SLB

Business Context and Reporting Period

Company: Schlumberger Limited (SLB)

Filing Type: Form 10-Q (Quarterly Report)

Period Ended: June 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 drilling, well construction, and seismic data acquisition.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. Net Debt is defined 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 7% in Q2 2003 compared to Q2 2002, and 5% for the six-month period. Growth was driven by Oilfield Services (+9% Q2, +6% 6-month) and SchlumbergerSema (+16% Q2, +14% 6-month).
• Profitability Decline: Net income decreased significantly (43% in Q2, 29% for 6 months) primarily due to a one-time $81 million charge for debt extinguishment costs recorded in Q2 2003. Excluding this charge, income from continuing operations would have been $0.38 per share in Q2 2003 versus $0.33 in Q2 2002.
• Segment Performance:
  • Oilfield Services: Pretax operating income rose 10% year-over-year to $382 million in Q2, driven by increased activity in North America, Latin America, and the Middle East.
  • WesternGeco: Revenue fell 15% year-over-year to $306 million, resulting in a pretax operating loss of $16 million compared to a profit of $18 million in Q2 2002. Declines were attributed to lower multiclient sales and rationalization of land seismic operations.
  • SchlumbergerSema: Revenue increased 16% year-over-year, aided by favorable currency fluctuations (Euro appreciation). Pretax operating income improved to $24 million from $4 million.
• Discontinued Operations: Recorded a net loss of $30.2 million in Q2 2003, including a $12 million loss on the sale of the NPTest business and an $18 million loss on the pending sale of Verification Systems.

Guidance, Outlook, and Risks

• Debt Refinancing: The company completed a tender offer to repurchase $1.3 billion of European bonds at a cost of $1.5 billion. This action is expected to generate $46 million in annual interest savings. The remaining $87 million of the total $168 million charge will be recorded in Q3 2003.
• Capital Markets: In June 2003, Schlumberger issued $1.425 billion in convertible debentures (Series A and B) with net proceeds of approximately $1.4 billion. Proceeds were used to fund the bond repurchase and working capital.
• Outlook Risks:
  • Global economic recovery timing and exploration/production spending by major oil companies.
  • Political and economic uncertainty in Venezuela, Nigeria, and the Persian Gulf.
  • Weakness in the IT services environment affecting SchlumbergerSema.
  • Impact of SARS on activity levels in Asia.
• Accounting Changes: The company adopted several new accounting standards (SFAS 143, 146, FIN 45, EITF 00-21, FIN 46, SFAS 150) effective in 2003. Management does not believe these will have a material effect on financial position or results of operations.

Investor Verification Checklist

• Debt Extinguishment Charge: Verify the impact of the $81 million Q2 charge and the remaining $87 million Q3 charge on full-year earnings.
• WesternGeco Turnaround: Monitor the effectiveness of cost-cutting initiatives and the recovery of multiclient seismic sales given the 15% revenue decline.
• Currency Impact: Assess the sustainability of SchlumbergerSema's revenue growth, which was significantly boosted by the strengthening of the Euro against the US dollar.
• Discontinued Operations: Confirm the closing of the Verification Systems management buyout and the final proceeds from the NPTest sale.
• Convertible Debentures: Review the dilution potential of the $1.425 billion convertible debentures issued in June 2003.