SLB

Business Context and Reporting Period

Company: Schlumberger Limited (Schlumberger N.V.)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Second Quarter and Six Months ended June 30, 2006
Business Overview: Schlumberger operates two primary business segments: Oilfield Services (OFS) and WesternGeco. The company provides technology and services for the exploration, development, and production of oil and natural gas resources globally.

Key Financial Metrics

Note: Net Debt is defined by management as gross debt less cash, short-term investments, and fixed income investments held to maturity. Negative values indicate a net cash position.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 37% year-over-year in Q2 2006 and 35% for the six-month period, driven by higher activity levels, increased pricing, and stronger demand for higher-margin technologies across all regions.
• Profitability: Net income for Q2 2006 rose 78% compared to Q2 2005. Pretax operating margins for Oilfield Services reached 27.2% in Q2, up 160 basis points sequentially.
• Acquisitions: The most significant event was the acquisition of the remaining 30% minority interest in WesternGeco from Baker Hughes for $2.4 billion in cash, resulting in 100% ownership. Additionally, the company acquired the remaining 49% of PetroAlliance Services for $495 million.
• Stock Split: A two-for-one stock split was executed on April 7, 2006. All share and per-share data have been restated to reflect this split.
• Charges and Credits: Q2 2006 included $46 million in pretax charges (primarily related to WesternGeco in-process R&D and a visa settlement). In contrast, Q2 2005 included no such charges, while the first half of 2005 included a $146 million gain from the sale of the Montrouge facility.

Guidance, Outlook, and Risks

• Outlook: Management expects continued strong demand for higher-margin technologies. The WesternGeco backlog reached an all-time high of $1.2 billion, reflecting strong market positions in Marine, Land, and Data Processing.
• Stock-Based Compensation: Adoption of SFAS 123R effective January 1, 2006, increased stock-based compensation expense. Total expense is estimated at $112 million for fiscal 2006, compared to $40 million in 2005.
• Corporate Relocation: The company plans to relocate U.S. corporate offices from New York to Texas and its research center from Ridgefield to Boston in 2006, with estimated incremental expenses of $25 million to $30 million.
• Risks and Contingencies:
  • Legal: WesternGeco settled a federal investigation regarding visa violations for foreign crewmembers, agreeing to a $18 million penalty and a deferred prosecution agreement.
  • Market: Results are subject to global economic conditions, oil and natural gas prices, and exploration/production spending by customers.
  • Environmental: Accruals exist for environmental remediation related to divested operations; ultimate costs may exceed estimates but are not expected to be material.

Investor Verification Checklist

• WesternGeco Integration: Verify the impact of the $2.4 billion acquisition on future cash flows and the realization of synergies mentioned in the purchase price allocation.
• Stock-Based Compensation Impact: Confirm the full-year impact of SFAS 123R adoption on net income, as expenses are expected to rise significantly compared to prior years.
• Net Debt Position: Review the composition of the $3.17 billion net cash position (negative net debt) to understand liquidity available for future dividends, buybacks, or acquisitions.
• Regional Exposure: Assess the concentration of revenue in high-growth but potentially volatile regions such as the Middle East, Russia, and Latin America.
• Visa Settlement Monitoring: Monitor the one-year deferred prosecution period for WesternGeco to ensure compliance and avoid future penalties.