SLB LIMITED quarterly report, Q2 FY2009

Business context and reporting period

Schlumberger Limited (the registrant named in this filing) reported its unaudited results for the quarter and six months ended June 30, 2009. Its principal businesses are Oilfield Services and WesternGeco. Amounts below are in U.S. dollars; financial statement amounts are in millions unless indicated otherwise.

Financial results and liquidity

Q2 revenue fell 18% year over year and continuing income attributable to Schlumberger fell about 57%. The six-month figures also reflect a $38 million after-tax gain from discontinued operations in 2008; there were no discontinued-operation results in 2009. Q2 included $238 million of pretax charges, or $207 million after tax, for workforce reductions and pension and other postretirement benefit curtailments.

For Q2, Oilfield Services revenue was $4,956 million and pretax operating income was $1,022 million, down 18% and 40% year over year. Its pretax operating margin was 20.6%, down 7.46 percentage points. WesternGeco revenue was $559 million and pretax operating income was $97 million, down 17% and 51%; its pretax margin was 17.3%. WesternGeco backlog was $1.2 billion, versus $1.5 billion at March 31, 2009 and $1.8 billion at December 31, 2008.

At June 30, 2009, cash was $216 million, short-term investments $4,195 million and held-to-maturity fixed-income investments $464 million. Current assets were $13,655 million and current liabilities $7,461 million. Total debt was approximately $5.9 billion; management’s net-debt measure was negative $990 million, meaning cash and qualifying investments exceeded debt under its definition. The company also reported $2.3 billion available and unused under committed facilities of $3.8 billion. Six-month capital expenditures were $1,252 million; full-year 2009 capital expenditures were expected to approach $2.4 billion.

Material changes versus comparable periods

• Q2 revenue declined sequentially 8% from $6.00 billion in Q1 2009; income from continuing operations attributable to Schlumberger declined from $938 million to $613 million, including the Q2 charges.
• North America was the sharpest pressure point: Q2 Oilfield Services revenue fell 31% sequentially and 43% year over year. The North America pretax operating margin was 1.0%.
• For the first six months, Oilfield Services revenue declined 11% year over year and pretax operating income declined 29%; WesternGeco revenue declined 18% and pretax operating income declined 61%.
• Operating cash flow fell from $2,730 million to $2,064 million for the six-month period, reflecting lower earnings and substantial pension funding, partly offset by improved working-capital movements. Capital expenditures were lower than in the prior-year period.
• Debt increased approximately $0.6 billion from December 31, 2008, primarily following issuance of €1.0 billion of 4.50% notes due 2014. The notes were swapped into U.S.-dollar exposure at an effective 4.95% interest rate.

Outlook, management commentary, risks and unusual items

Management expected North American natural-gas rig counts to remain broadly stable, with service pricing depressed; it did not anticipate a major recovery in drilling before 2010. It expected further, but limited, activity declines overseas, and said first-half pricing concessions would affect second-half revenue. Management noted that volatile oil prices, postponed or cancelled projects, lower prices and tighter credit were constraining customer investment. It identified the broader economic recovery and resulting oil and gas demand as key determinants of future activity. No specific revenue or earnings guidance was provided.

Management reported some sequential improvement in Russia and selected other markets, while describing continued severe weakness in North American land activity and pricing. WesternGeco saw some improvement in multiclient sales and land activity, offset by weaker marine revenue and declining marine pricing. Multiclient sales remained difficult to forecast. Capital expenditure and pension contribution expectations were approximately $2.4 billion and $300 million, respectively, for the second half of 2009.

Risks highlighted include customer delays or nonpayment, pricing erosion, reduced exploration and production spending, project delays or cancellations, foreign-exchange movements and seasonal effects. The company said it had experienced payment delays from certain customers. A U.S. Department of Justice inquiry concerning possible Foreign Corrupt Practices Act violations involving freight-forwarding and customs-clearance services was ongoing; Schlumberger said it was cooperating and conducting its own investigation. Management said potential liabilities from legal proceedings could not then be estimated, but did not expect them to be material to liquidity, financial position or future results.

The filing reported $136 million of noncash pension and other postretirement curtailment charges. The curtailment and plan remeasurement reduced the postretirement benefit liability by $361 million. Schlumberger contributed $502 million to defined-benefit pension plans in the first half and anticipated approximately $300 million of additional contributions in the second half. A $321 million convertible debenture was classified as current because holders may require repurchase for cash on June 1, 2010.

Important facts for investors to verify

• Whether oilfield activity and pricing stabilize, particularly in North America, and whether management’s second-half outlook assumptions hold.
• Customer collections, receivables quality and exposure to customer credit constraints; the filing does not provide a clear aggregate amount of delayed payments.
• WesternGeco backlog conversion, marine pricing and the timing and variability of multiclient sales.
• Actual capital expenditures and pension contributions versus the stated expectations, and the effect of benefit-plan changes on future costs and liabilities.
• Debt maturities, the 2010 debenture repurchase option, and continued access to committed credit facilities.
• Developments in the DOJ inquiry and other legal proceedings, whose potential loss amounts were not estimable in the filing.