SLB

Business Context and Reporting Period

Company: Schlumberger Limited (Schlumberger N.V.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
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 resources globally.

Key Financial Metrics

All figures in millions unless otherwise noted.

Note: Net Debt is defined by management as gross debt less cash, short-term investments, and fixed income investments held to maturity. A negative value indicates a net cash position.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 34% year-over-year for the nine months ended September 30, 2006, driven by higher activity levels, pricing gains, and strong demand for higher-margin technologies across all regions.
• Profitability: Net income for the nine months increased 67% to $2.58 billion. Pretax operating income for Oilfield Services rose 68% and WesternGeco rose 181% compared to the prior year.
• Acquisitions:
  • WesternGeco: Acquired the remaining 30% minority interest from Baker Hughes for $2.4 billion in cash in Q2 2006, resulting in 100% ownership.
  • PetroAlliance: Acquired the remaining 49% interest for $495 million (cash and stock) in Q2 2006.
• Charges and Credits:
  • 2006: Recorded pretax charges of $46 million (primarily in-process R&D and visa settlement costs) in the first half of the year. No charges in Q3 2006.
  • 2005: Included net pretax credits of $151 million, largely due to a $146 million gain on the sale of the Montrouge facility.
• Stock-Based Compensation: Expense increased significantly to $84 million for the nine months of 2006 (vs. $29 million in 2005) due to the adoption of SFAS 123R.

Guidance, Outlook, and Risks

• Management Commentary: Demand remains strong for Drilling & Measurements, Well Services, and Data & Consulting Services. WesternGeco reported vessel utilization at 97% in Q3. Management expects continued growth driven by robust commodity prices and increased rig counts.
• Capital Allocation:
  • Share Repurchases: A new program approved in April 2006 allows for the repurchase of up to 40 million shares. 16.13 million shares were repurchased in the first nine months of 2006.
  • Dividends: Dividends paid totaled $420 million for the nine months ended September 30, 2006.
• Risks and Contingencies:
  • Legal: WesternGeco settled a federal investigation regarding visa violations for a penalty of $18 million plus $1.6 million in expenses. A deferred prosecution agreement is in place for one year.
  • Market Risk: Exposure to global economic conditions, oil and gas prices, and political instability in key operating regions.
  • Accounting Changes: Adoption of FAS 158 (pension accounting) effective December 31, 2006, is expected to increase liabilities and decrease equity by approximately 2%.

Investor Verification Checklist

• WesternGeco Integration: Verify the realization of synergies and the impact of the $2.4 billion acquisition on future cash flows and debt levels.
• Stock-Based Compensation: Monitor the ongoing impact of SFAS 123R adoption on reported earnings, with $252 million of unrecognized compensation cost remaining as of September 30, 2006.
• Working Capital: Review the $761 million increase in receivables over the nine-month period, which offset operating cash flow generation.
• Regional Exposure: Assess the sustainability of revenue growth in key regions like North America (US Land/Canada) and the Middle East, which drove significant year-over-year increases.
• Debt Structure: Confirm the terms of the €400 million floating rate notes issued in September 2006 and the associated currency swap arrangements.