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Print friendly pdf of Form 10-K Part II |
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Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
2003 Summary
The year 2003 marked a watershed for Schlumberger as we took
the decision to focus on our core businesses in oilfield services. Our reasoning
was simple. World energy needs for much of the next half-century will be
met mostly by carbon-based fuels produced from an aging reserves base. Substantial
investment will be needed to sustain today’s production as well as to meet tomorrow’s demand, and technology will be the key to a cleaner, more cost-effective response to this challenge. We therefore believe the future for Schlumberger is exceptionally bright.
The year's results for Oilfield Services were robust, with growth in all regions. Among the GeoMarket
regions, activity was strongest in Mexico, Indonesia, India, the Caspian, and on land in the United States. Most technology segments registered double-digit gains, with records achieved by Drilling & Measurements and Data & Consulting Services. Much of the technology that saw increasing market penetration was associated with boosting performance in mature fields, or "brownfields", to stem declining production. Rotary steerable systems to accurately place well trajectories to tap bypassed hydrocarbon pockets and a range of cased-hole wireline evaluation tools to analyze such zones were two particular successes.
A number of technical and business highlights marked the year. Integrated Project Management (IPM) continued to grow, particularly in Mexico, where our history of successful projects led to the award of the Chicontepec contract, the most significant oil development project in Mexico in the last 20 years. In Malaysia, we signed a contract with PETRONAS Carigali Sdn. Bhd. to jointly redevelop the Bokor field that began production in the 1980s. This field, comprising more than 165 stacked sands and over 100 producing strings, has been modeled using the latest techniques and the redevelopment plan involves multiple technology segments. Such projects underline the value of our unique GeoMarket organization.
In December we announced a phased agreement to acquire PetroAlliance, Russia's largest independent oilfield service company, beginning with a minority share in 2004. PetroAlliance was formed in 1995 to provide a broad range of exploration and development services to international standards. The size and scope of activity in Russia is huge, and this type of investment will benefit Schlumberger and the Russian oil industry as that industry seeks access to technology to be applied to its particular needs for continued growth.
Perhaps the most difficult challenge we set for ourselves early in 2003 was to return WesternGeco to sustainable profitability. Continued overcapacity in both the land and marine and multiclient data markets made this a daunting task. Our approach has been threefold: to bring capacity and cost down to appropriate levels, to reflect a proper carrying value for the data library, and to continue the aggressive introduction of proprietary Q* technology, for which the market has continued to grow rapidly.
Last summer we acquired the first marine time-lapse Q survey for Statoil, 200 km from the western coast of Norway. Twenty-one months had elapsed between the two surveys. Initial results, produced only 11 days after acquisition, enabled Statoil to revise plans for a new well and drill a shallower trajectory to remain clear of the oil/water contact. The well was a success and is producing without making water. The reliability and extremely high repeatability of Q-Marine* technology were considered critical to achieving this result. In other applications, a Q system was commissioned in the Middle East late in the year and Q-Seabed* underwent highly successful trials in both the North Sea and Middle East.
In defining the business activities sold with SchlumbergerSema, we maintained our commitment to the growing activity in oil and gas IT solutions. The natural fusion of the Schlumberger software and information management activities with the SchlumbergerSema oil & gas consulting and network infrastructure businesses began in October, and by year-end business managers were in place throughout the GeoMarket organization. We have chosen to retain the Schlumberger Information Solutions name for the enlarged business, and our objective is to help customers extract more value from their core operational processes through leveraging the combination of our domain knowledge in IT and in exploration and production (E&P).
Early in 2003 we stated clear financial goals. By year-end we had made solid progress. Return on capital employed had risen to 12.8% in the fourth quarter, double the corresponding figure in 2002 and well in line with our intention to reach the mid-teens longer term. After-tax return on sales for Oilfield Services reached 14.2% in the same quarter—a level much more consistent with our performance in previous cycles. Net debt fell to $4.2 billion, just shy of our $4 billion target as a result of adverse currency movements. For more information regarding the purposes for which we use net debt, see page 29 of this Report.
In January 2004, we concluded the sale of the major part of SchlumbergerSema to Atos Origin and reduced our holding in that company to 14.5%. Total cash proceeds from the cash and stock sale amounted to $1.1 billion. With conclusion of the sale of the North American electricity meter business and the sales of the Business Continuity, Infodata, and Telecom software products businesses we expect to see net debt below the $3 billion level by the middle of 2004. Beyond that point, the only significant divestiture remaining will be the IPO of Axalto, the Schlumberger smart card business, as and when market conditions permit.
In 2003, Schlumberger operated four business segments: Oilfield Services, WesternGeco, SchlumbergerSema and Other. The following discussion and analysis of results of operations should be read in conjunction with the Consolidated Financial Statements.
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20032 |
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20022 |
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% Change |
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| OILFIELD SERVICES |
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| Operating Revenue |
$ |
8,823 |
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$ |
8,171 |
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8 |
% |
| Pretax Segment Income1 |
$ |
1,536 |
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$ |
1,278 |
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20 |
% |
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| WESTERNGECO |
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| Operating Revenue |
$ |
1,183 |
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$ |
1,476 |
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(20 |
)% |
| Pretax Segment Income1,3 |
$ |
(20 |
) |
$ |
71 |
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– |
% |
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| SCHLUMBERGERSEMA |
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| Operating Revenue |
$ |
2,677 |
|
$ |
2,409 |
|
11 |
% |
| Pretax Segment Income1 |
$ |
61 |
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$ |
17 |
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249 |
% |
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| OTHER4 |
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| Operating Revenue |
$ |
1,480 |
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$ |
1,334 |
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11 |
% |
| Pretax Segment Income1 |
$ |
109 |
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$ |
18 |
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505 |
% |
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| 1 |
Pretax segment income represents income before taxes and minority interest, excluding interest income, interest expense and amortization of intangibles. |
| 2 |
2003 excludes: a net charge of $49 million for the write-down of an investment and the gain on the sale of a note; $167 million of debt extinguishment costs; a charge of $421 million for impairment and other charges/credits. 2002 excludes an aggregate $30 million charge related to the financial/economic crisis in Argentina. |
| 3 |
2003 excludes impairment charges of $398 million for Multiclient library and $54 million for vessels. 2002 excludes an impairment charge of $184 million for Multiclient library and charges of $117 million for severance and other costs. |
| 4 |
Principally comprises the Axalto (Smart Cards and Point-of-Sale Terminals) and Electricity Meters activities. Also included are the Business Continuity, Infodata, Telecom Software Products, Water Services, Essentis and Payphones activities.
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Oilfield Services
World oil demand surged in 2003 due to strong economic growth in North America
and China. The increase in demand from these areas accounted for almost
two thirds of overall world oil demand growth. The rise in world oil production
more than matched demand growth. Non-OPEC oil production accounted for one
third of the increase, due to expanding production in the CIS. OPEC output
increased despite supply disruptions in Venezuela and Nigeria and the loss
of Iraqi production during and after the war. Oil prices remained high throughout
the year, with an average Western Texas Intermediate (WTI) oil price almost
20% higher than in 2002.
In 2004, the rate of global oil demand growth is expected to be similar to
2003, with oil demand projected to grow strongly in developing countries
and ease in OECD countries. Non-OPEC oil production is forecast to grow
at roughly similar levels to 2003 although there is more uncertainty over
the level of supply in the CIS and the US. OPEC production is likely to
be adjusted to maintain the price of the OPEC basket of crude in the stated
target price range of $22 to $28 per barrel.
North American gas demand in 2003 showed little change compared to 2002, and is
not expected to vary much in 2004. However, maintaining gas supply to meet
demand is challenging, as production decline rates are already high and
expected to increase further. The average annual US natural gas price in
2003 rose considerably compared to last year and has stimulated growth in
the number of active drilling rigs in North America.
Relatively high commodity prices in 2003 and increases in production have resulted
in high levels of cash generation in the oil and gas industry, and a subsequent
increase in the average number of active drilling rigs. Assuming demand
remains strong and that OPEC manages to maintain oil prices in its target
range, exploration and production (E&P) spending is expected to increase
in 2004.
2003 Results
Revenue of $8.8 billion increased 8% in 2003 versus 2002 led
by North America with an increase of 14%, followed by Latin America and
Middle East & Asia, which both increased 9%, and Europe/CIS/W. Africa, which
was up 4%. Pretax operating income of $1.54 billion in 2003 was 20% higher
than in 2002, primarily due to strong customer demand resulting from increased
E&P expenditures and customer acceptance of new technologies, such as PowerDrive*
rotary steerable systems, LiteCRETE* coalbed methane slurry system, ABC*Analysis
Behind Casing suite of services, Viscoelastic Diverting Acid (VDA*) advanced
acidizing system, and ClearFRAC* polymer-free fracturing fluid. Overhead
cost savings of $67 million generated from restructuring and downsizing
efforts, principally in Europe/CIS/W. Africa and North & South America,
also contributed to the increased profitability during the year.
Oilfield Services began the year with relatively flat revenue in the first quarter,
then achieved modest, but continuous growth over the following three quarters
due to new contracts, the introduction of new technologies, and increased
demand for Integrated Project Management and Schlumberger Information Solutions
(SIS) services. The results were positively impacted by an upturn in natural
gas drilling in North America, and increased activity in Mexico, Russia
and the Middle East, partially offset by a nationwide strike in Venezuela
and ethnic unrest in Nigeria.
All technology product lines helped drive revenue growth. Well Services and
Drilling & Measurements' record levels of revenue contributed to more than
half of the increase in Oilfield Services revenue. Data & Consulting services
drew the award of several contracts for reservoir modeling, field development
planning, and production optimization. SIS experienced strong demand, particularly
in Europe, Asia, and the Middle East. Integrated Project Management (IPM)
experienced high activity levels principally fueled by Latin America.
In December, Schlumberger announced a phased agreement to acquire PetroAlliance
beginning with a minority share in 2004. PetroAlliance is Russia’s
largest independent oilfield services company, and provides a broad range
of exploration and development services throughout Russia and the Caspian.
North America
North America revenue of $2.6 billion increased 14% versus 2002. The growth
in revenue was mainly due to increased activity in US Land, as well as Canada,
which had a 31% increase in revenue to $410 million. Both markets were driven
by strong commodity prices, which, in turn, were caused by the record low
gas storage levels at the end of the 2003 drawdown season. This growth was
not mirrored in the Gulf of Mexico where activity was essentially flat year-on-year.
A combination of factors contributed to the sluggish performance offshore,
including higher finding and developing cost on the shelf, lack of exploration
success in deepwater and unfavorable weather conditions hampering drilling
and completion efficiency on a number of deepwater projects.
Pretax operating income of $365 million increased 33% over 2002 primarily due to
a beneficial fall-through resulting from improved equipment utilization
in US Land following asset rationalization and cost containment. Increased
demand for Drilling & Measurements, cased hole wireline and hydraulic fracturing
solutions, related to increased complexity in developing new gas reserves
in US Land, also contributed to profitability improvement.
Latin America
Latin America revenue of $1.4 billion increased 9% versus 2002 primarily
due to substantial increases in Mexico, Brazil and Argentina, partially
offset by a significant decline in Venezuela. Large-scale project management
contracts substantially accounted for the growth in activity in Mexico.
Growth in Brazil was driven by a strong increase in Petrobras exploration
activity, and Argentina benefited from the high oil price.
The political turmoil in the early part of the year substantially impacted results
in Venezuela, however the focus on restoring production favorably drove
the revenue in the latter half of the year. The increase in E&P spending
in Mexico was driven by the compelling need to satisfy the domestic demand
for natural gas, increase the light oil production and ramp-up the oil production
potential. Key contracts that contributed to revenue growth included project
management of a four-year, $500 million integrated oilfield services project
which represents the most significant oil development project in Mexico
in the last 20 years, and a two-year, $60 million information management
solution.
Pretax operating income of $221 million was up 31% year-on-year with all areas
excluding Venezuela contributing to improved profitability. There were record
levels of Integrated Project Management contracts in Mexico and positive
fall-through on incremental revenue in Argentina and Brazil.
Europe/CIS/West Africa
Revenue of $2.6 billion increased 4% over 2002, primarily in Russia due
to growth in E&P spending and continued expansion of the addressable market,
which drove increased fracturing activity, high sales of artificial lift
pumps, and the adoption of more advanced drilling technologies. CIS reached
a record revenue level of $629 million, 22% higher than 2002. An increase
in the number of E&P companies entering the development phase of deepwater
projects in the West & South Africa GeoMarket during the second half of
2003, and an offshore gas project in the Mediterranean also contributed
to overall activity improvement in the Area, principally in Well Completions
& Productivity and Well Services technologies. These results were partially
offset by lower exploration activity by the major oil companies in the North
Sea and by production shutdowns in the Western Niger delta in Nigeria due
to socio-political unrest.
Pretax operating income of $460 million increased 20% over 2002 primarily due to
cost savings generated at the beginning of the year, as well as increased
activities in West & South Africa due to deepwater activities moving into
a more lucrative development phase. This was partially offset by appreciation
of currencies against the US dollar negatively impacting the results by
$4 million later in the year.
Middle East & Asia
Revenue of $2.1 billion increased 9% over 2002 with more than half the growth
coming from Saudi Arabia/ Kuwait, Egypt and Indonesia. Despite geopolitical
uncertainty in the period leading up to the war in Iraq and relative softness
in Asia principally caused by the SARS outbreak, revenue showed marked improvement
primarily due to higher demand for Drilling & Measurements, Wireline and
Well Completion & Productivity technologies in Egypt, Saudi Arabia/Kuwait
and Indonesia partially offset by reduced activity in Malaysia/ Brunei/Philippines
due to the suspension of planned deepwater development work resulting from
the deepwater acreage dispute between Malaysia and Brunei. Late in the year,
strong year-on-year improvements across the region were tempered by reduced
rig activity in Saudi Arabia due to customers' accelerated spending in the
first three quarters.
Pretax operating income of $509 million increased 12%, primarily due to the operating
leverage on increased revenue across most GeoMarkets, principally caused
by increased activity in Indonesia's East Kalimantan and stimulation activity
and artificial lift sales in East Africa.
2002 Results
Revenue for 2002 was $8.2 billion versus $8.4 billion in 2001 reflecting
reduced activity in North America and Latin America, which was partially
mitigated by higher activity in Europe/CIS/W. Africa and the Middle East
& Asia. Pretax operating income of $1.3 billion decreased 19% primarily
from reduced margins in Wireline and Well Services as activity declined
in North America.
A sharp fall in revenue at the beginning of 2002 reflected declining activity
levels in North America, which remained depressed for the remainder of the
year, together with political and economic uncertainty in Latin America.
In the second and third quarters, robust activity in Europe/CIS/W. Africa,
and signs of a possible recovery in Asia, mitigated the effects of low North
American drilling levels resulting in increased revenue. However, this trend
was short-lived as slower activity outside North America due mainly to seasonal
influences coupled with budget cuts resulted in lower fourth quarter revenue.
The Caspian, Russia and Mexico GeoMarkets posted the highest double-digit
year-on-year revenue growth of 89%, 62% and 48%, respectively.
From a technology standpoint, the strongest performer was Well Completions & Productivity where acquisitions, testing, advanced completions systems and
artificial lift technology showed market share gains.
During the year, Schlumberger acquired A. Comeau & Associates Limited, a leading
provider of electrical engineering products and services for artificially
lifted wells. This latest addition, combined with the successful integration
of Sensa and Phoenix technologies into the Schlumberger Artificial Lift
services portfolio, contributed to higher sales in 2002, particularly in
the Eastern Hemisphere. The Drilling & Measurements technology segment also
recorded solid revenue growth fuelled largely by the continued penetration
of the PowerDrive475* rotary steerable system into new GeoMarkets.
Schlumberger made two further acquisitions during the year to bolster its real-time reservoir
management suite of services. In January, Schlumberger acquired Norwegian-based
Inside Reality AS providing new 3D virtual reality systems that create a
unique and powerful environment for interactive well planning and realtime
geosteering analysis. Schlumberger also acquired the software and services
business of Technoguide AS, a leader in the reservoir modeling domain.
North America
Revenue of $2.3 billion decreased 19% versus 2001. A steep revenue decline
at the outset of the year reflected a continued lackluster drilling environment
and unseasonably mild weather conditions. Throughout the remainder of the
year activity levels remained depressed resulting in essentially flat revenue
for 2002. Other factors contributing to reduced revenue included lower non-rig
related activity resulting in lower Wireline, Well Services, and Well Completions
& Productivity revenue, the effects of the tropical storms in the third
quarter and a slow pick-up in Canadian activity post spring break-up.
Pretax operating income of $274 million decreased from $637 million in 2001 due
to pricing pressures across all services, particularly in Well Services
and Well Completions & Productivity.
Latin America
Revenue of $1.3 billion decreased 9% versus 2001. Ongoing political and
economic uncertainty in the region continued to affect business conditions,
particularly in Venezuela and Argentina. This particularly impacted results
in the first half of the year. In sharp contrast, the second half of 2002
saw solid growth partly as a result of higher demand for Drilling & Measurements
and Well Completions technologies connected to contracts in the Burgos Basin.
In addition, the completion of an IPM project that involved the sale of
production facilities in Ecuador for $26.5 million in the fourth quarter
contributed to end-of-year higher revenue.
Pretax operating income of $169 million declined 8% as a result of decreased activity
in Venezuela and Argentina.
Europe/CIS/West Africa
Revenue of $2.5 billion increased 17% versus 2001. Strong revenue growth
was recorded in the first three quarters reflecting increased activity levels
and market share gains particularly in the Caspian and Russia GeoMarkets
in respect to artificial lift and drilling technologies. The Well Completions
& Productivity technology segment recorded the strongest growth of 27% followed
by Drilling & Measurements, which grew 24%. This growth was partially mitigated
by a steep revenue drop in the fourth quarter due to exceptionally severe
winter weather conditions in the North Sea and Russia that affected all
services, particularly fracturing activities. In addition, operator budget
cuts in the Nigeria GeoMarket and refocused investment decisions in the
UK contributed to lower fourth quarter revenue.
Pretax operating income was $383 million compared to $385 million in 2001, with
the very slight decrease due to softening in pricing towards the end of
the year and restructuring in the region to reduce support infrastructure
to match slowing activity levels.
Middle East & Asia
Revenue of $1.9 billion increased 8% versus 2001. After a decline at the
beginning of the year resulting from exceptional artificial lift sales at
the end of 2001, the Asian market showed signs of recovery highlighted by
strong revenue growth in the second quarter. Over the year, the India and
Malaysia/Brunei/Philippines GeoMarkets recorded the strongest growth due
to increased activity in these countries. In addition, the Wireline and
Well Services technology segments posted the highest growth, up 14% and
10%, respectively. This was partly offset by a slowdown in activity in the
second half of 2002 due to a number of major projects nearing completion
and lower equipment sales.
Pretax operating income of $453 million was up 9% versus 2001.
2001 Results
Revenue of $8.4 billion increased 22% over 2000. Increased non-rig related
activity and higher pricing levels contributed to the growth. First quarter
results reflected continued high activity in North America and increased
demand internationally, but a softening in North American drilling activity
in the third quarter offset international growth. Market share gains, improved
pricing levels, and the introduction of new technology contributed to strong
growth in the Drilling & Measurements and Well Completions & Productivity
technology segments. Three key acquisitions were made during the year: Baker
Jardine (software tools, IT consulting and integrated solutions that help
operators increase oil and gas production), Sensa (fiber optic sensing technologies),
and Phoenix (technologies and techniques for optimizing production from
artificially lifted wells). Pretax operating income of $1.59 billion increased
49% over last year.
North America
Revenue of $2.8 billion increased 17% versus 2000. The strong revenue growth
in the first quarter of 2001 plateaued in the middle of the year. This was
due to slower economic conditions and declining natural gas prices, which
resulted in reduced activity towards the end of the year. The Alaska and
Gulf Coast GeoMarkets recorded the strongest revenue growth due to increased
demand for Drilling & Measurements, Well Services, and Wireline technologies.
Pretax operating income of $637 increased 69%, primarily due to strong demand
for Well Services technology.
Latin America
Revenue of $1.5 billion increased 31%, with improvements across all services
contributing to double-digit growth across the GeoMarkets, which was led
by Peru/Colombia/Ecuador and Latin America South as a result of increased
Drilling & Measurements, Well Services, and Well Completions activity. Pretax
operating income of $183 million increased 131% principally as a result
of increases in Integrated Project Management and Wireline services.
Europe/CIS/West Africa
Revenue of $2.1 billion increased 36%. Overall moderate growth was led by
high demand for Well Completions services in Nigeria, and strong growth
in both Drilling & Measurements and Wireline services in Russia. Growth
in the West & South Africa GeoMarket was partly due to an Early Production
Facility Project for IPM during the year. Pretax operating income of $385
million increased 60% due mainly to the Well Completions & Productivity
segment, which recorded strong growth across most GeoMarkets.
Middle East & Asia
Revenue of $1.8 billion increased 16%. Almost all GeoMarkets in the Area
recorded strong double-digit growth led by Drilling & Measurements and Well
Services activities in the Malaysia/Brunei/Philippines GeoMarket, and as
a result of new contract wins in the Gulf GeoMarket. Pretax operating income
of $416 grew 34% due to increases in the Drilling & Measurements and Well
Completions & Productivity technology segments.
WesternGeco
2003 Results
Revenue for 2003 was $1.2 billion versus $1.5 billion in 2002, reflecting
a 20% decrease year-on-year. This was primarily due to lower land crew activity
following the exiting of the North American Land market combined with the
completion of some contracts in the Middle East. The decrease in revenue
was also due to declines in Multiclient sales principally in North & South
America, partially offset by increased Marine activity in Europe, Caspian
and the Middle East. Q-Marine* continued to gain customer acceptance with
75% vessel utilization on third party contracts in the third quarter, and
the first Q-on-Q time lapse survey, which was performed in the North Sea
with initial processing results available after 11 days. The end of the
year saw a return to traditional seasonal Multiclient revenue levels partially
helped by the signing of a long-term business agreement with a major energy
company that included the licensing of part of the WesternGeco data library,
as well as joint R&D and training on new technology for seismic data processing.
Including Multiclient pre-commitments, the backlog at the end of 2003 reached $408
million, reflecting the award of a number of Land contracts in the Middle
East and a material Multiclient volume agreement signed in the fourth quarter.
During 2003, Q-Marine continued to command significant pricing premiums
as a result of the added value obtained from the delivered product, but
pricing across other business segments was flat to down for conventional
marine, land and data processing activity due to continued overcapacity
in the industry. The company's decision to acquire only significantly prefunded
multiclient surveys, along with lower amortization following the impairment
charge in 2003, resulted in the Multiclient product line being in a much
healthier condition at the end of the year. Q-Marine penetration continued
strong, reflected by the doubling of Q revenue year-on-year.
Pretax operating loss was $20 million versus a profit of $71 million in 2002 (excluding
Multiclient impairment and other charges in both years) mainly due to significantly
higher Multiclient amortization charges as a result of lower sales and a
more conservative amortization policy in light of business conditions. The
lower Multiclient sales were primarily due to an overall lessening in interest
in the Gulf of Mexico from the major oil companies coupled with an average
price reduction of approximately 30% during the year. The deterioration
in the Multiclient results was partially offset by an improvement in Land
and Marine following the fourth quarter 2002 restructuring program combined
with better service delivery.
In the third quarter, an impairment charge of $398 million pretax was taken
against the multiclient library and there was a $54 million pretax charge
on the Western Trident and Western Monarch vessels.
2002 Results
WesternGeco revenue of $1.5 billion decreased 13% compared to the prior
year, primarily due to decreased activity in North America and Europe/CIS/W.
Africa, which were partially offset by increases in Latin America and the
Middle East & Asia.
The seismic downturn continued throughout 2002 resulting in significantly lower
activity levels, a reduction in Multiclient sales, and extreme pricing pressures
on all services due to large overcapacity in the seismic industry. Significant
workforce reductions were made in the fourth quarter of 2002 as a result
of the decision to stop Land acquisition activities in the US lower 48 states
and Canada.
Pretax operating income of $71 million fell 68%, primarily due to significantly
lower Multiclient sales and decreased activities in North America coupled
with Land seismic contract losses in Mexico and Marine seismic contract
losses in India, both of which were related to production delays.
2001 Results
The WesternGeco joint venture was formed on November 30, 2000. Revenue in
2001 was $1.7 billion and pretax operating income was $221 million. The
Malaysia/Brunei/Philippines, Alaska, Gulf Coast, and West & South Africa
GeoMarkets recorded the strongest results for the year. Multiclient sales
of $654 million in a favorable pricing environment also contributed to the
high level of activity and were the major contributor to the operating income.
SchlumbergerSema
2003 Results
On September 22, 2003, Schlumberger announced its intention to sell the
SchlumbergerSema business to Atos Origin. The sale closed on January 29,
2004.
The transaction proceeds consisted of ?443 million ($550 million) in cash, which
included a working capital adjustment, and 19.3 million shares of common
stock of Atos Origin with a value of ?1.02 billion ($1.275 billion) which
represented approximately 29% of the outstanding common shares of Atos Origin.
On February 2, 2004, Schlumberger sold 9.6 million shares for $630 million
reducing its investment in Atos Origin to approximately 15% of the outstanding
common shares.
Revenue of $2.7 billion was 11% higher than 2002. The increase was mainly due to
the strengthening of the European currencies against the US dollar, with
a positive impact of $274 million, resulting in an underlying decrease in
operating revenue of $6 million.
Pretax operating income of $61 million increased $44 million versus 2002. The improvement
in profitability reflected the full year benefit of indirect cost reduction
programs carried out in 2002 in North America, Asia, UK, and Sweden coupled
with improvement in gross margins in Asia and South America.
North & South America
Revenue of $350 million decreased 2% mainly due to the Salt Lake City Olympic
Games revenue in 2002, partially offset by new contracts for Lee County,
Florida; Dallas County, Texas; Sprint; and the city of Los Angeles, California.
Pretax operating income of $3 million increased $57 million year-on-year. Despite
the decline in revenue, operating income increased substantially mainly
due to the positive impact of indirect cost reduction programs initiated
in 2002, which had a full impact of $29 million in 2003.
Europe/Middle East/Africa
Revenue of $2.2 billion increased 14% mainly due to the appreciation of
European currencies against the US dollar. Revenue from operations declined
due to a depressed IT market in Italy, a more than 20% average selling price
drop in France, and a sharp downturn in the telecommunications industry
in Germany. These declines were substantially offset by a significant increase
in revenue in the UK due to the Metropolitan Police, Department of Works
and Pension, Consignia, and Department of Trade and Industry contracts,
and by the award of the All Africa Games project in Nigeria.
Pretax operating income of $46 million decreased 65% year-on-year reflecting the
impact of lower revenue from operations due to the major downturn in the
IT industry, especially in France and Germany. Profitability also decreased
due to extra service delivery costs in Sweden, and higher pension costs
in France. These decreases were partially offset by the benefit of indirect
cost reduction programs in the UK, as well as increased profitability from
the revenue growth in the UK and Nigeria.
Asia
Revenue of $144 million decreased 4% mainly due to a lower activity level
in India and Taiwan.
Pretax operating income increased from break-even in 2002 to $34 million profit
in 2003, reflecting a 10% increase in gross margins, as well as lower costs
following headcount reduction programs initiated in 2001 and 2002.
2002 Results
Revenue of $2.4 billion increased 31% compared to 2001 mainly due to the
acquisition of Sema plc whose results were consolidated with effect from
April 1, 2001.
The pretax operating income was $17 million compared to a loss of $15 million
in 2001, reflecting the cost reductions initiatives implemented since the
integration of Sema plc into Schlumberger.
North & South America
Revenue of $356 million decreased 7% over 2001 primarily due a declining
activity level in the telecommunications and utility industries due primarily
to the weak IT services spending environment as customers faced economic
challenges and continued to revise budgets downwards and delay decisions
on contract awards. At the 2002 Winter Olympic Games, SchlumbergerSema led
a consortium of 15 technology partners in a three-year long project to deliver
the IT infrastructure needed to run the Games.
Pretax operating loss of $54 million improved by $4 million over 2001, mainly attributable
to the cost reduction programs implemented throughout the area.
Europe/Middle East/Africa
Revenue of $1.9 billion increased 33% over 2002 mainly due to the inclusion
of a full year's revenue from the acquisition of Sema plc compared to nine
months in 2001. Additionally, the main growth contributor was the Public
Sector mainly in the UK where SchlumbergerSema won large outsourcing contracts
with the Association of Train Operating Companies, the Department of Works
and Pension, and the Vehicle Inspectorate, and a health and welfare services
project to Consignia's 220,000 employees.
Pretax operating income of $132 million increased 33% due mainly to the cost cutting
program implemented throughout the year and higher activity level in the
UK.
Asia
Revenue of $150 million increased 36% mainly due to the inclusion of a full
year’s revenue from the acquisition of Sema plc compared to nine months
in 2001. The decreased activity in telecommunications, mainly in China and
Taiwan, was offset by the increase in the finance segment on new outsourcing
contracts in the insurance sector in Japan and delivery of payment systems
in China.
Pretax operating income decreased 94% mainly attributable to pricing pressure and
economic declines in the telecommunications IT services industry.
2001 Results
On April 6, 2001, Schlumberger completed the acquisition of Sema plc, an
IT and technical services company with a strong European presence, for $5.15
billion.
Revenue of $1.8 billion compared to $70 million in 2000 reflecting the acquisition
of Sema plc.
Pretax operating loss of $15 million improved $69 million over the prior year due
to the addition of Sema plc.
North & South America
Revenue of $381 million increased from $70 million in 2000 essentially
due to the inclusion of
SchlumbergerSema and the full year’s activity of the Convergent Group,
acquired in November 2000 and CellNet Data Systems, acquired in June 2000.
Pretax operating loss of $58 million improved $12 million compared to the previous
year due to the inclusion of SchlumbergerSema and the new businesses acquired
the previous year.
Europe/Middle East/Africa
Revenue of $1.4 billion in 2001 compared to no activity in 2000 due
to the inclusion of Sema plc. Main contracts included the award of multi-million
dollar contracts in France for Banque de France and in the UK for Metropolitan
Police.
Pretax operating income was $99 million due to the inclusion of Sema plc.
Asia
Revenue of $110 million compared to no activity in 2000 due to the inclusion
of Sema plc.
Pretax operating income was $8 million due to the inclusion of Sema plc.
Other
The activities included in this segment are Axalto (Smart Cards and Point-of-Sale
Terminals), Electricity
Meters, Business Continuity, Infodata, Telecom Software Products, Payphones,
and Essentis. Active divestiture negotiations are currently ongoing for
each of these activities.
2003 Results
In July 2003, Schlumberger entered into an agreement to sell the Electricity
Meters activity to Itron Inc. for $255 million in cash. The deal is expected
to be completed in the first half of 2004 depending upon the successful
completion of the Hart-Scott-Rodino review process and other conditions.
Revenue of $1.5 billion increased 11% over 2002. Electricity Meters had a 25% improvement
on revenue of $294 million partially as a result of the transition from
electro-mechanical meters to solid-state meters. Also contributing to revenue
growth, Smart Cards and Point-of-Sale Terminals revenue of $776 million
increased 8% principally due to strong demand for Subscriber Identity Module
(SIM) cards for the mobile communications sector, particularly in North & South America and Eastern Europe.
Pretax operating income of $109 million increased six fold. Electricity Meters
pretax operating income of $61 million increased 132% primarily due to improved
manufacturing efficiencies, changes in product mix, and cost reductions.
Smart Cards pretax operating income of $58 million increased 68% due to
better growth margins as a result of increased volume and a more favorable
product mix, partially offset by lower average selling prices.
2002 Results
Revenue of $1.3 billion decreased 34% reflecting the divestiture of
the Resource Management Services’ North American water metering activities,
non-North American electricity and water meter, and worldwide gas meter
businesses in November 2001.
Cards activity remained flat despite the continuing slump in the telecommunications
industry and the continued pricing pressure. This was partially offset by
higher activity in banking and IT cards. Electricity Meters activity improved
13% on revenue of $235 million as a result of the market penetration of
Automated Meter Reading (AMR) technologies.
Pretax operating income of $18 million decreased 80% mainly due to the divestiture
of most of the Resource Management Services businesses, and significantly
lower growth margins in the Cards business.
2001 Results
Revenue of $2.0 billion decreased 4% reflecting mainly the divestiture
of most of the Resource Management Services businesses, which were sold
in November 2001.
Cards revenue grew by 8% reflecting the acquisition of Bull CP8 in March 2001,
partially offset by a decline in SIM card activity related to a slowdown
in the telecommunications industry. Electricity Meters activity grew 29%
on revenue of $208 million as a result of the acquisition of CellNet and
participation in network projects.
Pretax operating income of $88 million decreased 42% due mainly to lower growth
margins and higher operating expenses in the Smart Cards business.
Income-Continuing Operations
(Stated in millions except per share amounts) |
|
| |
|
|
| |
|
Income (loss)
from Continuing |
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operations |
|
|
Basic |
|
Diluted |
|
Adjusted5 |
|
| 20031 |
$ |
473 |
|
$ |
0.81 |
|
$ |
0.81 |
|
$ |
0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 20022,4 |
$ |
(2,417 |
) |
$ |
(4.18 |
) |
$ |
(4.18 |
) |
$ |
(4.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 20013,4 |
$ |
494 |
|
$ |
0.86 |
|
$ |
0.85 |
|
$ |
1.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
In
2003, Oilfield Services segment net income increased $196 million, or 20%,
to $1.19 billion as revenue increased 8%, with increases in all geographic
areas, particularly North America where revenue was up 14%. WesternGeco
segment net loss of $17 million compared to a $4 million profit in 2002
as revenue decreased 20% reflecting lower land crew activity following the
decision to exit the North American Land market and lower Multiclient sales
principally in North & South America. SchlumbergerSema net income of
$38 million improved from $9 million in 2002, as revenue increased 11%.
In the Other segment, net income of $72 million increased $61 million as
revenue increased 11% reflecting strong improvement in the Smart Cards and
Electricity Meters activities.
In 2002, Oilfield Services segment net income decreased $179 million, or 15%,
to $998 million as revenue declined 3%. North America registered the most
significant decline as revenue decreased 19%. WesternGeco segment net income
of $4 million decreased from $79 million in 2001, as revenue decreased 13%
in the declining seismic market. SchlumbergerSema segment net income of
$9 million improved from a loss of $5 million in 2001, reflecting the revenue
increase of 31% (7% on a pro forma basis – assuming the Sema plc acquisition
took place on January 1, 2001) and the effect of the previously announced
cost reduction program. In the Other segment, net income declined to $11
million, from $71 million in 2001 which included the divested Resource Management
Services businesses.
In 2001, Oilfield Services segment net income increased $387 million, or 49%,
to $1.18 billion reflecting the 22% growth in revenue. Higher pricing levels
and increased non-rig related activity were the major contributing factors.
WesternGeco segment net income of $79 million improved from a loss of $37
million in 2000 as revenue increased to $1.7 billion, from $0.5 billion,
attributable to the new venture with Baker Hughes Incorporated, formed in
November 2000. SchlumbergerSema segment net loss of $5 million improved
$44 million reflecting the incremental income from the newly acquired Sema
plc. In the Other segment, net income of $71 million declined $42 million
from the prior year with declines in the semiconductor-related and Smart
Cards activities.
Currency Risks
Refer to page 42 of this Report, Translation of Non-US Currencies
in the Notes to Consolidated Financial Statements, for a description
of the Schlumberger policy on currency hedging. There are no material unhedged
assets, liabilities or commitments which are denominated in other than a
business’ functional currency. Schlumberger businesses operate principally
in US dollars, the euro and most other European currencies and most South
American currencies.
A 5% change in average exchange rates in 2003 would have changed revenue by
about 1% and income from continuing operations before charges by about 7%.
Research & Engineering
Expenditures by business segment were as follows:
(Stated in millions) |
|
|
|
|
| |
| |
|
2003 |
|
2002 |
|
2001 |
Oilfield Services |
|
$ |
375 |
|
$ |
370 |
|
$ |
362 |
| WesternGeco |
|
|
52 |
|
|
68 |
|
|
63 |
| SchlumbergerSema |
|
|
55 |
|
|
84 |
|
|
86 |
| Other |
|
|
74 |
|
|
74 |
|
|
118 |
| In-process R&D charge1 |
|
|
— |
|
|
— |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
556 |
|
$ |
596 |
|
$ |
654 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
1 |
Relating to the Bull CP8 acquisition. |
|
|
| |
Interest Expense
Interest expense decreased $34 million, to $334 million due to a
decrease in average debt balances and a decrease in average borrowing rates
from 4.9% to 4.6%. The decrease in 2002 of $17 million, to $368 million,
was due to a decrease in average borrowing rates from 5.8% to 4.9% which
more than offset a $1 billion increase in average debt balances. The increase
in 2001 of $109 million, to $385 million, reflected the significantly higher
debt balances incurred, relating to the acquisition of Sema plc, which were
only partially offset by a reduction in average borrowing rate from 6.9%
to 5.8%.
Hanover Compressor Company
In August 2001, Schlumberger sold its Oilfield Services worldwide gas compression
activity to Hanover
Compressor Company. The proceeds included 8.7 million shares of Hanover
Compressor common stock, with a value at closing of $173 million, which
is restricted from marketability until August 30, 2004, and a $150 million
long-term subordinated note maturing December 15, 2005.
In the fourth quarter of 2003, Schlumberger sold the subordinated note for
$177 million and realized a pretax gain of $32 million ($20 million after-tax;
$0.03 per share).
At December 31, 2003, the carrying value of Schlumberger’s investment
in Hanover Compressor common stock exceeded the market value. As required
by generally accepted accounting principles (SFAS 115), Schlumberger wrote
down its investment to the fair market value of $91.4 million at December
31, 2003 and recorded a charge of $81.2 million (before and after-tax; $0.13
per share).
As part of the sale agreement, Hanover Compressor had an option to put its
interest in the PIGAP II joint venture in Venezuela back to Schlumberger
if certain financing conditions were not met. Hanover Compressor did not
exercise this option.
Charges – Continuing Operations
Schlumberger recorded the following after-tax and minority interest charges/credits
for continuing operations in 2003, 2002 and 2001:
|
|
| |
| • |
In December 2003, a gain of $20 million on the sale of the Hanover
Compressor note.
|
| • |
In December 2003, a charge of $81 million relating to the write-down,
to fair market value, of Schlumberger’s investment in Hanover
Compressor common stock. The write-down was required by SFAS 115 as
the decline in the market value of the stock is “other than temporary”.
|
| • |
In September 2003, a $205 million multiclient library impairment
charge following an evaluation of
current and expected future business conditions in the seismic sector,
a $38 million seismic vessel
impairment charge and a $31 million gain on the sale of a drilling
rig.
|
| • |
Between June 12 and July 22, 2003, subsidiaries of Schlumberger
launched and concluded tender offers to acquire three series of outstanding
European bonds; $1.3 billion of principal was repurchased for a total
cost of $1.5 billion, which included the premium, and issuing and
tender costs. The total charge on the tenders was $168 million, of
which $81.5 million was recorded in the second quarter of 2003, when
the first tender closed, with the balance of $86.3 million recorded
in the third quarter of 2003.
|
| • |
On December 10, 2002, Schlumberger announced that the Board of Directors
had approved an
updated strategy for its SchlumbergerSema business segment. The new
strategic plan outlook, current business values and the reorganization
of SchlumbergerSema constitute significant events that required an
impairment analysis to be performed in accordance with SFAS 142. SchlumbergerSema
was ‘valued’ on a stand-alone basis; each reporting unit
within SchlumbergerSema was valued using a discounted cash flow analysis
based on a long-term forecast prepared by SchlumbergerSema management
with the assistance of a third party valuation expert. The implied
multiples yielded by the discounted cash flow analysis were compared
to observed trading multiples of comparable companies and recent transactions
in the IT services industry to assess the fair value of the reporting
units. The fair value was below the book value. As a result, goodwill
was written down to its estimated fair value based on Schlumberger’s
valuation. The impairment of goodwill mainly reflected the prevailing
difficulties of the telecommunications industry and the severely depressed
market values of the IT companies serving SchlumbergerSema’s
sector. Certain intangible assets were also identified and written
down as part of this process.
Schlumberger recorded severance, facility and other costs in an effort to reduce costs at SchlumbergerSema and WesternGeco. These costs related to expenses that offer no future benefit to the ongoing operations of these businesses. During the fourth quarter, Schlumberger also recorded an impairment charge, to reflect a change in the business projections of the WesternGeco business, related to capitalized multiclient seismic library costs, a deferred tax valuation allowance and other costs.
The total of the above charges was $3,168 million and consisted of (1) a goodwill impairment charge of $2,638 million; (2) an intangible assets impairment charge of $132 million; (3) SchlumbergerSema severance and other charges of $77 million in response to current business conditions; (4) WesternGeco severance and other charges of $72 million in response to current business conditions; (5) a WesternGeco multiclient library impairment charge of $129 million following a valuation of the library; (6) environmental related charges of $26 million; and (7) a deferred tax valuation allowance charge of $94 million.
|
| • |
In December 2002, a credit of $87 million reflecting the gain on
the sale of two drilling rigs.
|
| • |
In March 2002, a charge of $29 million related to the financial/economic
crisis in Argentina.
|
| • |
In December 2001, a net credit of $5 million, including an after-tax
gain on the sale of the former Resource Management Services North
American Water division ($117 million). This gain was partially offset
by certain charges: (1) a provision of $37 million for employee termination
costs, principally in Europe and the US, related to Oilfield Services
and SchlumbergerSema in response to the prevailing business conditions;
(2) tax reorganization costs of $29 million; (3) a further $20 million
charge related to the second quarter estimated loss on the divestiture
of certain Resource Management Services businesses following the actual
closing in the fourth quarter; and (4) asset write-down of $23 million
for technological impairment related to certain Land seismic assets
in the newly formed WesternGeco Joint Venture.
|
| • |
In September 2001, a net credit of $3 million representing the gain
on the sale of the worldwide gas compression business, partially offset
by an impairment charge relating to the expected disposition of certain
activities. |
| • |
In June 2001, a charge of $280 million for the estimated impairment
charge from the disposition of certain Resource Management Services
businesses.
|
| • |
In March 2001, a charge of $25 million for in-process R&D related
to the Bull CP8 acquisition. |
An analysis of the fourth quarter 2002 pretax severance and facility charges as of December 31, 2003 is as follows:
($ stated in millions)
|
|
|
|
|
|
|
|
|
|
Severance
 |
|
|
Facilities |
|
|
Amount |
|
People |
|
|
Amount |
| Charges |
$ |
94.5 |
|
3,492 |
|
$ |
42.8 |
| Paid in December 2002 |
|
32.9 |
|
1,643 |
|
|
6.6 |
|
|
|
|
|
|
|
|
| Balance December 31, 2002 |
|
61.6 |
|
1,849 |
|
|
36.2 |
| Paid/reversed in 2003 |
|
60.6 |
|
1,841 |
|
|
25.1 |
|
|
|
|
|
|
|
|
| Balance December 31, 2003 |
$ |
1.0 |
|
8 |
|
$ |
11.1 |
|
|
|
|
|
|
|
|
|
|
| |
At
December 31, 2003, the Severance balance of $1.0 million is classified as
Accounts Payable and Accrued Liabilities and the Facilities balance
of $11.1 million is classified in Liabilities held for sale on the
Consolidated Balance Sheet.
The December 2001 charge included severance costs of $41 million (775 people),
which have been paid.
Critical Accounting Policies and Estimates
Schlumberger's discussion and analysis of its financial condition
and results of operations are based upon Schlumberger's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires Schlumberger to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities.
On an on-going basis, Schlumberger evaluates its estimates, including those
related to bad debts, valuation of inventories and investments, recoverability
of long-lived assets, income tax provision and deferred taxes, profit assumptions
on long-term percentage-of-completion contracts, contingencies and litigation
and actuarial assumptions for employee benefit plans. Schlumberger bases
its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions
or conditions.
Schlumberger believes the critical accounting policies described below affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Schlumberger recognizes revenue and profit as work progresses on long-term, fixed price
contracts using the percentage-of-completion method, which relies on estimates
of total expected contract revenue and costs. Schlumberger follows this
method since reasonably dependable estimates of the revenue and costs applicable
to various stages of a contract can be made. Recognized revenue and profit
are subject to revisions as the contract progresses to completion. Revisions
in profit estimates are charged or credited to income in the period in which
the facts that give rise to the revision become known as a change in estimate.
Losses on long-term contracts are provided for when such losses are known
and reasonably estimated.
Schlumberger recognizes revenue from the sale of software licenses when persuasive evidence
of an arrangement exists, the product has been delivered, the fee is fixed
and determinable and collection of the resulting receivable is reasonably
assured. Whether the fee is fixed and determinable is assessed based on
the payment terms associated with the transaction. Collection is assessed
based on a number of factors, including past transaction history with the
customer and the credit-worthiness of the customer.
Revenues from contracts with multiple element arrangements, such as those including
installation and integration services, are recognized as each element is
earned based on the relative fair value of each element and when the delivered
elements have stand alone value to the customers.
For sales, either a binding purchase order, signed license agreement or a written
contract is used as evidence of an arrangement.
Revenue from maintenance services is recognized ratably over the contract term.
The training and consulting services (time and materials) are billed based
on hourly rates, and revenue is generally recognized as these services are
performed. Revenue from outsourcing services is generally recognized as
services are performed.
The WesternGeco segment capitalizes the cost associated with obtaining multiclient
seismic data. Such costs are charged to Cost of goods sold and services
based on a percentage of estimated total revenue that Schlumberger estimates
that it will receive from the sales of such data. The carrying value of
individual surveys is reviewed at least annually and adjustments to the
value are made based upon the revised estimated revenues for the surveys.
Schlumberger maintains allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the financial
condition of Schlumberger's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may
be required.
Schlumberger writes down its inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated
market value based upon assumptions about future demand and market conditions.
If actual market conditions are less favorable than those projected by management,
additional inventory writedowns may be required.
Schlumberger assesses the impairment of identifiable intangibles, long-lived assets and
related goodwill at least annually, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors considered
important, which could trigger an impairment review, include the following:
|
|
| |
| • |
significant underperformance relative to expected historical or
projected future operating results;
|
| • |
significant changes in the manner of our use of the acquired assets
or the strategy for our overall business;
|
| • |
significant negative industry or economic trends;
|
| • |
significant decline in Schlumberger's stock price and our market
capitalization relative to net book value, for a sustained period.
|
|
|
| |
When Schlumberger determines that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence
of one or more of the above indicators of impairment, any impairment is
measured based on projected net cash flows expected to result from that
asset, including eventual disposition.
Schlumberger had net deferred tax assets of $632 million at December 31, 2003 which excluded
$325 million relating to a certain European net operating loss for which
there is a valuation allowance. In assessing the need for valuation allowances,
Schlumberger considers the probable likelihood of future taxable income
and available tax planning strategies.
With regard to pension and postretirement benefits, Schlumberger evaluates the
appropriateness of assumptions used by an independent actuary, in particular
assumptions as to discount rate, return on plan assets and medical cost
trend rates. The assumptions are revised at least annually as circumstances
require.
Cash Flow
In 2003, cash provided by operations was $2.11 billion as net income plus
depreciation/amortization and net charges including the extinguishment of
European debt and multiclient and vessel impairments, were only partially
offset by increases in customer receivables, due to higher revenue, and
decrease in accounts payable and accrued liabilities. Cash used in investing
activities was $1.49 billion and included investments in fixed assets ($1.03
billion) and multiclient seismic data ($150 million), the purchase of short-term
investments ($1.15 billion), the net proceeds ($106 million) from the sale
of Schlumberger's investment of 9.7 million shares in Grant Prideco Inc.,
the proceeds from the sales of NPTest ($220 million) and e-City ($79 million)
activities and the net proceeds ($177 million) from the sale of the Hanover
Compressor note. Cash used by financing activities was $558 million with
the proceeds from employee stock plans ($172 million) offset by the payment
of dividends to shareholders ($437 million), the costs related to the extinguishment
of certain European debt ($168 million) and an overall reduction in debt
of $126 million.
"Net Debt" is gross debt less cash, short-term investments and fixed income investments
held to maturity. Management believes that Net Debt provides useful information
regarding the level of Schlumberger's indebtedness by reflecting cash and
investments that could be used to repay debt, and that the level of net
debt provides useful information as to the results of Schlumberger's deleveraging
efforts. Details of the Net Debt follows:
|
|
| |
|
|
| |
|
|
| |
| 1. |
Includes Multiclient seismic data costs. |
|
|
| |
|
Dec. 31
2003 |
|
Dec. 31
2002 |
|
Dec. 31
2001 |
|
Components of Net Debt
|
|
|
|
|
|
|
|
|
|
| Cash and short term investments |
$ |
3,109 |
|
$ |
1,736 |
|
$ |
1,618 |
|
| Fixed income investments, held to maturity |
|
223 |
|
|
408 |
|
|
576 |
|
| Bank loans and current portion of long-term debt |
|
(1,411 |
) |
|
(1,136 |
) |
|
(1,015 |
) |
| Long-term debt |
|
(6,097 |
) |
|
(6,029 |
) |
|
(6,216 |
) |
|
|
|
|
|
|
|
|
|
|
| |
$ |
(4,176 |
) |
$ |
(5,021 |
) |
$ |
(5,037 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
At December 31, 2003, the cash and short-term investments of $3.1 billion and
the remaining facilities of $2.6 billion are sufficient to meet future business
requirements.
Based on forecast 2004 net income, depreciation/amortization estimates, cash from
the sale of SchlumbergerSema ($550 million) and Atos Origin stock ($625
million) and other possible business and asset divestitures, and other cash
flow components, Schlumberger expects to improve cash flow with an objective
of reducing the net debt to $3 billion by mid-year and $2 billion by year-end
2004. This will largely be dependent upon the business segments operating
results and the successful completion of certain business divestitures.
In addition, Schlumberger is currently reviewing the feasibility and cost of
a buyback of all, or a portion of, the remaining European long-term debt
and the continued appropriateness of maintaining the effectiveness of its
US interest rate derivative. A buyback of the debt and the interest rate
derivative becoming ineffective would result in a charge to income from
continuing operations in 2004.
Financing
On June 9, 2003, Schlumberger Limited issued $850 million aggregate principal
amount of 1.5% Series A Convertible Debentures due June 1, 2023 and $450
million aggregate principal amount of 2.125% Series B Convertible Debentures
due June 1, 2023. On July 2, 2003, Schlumberger Limited issued an additional
$125 million aggregate principal amount of the Series A debentures pursuant
to an option granted to the initial purchasers.
The debentures were sold to Citigroup Global Markets Inc. and Goldman, Sachs
& Co. pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933. The debentures were resold, with registration rights,
by the initial purchasers in transactions exempt from registration under
Rule 144A of the Securities Act. The aggregate offering price of the debentures
was $1.425 billion, the initial purchasers' discount was $25.4 million and
the net proceeds to Schlumberger Limited were $1.4 billion.
The Series A debentures and the Series B debentures are convertible, at the
holders' option, into shares of common stock of Schlumberger Limited. Holders
of the Series A debentures may convert their debentures into common stock
at a conversion rate of 13.8255 shares for each $1,000 principal amount
of Series A debentures (equivalent to an initial conversion price of $72.33
per share). Holders of the Series B debentures may convert their debentures
into common stock at a conversion rate of 12.5 shares for each $1,000 principal
amount of Series B debentures (equivalent to an initial conversion price
of $80.00 per share). Each conversion rate may be adjusted for certain events,
but it will not be adjusted for accrued interest.
On or after June 6, 2008 (in the case of the Series A debentures) or June 6,
2010 (in the case of the Series B debentures), Schlumberger may redeem for
cash all or part of the applicable series of debentures, upon notice to
the holders, at the redemption prices of 100% of the principal amount of
the debentures, plus accrued and unpaid interest to the date of redemption.
On June 1, 2008, June 1, 2013, and June 1, 2018, holders of Series A debentures
may require Schlumberger to repurchase their Series A debentures. On June
1, 2010, June 1, 2013 and June 1, 2018, holders of Series B debentures may
require Schlumberger to repurchase their Series B debentures. The repurchase
price will be 100% of the principal amount of the debentures plus accrued
and unpaid interest to the repurchase date. The repurchase price for repurchases
on June 1, 2008 (in the case of the Series A debentures) and June 1, 2010
(in the case of the Series B debentures) will be paid in cash. On the other
repurchase dates, Schlumberger may choose to pay the repurchase price in
cash or common stock or any combination of cash and common stock. In addition,
upon the occurrence of a Fundamental Change, holders may require Schlumberger
to repurchase all or a portion of their debentures, in cash or, at Schlumberger's
election, common stock valued at 99% of its market price or any combination
of cash and common stock, at a repurchase price equal to 100% of the principal
amount of the debentures plus accrued and unpaid interest to the redemption
date. The debentures will mature on June 1, 2023 unless earlier redeemed
or repurchased.
Between June 12 and July 22, 2003, certain subsidiaries of Schlumberger launched
and concluded tender offers to acquire three series of their outstanding
European bonds. The companies bought back $1.3 billion of principal of these
bonds for a total cost of $1.5 billion, which includes the premium, and
issuing and tender costs. The total charge on the tender was $168 million.
Sale of SchlumbergerSema to Atos Origin
On September 22, 2003, Schlumberger announced the signing of an agreement
with Atos Origin for the sale of the SchlumbergerSema business.
On the January 29, 2004 the sale transaction was completed. As consideration
for the transaction Schlumberger received ?443 million ($550 million) in
cash which included a working capital adjustment, and 19.3 million shares
of common stock of Atos Origin with a value of ?1.02 billion ($1.275 billion),
which represented approximately 29% of the outstanding common shares of
Atos Origin after the transaction was completed. Schlumberger expects the
result of the sale will be a gain.
On February 2, 2004 Schlumberger sold 9.6 million of the Atos Origin shares
for a net consideration of ?500 million ($625 million). As a result of this
sale, Schlumberger's investment was reduced to approximately 15% of the
outstanding common shares of Atos Origin. Schlumberger will account for
the remaining investment in Atos Origin on the cost method.
Business Divestitures
During 2003, Schlumberger divested the following businesses:
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In July, the NPTest semiconductor testing business to a partnership
led by Francisco Partners and Shah Management. The proceeds were $220
million in cash. Additionally, the partnership has a contingent obligation
to make a further payment to Schlumberger upon a subsequent qualifying
disposition or an initial public offering of NPTest by the partnership,
under certain circumstances. The results of NPTest are reported as
Discontinued Operations in the Consolidated Statement of
Income and include a net loss of $12 million on the sale. The
net assets were $202 million.
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In August, the Verification Systems business by a proceed-free management
buyout. The results of Verification Systems are reported as Discontinued
Operations in the Consolidated Statement of Income and
include a net loss of $18 million on the sale. The net assets were
$17 million.
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In October, the e-City 'pay & display' parking solutions business
to Apax Partners. The proceeds were $84 million in cash. The results
of e-City are reported as Discontinued Operations in the Consolidated
Statement of Income and include a net loss of $56 million on the
sale. The net assets were $120 million, including a $65 million allocation
of goodwill.
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During 2002, Schlumberger divested the following businesses:
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In December, the Reed Hycalog drillbits business. The proceeds included
$259 million in cash and 9.7 million shares of Grant Prideco common
stock with a value of $103 million. The after-tax gain was $66 million.
The results of Reed Hycalog are reported as Discontinued Operations
in the Consolidated Statement of Income.
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During 2001, Schlumberger divested the following businesses:
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In August, the Oilfield Services worldwide gas compression activity
primarily consisting of the Production Operators Corp. subsidiary.
The proceeds included $274 million in cash, a $150 million long-term
subordinated note and newly issued Hanover Compressor Company shares
with a value of $173 million. The shares have a three year marketability
restriction. The after-tax gain was $52 million.
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In November, the Resource Management Services North American water
metering activities. Cash proceeds were $304 million and the after-tax
gain was $117 million.
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In November, the Resource Management Services non-North American
electricity and water meter, and worldwide gas meter businesses. The
net cash proceeds were $256 million and the after-tax loss was $300
million, of which $280 million had been recorded as an impairment
charge in June (See Charges-Continuing Operations).
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In November, the Yield Enhancement Systems division of Semiconductor
Solutions. Cash proceeds were $62 million and the after-tax gain was
$12 million.
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Summary of Major Contractual Commitments
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Payment Period |
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| Contractual Commitments |
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Total |
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Less than
1year |
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2-3years |
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4-5years |
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After
5 years |
| Long-Term Debt |
$ |
6,987 |
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$ |
890 |
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$ |
866 |
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$ |
3,149 |
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$ |
2,082 |
| Operating Leases |
$ |
1,653 |
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$ |
344 |
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$ |
522 |
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$ |
366 |
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$ |
421 |
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Letters of credit/guarantees outstanding aggregated $788 million at December
31, 2003.
In general, the remaining amount of letters of credit/guarantees relate to
business performance bonds, custom/excise tax commitments, facility lease/rental
obligations, etc. All such were entered into in the ordinary course of business
and are customary practices in the various countries where Schlumberger
operates.
Common Stock, Market Prices and Dividends Declared per Share
Quarterly high and low prices for Schlumberger common stock as reported
by the New York Stock Exchange (composite transactions), together with dividends
declared per share in each quarter of 2003 and 2002, were: |
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The number of holders of record of Schlumberger common stock at December 31, 2003, was approximately 24,770. There are no legal restrictions on the payment of dividends or ownership or voting of such shares, except as to shares held in the Schlumberger Treasury. US stockholders are not subject to any Netherlands Antilles withholding or other Netherlands Antilles taxes attributable to ownership of such shares.
Environmental Matters
The Consolidated Balance Sheet includes accruals for the estimated future costs
associated with certain environmental remediation activities related to
the past use or disposal of hazardous materials. Substantially all such
costs relate to divested operations and to facilities or locations that
are no longer in operation. Due to a number of uncertainties, including
uncertainty of timing, the scope of remediation, future technology, regulatory
changes, the risk of personal injury, natural resource or property damage
claims and other factors, it is possible that the ultimate remediation costs
may exceed the amounts estimated. However, in the opinion of management,
such additional costs are not expected to be material relative to consolidated
liquidity, financial position or future results of operations.
New Accounting Standards
In July 2002, the Financial Accounting Standards Board issued SFAS
146 (Accounting for Costs Associated with Exit or Disposal Activities).
The standard required companies to recognize costs associated with exit
or disposal activities when they are incurred rather than at the date of
a commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation,
plant closing, or other exit or disposal activity. Previous accounting guidance
was provided by EITF Issue No. 94-3, (Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity [including
Certain Costs Incurred in a Restructuring]). SFAS 146 replaced Issue
94-3. Schlumberger adopted SFAS 146 prospectively to exit or disposal activities
initiated after December 31, 2002.
In November 2002, FASB Interpretation No. 45 (Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others) was issued. It requires certain accounting and
disclosures of guarantees to third parties including indebtedness. The interpretation
is effective on a prospective basis for guarantees issued or modified after
December 31, 2002. The implementation of this interpretation did not have
a material effect on Schlumberger's financial position or results of operations.
In January 2003, the Emerging Issues Task Force (EITF) issued No. 00-21 (Accounting
for Revenue Arrangements with Multiple Deliverables). This EITF
establishes the criteria for recognizing revenue in arrangements when several
deliverables are bundled into one agreement. EITF 00-21 does not allow revenue
recognition unless the fair value of the undelivered element(s) is available
and the element has stand-alone value to the customer. EITF 00-21 also provides
guidance on allocating the total contract revenue to the individual elements
based upon the available fair value of each deliverable. The implementation
of this pronouncement did not have a material impact on Schlumberger's financial
position or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation
No. 46, (Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51). The primary objective of the interpretation is to provide
guidance on the identification of, and financial reporting for entities
over which control is achieved through means other than voting rights; such
entities are known as variable-interest entities (VIE's). FIN 46 provides
guidance that determines (1) whether consolidation is required under the
"controlling financial interest" model of Accounting Research Bulletin No.
51 (ARB 51), Consolidated Financial Statements, or other existing
authoritative guidance, or, alternative, (2) whether the variable-interest
model under FIN 46 should be used to account for existing and new entities.
Schlumberger does not believe that the adoption of this statement will have
a material effect on the financial position or results of operations.
In April 2003, the Financial Accounting Standards Board issued SFAS No. 149
(Amendment of Statement 133 on Derivative Instruments and Hedging Activities)
which amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133 (Accounting for
Derivative Instruments and Hedging Activities). SFAS 149, which
is to be applied prospectively, is effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of this new standard did not have a material
impact on Schlumberger's results of operations or financial position.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, (Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity). The Standard specifies that instruments
within its scope embody obligations of the issues and therefore, the issuer
must classify them as liabilities. The Standard was effective July 1, 2003,
and had no material effect on Schlumberger’s financial position.
In January 2004, the Financial Accounting Standards Board issued FSP No. FAS
106-1 (Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug Improvement and Modernization Act of 2003). The
statement permits the deferral of accounting related to the effects of the
legislation until the earlier of issuance of final accounting guidance by
the FASB or a significant plan mendment/curtailment event requiring remeasurement,
occurring after January 31, 2004. Schlumberger expects the new legislation
will reduce future postretirement medical costs.
Forward-looking Statements
This 10-K report, the fourth quarter and full year 2003 earnings
release, associated web-based publications and other statements we make
contain forward looking statements, which include any statements that are
not historical facts, such as our expectations regarding business outlook,
economic recovery, expected capex and depreciation and amortization charges,
the capitalizing of multiclient survey costs and the acquisition of new
multiclient surveys, the funding of pension plans and related pension expense,
the likelihood and timing of and the benefits to be derived from divestitures,
conditions in the oilfield service business, including activity levels during
2004 and higher E&P investment, production increases in non-OPEC areas,
issues affecting the seismic industry, including sales pertaining to Q technology,
continued deepwater drilling activity, benefits from contract awards, future
results of operations, pricing, future effective tax rates and our expectations
regarding the sale of our remaining investment in Atos Origin shares. These
statements involve risks and uncertainties, including, but not limited to,
the extent and timing of a rebound in the global economy; changes in exploration
and production spending by major oil companies; recovery of activity levels,
improved pricing and realization of cost reduction and cost savings targets
associated with the seismic business; market acceptance of Q seismic technology;
general economic and business conditions in key regions of the world, including
Argentina; political and economic uncertainty in Venezuela and Nigeria and
further socio-political unrest in the Persian Gulf and/or Asia; the market
in Atos Origin shares; our ability to complete and benefits to be derived
from other divestitures; our ability to achieve growth objectives in IT
solutions to upstream E&P business; continued growth in the demand for smart
cards and related products; our ability to meet our identified liquidity
projections, including the generation of sufficient cash flow from oilfield
operating results and the successful completion of certain business divestitures;
potential contributions to pension plans; and other factors detailed in
our fourth quarter and full year 2003 earnings release, this Report and
other filings with the Securities and Exchange Commission. If one or more
of these risks or uncertainties materialize (or the consequences of such
a development changes), or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those forecasted or expected. Schlumberger
disclaims any intention or obligation to update publicly or revise such
statements, whether as a result of new information, future events or otherwise.
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Go to Part II, Item 7A |
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