SLB

Business Context and Reporting Period

Company: Schlumberger Limited (SLB)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Second Quarter and Six Months ended June 30, 2007

Business Overview: Schlumberger operates two primary business segments: Oilfield Services and WesternGeco. The company provides technology and services for the exploration, development, and production of oil and gas reserves globally. As of June 30, 2007, the company had 1,192,062,611 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Q2 2007 revenue increased 20% year-over-year (YoY) to $5.64 billion. Six-month revenue grew 24% YoY to $11.10 billion.
• Profitability: Net income for Q2 2007 rose 47% YoY. Pretax operating income for Oilfield Services increased 33% YoY, while WesternGeco pretax income increased 28% YoY.
• Margin Expansion: Oilfield Services pretax operating margins reached 30.4% in Q2 2007, an increase of 90 basis points sequentially. WesternGeco margins declined sequentially to 32.5% due to seasonal multiclient declines but remained strong YoY.
• Segment Performance:
  • Oilfield Services: Driven by strong demand in North America (US land and Gulf Coast), Latin America (Venezuela/Trinidad & Tobago), and Europe/CIS/West Africa.
  • WesternGeco: Revenue grew 18% YoY, driven by multiclient sales (E-Octopus surveys) and higher marine pricing, offset by seasonal declines in multiclient revenue.
• Acquisitions: In Q2 2007, Schlumberger acquired Tyumenpromgeofizika (geophysical services in Western Siberia) and made other minor acquisitions totaling $143 million for the six-month period.

Guidance, Outlook, and Risks

• Outlook: Management notes that operating results for the first six months are not necessarily indicative of full-year results. The company expects continued demand for high-margin technologies in exploration and deep-water environments.
• Capital Allocation:
  • Dividends: $354 million paid in the first six months of 2007.
  • Share Repurchases: $505 million spent on stock buybacks in the first six months of 2007. Approximately 19 million shares remain available under the current program.
  • Convertible Debentures: $396 million of 1.5% Series A Convertible Debentures were converted into approximately 11 million shares in Q2 2007.
• Risks and Contingencies:
  • Legal Proceedings: The WesternGeco visa matter (Deferred Prosecution Agreement) concluded in June 2007 with no prosecution. The company maintains accruals for environmental remediation and other legal proceedings, though management does not expect these to be material.
  • Market Risks: Revenue is heavily dependent on oil and gas industry spending, which is sensitive to commodity prices. Approximately 74% of revenue is derived from non-US operations, exposing the company to political, economic, and currency risks in ~80 countries.
  • Tax Uncertainty: The company adopted FIN 48 in 2007, recognizing $764 million in liabilities for uncertain tax positions. Audits are ongoing in major jurisdictions including the US, UK, Canada, and Russia.

Investor Verification Checklist

• Revenue Quality: Verify the sustainability of the 20% YoY revenue growth, particularly the reliance on exploration-driven activity in North America and deep-water regions.
• Margin Sustainability: Assess whether the 30.4% Oilfield Services margin can be maintained given potential pricing erosion in pressure pumping services noted in North America.
• Working Capital: Review the $801 million increase in working capital requirements that offset operating cash flow generation in the first half of 2007.
• Tax Exposure: Monitor the $764 million liability for uncertain tax positions and the outcome of ongoing audits in key jurisdictions.
• Debt Structure: Confirm the impact of the $396 million convertible debenture conversion on future interest expense and share dilution.