$1 million of outstanding Series B convertible debentures were redeemed for cash. Consequently, there are no
convertible debentures outstanding at December 31, 2010.
11. Derivative Instruments and Hedging Activities
Schlumberger is exposed to market risks related to fluctuations in foreign currency exchange rates, commodity prices
and interest rates. To mitigate these risks, Schlumberger utilizes derivative instruments. Schlumberger does not enter
into derivatives for speculative purposes.
Foreign Currency Exchange Rate Risk
As a multinational company, Schlumberger conducts its business in approximately 80 countries. Schlumberger’s
functional currency is primarily the US dollar, which is consistent with the oil and gas industry. Approximately 80% of
Schlumberger’s revenue in 2010 was denominated in US dollars. However, outside the United States, a significant portion
of Schlumberger’s expenses is 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 local currency expenses exceed revenues
denominated in local currency that are other than the functional currency. Schlumberger uses foreign currency forward
contracts and foreign currency options to provide a hedge against a portion of these cash flow risks. These contracts are
accounted for as cash flow hedges, with the effective portion of changes in the fair value of the hedge recorded on the
Consolidated Balance Sheet
and in
Other Comprehensive Income (Loss).
Amounts recorded in
Other Comprehensive
Income (Loss)
are reclassified into earnings in the same period or periods that the hedged item is recognized in
earnings. The ineffective portion of changes in the fair value of hedging instruments, if any, is recorded directly to
earnings.
At December 31, 2010, Schlumberger recognized a cumulative net $45 million gain in
Accumulated other compre-
hensive loss
relating to revaluation of foreign currency forward contracts and foreign currency options designated as
cash flow hedges, the majority of which is expected to be reclassified into earnings within the next twelve months.
Schlumberger is also exposed to changes in the fair value of assets and liabilities, including certain of its long-term
debt, which are denominated in currencies other than the functional currency. Schlumberger uses foreign currency
forward contracts and foreign currency options to hedge this exposure as it relates to certain currencies. These
contracts are accounted for as fair value hedges with the fair value of the contracts recorded on the
Consolidated
Balance Sheet
and changes in the fair value recognized in the
Consolidated Statement of Income
along with the change
in fair value of the hedged item.
At December 31, 2010, contracts were outstanding for the US dollar equivalent of $7.3 billion in various foreign
currencies.
Commodity Price Risk
Schlumberger is exposed to the impact of market fluctuations in the price of certain commodities, such as metals and
fuel. Schlumberger utilizes forward contracts to manage a small percentage of the price risk associated with forecasted
metal purchases. The objective of these contracts is to reduce the variability of cash flows associated with the forecasted
purchase of those commodities. These contracts do not qualify for hedge accounting treatment and therefore, changes in
the fair value of the forward contracts are recorded directly to earnings.
At December 31, 2010, $12 million of commodity forward contracts were outstanding.
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 and interest rate swaps to mitigate the exposure to changes in interest rates.
During the third quarter of 2009, Schlumberger entered into interest rate swaps relating to two of its debt
instruments. The first swap was for a notional amount of $450 million in order to hedge changes in the fair value of
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Part II, Item 8
