservoir Performance Division, with the remaining $23 million reflected among the Well Construction Division and Production Systems Division.
As a result of the third quarter 2020 restructuring charges, commencing with the fourth quarter of 2020, depreciation and lease expense was reduced by $15 million on a quarterly basis. This quarterly reduction is reflected among all of the Divisions.
The following is a summary of the 2019 charges and credits.
| (Stated in millions) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Pretax | Tax | Net | |||||||||
| Third quarter: | |||||||||||
| Goodwill impairment | $ | 8,828 | $ | 43 | $ | 8,785 | |||||
| Intangible assets impairment | 1,085 | 248 | 837 | ||||||||
| North America pressure pumping | 1,575 | 344 | 1,231 | ||||||||
| Other North America-related | 310 | 53 | 257 | ||||||||
| Argentina | 127 | - | 127 | ||||||||
| Equity-method investments | 231 | 12 | 219 | ||||||||
| Asset Performance Solutions investments | 294 | - | 294 | ||||||||
| Other | 242 | 13 | 229 | ||||||||
| Fourth quarter: | |||||||||||
| North America restructuring | 225 | 51 | 174 | ||||||||
| Other restructuring | 104 | (33 | ) | 137 | |||||||
| Workforce reductions | 68 | 8 | 60 | ||||||||
| Pension settlement accounting | 37 | 8 | 29 | ||||||||
| Repurchase of bonds | 22 | 5 | 17 | ||||||||
| Gain on formation of Sensia joint venture | (247 | ) | (42 | ) | (205 | ) | |||||
| $ | 12,901 | $ | 710 | $ | 12,191 |
A significant portion of the third-quarter impairment charges were recorded effective August 31, 2019. Accordingly, the 2019 results reflect a $108 million reduction in depreciation and amortization expense for the last four months of 2019. Approximately $64 million of this amount is reflected in the Reservoir Performance Division and $20 million is reflected in the Production Systems Division. The remaining $24 million is reflected in the “Corporate & other” line item.
The following is a summary of the 2018 charges and credits. The $215 million gain on the sale of the marine seismic acquisition business is classified in Gains on sale of businesses in the Consolidated Statement of Income (Loss), while the $356 million of charges are classified in Impairments & other.
| (Stated in millions) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Pretax | Tax | Net | |||||||||
| Gain on sale of marine seismic acquisition business | $ | (215 | ) | $ | (19 | ) | $ | (196 | ) | ||
| Workforce reductions | 184 | 20 | 164 | ||||||||
| Asset impairments | 172 | 16 | 156 | ||||||||
| $ | 141 | $ | 17 | $ | 124 |
Liquidity and Capital Resources
The effects of the COVID-19 pandemic have resulted in a significant and swift reduction in international and US economic activity. These effects have adversely affected the demand for oil and natural gas, as well as for Schlumberger’s products and services, and caused significant volatility and disruption of the financial markets. This period of extreme economic disruption, low oil prices and reduced demand for Schlumberger’s products and services has had, and is likely to continue to have, a material adverse impact on Schlumberger’s business, results of operations, financial condition and, at times, access to sources of liquidity.
In view of the uncertainty of the depth and extent of the contraction in oil demand due to the COVID-19 pandemic combined with the weaker commodity price environment, Schlumberger turned its strategic focus to cash conservation and protecting its balance sheet. As a result, in April 2020 Schlumberger announced a 75% reduction to its quarterly cash dividend. The revised dividend supports Schlumberger’s value proposition through a balanced approach of shareholder distributions and organic investment, while providing flexibility to address the uncertain environment. This decision reflects the Company’s focus on its capital stewardship program as well as its commitment to maintain both a strong liquidity position and a strong investment grade credit rating that provides privileged access to the financial markets.
Details of the components of liquidity as well as changes in liquidity follow:
| (Stated in millions) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, | Dec. 31, | Dec. 31, | |||||||||
| Components of Liquidity: | 2020 | 2019 | 2018 | ||||||||
| Cash | $ | 844 | $ | 1,137 | $ | 1,433 | |||||
| Short-term investments | 2,162 | 1,030 | 1,344 | ||||||||
| Short-term borrowings and current portion of long-term debt | (850 | ) | (524 | ) | (1,407 | ) | |||||
| Long-term debt | (16,036 | ) | (14,770 | ) | (14,644 | ) | |||||
| Net debt (1) | $ | (13,880 | ) | $ | (13,127 | ) | $ | (13,274 | ) |
| Changes in Liquidity: | 2020 | 2019 | 2018 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net income (loss) | $ | (10,486 | ) | $ | (10,107 | ) | $ | 2,177 | |||
| Impairments and other charges and credits | 12,515 | 12,901 | 141 | ||||||||
| Depreciation and amortization (2) | 2,566 | 3,589 | 3,556 | ||||||||
| Deferred taxes | (1,248 | ) | (1,011 | ) | (245 | ) | |||||
| Earnings of equity method investments, less dividends received | (28 | ) | 6 | (48 | ) | ||||||
| Stock-based compensation expense | 397 | 405 | 345 | ||||||||
| Pension and other postretirement benefits funding | (16 | ) | (25 | ) | (83 | ) | |||||
| Increase in working capital and other (3) | (756 | ) | (327 | ) | (130 | ) | |||||
| Cash flow from operations | 2,944 | 5,431 | 5,713 | ||||||||
| Capital expenditures | (1,116 | ) | (1,724 | ) | (2,160 | ) | |||||
| APS investments | (303 | ) | (781 | ) | (981 | ) | |||||
| Multiclient seismic data capitalized | (101 | ) | (231 | ) | (100 | ) | |||||
| Free cash flow (4) | 1,424 | 2,695 | 2,472 | ||||||||
| Dividends paid | (1,734 | ) | (2,769 | ) | (2,770 | ) | |||||
| Stock repurchase program | (26 | ) | (278 | ) | (400 | ) | |||||
| Proceeds from employee stock plans | 146 | 219 | 261 | ||||||||
| Net proceeds from divestitures | 434 | 348 | - | ||||||||
| Proceeds from formation of Sensia joint venture | - | 238 | - | ||||||||
| Proceeds from sale of WesternGeco marine seismic business, net of cash divested | - | - | 579 | ||||||||
| Business acquisitions and investments, net of cash acquired plus debt assumed | (33 | ) | (23 | ) | (292 | ) | |||||
| Repayment of finance lease obligations | (188 | ) | - | - | |||||||
| Other | (181 | ) | (204 | ) | (93 | ) | |||||
| Change in net debt before impact of changes in foreign exchange rates on net debt | (158 | ) | 226 | (243 | ) | ||||||
| Impact of changes in foreign exchange rates on net debt | (595 | ) | (79 | ) | 79 | ||||||
| (Increase) decrease in Net Debt | (753 | ) | 147 | (164 | ) | ||||||
| Net Debt, Beginning of period | (13,127 | ) | (13,274 | ) | (13,110 | ) | |||||
| Net Debt, End of period | $ | (13,880 | ) | $ | (13,127 | ) | $ | (13,274 | ) |
| (1) | “Net Debt” represents gross debt less cash, short-term investments and fixed income investments, held to maturity. Management believes that Net Debt provides useful information regarding the level of Schlumberger’s indebtedness by reflecting cash and investments that could be used to repay debt. Net Debt is a non-GAAP financial measure that should be considered in addition to, not as a substitute for or superior to, total debt. |
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| (2) | Includes depreciation of property, plant and equipment and amortization of intangible assets, multiclient seismic data costs and APS investments. |
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| (3) | Includes severance payments of approximately $843 million, $128 million and $340 million during 2020, 2019 and 2018, respectively. |
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| (4) | “Free cash flow” represents cash flow from operations less capital expenditures, APS investments and multiclient seismic data costs capitalized. Management believes that free cash flow is an important liquidity measure for the Company and that it is useful to investors and management as a measure of the ability of our business to generate cash. Once business needs and obligations are met, this cash can be used to reinvest in the Company for future growth or to return to shareholders through dividend payments or share repurchases. Free cash flow does not represent the residual cash flow available for discretionary expenditures. Free cash flow is a non-GAAP financial measure that should be considered in addition to, not as substitute for or superior to, cash flow from operations. |
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Key liquidity events during 2020, 2019 and 2018 included:
| • | Cash flow from operations was $2.9 billion in 2020, $5.4 billion in 2019 and $5.7 billion in 2018. The decrease in cash flow from operations in 2020 as compared to 2019 was driven by the sharp reduction in earnings excluding non-cash charges and credits and depreciation and amortization expense as a result of the challenging business conditions in 2020. |
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| • | On January 21, 2016, the Schlumberger Board of Directors approved a $10 billion share repurchase program for Schlumberger common stock. Schlumberger had repurchased $1.0 billion of Schlumberger common stock under this program as of December 31, 2020. |
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The following table summarizes the activity under this share repurchase program during 2020, 2019 and 2018:
| (Stated in thousands, except per share amounts) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Cost | Total Number | Average Price | |||||||||
| of Shares | of Shares | Paid per | |||||||||
| Purchased | Purchased | Share | |||||||||
| 2020 | $ | 26,244 | 776.2 | $ | 33.81 | ||||||
| 2019 | $ | 278,162 | 6,968.3 | $ | 39.92 | ||||||
| 2018 | $ | 399,786 | 6,495.1 | $ | 61.55 |
| • | Dividends paid during 2020, 2019 and 2018 were $1.7 billion, $2.8 billion and $2.8 billion, respectively. |
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| • | Capital investments (consisting of capital expenditures, APS investments and multiclient seismic data capitalized) were $1.5 billion in 2020, $2.7 billion in 2019 and $3.2 billion in 2018. Capital investments during 2021 are expected to be between $1.5 billion and $1.7 billion. |
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| • | During the fourth quarter of 2020, Schlumberger repaid certain finance lease obligations totaling $188 million as a result of the OneStim transaction. |
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| • | During the third quarter of 2020, Schlumberger issued $500 million of 1.40% Senior Notes due 2025 and $350 million of 2.65% Senior Notes due 2030. |
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| • | During the second quarter of 2020, Schlumberger issued €1.0 billion of 1.375% Guaranteed Notes due 2026, $900 million of 2.650% Senior Notes due 2030 and €1.0 billion of 2.00% Guaranteed Notes due 2032. |
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| • | During the second quarter of 2020, Schlumberger repurchased all $600 million of its 4.20% Senior Notes due 2021 and $935 million of its 3.30% Senior Notes due 2021. Schlumberger paid a premium of approximately $40 million in connection with these repurchases. This premium was classified in Impairments & other in the Consolidated Statement of Income (Loss). See Note 3 – Charges and Credits. |
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| • | During the second quarter of 2020, Schlumberger established a €5.0 billion Guaranteed Euro Medium Term Note program that provides for the issuance of various types of debt instruments such as fixed or floating rate notes in euro, US dollar or other currencies. Schlumberger has not issued any debt under this program. |
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| • | During the first quarter of 2020, Schlumberger issued €400 million of 0.25% Notes due 2027 and €400 million of 0.50% Notes due 2031. |
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| • | During the first quarter of 2020, Schlumberger completed the sale of its 49% interest in the Bandurria Sur Block in Argentina. The net cash proceeds from this transaction, combined with the proceeds received from the divestiture of a smaller APS project, amounted to $298 million. |
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| • | During the fourth quarter of 2019, Schlumberger repurchased the remaining $416 million of its 3.00% Senior Notes due 2020; $126 million of its 4.50% Senior Notes due 2021; $500 million of its 4.20% Senior Notes due 2021; and $106 million of its 3.60% Senior Notes due 2022. |
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| • | During the fourth quarter of 2019, Schlumberger completed the sale of the businesses and associated assets of DRILCO, Thomas Tools and Fishing and Remedial Services and received net cash proceeds of $348 million. These businesses represented less than 1% of Schlumberger’s consolidated 2019 revenue. |
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| • | During the fourth quarter of 2019, Schlumberger and Rockwell Automation closed their Sensia joint venture. Rockwell Automation owns 53% of the joint venture and Schlumberger owns 47%. At closing, Rockwell Automation made a $238 million cash payment, net of working capital adjustments, to Schlumberger. |
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| • | During the third quarter of 2019, Schlumberger issued €500 million of 0.00% Notes due 2024, €500 million of 0.25% Notes due 2027 and €500 million of 0.50% Notes due 2031. |
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| • | During the third quarter of 2019, Schlumberger repurchased $783 million of its 3.00% Senior Notes due 2020 and $321 million of its 3.625% Senior Notes due 2022. |
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| • | During the second quarter of 2019, Schlumberger completed a debt exchange offer, pursuant to which it issued $1.5 billion in principal of 3.90% Senior Notes due 2028 in exchange for $401 million of 3.00% Senior Notes due 2020, $234 million of 3.63% Senior Notes due 2022 and $817 million of 4.00% Senior Notes due 2025. |
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| • | During the first quarter of 2019, Schlumberger issued $750 million of 3.75% Senior Notes due 2024 and $850 million of 4.30% Senior Notes due 2029. |
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| • | During the fourth quarter of 2018, Schlumberger issued €600 million of 1.00% Guaranteed Notes due 2026. |
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| • | During the fourth quarter of 2018, Schlumberger completed the divestiture of its marine seismic acquisition business for net proceeds of $579 million (after considering $21 million of cash divested). |
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Schlumberger expects to receive an income tax refund of approximately $0.5 billion in 2021. This receivable is included in Other current assets in the Consolidated Balance Sheet as of December 31, 2020.
Schlumberger has a provision of $0.5 billion relating to severance recorded in its Consolidated Balance Sheet as of December 31, 2020. The majority of this balance is expected to be paid during the first half of 2021.
As of December 31, 2020, Schlumberger had $3.0 billion of cash and short-term investments on hand. Schlumberger had committed credit facility agreements with commercial banks aggregating $6.3 billion that support commercial paper programs, of which $5.9 billion was available and unused as of December 31, 2020. Schlumberger also has a €1.54 billion committed revolving credit facility that expires in the second quarter of 2021 but can be extended at Schlumberger’s option for up to an additional year. At December 31, 2020, no amounts have been drawn under this facility. Schlumberger believes these amounts are sufficient to meet future business requirements for at least the next 12 months.
The total outstanding commercial paper borrowings were $0.4 billion as of December 31, 2020 and $2.2 billion as of December 31, 2019.
Summary of Contractual Obligations
| (Stated in millions) | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Payment Period | |||||||||||||||||||
| Total | 2021 | 2022-2023 | 2024-2025 | After 2025 | |||||||||||||||
| Debt (1) | $ | 16,886 | $ | 850 | $ | 3,761 | $ | 2,940 | $ | 9,335 | |||||||||
| Interest on fixed rate debt obligations (2) | 3,202 | 486 | 874 | 655 | 1,187 | ||||||||||||||
| Operating leases | 1,154 | 256 | 360 | 220 | 318 | ||||||||||||||
| Purchase obligations (3) | 3,014 | 2,693 | 199 | 75 | 47 | ||||||||||||||
| $ | 24,256 | $ | 4,285 | $ | 5,194 | $ | 3,890 | $ | 10,887 |
| (1) | Excludes future payments for interest. |
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| (2) | Excludes interest on $0.6 billion of variable rate debt, which had a weighted average interest rate of 1.0% as of December 31, 2020. |
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| (3) | Represents an estimate of contractual obligations in the ordinary course of business. Although these contractual obligations are considered enforceable and legally binding, the terms generally allow Schlumberger the option to reschedule and adjust its requirements based on business needs prior to the delivery of goods. |
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Refer to Note 17, Pension and Other Benefit Plans, of the Consolidated Financial Statements for details regarding Schlumberger’s pension and other postretirement benefit obligations.
As discussed in Note 13, Income Taxes*,* of the Consolidated Financial Statements, included in the Schlumberger Consolidated Balance Sheet at December 31, 2020 is approximately $1.3 billion of liabilities associated with uncertain tax positions in the over 100 tax jurisdictions in which Schlumberger conducts business. Due to the uncertain and complex application of tax regulations, combined with the difficulty in predicting when tax audits throughout the world may be concluded, Schlumberger cannot make reliable estimates of the timing of cash outflows relating to these liabilities.
Schlumberger has outstanding letters of credit/guarantees that relate to business performance bonds, custom/excise tax commitments, facility lease/rental obligations, etc. These were entered into in the ordinary course of business and are customary practices in the various countries where Schlumberger operates.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires Schlumberger to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expenses. The following accounting policies involve “critical accounting estimates” because they are particularly dependent on estimates and assumptions made by Schlumberger about matters that are inherently uncertain.
Schlumberger bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Allowance for Doubtful Accounts
Schlumberger maintains an allowance for doubtful accounts in order to record accounts receivable at their net realizable value. Judgment is involved in recording and making adjustments to this reserve. Allowances have been recorded for receivables believed to be uncollectible, including amounts for the resolution of potential credit and other collection issues such as disputed invoices. Adjustments to the allowance may be required in future periods depending on how such potential issues are resolved, or if the financial condition of Schlumberger’s customers were to deteriorate resulting in an impairment of their ability to make payments.
As a large multinational company with a long history of operating in a cyclical industry, Schlumberger has extensive experience in working with its customers during difficult times to manage its accounts receivable. During weak economic environments or when there is an extended period of weakness in oil and gas prices, Schlumberger typically experiences delays in the payment of its receivables. However, except for a $469 million accounts receivable write-off during the fourth quarter of 2017 as a result of the political and economic condition in Venezuela, Schlumberger has not had material write-offs due to uncollectible accounts receivable over the recent industry downturn. Schlumberger generates revenue in more than 120 countries. As of December 31, 2020, only five of those countries individually accounted for greater than 5% of Schlumberger’s net accounts receivable balance, of which only one (Mexico) accounted for greater than 10% of such receivables.
Goodwill, Intangible Assets and Long-Lived Assets
Schlumberger records the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed as goodwill. The goodwill relating to each of Schlumberger’s reporting units is tested for impairment annually as well as when an event, or change in circumstances, indicates an impairment may have occurred.
Under generally accepted accounting principles, Schlumberger has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one or more of its reporting units is greater than its carrying amount. If, after assessing the totality of events or circumstances, Schlumberger determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, there is no need to perform any further testing. However, if Schlumberger concludes otherwise, then it is required to perform a quantitative impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded based on that difference.
Schlumberger has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test.
During 2020 and 2019, Schlumberger recorded goodwill impairment charges of $3.1 billion and $8.8 billion, respectively. Refer to Note 3 to the Consolidated Financial Statements for details regarding the facts and circumstances that led to this impairment and how the fair value of each reporting unit was estimated, including the significant assumptions used and other details.
Long-lived assets, including fixed assets, intangible assets and investments in APS projects, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual
disposition. If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the long-lived asset to its estimated fair value. The determination of future cash flows as well as the estimated fair value of long-lived assets involves significant estimates on the part of management. If there is a material change in economic conditions or other circumstances influencing the estimate of future cash flows or fair value, Schlumberger could be required to recognize impairment charges in the future.
Income Taxes
Schlumberger conducts business in more than 100 tax jurisdictions, a number of which have tax laws that are not fully defined and are evolving. Schlumberger’s tax filings are subject to regular audits by the tax authorities. These audits may result in assessments for additional taxes that are resolved with the authorities or, potentially, through the courts. Schlumberger recognizes the impact of a tax position in its financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Tax liabilities are recorded based on estimates of additional taxes that will be due upon the conclusion of these audits. Estimates of these tax liabilities are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of tax regulations, the ultimate resolution of audits may result in liabilities that could be materially different from these estimates. In such an event, Schlumberger will record additional tax expense or tax benefit in the period in which such resolution occurs.
Revenue Recognition for Certain Long-term Construction-type Contracts
Schlumberger recognizes revenue for certain long-term construction-type contracts over time. These contracts involve significant design and engineering efforts in order to satisfy custom designs for customer-specific applications. Under this method, revenue is recognized as work progresses on each contract. Progress is measured by the ratio of actual costs incurred to date on the project in relation to total estimated project costs. Approximately 5% of Schlumberger’s revenue in each of 2020, 2019 and 2018, respectively, was recognized under this method.
The estimate of total project costs has a significant impact on both the amount of revenue recognized as well as the related profit on a project. Revenue and profits on contracts can also be significantly affected by change orders and claims. Profits are recognized based on the estimated project profit multiplied by the percentage complete. Due to the nature of these projects, adjustments to estimates of contract revenue and total contract costs are often required as work progresses. Any expected losses on a project are recorded in full in the period in which they become probable.
Multiclient Seismic Data
Schlumberger capitalizes the costs associated with obtaining multiclient seismic data. The carrying value of the multiclient seismic data library at December 31, 2020 and 2019 was $317 million and $568 million, respectively. Such costs are charged to Cost of services based on the percentage of the total costs to the estimated total revenue that Schlumberger expects to receive from the sales of such data. However, an individual survey generally will not carry a net book value greater than a 4-year, straight-line amortized value.
The carrying value of surveys is reviewed for impairment annually as well as when an event or change in circumstance indicates an impairment may have occurred. Adjustments to the carrying value are recorded when it is determined that estimated future revenues, which involve significant judgment on the part of Schlumberger, would not be sufficient to recover the carrying value of the surveys. Significant adverse changes in Schlumberger’s estimated future cash flows could result in impairment charges in a future period. For purposes of performing the annual impairment test of the multiclient library, surveys are primarily analyzed for impairment on a survey-by-survey basis.
Pension and Postretirement Benefits
Schlumberger’s pension and postretirement benefit obligations are described in detail in Note 17 to the Consolidated Financial Statements. The obligations and related costs are calculated using actuarial concepts, which include critical assumptions related to the discount rate, expected rate of return on plan assets and medical cost trend rates. These assumptions are important elements of expense and/or liability measurement and are updated on an annual basis, or upon the occurrence of significant events.
The discount rate that Schlumberger uses reflects the prevailing market rate of a portfolio of high-quality debt instruments with maturities matching the expected timing of payment of the related benefit obligations. The following summarizes the discount rates utilized by Schlumberger for its various pension and postretirement benefit plans:
| • | The discount rate utilized to determine the liability for Schlumberger’s United States pension plans and postretirement medical plan was 2.60% at December 31, 2020 and 3.30% at December 31, 2019. |
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| • | The weighted-average discount rate utilized to determine the liability for Schlumberger’s international pension plans was 2.38% at December 31, 2020 and 3.27% at December 31, 2019. |
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| • | The weighted-average discount rate utilized to determine expense for Schlumberger’s United States pension plans and postretirement medical plan decreased from 4.30% in 2019 to 3.30% in 2020. |
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| • | The weighted-average discount rate utilized to determine expense for Schlumberger’s international pension plans decreased from 4.00% in 2019 to 3.27% in 2020. |
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The expected rate of return for Schlumberger’s retirement benefit plans represents the average rate of return expected to be earned on plan assets over the period that benefits included in the benefit obligation are expected to be paid, with consideration given to the distribution of investments by asset class and historical rates of return for each individual asset class. The weighted average expected rate of return on plan assets for the United States pension plans was 6.60% in both 2020 and 2019. The weighted average expected rate of return on plan assets for the international pension plans was 6.71% in 2020 and 7.22% in 2019. A lower expected rate of return would increase pension expense.
Schlumberger’s medical cost trend rate assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. The overall medical cost trend rate assumption utilized to determine the 2020 postretirement medical expense and the postretirement medical liability at December 31, 2020 was 7.25%, graded to 4.5% over the next eleven years.
The following illustrates the sensitivity to changes in certain assumptions, holding all other assumptions constant, for Schlumberger’s United States and international pension plans:
| (Stated in millions) | |||||
|---|---|---|---|---|---|
| Effect on | |||||
| Effect on 2020 | Dec. 31, 2020 | ||||
| Change in Assumption | Pretax Expense | Liability | |||
| 25 basis point decrease in discount rate | +$42 | +$664 | |||
| 25 basis point increase in discount rate | -$40 | -$625 | |||
| 25 basis point decrease in expected return on plan assets | +$31 | - | |||
| 25 basis point increase in expected return on plan assets | -$31 | - |
The following illustrates the sensitivity to changes in certain assumptions, holding all other assumptions constant, for Schlumberger’s United States postretirement medical plans:
| (Stated in millions) | |||
|---|---|---|---|
| Effect on | |||
| Effect on 2020 | Dec. 31, 2020 | ||
| Change in Assumption | Pretax Expense | Liability | |
| 25 basis point decrease in discount rate | - | +$46 | |
| 25 basis point increase in discount rate | - | -$42 |
Previous: Item 6. Selected Financial Data. · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk.