SCHLUMBERGER LIMITED/NV - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2020

Commission file No.: 1-4601

SCHLUMBERGER N.V.

(SCHLUMBERGER LIMITED)

(Exact name of registrant as specified in its charter)

Registrant’s telephone number in the United States, including area code, is:   (713) 513-2000

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

SCHLUMBERGER LIMITED

First Quarter 2020 Form 10-Q

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

SCHLUMBERGER LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (LOSS)

(Unaudited)

See Notes to Consolidated Financial Statements

3

SCHLUMBERGER LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

See Notes to Consolidated Financial Statements

4

SCHLUMBERGER LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

See Notes to Consolidated Financial Statements

5

SCHLUMBERGER LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

See Notes to Consolidated Financial Statements

6

SCHLUMBERGER LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

SHARES OF COMMON STOCK

(Unaudited)

See Notes to Consolidated Financial Statements

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SCHLUMBERGER LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.   Basis of Presentation

The accompanying unaudited consolidated financial statements of Schlumberger Limited and its subsidiaries (“Schlumberger”) have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of Schlumberger management, all adjustments considered necessary for a fair statement have been included in the accompanying unaudited financial statements.  All intercompany transactions and balances have been eliminated in consolidation.  Operating results for the three-month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020.  The December 31, 2019 balance sheet information has been derived from the Schlumberger 2019 audited financial statements.  For further information, refer to the Consolidated Financial Statements and notes thereto included in the Schlumberger Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on January 22, 2020.

2.   Charges and Credits

In connection with the preparation of its first-quarter 2020 financial statements, Schlumberger recorded the following charges:

All of the pretax charges presented above are classified in Impairments & other in the Consolidated Statement of Income (Loss).

Schlumberger had 11 reporting units with goodwill balances aggregating $16.0 billion.  Schlumberger determined that the fair value of four of its reporting units, representing $4.5 billion of the goodwill, was substantially in excess of their carrying value.  Schlumberger performed a detailed quantitative impairment assessment of the remaining seven reporting units, which represented $11.5 billion of goodwill. As a result of this assessment, Schlumberger concluded that the goodwill associated with each of these seven reporting units was impaired, resulting in a $3.1 billion goodwill impairment charge.  This charge primarily relates to goodwill associated with the Drilling and Production segments.

Following the $3.1 billion goodwill impairment charge relating to these seven reporting units, six of these reporting units had a remaining goodwill balance.  These six reporting units had goodwill balances which ranged between $0.2 billion and $5.0 billion and aggregated to $8.4 billion as of March 31, 2020.

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Schlumberger used the income approach to estimate the fair value of its reporting units, but also considered the market approach to validate the results.  The income approach estimates the fair value by discounting each reporting unit’s estimated future cash flows using Schlumberger’s estimate of the discount rate, or expected return, that a marketplace participant would have required as of the valuation date.  The market approach includes the use of comparative multiples to corroborate the discounted cash flow results.  The market approach involves significant judgement involved in the selection of the appropriate peer group companies and valuation multiples.

Some of the more significant assumptions inherent in the income approach include the estimated future net annual cash flows for each reporting unit and the discount rate.  Schlumberger selected the assumptions used in the discounted cash flow projections using historical data supplemented by current and anticipated market conditions and estimated growth rates.  Schlumberger’s estimates are based upon assumptions believed to be reasonable.  However, given the inherent uncertainty in determining the assumptions underlying a discounted cash flow analysis, particularly in the current volatile market, actual results may differ from those used in Schlumberger’s valuations which could result in additional impairment charges in the future.

The discount rates utilized to value Schlumberger’s reporting units were between 12.0% and 13.5%, depending on the risks and uncertainty inherent in the respective reporting unit as well as the size of the reporting unit.  Assuming all other assumptions and inputs used in each of the respective discounted cash flow analysis were held constant, a 50-basis point increase or decrease in the discount rate assumptions would have changed the fair value of the seven reporting units, on average, by less than 5%.

The fair value of these impaired assets was estimated based on the present value of projected future cash flows that the underlying assets are expected to generate.  Such estimates included unobservable inputs that required significant judgment.

Schlumberger expects to record a significant charge relating to severance during the second quarter of 2020.  However, at this time the amount cannot be reasonably estimated.  Additionally, as market conditions evolve and Schlumberger further develops its strategy to deal with such conditions, it may result in further restructuring and/or impairment charges in future periods relating to, among other things, inventory, fixed assets and other assets.

There were no charges or credits recorded during the first three months of 2019.

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3.   Earnings (Loss) Per Share

The following is a reconciliation from basic earnings (loss) per share of Schlumberger to diluted earnings (loss) per share of Schlumberger:

The number of outstanding options to purchase shares of Schlumberger common stock that were not included in the computation of diluted earnings per share, because to do so would have had an antidilutive effect, was as follows:

4.   Inventories

A summary of inventories, which are stated at the lower of average cost or net realizable value, is as follows:  

5.   Fixed Assets

A summary of fixed assets follows:

Depreciation expense relating to fixed assets was $449 million and $512 million in the first quarter of 2020 and 2019, respectively.

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6.   Multiclient Seismic Data

The change in the carrying amount of multiclient seismic data for the three months ended March 31, 2020 was as follows:

7.   Intangible Assets

The gross book value, accumulated amortization and net book value of intangible assets were as follows:

Amortization expense charged to income was $133 million during the first quarter of 2020 and $160 million during the first quarter of 2019.

Based on the net book value of intangible assets at March 31, 2020, amortization charged to income for the subsequent five years is estimated to be: remaining three quarters of 2020—$237 million; 2021—$307 million; 2022—$298 million; 2023—$280 million; 2024—$259 million; and 2025—$254 million.

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8.   Long-term Debt

A summary of Long-term Debt follows:

During the first quarter of 2020, Schlumberger issued €400 million of 0.25% Notes due 2027 and €400 million of 0.50% Notes due 2031.

The estimated fair value of Schlumberger’s Long-term Debt, based on quoted market prices at March 31, 2020 and December 31, 2019, was $15.1 billion and $15.3 billion, respectively.

At March 31, 2020, Schlumberger had separate committed credit facility agreements aggregating $6.25 billion with commercial banks, of which $3.5 billion was available and unused.   These committed facilities support commercial paper programs in the United States and Europe, of which $2.75 billion matures in February 2023, $1.5 billion matures in July 2024 and $2.0 billion matures in February 2025.  Interest rates and other terms of borrowing under these lines of credit vary by facility.

Subsequent to the end of the first quarter of 2020, Schlumberger entered into a €1.2 billion committed revolving credit facility.  This one-year facility can be extended at Schlumberger’s option for up to an additional year.  Schlumberger can potentially upsize this facility through syndication.  As of April 22, 2020, no amounts have been drawn under this facility.

Borrowings under the commercial paper programs at March 31, 2020 were $2.75 billion, all of which was classified in Long-term debt in the Consolidated Balance Sheet.  At December 31, 2019, borrowings under the commercial paper programs were $2.22 billion, all of which was classified in Long-term debt in the Consolidated Balance Sheet.

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9.   Derivative Instruments and Hedging Activities

Schlumberger is exposed to market risks related to fluctuations in foreign currency exchange rates and interest rates.  To mitigate these risks, Schlumberger utilizes derivative instruments.  Schlumberger does not enter into derivative transactions for speculative purposes.

Interest Rate Risk

Schlumberger is subject to interest rate risk on its debt and its investment portfolio.  Schlumberger maintains an interest rate risk management strategy that uses a mix of variable and fixed rate debt combined with its investment portfolio, to mitigate the exposure to changes in interest rates. 

At March 31, 2020, Schlumberger had fixed rate debt aggregating $13.7 billion and variable rate debt aggregating $2.9 billion.

Foreign Currency Exchange Rate Risk

As a multinational company, Schlumberger generates revenue in more than 120 countries. Schlumberger’s functional currency is primarily the US dollar.  However, outside the United States, a significant portion of Schlumberger’s expenses are incurred in foreign currencies.  Therefore, when the US dollar weakens (strengthens) in relation to the foreign currencies of the countries in which Schlumberger conducts business, the US dollar-reported expenses will increase (decrease).  

Schlumberger is exposed to risks on future cash flows to the extent that the local currency is not the functional currency and expenses denominated in local currency are not equal to revenues denominated in local currency.    Schlumberger uses foreign currency forward contracts to provide a hedge against a portion of these cash flow risks.  These contracts are accounted for as cash flow hedges, with the changes in the fair value of the hedge recorded on the Consolidated Balance Sheet and in Accumulated Other Comprehensive Loss.  Amounts recorded in Accumulated Other Comprehensive Loss are reclassified into earnings in the same period or periods that the hedged item is recognized in earnings. 

Schlumberger is also exposed to risks on future cash flows relating to certain of its fixed rate debt denominated in currencies other than the functional currency. Schlumberger uses cross-currency swaps to provide a hedge against these cash flow risks.

During 2017, a Canadian-dollar functional currency subsidiary of Schlumberger issued $1.1 billion of US-dollar denominated debt.  Schlumberger entered into cross-currency swaps for an aggregate notional amount of $1.1 billion in order to hedge changes in the fair value of its $0.5 billion of 2.20% Senior Notes due 2020 and its $0.6 billion of 2.65% Senior Notes due 2022.  These cross-currency swaps effectively convert the US-dollar denominated notes to Canadian-dollar denominated debt with fixed annual interest rates of 1.97% and 2.52%, respectively.

During 2019, a US-dollar functional currency subsidiary of Schlumberger issued €1.5 billion of Euro-denominated debt.  Schlumberger entered into cross-currency swaps for an aggregate notional amount of €1.5 billion in order to hedge changes in the fair value of its €0.5 billion 0.00% Notes due 2024, €0.5 billion 0.25% Notes due 2027 and €0.5 billion 0.50% Notes due 2031. These cross-currency swaps effectively convert the Euro-denominated notes to US-dollar denominated debt with fixed annual interest rates of 2.29%, 2.51% and 2.76%, respectively.

During the first quarter of 2020, a US-dollar functional currency subsidiary of Schlumberger issued €0.8 billion of Euro-denominated debt. Schlumberger entered into cross-currency swaps for an aggregate notional amount of €0.8 billion in order to hedge changes in the fair value of its €0.4 billion of 0.25% Notes due 2027 and €0.4 billion of 0.50% Notes due 2031. These cross-currency swaps effectively convert the Euro-denominated notes to US-dollar denominated debt with fixed annual interest rates of 1.87% and 2.20%, respectively.

Schlumberger is exposed to changes in the fair value of assets and liabilities that are denominated in currencies other than the functional currency.  While Schlumberger uses foreign currency forward contracts and foreign currency options to economically hedge this exposure as it relates to certain currencies, these contracts are not designated as hedges for accounting purposes.  Instead, the fair value of the contracts is recorded on the Consolidated Balance Sheet, and changes in the fair value are recognized in the Consolidated Statement of Income (Loss) as are changes in fair value of the hedged item.  

At March 31, 2020, contracts were outstanding for the US dollar equivalent of $7.3 billion in various foreign currencies, of which $4.0 billion relates to hedges of debt denominated in currencies other than the functional currency.

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At March 31, 2020, Schlumberger recognized a cumulative $202 million loss in Accumulated Other Comprehensive Loss relating to changes in the fair value of foreign currency forward contracts and cross-currency swaps.

The effect of derivative instruments designated as fair value and cash flow hedges, and those not designated as hedges, on the Consolidated Statement of Income (Loss) was as follows:

10.   Contingencies

Schlumberger is party to various legal proceedings from time to time.  A liability is accrued when a loss is both probable and can be reasonably estimated.  Management believes that the probability of a material loss with respect to any currently pending legal proceeding is remote.  However, litigation is inherently uncertain and it is not possible to predict the ultimate disposition of any of these proceedings.  

11.   Segment Information

Certain prior period amounts have been reclassified to conform to the current period presentation.

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Revenue by geographic area was as follows:

North America and International revenue disaggregated by segment was as follows: