Convertible Debentures
During 2003, Schlumberger Limited issued $450 million aggregate principal amount of 2.125% Series B Convertible
Debentures due June 1, 2023. The Series B debentures were convertible into common stock at a conversion rate of
25.000 shares for each $1,000 of principal (equivalent to an initial conversion price of $40.00 per share).
At December 31, 2009, there were $321 million of the Series B debentures outstanding. During 2010, $320 million of
these debentures were converted by holders into 8.0 million shares of Schlumberger common stock and the remaining
$1 million of outstanding Series B convertible debentures were redeemed for cash. Consequently, there were 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 85 countries. Schlumberger’s
functional currency is primarily the US dollar, which is consistent with the oil and gas industry. Approximately 75% of
Schlumberger’s revenue in 2011 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
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. The ineffective portion of changes in the fair value of hedging instruments, if any, is
recorded directly to earnings.
At December 31, 2011, Schlumberger recognized a cumulative net $26 million loss in
Accumulated other
comprehensive 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 for certain currencies. The fair value of these
contracts are 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, 2011, contracts were outstanding for the US dollar equivalent of $6.9 billion in various foreign
currencies, of which $3.9 billion relate to hedges of debt denominated in currencies other than the functional currency.
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, 2011, $27 million of commodity forward contracts were outstanding.
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