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Business Context and Reporting Period

Company: Schlumberger Limited (Schlumberger N.V.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: Schlumberger operates four reportable segments: Oilfield Services, WesternGeco, SchlumbergerSema, and Other. The company provides technology and services for the energy industry, including oilfield services, seismic data acquisition, and IT solutions.

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.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 3.5% year-over-year in Q3 2003 and 5% for the nine-month period, driven primarily by the Oilfield Services segment.
• Profitability Decline: Net income turned to a loss in Q3 2003 compared to a profit in Q3 2002. This was primarily due to significant non-recurring charges totaling approximately $507 million in the quarter.
• Segment Performance:
  • Oilfield Services: Revenue up 8% and pretax operating income up 20% year-over-year in Q3, driven by increased rig counts in North America and Latin America.
  • WesternGeco: Revenue down 34% year-over-year due to weakness in multiclient seismic data sales. The segment reported a pretax operating loss of $36 million.
  • SchlumbergerSema: Revenue up 6% year-over-year, with pretax operating income improving from a loss to $27 million.
• Debt Reduction: The company repurchased $1.3 billion of European bonds, incurring $168 million in debt extinguishment costs. Net debt decreased from $5.02 billion to $4.87 billion.

Guidance, Outlook, and Unusual Items

Unusual Items and Charges

• Debt Extinguishment: A charge of $86 million was recorded in Q3 2003 (total $168 million for the year) related to the tender offer for European bonds.
• Impairment Charges: A $398 million pretax charge ($205 million after-tax) was taken against the WesternGeco multiclient seismic library. Additionally, a $54 million pretax vessel impairment charge was recorded.
• Discontinued Operations: The company sold its NPTest business for $220 million and its Verification Systems business. These are reported as discontinued operations, resulting in a net loss of $29 million for the nine months ended Sept 30, 2003.

Strategic Transactions

• SchlumbergerSema Sale: On September 22, 2003, Schlumberger signed a binding agreement to sell the majority of SchlumbergerSema to Atos Origin. The deal, expected to close in January 2004, involves approximately $468 million in cash and 19.3 million shares of Atos stock. Schlumberger will retain specific IT services for the oil and gas industry.

Outlook and Risks

• Forward-Looking Statements: Management expects continued growth in Oilfield Services driven by gas drilling activity in North America. However, risks include political instability in Venezuela and Nigeria, fluctuations in oil and gas prices, and the timing of the SchlumbergerSema divestiture.
• WesternGeco Recovery: The segment faces challenges in the multiclient market, particularly in the Gulf of Mexico, though backlog improved 14% sequentially.

Investor Verification Checklist

• Charge Impact: Verify the sustainability of earnings by excluding the $507 million in Q3 charges (impairments and debt costs) to assess core operational performance.
• WesternGeco Impairment: Assess the long-term viability of the multiclient seismic library and the impact of the $398 million write-down on future revenue potential.
• SchlumbergerSema Divestiture: Monitor the closing of the Atos Origin transaction (expected Jan 2004) and the final valuation of the consideration received (cash + stock).
• Debt Structure: Review the impact of the $1.3 billion bond repurchase on future interest expenses and liquidity.
• Geopolitical Exposure: Evaluate exposure to political risks in key operating regions, specifically Venezuela, Nigeria, and Argentina.