SLB

Business Context and Reporting Period

Company: Schlumberger Limited (SLB)

Filing Type: Form 10-K (Annual Report)

Period Ended: December 31, 2004

Schlumberger is the world's leading oilfield services company, operating in over 80 countries with approximately 52,500 employees. The company operates through two primary segments: Oilfield Services (providing technology and project management for the oil and gas industry) and WesternGeco (a joint venture providing seismic services). 2004 marked the completion of Schlumberger's transformation into a pure oilfield services company following the divestiture of its non-oilfield businesses, including the sale of SchlumbergerSema and the IPO of Axalto.

Key Financial Metrics

Note: Net Debt is defined as gross debt less cash, short-term investments, and fixed income investments held to maturity. Negative values indicate a net cash position.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenue increased 15% to $11.48 billion, driven by a 16% increase in Oilfield Services revenue ($10.24 billion) and a 5% increase in WesternGeco revenue ($1.24 billion).
• Profitability Surge: Net income from continuing operations rose 155% to $1.01 billion. Pretax segment income for Oilfield Services reached a record $1.80 billion (17.6% return on sales), while WesternGeco returned to profitability with $124 million in pretax income compared to a $20 million loss in 2003.
• Deleveraging: Net debt improved significantly from $4.18 billion to $1.46 billion, primarily due to proceeds from business divestitures ($1.66 billion) and the sale of Atos Origin shares ($1.16 billion), alongside a reduction in debt principal.
• Divestitures: The company completed the sale of SchlumbergerSema, Axalto, and other non-oilfield assets, resulting in $210 million of income from discontinued operations in 2004.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management anticipates double-digit compound annual revenue growth for the remainder of the decade, driven by strong oil demand, geopolitical tensions, and the need to maintain production in aging fields. The company targets an after-tax return on sales of 15% and a return on capital employed in the upper teens. Growth strategies focus on production-oriented environments, particularly in the Middle East, Caspian, deepwater regions, Russia, and China.

Risks and Contingencies

• Legal Proceedings: In December 2004, WesternGeco and Schlumberger received grand jury subpoenas regarding possible visa fraud for crewmembers on vessels in the Gulf of Mexico. The outcome and financial impact are currently undeterminable.
• Market Risks: The company is exposed to foreign currency fluctuations (85% of revenue is USD-denominated, but expenses are often in local currencies) and interest rate changes. A 5% strengthening of the USD would increase income by 8%, while a 5% weakening would decrease it by 11%.
• Accounting Changes: The adoption of SFAS 123R (Share-Based Payment) effective July 1, 2005, is expected to reduce 2005 diluted EPS by approximately $0.03.
• Unusual Items: 2004 results included $243 million in pretax charges, primarily related to debt extinguishment costs ($115 million) and interest rate swap settlements ($73 million).

Investor Verification Checklist

• Divestiture Proceeds: Verify the realization of proceeds from the sale of SchlumbergerSema and Axalto shares, which were critical to the 2004 debt reduction.
• WesternGeco Turnaround: Monitor the sustainability of WesternGeco's return to profitability, specifically the performance of Q-Technology and multiclient seismic sales.
• Legal Exposure: Track the status of the US Attorney's office investigation regarding visa fraud in the Gulf of Mexico.
• Debt Structure: Review the maturity profile of the remaining $4.66 billion in debt and the impact of interest rate swaps on future earnings.
• Geographic Concentration: Assess risks associated with non-US operations, which accounted for 68% of consolidated revenues in 2004.