SLB

Business Context and Reporting Period

This Form 10-Q covers Schlumberger Limited (Schlumberger N.V.) for the quarter and six months ended June 30, 1996. The company operates globally in two primary segments: Oilfield Services and Measurement & Systems. The report reflects a period of significant growth in the oilfield sector driven by increased worldwide rig counts, contrasted with mixed results in the measurement and systems division due to market pressures in the metering business.

Key Financial Metrics

Note: Debt figures include bank loans, long-term debt due within one year, and long-term debt. Cash flow figures are for the six-month period.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated operating revenue increased 15% year-over-year for both the quarter and the six-month period. Oilfield Services revenue surged 22%, driven by a 7% increase in worldwide rig count. Measurement & Systems revenue grew modestly by 2% (quarter) and 3% (six months).
• Profitability: Net income rose 18% in Q2 and 17% for the six months. Oilfield Services operating income increased 31% (Q2) and 30% (6 months). Conversely, Measurement & Systems operating income declined 21% (Q2) and 12% (6 months) due to margin compression in metering and higher R&D costs.
• Cash Flow: Net cash provided by operating activities decreased to $423 million for the first half of 1996 from $559 million in the prior year, primarily due to increases in receivables and inventories.
• Interest Expense: Interest expense decreased significantly ($3M in Q2, $7M for six months) due to sharply lower average borrowing rates.

Outlook, Risks, and Contingencies

Management Commentary: Management attributes growth to strong activity in the Gulf of Mexico, West Africa, the North Sea, and Latin America. New technologies such as DeepSEA EXPRES cementing and PLATFORM EXPRESS wireline logging are being successfully deployed. The Measurement & Systems segment faces headwinds from European utility deregulation and pricing pressures in the metering business, though Electronic Transactions (smart cards) continues to grow strongly.

Risks and Contingencies:

• Legal Proceedings: A Texas Court of Appeals reinstated a jury award of approximately $75 million against Schlumberger in a 1988 settlement dispute; the case is pending before the Texas Supreme Court. No provision has been made as management believes the trial court's original exoneration was correct. Additionally, a $23 million judgment (doubled plus fees) was entered in a contract dispute in May 1996, which the company intends to appeal.
• Environmental: Accruals exist for environmental remediation related to divested operations. Management believes potential additional costs are not expected to be material.
• Tax Position: The company has a $470 million US net operating loss carryforward and $650 million in net deductible temporary differences. A full valuation allowance is maintained, meaning no deferred tax asset is recorded. This carryforward reduced income tax expense by $20 million in Q2 1996.

Investor Verification Checklist

• Verify the status of the Texas Supreme Court appeal regarding the $75 million reinstated jury award.
• Monitor the outcome of the appeal regarding the $23 million contract dispute judgment entered in May 1996.
• Assess the sustainability of the 22% revenue growth in Oilfield Services against global rig count trends.
• Review the margin trajectory in the Measurement & Systems segment, specifically the impact of European utility deregulation on the metering business.
• Confirm the utilization of the $470 million net operating loss carryforward and the continued appropriateness of the full valuation allowance.