For Fiscal Year Ended December 31, 2004

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

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

 

For fiscal year ended December 31, 2004

 

OR

 

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

 

For the Transition period from                      to                     

 

Commission File Number 1-4601

 

Schlumberger N.V. (Schlumberger Limited)

(Exact name of registrant as specified in its charter)

 

Netherlands Antilles   52-0684746
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)

153 East 53 Street, 57th Floor

New York, New York, U.S.A.

  10022-4624

42, rue Saint-Dominique

Paris, France

  75007

Parkstraat 83, The Hague,

The Netherlands

  2514 JG
(Addresses of principal executive offices)   (Zip Codes)

 

Registrant’s telephone number in the United States, including area code, is: (212) 350-9400

 

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

 

Title of each class


  

Name of each exchange on which registered


Common Stock, par value $0.01 per share   

New York Stock Exchange

Euronext Paris

Euronext Amsterdam

The London Stock Exchange

SWX Swiss Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether 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  x    NO  ¨    

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES  x    NO  ¨    

 

As of June 30, 2004, the aggregate market value of the common stock of the registrant held by non-affiliates of the registrant was approximately $36.3 billion.

 

As of January 31, 2005, Number of Shares of Common Stock Outstanding: 589,258,183.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the following document have been incorporated herein by reference into Part III of this Form 10-K: Definitive Proxy Statement for the 2005 Annual General Meeting of Stockholders (“Proxy Statement”).

 


 

1


 

SCHLUMBERGER LIMITED

Table of Contents

Form 10-K

 

          Page

PART I

         

Item 1.

  

Business

   3

Item 2.

  

Properties

   6

Item 3.

  

Legal Proceedings

   7

Item 4.

  

Submission of Matters to a Vote of Security Holders

   7

PART II

         

Item 5.

  

Market for Schlumberger’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

   8

Item 6.

  

Selected Financial Data

   10

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operation

   12

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   34

Item 8.

  

Financial Statements and Supplementary Data

   37

Item 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

   80

Item 9A.

  

Controls and Procedures

   80

Item 9B.

  

Other Information

   81

PART III

         

Item 10.

  

Directors and Executive Officers of Schlumberger

   82

Item 11.

  

Executive Compensation

   82

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management

   82

Item 13.

  

Certain Relationships and Related Transactions

   82

Item 14.

  

Principal Accounting Fees and Services

   82

PART IV

         

Item 15.

  

Exhibits, Financial Statement Schedules

   83
    

Signatures

   86
    

Certifications

   92

 

2


 

PART I

 

Item 1 Business

 

All references herein to “Registrant”, “Company” and “Schlumberger” refer to Schlumberger Limited and its consolidated subsidiaries.

 

Founded in 1927, Schlumberger is the world’s leading oilfield services company, supplying technology, project management, and information solutions that optimize performance in the oil and gas industry. As of December 31, 2004, the Company employed more than 52,000 people of over 140 nationalities operating in more than 80 countries. Schlumberger has principal executive offices in New York, Paris and The Hague. Schlumberger consists of two business segments: Schlumberger Oilfield Services is the world’s premier oilfield services company supplying a wide range of technology services and solutions to the international oil and gas industry. WesternGeco, jointly owned with Baker Hughes, is one of the world’s largest and most advanced surface seismic companies.

 

On January 29, 2004, Schlumberger completed the sale of the SchlumbergerSema business to Atos Origin. During 2004, Schlumberger completed the initial public offering of Axalto and no longer retains any ownership interest in this business. Including other divestitures completed in 2004 and 2005, Schlumberger’s divestiture program of its non-oilfield businesses is now complete.

 

Schlumberger Oilfield Services is the world’s leading provider of technology, project management and information solutions to the international petroleum industry. With 46,000 employees, Schlumberger Oilfield Services manages its business through 27 Oilfield Services GeoMarket* regions, which are grouped into four geographic areas: North America; Latin America; Europe/CIS/W. Africa; Middle East & Asia. The GeoMarket structure offers customers a single point of contact at the local level for field operations and brings together geographically focused teams to meet local needs and deliver customized solutions.

 

Schlumberger invented wireline logging in 1927 as a technique for obtaining downhole data in oil and gas wells. Today, Schlumberger Oilfield Services operates in each of the major oilfield service markets covering the entire life cycle of the reservoir. These services are organized into seven technology product lines, in which Schlumberger holds a number of market leading positions, to capitalize on technical synergies and introduce innovative solutions within the GeoMarket regions.

 

    Wireline – provides the information necessary to evaluate the formation, plan and monitor well construction, and monitor and evaluate production, divided into open-hole and cased-hole wireline logging.

 

    Drilling & Measurements – directional drilling, measurements-while-drilling and logging-while-drilling services.

 

    Well Services – services to construct oil and gas wells, as well as maintain optimal production through the life of an oil and gas field. These include pressure pumping, well stimulation services, coiled tubing, cementing and engineering services.

 

    Well Completions & Productivity – testing, completion and oil & gas production optimization services. Services range from well-testing, perforating, intelligent completions systems and artificial lifts.

 

    Integrated Project Management – consulting, project management and engineering services leveraging the expertise from the other technology segments for the E&P industry.

 

    Data & Consulting Services – measurements, interpretation and integration of all exploration and production data types, and expert consulting services for reservoir characterization, production enhancement, multi-disciplinary reservoir and production solutions, and field development planning.

 

    Schlumberger Information Solutions – consulting, software, information management and IT infrastructure services that support oil and gas industry core operational processes.

 

The technology product lines are also responsible for overseeing operational processes, resource allocation, personnel and quality, health, safety and environmental matters in the GeoMarket.

 

3


Supporting the service technology product lines are 23 research and development (R&D) centers. Through its R&D, Schlumberger is committed to advanced technology programs that will enhance oilfield efficiency, lower finding and producing costs, improve productivity, maximize reserve recovery, increase asset value and accomplish all of these goals in a safe, environmentally sound manner.

 

Schlumberger Oilfield Services uses its own personnel to market its products and services. The customer base, business risks and opportunities for growth are essentially uniform across all services. There is a sharing of manufacturing and engineering facilities as well as research centers; labor force is interchangeable. Technological innovation, quality of service, and price are the principal methods of competition. Competition varies geographically with respect to the different services offered. While there are numerous competitors, both large and small, Schlumberger believes that it is an industry leader in providing measurements-while-drilling and logging-while-drilling services, and fully computerized logging and geoscience software and computing services. A large proportion of the Company’s offering is non-rig related; consequently, revenue does not necessarily correlate to rig count fluctuations.

 

Schlumberger is a 40% owner in M-I Drilling Fluids, a joint venture with Smith International that offers drilling and completion fluids utilized to stabilize rock strata during the drilling process and minimize formation damage during completion and workover operations.

 

WesternGeco, which is 70% owned by Schlumberger, provides comprehensive worldwide reservoir imaging, monitoring, and development services, with the most extensive seismic crews and data processing centers in the industry, as well as the world’s largest multiclient seismic library. Services range from 3D and time-lapse (4D) seismic surveys to multi-component surveys for delineating prospects and reservoir management. Seismic solutions include proprietary Q*-Technology for enhanced reservoir description, characterization, and monitoring throughout the life of the field - from exploration through enhanced recovery.

 

Positioned for meeting a full range of customer needs in land, marine and shallow-water transition-zone services, WesternGeco offers a wide range of technologies and services:

 

    Land Seismic – comprehensive resources for seismic data acquisition on land and across shallow-water transition zones.

 

    Marine Seismic – fully calibrated single-sensor marine seismic acquisition and processing system, delivering the seismic technology breakthrough needed for new-generation reservoir management.

 

    Multiclient Services – high-quality seismic data from the most prospective hydrocarbon basins with the leading multiclient data library.

 

    Reservoir Services – people, tools, and technology to help customers capture the benefits of a completely integrated approach to locating, defining, and monitoring the reservoir.

 

    Seismic Data Processing – extensive seismic data processing centers for complex processing projects.

 

Acquisitions

 

Information on acquisitions made by Schlumberger or its subsidiaries appears under the heading “Acquisitions” on page 54 of this Report within the Notes to Consolidated Financial Statements.

 

GENERAL

 

Research & Development

 

Research to support the engineering and development efforts of Schlumberger’s activities is conducted at Schlumberger Doll Research, Ridgefield, Connecticut and Boston Massachusetts, USA; Schlumberger Cambridge Research, Cambridge, England, and at Stavanger, Norway; Moscow, Russia and Dhahran, Saudi Arabia.

 

4


Patents

 

While Schlumberger seeks and holds numerous patents, no particular patent or group of patents is considered material to Schlumberger’s business.

 

Seasonality

 

Although weather and natural phenomena can temporarily affect delivery of oilfield services, the widespread geographic location of such services precludes the overall business from being characterized as seasonal. However, because oilfield services are provided predominantly in the Northern Hemisphere, severe weather can temporarily affect the delivery of such services and products.

 

Customers and Backlog of Orders

 

No single customer exceeded 10% of consolidated revenue. Oilfield Services has no backlog due to the nature of their business. The WesternGeco backlog at December 31, 2004, was $670 million (2003: $408 million), the majority of which is expected to be realized in 2005.

 

Government Contracts

 

No material portion of Schlumberger’s business is subject to renegotiation of profits or termination of contracts by the US or other governments.

 

Employees

 

As of December 31, 2004, Schlumberger had approximately 52,500 employees.

 

Non-US Operations

 

Schlumberger derives a significant portion of its revenues from non-US operations, which subject Schlumberger to risks which may affect such operations. Schlumberger’s non-US operations accounted for approximately 68% of our consolidated revenues in 2004 and approximately 70% of our consolidated revenues during 2003. Risk which may adversely affect our operations in such countries include unsettled political and economic conditions in certain areas, exposure to possible expropriation or other governmental actions, social unrest, acts of terrorism, outbreak of war or other armed conflict, deprivation of contract rights, trade restrictions or embargoes imposed by the US or other countries, exchange controls and currency fluctuations. Although it is impossible to predict such occurrences or their effects on Schlumberger, management believes these risks are acceptable. Management also believes that the geographical diversification of our activities reduces the risk that loss of operations in any one country would be material to all the operations taken as a whole.

 

Environmental Protection

 

Compliance with governmental provisions relating to the protection of the environment does not materially affect Schlumberger’s capital expenditures, earnings or competitive position. Management believes that Schlumberger is currently in substantial compliance with applicable environmental laws and regulations. For more information, see Environmental Matters on page 33 of this Report.

 

Financial Information

 

Financial information by business segment for the years ended December 31, 2004, 2003 and 2002 is given on pages 65 to 67 of this Report, within the Notes to Consolidated Financial Statements.

 

5


Internet Website

 

Schlumberger’s Internet website can be found at www.slb.com. Schlumberger makes available free of charge, or through our internet website at www.slb.com/ir, access to its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, its proxy statement and Forms 3, 4 and 5 filed on behalf of directors and executive officers and amendments to those reports as soon as reasonably practicable after such material is filed or furnished to the Securities and Exchange Commission (“SEC”). Additionally, Schlumberger’s corporate governance materials, including Board Committee Charters, Corporate Governance Guidelines, and Code of Ethics may also be found on www.slb.com/ir. From time to time to time corporate governance materials on our website may be updated to comply with rules issued by the SEC and the New York Stock Exchange (“NYSE”) or as desirable to promote the effective governance of Schlumberger. In addition, amendments to the Code of Ethics and any grant of a waiver from a provision of the Code of Ethics requiring disclosure under applicable SEC rules will be disclosed on our website. Any stockholder wishing to receive, without charge, a copy of any of the SEC filings or corporate governance materials should write the Secretary, Schlumberger Limited, 153 East 53rd Street, 57th Floor, New York, New York, 10022.

 

The reference to this website address does not constitute incorporation by reference of the information contained on the website and should not be construed as part of this report.

 

Item 2 Properties

 

Schlumberger owns or leases manufacturing facilities, administrative offices, service centers, research centers, sales offices and warehouses in North and South America, Europe, Africa, Asia and Australia. Some facilities are owned and some are held through long-term leases. No significant lease is scheduled to terminate in the near future, and Schlumberger believes comparable space is readily obtainable should any lease expire without renewal. Schlumberger believes all of its properties are generally well maintained and adequate for the intended use.

 

Outside the United States the principal owned or leased facilities of Oilfield Services are located in Hassi Massoud, Algeria; Luanda, Angola; Perth, Australia; Baku, Azerbaijan; Rio de Janeiro, Brazil; Calgary and Edmonton, Canada; Beijing, China; Bogota, Colombia; Cairo, Egypt; Clamart and Paris, France; Bombay, India; Balikpapan and Jakarta, Indonesia; Milan, Italy; Fuchinobe, Japan; Atyrau, Kazakhstan; Kuwait City, Kuwait; Kuala Lumpur, Malaysia; Mexico City and Reynosa, Mexico; Port Harcourt, Nigeria; Belfast, Northern Ireland; Stavanger, Norway; Doha, Qatar; Moscow, Nefteyugansk and Noyabrsk, Russia; Al-Khobar, Saudi Arabia; Singapore; Bangkok, Thailand; Abu Dhabi and Dubai, United Arab Emirates; Aberdeen and Stonehouse, United Kingdom; and Caracas, Venezuela.

 

Within the United States, the principal owned or leased facilities of Oilfield Services are located in Anchorage, Alaska; Lawrence, Kansas; New Orleans, Louisiana; Bartlesville, Oklahoma; and Houston, Rosharon and Sugar Land, Texas.

 

Outside the United States, the principal owned or leased facilities of WesternGeco are located in Luanda, Angola; Perth, Australia; Baku, Azerbaijan; Rio de Janeiro, Brazil; Calgary, Canada; Cairo, Egypt; Atyrau, Kazakhstan; Kuwait City, Kuwait; Kuala Lumpur, Malaysia; Mexico City and Poza Rica, Mexico; Lagos, Nigeria; Bergen, Oslo and Stavanger, Norway; Moscow, Russia; Al-Khobar, Saudi Arabia; Singapore; Abu Dhabi, Dubai and Jebel Ali, United Arab Emirates; Gatwick and London, United Kingdom; and Caracas, Venezuela.

 

Within the United States, the principal owned or leased facilities of WesternGeco are located in Denver, Colorado; Dead Horse, Alaska, and Houston, Texas.

 

In addition to the properties noted above, Schlumberger also owns a facility in Montrouge, France.

 

6


Item 3 Legal Proceedings

 

The information with respect to Item 3 is set forth under the heading Contingencies page 65 of this Report, within the Notes to Consolidated Financial Statements.

 

Item 4 Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of Schlumberger’s security holders during the fourth quarter of the fiscal year covered by this report.

 

Executive Officers of Schlumberger

 

Information with respect to the executive officers of Schlumberger and their ages as of February 28, 2005 is set forth below. The positions have been held for at least five years, except where stated.

 

Name


   Age

  

Present Position and Five-Year Business Experience


Andrew Gould

   58   

Chairman and Chief Executive Officer, since February 2003;

President and Chief Operating Officer, March 2002 to February 2003; and

Executive Vice President - Oilfield Services, January 1999 to March 2002.

Jean-Marc Perraud

   57   

Executive Vice President and Chief Financial Officer, since March 2002;

Controller and Chief Accounting Officer, April 2001 to March 2002; and

Treasurer, January 1999 to May 2001.

Chakib Sbiti

   50   

Executive Vice President, since February 2003;

President Oilfield Services Middle East & Asia, July 2001 to February 2003;

President Oilfield Services Asia, August 2000 to July 2001; and

Oilfield Services Director of Personnel, January 1998 to August 2000.

Dalton Boutte

   50   

Executive Vice President, since February 2004 and President WesternGeco, since

January 2003;

Vice President OFS Operations, May 2001 to January 2003;

President OFS Europe/C.I.S./Africa, March 2000 to May 2001; and

Gulf Coast GeoMarket Manager, February 1998 to March 2000.

Ellen Summer

   58   

Secretary and General Counsel, since March 2002;

Director of Legal Services, April 2001 to March 2002; and

Deputy General Counsel, March 2001 and prior.

Simon Ayat

   50   

Vice President Treasurer since February 2005;

Vice President, Controller and Business Processes, since December 2002;

Vice President Finance SchlumbergerSema, April 2001 to December 2002; and

Oilfield Services Controller, September 1998 to April 2001.

Mark Danton

   48    Vice President - Director of Taxes, since January 1, 1999.

Andre Erlich

   57   

Chief Information Officer, since May 2002;

Vice President Technology and General Manager, April 2001 to May 2002; and

Vice President Business Development, October 1999 to April 2001.

Jean Chevallier

   57   

Vice President Industry Affairs, since February 2005;

Seconded to Atos Origin February 2004 to February 2005;

Vice President Business Development SchlumbergerSema, September 2001 to

February 2004;

President of Utilities Services, SchlumbergerSema, March 2001 to September 2001;

Chief Information Officer, Schlumberger Limited, January 1999 to September 2001.

 

7


Name


   Age

  

Present Position and Five-Year Business Experience


Philippe Lacour-Gayet

   57   

Vice President and Chief Scientist, since January 2001; and

Chief Scientist, July 1997 to January 2001.

Satish Pai

   43   

Vice President since February 2004 and Vice President Oilfield Technologies since

March 2002;

President Schlumberger Information Solutions, January 2001 to March 2002;

President IndigoPool.Com, April 2000 to January 2001; and

GeoQuest Operations Manager UKI, July 1999 to April 2000.

Doug Pferdehirt

   41   

Vice President Communications and Investor Relations, since July 2003;

President SchlumbergerSema NSA, August 2002 to July 2003;

Vice President Marketing and Technique, April 2002 to August 2002;

Gulf Coast GeoMarket Manager, February 2000 to April 2002; and

Dowell North and South America Business Manager, March 1998 to February 2000.

Frank Sorgie

   57   

Chief Accounting Officer, since May 2002; and

Director of Financial Reporting, January 1993 to May 2002.

David Tournadre

   37   

Vice President Personnel since August 2003;

Operations Manager REW, September 2001 to August 2003;

Management and Technical Training Program, April 2001 to September 2001; and

Seconded as Vice President Personnel, Exploration and Production to Yukos,

December 1998 to April 2001.

 

PART II

 

Item 5 Market for Schlumberger’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

As of January 31, 2005, there were 589,258,183 shares of the Common Stock of Schlumberger outstanding, exclusive of 77,847,832 shares held in treasury, and approximately 22,500 stockholders of record. The principal United States market for Schlumberger’s Common Stock is the New York Stock Exchange.

 

Schlumberger’s Common Stock is also traded on the Euronext Paris, Euronext Amsterdam, London and SWX Swiss stock exchanges.

 

Share Repurchases

 

On July 22, 2004, the Board of Directors of Schlumberger approved a share buyback program of up to 15 million shares to be acquired in the open market before December 2006, subject to market conditions.

 

The following table sets forth information on Schlumberger’s common stock repurchase program activity for the quarter ended December 31, 2004.

 

8


               (Stated in thousands except per share amounts)
     Total number
of shares
purchased


   Average price
paid per
share


   Total number of
shares purchased
as part of publicly
announced program


   Maximum number
of shares that may
yet be purchased
under the program


October 1 through October 31, 2004

   330    $ 63.22    330    10,854

November 1 through November 30, 2004

   533    $ 62.58    533    10,321

December 1 through December 31, 2004

   469    $ 62.77    469    9,852
    
  

  
    
     1,332    $ 62.80    1,332     
    
  

  
    

 

In connection with the exercise of stock options under Schlumberger’s incentive compensation plans, Schlumberger routinely receives shares of its common stock from optionholders in consideration of the exercise price of the stock options. Schlumberger does not view these transactions as implicating the disclosure required under this Item. The number of shares of Schlumberger common stock received from optionholders is immaterial.

 

Common Stock, Market Prices and Dividends Declared per Share

 

The information with respect to this portion of Item 5 is set forth under the heading Common Stock, Market Prices and Dividends Declared per Share on page 33 of this Report.

 

9


Item 6 Selected Financial Data

 

FIVE-YEAR SUMMARY

 

     (Stated in millions except per share amounts)  
     Year Ended December 31,

 
     2004

    2003 1

    2002 1

    2001 1

    2000 1

 

SUMMARY OF OPERATIONS

                                        

Operating revenue:

                                        

Oilfield Services

   $ 10,239     $ 8,823     $ 8,171     $ 8,381     $ 6,855  

WesternGeco

     1,238       1,183       1,476       1,702       511  

Eliminations and other

     3       11       10       770       1,138  
    


 


 


 


 


Total operating revenue

   $ 11,480     $ 10,017     $ 9,657     $ 10,853     $ 8,504  
    


 


 


 


 


% increase (decrease) over prior year

     15 %     4 %     (11 )%     28 %     14 %

Pretax Segment income:

                                        

Oilfield Services

   $ 1,801     $ 1,537     $ 1,278     $ 1,585     $ 1,061  

WesternGeco

     124       (20 )     71       221       (25 )

Eliminations and other 2

     (208 )     (142 )     (115 )     (116 )     (131 )
    


 


 


 


 


Pretax Segment income before Minority interest

     1,717       1,375       1,234       1,690       905  

Minority interest

     (36 )     15       (9 )     (57 )     —    
    


 


 


 


 


Total Pretax Segment income, before charges

   $ 1,681     $ 1,390     $ 1,225     $ 1,633     $ 905  
    


 


 


 


 


% increase (decrease) over prior year

     21 %     13 %     (25 )%     80 %     99 %

Interest income

     54       49       68       153       297  

Interest expense

     201       329       364       380       273  

Charges (Credits), net of minority interest 3

     243       502       188       17       (36 )

Taxes on income 3

     277       210       252       592       240  
    


 


 


 


 


Income, continuing operations

   $ 1,014     $ 398     $ 489     $ 797     $ 725  
    


 


 


 


 


% increase (decrease) over prior year

     155 %     (20 )%     (39 )%     10 %     177 %
    


 


 


 


 


Income (loss), discontinued operations

   $ 210     $ (15 )   $ (2,809 )   $ (275 )   $ 10  
    


 


 


 


 


Net income (loss)

   $ 1,224     $ 383     $ (2,320 )   $ 522     $ 735  
    


 


 


 


 


% increase (decrease) over prior year

     220 %     —         —         (29 )%     100 %

Basic earnings per share

                                        

Continuing operations

   $ 1.72     $ 0.68     $ 0.84     $ 1.39     $ 1.27  

Discontinued operations

     0.36       (0.03 )     (4.85 )     (0.48 )     0.02  
    


 


 


 


 


Net income (loss)

   $ 2.08     $ 0.66     $ (4.01 )   $ 0.91     $ 1.29  

Add back amortization of goodwill

     —         —         —         0.50       0.17  
    


 


 


 


 


Adjusted earnings (loss) per share

   $ 2.08     $ 0.66     $ (4.01 )   $ 1.41     $ 1.46  
    


 


 


 


 


Diluted earnings per share

                                        

Continuing operations

   $ 1.70     $ 0.68     $ 0.84     $ 1.38     $ 1.25  

Discontinued operations

     0.34       (0.03 )     (4.83 )     (0.47 )     0.02  
    


 


 


 


 


Net income (loss)

   $ 2.04     $ 0.65     $ (3.99 )   $ 0.91     $ 1.27  

Add back amortization of goodwill

     —         —         —         0.50       0.17  
    


 


 


 


 


Adjusted earnings (loss) per share

   $ 2.04     $ 0.65     $ (3.99 )   $ 1.41     $ 1.44  
    


 


 


 


 


Cash dividends declared per share

   $ 0.75     $ 0.75     $ 0.75     $ 0.75     $ 0.75  
    


 


 


 


 


 

10


     (Stated in millions except per share amounts)
     Year Ended December 31,

     2004

    20031

    20021

    20011

    20001

SUMMARY OF FINANCIAL DATA

                                      

Fixed asset additions

   $ 1,216     $ 872     $ 1,169     $ 1,811     $ 1,242
    


 


 


 


 

Depreciation expense

   $ 1,007     $ 1,016     $ 1,076     $ 1,027     $ 939
    


 


 


 


 

Avg. number of shares outstanding:

                                      

Basic

     589       584       579       574       570
    


 


 


 


 

Assuming dilution

     613       586       582       580       580
    


 


 


 


 

ON DECEMBER 31

                                      

Net Debt 4

   $ (1,459 )   $ (4,176 )   $ (5,021 )   $ (5,037 )   $ 422
    


 


 


 


 

Working capital

   $ 2,328     $ 1,554     $ 735     $ 1,487     $ 3,502
    


 


 


 


 

Total assets

   $ 16,038     $ 20,041     $ 19,435     $ 22,326     $ 17,173
    


 


 


 


 

Long-term debt

   $ 3,944     $ 6,097     $ 6,029     $ 6,216     $ 3,573
    


 


 


 


 

Stockholders’ equity

   $ 6,117     $ 5,881     $ 5,606     $ 8,378     $ 8,295
    


 


 


 


 

Number of employees continuing operations

     52,500       51,000       51,000       53,000       53,000
    


 


 


 


 

 

1. Reclassified for operations discontinued in 2004.

 

2. Includes amortization of goodwill in 2001 and 2000.

 

3. For details of Charges and the related income taxes, see pages 22 to 25 of this Report.

 

4. As defined on page 31 of this Report.

 

11


Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

The following discussion of results should be read in conjunction with the Consolidated Financial Statements.

 

2004 Summary

 

Schlumberger consists of two business segments: Oilfield Services and WesternGeco.

 

The year marked the transformation of Schlumberger into a pure oilfield services company with a clear record for growth and technology leadership. Income from continuing operations before income taxes and minority interest was $1.3 billion in 2004 compared to $457 million in 2003. The 2004 and 2003 results include pretax charges of $243 million and $638 million, respectively, which are described in detail on pages 22 to 25. The growth in earnings from continuing operations far exceeded the 15% growth in revenue.

 

Oilfield Services reached new revenue and pretax operating income records of $10.24 billion and $1.80 billion, respectively. Strong growth was experienced in all Areas, but most notably in North America, Middle East and Asia. Pretax return on sales for the full year was 17.6%, considerably higher than the 15% objective set in March of 2003.

 

WesternGeco returned to profitability with pretax operating income of $124 million versus a loss of $20 million in 2003. Our approach has been threefold: to bring capacity and cost down to appropriate levels, to take a cautious approach to new investment in the data library, and to continue aggressive introduction of Q* technology. The keys to success are industry discipline in managing capacity but above all clear demonstration of the differentiation in Q-technology. Q-revenue more than doubled from $79 million in 2003 to $162 million in 2004.

 

Our divestiture program of non-Oilfield businesses is now complete. During 2004, we finalized the sale of SchlumbergerSema, completed the initial public offering of Axalto, and divested of substantially all remaining non-oilfield businesses. As a result net debt fell below $1.5 billion at December 31, 2004 and is at a level consistent with the longer-term capital structure of Schlumberger.

 

In May 2004, Schlumberger completed the acquisition of a 26% equity stake in PetroAlliance, Russia’s largest independent oilfield service company. A further 25% stake is expected to be acquired in the first half of 2005. We also finalized the acquisition of SGK, a joint venture with which we have been associated with for the past four years in Russia. The market potential in Russia is substantial, and this type of investment will benefit Schlumberger and the Russian oil industry by facilitating growth through access to technology.

 

In June 2004, we outlined our growth strategy with a particular focus on the production-oriented environment. New and increased investment in additional production capacity, largely in the international and deepwater markets where Schlumberger is strongest,

 

12


coupled with the requirement to prolong production from existing reservoirs, will be reflected in higher levels of oilfield service activity for many years to come. Seventy percent of today’s oil production comes from fields that have been in production for more than thirty years. As these fields continue to age, their performance declines and remedial actions are required to maintain their output. The significance of this can be seen from the fact that as much as three-quarters of today’s investment in the upstream industry is directed at such activity–with the remaining quarter being spent on developing new sources of oil for the future. There are three key avenues that Schlumberger intends to exploit in addition to maintaining our leading position in exploration and development technology for harsh and complex environments.

 

First, Schlumberger already has broad geographical spread. However, our strong positions in the strategically important areas for new production in the Middle East, the Caspian and in deepwater regions provide a unique growth opportunity. Schlumberger sees the largest opportunity to be in Russia as well as to some extent in China.

 

The second avenue for growth is through technology, both developed internally and acquired externally. A wide range of internally developed products and services has created a portfolio targeted at growth in the production-oriented market. Schlumberger’s research and engineering expenditures have been relatively constant while the rate of introduction of new products and services is accelerating. We consider complementary technology acquisition with subsequent enhancement and integration into our portfolio to be an on-going feature of our future growth.

 

The third avenue of growth for Schlumberger will be our ability to perform reservoir-oriented project management. Conceived largely as a well construction business, and confirmed by successful execution of projects such as Burgos in Mexico, Integrated Project Management (IPM) is now developing more and more expertise in the execution of projects designed to boost production in mature areas.

 

Early in 2004, we set a number of new financial goals for the Company. These included the anticipation that the compound annual growth rate in revenue would be in double digits throughout the remainder of the decade - although such growth may not be linear as the industry will remain to some extent cyclical; an after-tax return-on-sales target, before minority interests, of 15% -including WesternGeco; and a target return on capital employed consistently in the upper teens.

 

The following discussion and analysis of results of operations should be read in conjunction with the Consolidated Financial Statements.

 

     (Stated in millions)  
     2004

   2003

    % Change

 

OILFIELD SERVICES

                     

Operating Revenue

   $ 10,239    $ 8,823     16 %

Pretax Segment Income 1

   $ 1,801    $ 1,537     17 %

WESTERNGECO

                     

Operating Revenue

   $ 1,238    $ 1,183     5 %

Pretax Segment Income 1

   $ 124    $ (20 )   —   %

 

1 Pretax segment income represents income before taxes and minority interest, excluding interest income, interest expense, amortization of intangibles and pretax charges of $243 million in 2004 and $638 million in 2003 (see pages 22 to 25 for description of charges).

 

Oilfield Services

 

As the year progressed, oil prices continued to climb, rising from $32.50 per barrel on January 1st to $38 per barrel at the end of June to a record of over $55 per barrel in late October. Despite oil trading on average some $15 per barrel higher in 2004 than in 2003, robust world demand growth of over 2 million barrels per day continued throughout the second half of 2004. Consumption, especially in the US and China, pushed demand to an average 82.5 million barrels per day in 2004, a year-on-year growth of 3.3% and the sharpest growth rate since 1976. Supply growth in 2004 was restrained by a number of factors that, when added together resulted in an extremely tight supply-demand balance that pushed prices higher than prior year forecasts. The factors that created this tight environment are expected to remain in 2005, including strong oil demand, geopolitical tension, a stretched refining system, relatively low crude and product inventories, limited spare production capacity and a weak US dollar. Accordingly, most forecasts call for some early 2005 softening in prices after a relatively mild winter followed by average oil prices at or slightly above 2004 levels. The main risks to this scenario remain a dramatic slowing of world economic growth and supply side disruption.

 

13


Upstream exploration and production (E&P) spending trended higher in 2004, up an estimated 13% over 2003. International spending, accounting for over 70% of the total, saw the largest gain of 14%, while North America was up 11%. Exploration spending remained flat in 2004 while development and production saw the majority of the increase as operators focused on maintaining production in aging fields. Worldwide rig counts were up 13% over 2003.

 

The outlook for 2005 remains robust with the industry now clearly focused on the need to build additional supply capacity for both oil and gas. This is evidenced by increased new field development plans, as well as unprecedented efforts to increase production and recovery from existing reservoirs. Exploration, especially in challenging environments such as deep water, should see a substantial increase in 2005. Strong market fundamentals, our extensive technology portfolio and unique global workforce make us ideally placed to grow in this environment.

 

2004 Results

 

Revenue of $10.24 billion increased 16% in 2004 versus 2003. North America increased 18%, Middle East & Asia increased 19%, and Latin America increased 21%. Europe/CIS/West Africa was up by 4%. Pretax operating income of $1.80 billion in 2004 was 17% higher than in 2003.

 

Activity increased in almost all regions with the largest growth recorded in the GeoMarkets in India; Mexico; Russia; East Africa and the Eastern Mediterranean; and the Caspian. Russia continued to make impressive progress with growth exceeding our expectations despite the absence of any activity for Yuganskneftegas at the end of the year.

 

Demand for all technology services increased, but particularly for Drilling & Measurements technologies including the PowerDrive* and newly introduced PowerV* rotary steerable systems as well as Wireline Analysis Behind Casing and PressureXpress services. Increased demand for Well Services production technologies also contributed significantly to the growth. These technologies included the successful launch of the PowerCLEAN* system, an integrated solution for optimizing production through wellbore fill removal using coiled tubing. The Well Completions & Productivity technology service also showed strong growth for production-based technologies while IPM activity continued its expansion. The rate of new technology introductions is expected to accelerate over the coming two-year period.

 

Offshore and deepwater activity in India utilizing Wireline, Drilling & Measurements and Well Completions & Productivity technologies continued to drive significant year-on-year growth. Growth in India was supported by the award of a completion sales tender for subsurface safety valves and a three-year contract for wireline logging on onshore fields for ONGC valued at more than $125 million.

 

During the year Schlumberger opened a Technology Hub on the campus of the Gubkin Russian State University of Oil and Gas, Russia’s leading oil and gas educational facility. The Hub complements other Schlumberger research and engineering activities in Russia.

 

Shell International Exploration and Production BV and Schlumberger Information Solutions established an alliance for research and development of next generation Smart Fields hydrocarbon development solutions.

 

North America

 

Revenue of $3.11 billion increased 18% over 2003 led principally by Canada and US Land, which benefited from the strong performance of most technology services, coupled with pricing improvements particularly for Well Services.

 

Growth in Canada was due to increased activity and substantially higher pricing.

 

US Land delivered robust revenue growth primarily due to continued favorable oil and gas industry dynamics, the expansion of the unconventional gas market, an improved pricing environment as a result of tighter resource availability, and strong overall market demand combined with increasing demand for ABC* Analysis Behind Casing technologies, and Drilling & Measurements PowerDrive rotary steerable systems. These technology advances are demonstrating value and are helping drive activity while enabling price increases and efficiency gains.

 

14


Pretax operating income of $519 million was 42% higher than in 2003 due mainly to increased operating leverage in US Land, with double-digit price improvements in Wireline and Well Services over 2003 averages. In Canada, increased activity coupled with sustained pricing improvements, and the favorable exchange rate effect led to a notable improvement in operating income.

 

At the end of the year, the technology component of turnkey service revenue in the Gulf of Mexico was evaluated against our objectives but proved insufficient to outweigh the risk associated with the turnkey drilling business model. As a result, the decision was made to exit the activity.

 

Latin America

 

Revenue of $1.75 billion grew 21% over 2003 as all the GeoMarkets, except Venezuela, posted revenue increases. Record revenue in Mexico was mainly due to PEMEX drilling activity coupled with higher levels of IPM activity.

 

Increasing demand for Integrated Project Management in Argentina, an increase in Wireline activity associated with the Peruvian jungle operations, and growing demand for rotary steerable systems in Brazil also contributed to the revenue growth.

 

In Venezuela, revenue decreased slightly on lower activity with PDVSA due to ongoing contract negotiation on certain integrated projects.

 

Pretax operating income of $221 million was flat over 2003. The substantial revenue growth did not materialize into higher operating income mainly because of a larger contribution of Schlumberger-managed third-party services on IPM projects in Mexico as well as an unfavorable revenue mix in Mexico. Additionally, throughout the year, certain barges in West Venezuela were partially idled while contractual negotiations continued with PDVSA.

 

A key contract award during the fourth quarter of 2004 included a new 350-well IPM contract in the Burgos Basin for PEMEX in Mexico. The multi-year contract value is estimated at $550 million and will include drilling and completion work for development and appraisal gas wells.

 

Europe/CIS/West Africa

 

Revenue of $2.79 billion increased 7% over 2003 mainly due to Russia, the Caspian and West Africa with gains recorded in all technology services led by Drilling & Measurements and Well Services.

 

CIS reached a new revenue record at $825 million, a 33% increase over 2003. Activity was particularly sustained in Russia mainly due to the continued expansion of the customer base and the deployment of new production-related technologies. The revenue growth was tempered by the halt of activities for Yuganskneftegas in Russia in the fourth quarter. However, successful redeployment of the equipment previously working for Yuganskneftegas was completed by the end of the year.

 

West Africa continued to deliver robust performance achieving record activity levels mainly due to the development of deepwater projects combined with price increases through the introduction of new services and increasing demand for Well Services and Well Completions & Productivity technology services.

 

Pretax operating income of $447 million declined 3% over 2003 mainly due to persistent union strikes in Norway, redeployment costs and associated decreased operating efficiency in Russia, weak results in North Africa, and the appreciation of local currencies against the US dollar. These were partially offset by the continued strengthening of activity in Continental Europe and the Caspian.

 

15


In Russia, Sibneft awarded Schlumberger a contract for more than $100 million to provide well construction and stimulation services in Western Siberia.

 

Middle East & Asia

 

Revenue in 2004 reached a record of $2.48 billion, increasing 19% over 2003. The GeoMarkets in the Middle East, Malaysia and India primarily drove the growth. Activity in Saudi Arabia was focused on increasing production capacity, which resulted in higher levels of drilling activity throughout the year. This trend is expected to continue in 2005. India reached record revenue with the ramp-up in deepwater activity for ONGC and deepwater exploration activity for Reliance Industries Ltd. Activity in Qatar continued to increase due to ongoing gas development projects in the North Field. Also contributing to the record revenue level was the start of a new fracturing campaign in Oman. Demand for Well Completions & Productivity technologies was particularly strong, mainly in the Gulf from projects with RasGas, in Saudi Arabia from the commissioning of the Abu Safah project, and in Malaysia from higher testing activities and artificial lift sales.

 

Pretax operating income of $649 million increased 27% over 2003 primarily driven by India, due to a substantial increase in deepwater activity combined with strong technology deployment, the ramp up of favorable projects in the Gulf, improved pricing on contract renewals, and new technology introductions.

 

Key technology solutions that were deployed included the CHDT* Cased Hole Dynamic Tester tool, part of the suite of ABC Analysis Behind Casing technology services, was used to identify a high-pressured zone in a depleted reservoir in China; to acquire pressures and fluid samples in Saudi Arabia and Abu Dhabi; and to acquire samples and pressure readings in Malaysia.

 

In the Gulf, demonstrated service quality and the introduction of new technology services led to the award of major contracts in Qatar and Oman. These included a $320 million, multi-year wireline and tubing conveyed perforating contract by Petroleum Development Oman (PDO) for their North and South operations.

 

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/West 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. Overhead cost savings of $67 million generated from restructuring and downsizing efforts, principally in Europe/CIS/West 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. 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 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. Integrated Project Management experienced high activity levels principally fueled by Latin America.

 

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. 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.

 

16


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.

 

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 West Africa during the second half of 2003 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 Africa due to deepwater activities moving into a more lucrative development phase.

 

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.

 

17


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 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.

 

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 2002, Schlumberger acquired A. Comeau & Associates Limited, a leading provider of electrical engineering products and services for artificially lifted wells. This 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 service 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 2002 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 real-time 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 of 2002 and a slow pick-up in Canadian activity post spring break-up in 2002.

 

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.

 

18


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 of 2002 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 and Drilling & Measurements technologies recorded the strongest growth. This growth was partially mitigated by a steep revenue drop in the fourth quarter of 2002 due to exceptionally severe winter weather conditions in the North Sea and Russia that affected all services. 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 2002 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 technologies posted the highest growth. 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.

 

WesternGeco

 

2004 Results

 

The revenue increase of 5% to $1.24 billion in 2004 from $1.18 billion in 2003 was mainly attributable to the successful expansion of Q-Technology together with strong Multiclient sales. Q-revenue grew from $79 million in 2003 to $162 million in 2004, with a similar growth rate expected in 2005.

 

Multiclient sales increased 24%, to $436 million, mainly in the Gulf of Mexico driven by the renewed interest in the library resulting from a higher oil price environment and an increasing number of blocks in the Gulf of Mexico coming up for renewal. Approximately 47% of the multiclient surveys sold in 2004 had no net book value due to prior amortization of capitalized costs and only 5% of the surveys sold were impaired in 2003 and 2002.

 

Land activity decreased 8% reflecting the completion of some projects in Malaysia and the Middle East, and the shutdown of several crews active in the previous year in Alaska, Mexico and West Africa.

 

Marine activity declined 3% mainly as a result of the decision to reduce the number of vessels in the WesternGeco fleet coupled with adverse weather in Latin America, lower activity in the Caspian and a high number of vessel transits at the end of the year. Marine activity in the first half of 2005 is expected to recover with higher vessel utilization and improved pricing.

 

Data Processing increased 6% reflecting higher acquisition volumes, higher levels of Q-processing, and robust third-party work coupled with improved operational efficiencies.

 

Pretax operating income reached $124 million in 2004 compared to a loss of $20 million in 2003 due to lower amortization cost following the impairments of the Multiclient library in 2003 and 2002 coupled with savings related to restructuring measures taken in 2003, accelerating demand for reservoir-focused Q-Marine activity together with strong Multiclient sales. Data Processing also contributed to this improvement due to better operating efficiency.

 

19


The WesternGeco backlog at the end of the year reached $670 million, increasing 64% over 2003, of which 86% are committed over the next year.

 

Driven by Q-Marine vessel utilization, WesternGeco decided to convert the Western Regent vessel to Q-technology. The vessel is scheduled for deployment in the first half of 2005.

 

2003 Results

 

Revenue in 2003 was $1.2 billion versus $1.5 billion in 2002, a 20% decrease which 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. The end of 2003 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.

 

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. 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 described on page 24) mainly due to significantly higher Multiclient amortization charges as a result of lower estimated future revenues. 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 WesternGeco backlog at the end of the year reached $408 million.

 

2002 Results

 

WesternGeco revenue of $1.5 billion decreased 13% compared to 2001, 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% in 2002, 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.

 

20


Research & Engineering

 

Expenditures by business segment were as follows:

 

     (Stated in millions)
     2004

   2003

   2002

Oilfield Services

   $ 416    $ 375    $ 379

WesternGeco

     48      52      68

Other

     3      4      5
    

  

  

     $ 467    $ 431    $ 452
    

  

  

 

Interest Expense

 

Interest expense in 2004 of $272 million included a pretax charge of $73 million and a pretax credit of $10 million related to US interest rate swaps (see Charges Continuing Operations). Excluding these items, interest expense decreased $126 million in 2004 due to a $2 billion decrease in average debt balances and a decrease in the weighted average borrowing rates from 4.6% to 3.9%. The decrease in 2003 of $34 million, to $334 million, was due to a decrease in average debt balances of $185 million and a decrease in the weighted 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 the weighted average borrowing rates from 5.8% to 4.9%, which more than offset a $1 billion increase in average debt balances.

 

Interest Income

 

Interest income of $56 million in 2004 was $4 million higher than 2003. The average return on investment in 2004 was 2%, a reduction of 0.4% compared to 2003, due to lower interest rates. The average investment balance in 2004 was $2.7 billion, an increase of $567 million over 2003 due to cash flow from operations and business divestiture proceeds. The 2003 interest income of $52 million was $16 million lower than 2002. The average return on investment in 2003 decreased by 1.4% to 2.4% compared to 2002 due to lower interest rates. The average investment balance in 2003 was $2.2 billion an increase of $352 million over 2002 due mainly to cash flow generated by operations and the sale of Hanover note.

 

Other

 

Gross margin was 21%, 16% and 18% for 2004, 2003 and 2002, respectively. The charges and credits described in detail on pages 22 to 25 adversely impacted the gross margin by 1%, 5% and 3% in 2004, 2003 and 2002, respectively. As a percentage of revenue, marketing, research and engineering and general and administrative expenses are as follows:

 

     2004

    2003

    2002

 

Marketing

   0.4 %   0.5 %   0.7 %

Research and engineering

   4.1 %   4.3 %   4.7 %

General and administrative

   3.0 %   3.2 %   3.3 %

 

The reported effective tax rate including charges was 20.9% in 2004, 46.0% in 2003 and 38.4% in 2002. The charges and credits described in detail on pages 22 to 25 increased the effective tax rate by 0.4% in 2004, 21.2% in 2003 and 13.7% in 2002. The decrease in the reported effective tax rate between 2004 and 2003 was primarily due to lower non-tax effective charges, including charges related to the extinguishment of European debt in 2003, and the country mix of earnings in WesternGeco. The rate for 2003 was higher than 2002 mainly due to the non-tax effective charges related to the extinguishment of European debt in 2003.

 

21


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 was restricted from sale until August 30, 2004, and a $150 million long-term subordinated note maturing December 15, 2005. Schlumberger’s investment in Hanover Compressor is classified as an available-for-sale security and is included in Other Assets in the Consolidated Balance Sheet.

 

In the fourth quarter of 2003, Schlumberger sold the subordinated note for $177 million and realized a pretax gain of $32 million.

 

At December 31, 2003 the carrying value of Schlumberger’s investment in Hanover Compressor common stock exceeded the market value. As the decline in the market value of the Stock was deemed to be “other than temporary”, Schlumberger wrote down the cost basis of its investment to the fair market value of $91.4 million at December 31, 2003 and recorded a pretax and after-tax charge of $81.2 million in accordance with generally accepted accounting principles (SFAS 115).

 

At December 31, 2004 the market value of Schlumberger’s investment in Hanover Compressor was $123 million.

 

Charges – Continuing Operations

 

Schlumberger recorded the following charges/credits in continuing operations:

 

Debt Extinguishment Costs

 

In June 2004, Schlumberger Technology Corporation bought back and retired $351 million of its outstanding $1 billion 6.5% Notes due 2012. As a result, Schlumberger recorded a pretax charge of $37 million ($23 million after-tax), which included market premium and transaction costs.

 

In March 2004, Schlumberger plc (SPLC) accepted tenders for the outstanding £175 million SPLC 6.50% Guaranteed Bonds due 2032. In addition, Schlumberger SA (SSA) bought back €25 million of the outstanding €274 million SSA 5.25% Guaranteed Bonds due 2008 and €7 million of the outstanding €259 million SSA 5.875% Guaranteed Bonds due 2011. As a result, Schlumberger recorded a pretax and after-tax charge of $77 million, which included market and tender premiums, and transaction costs.

 

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 pretax and after- tax 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.

 

The above pretax charges are classified in Debt extinguishment costs in the Consolidated Statement of Income.

 

Other Charges

 

2004

 

Third quarter of 2004:

 

    In connection with its ongoing restructuring program to reduce overhead, Schlumberger recorded, a pretax and after-tax charge of $3 million related to employee severance. This charge is classified in Cost of goods sold & services in the Consolidated Statement of Income.

 

22


    Schlumberger recorded a pretax charge of $11 million ($10 million after-tax ) related to an Intellectual Property settlement which is classified in Cost of goods sold & services in the Consolidated Statement of Income.

 

Second quarter of 2004:

 

    Schlumberger sold 9.7 million ordinary shares of Atos Origin SA at a price of €48.50 per share. The net proceeds for the sale were $551 million and Schlumberger recorded a pretax and after-tax loss of $7 million on this transaction, which reflects both banking fees and currency effect. The pretax charge is classified in Interest and other income in the Consolidated Statement of Income. As a result of this transaction, Schlumberger does not have any remaining ownership interest in Atos Origin SA.

 

    In connection with its continuing restructuring program to reduce overhead, Schlumberger recorded a pretax and after-tax charge of $4 million related to employee severance. This charge is classified in Cost of goods sold & services in the Consolidated Statement of Income.

 

    Schlumberger Technology Corporation settled its US Interest Rate Swaps resulting in a pretax gain of $10 million ($6 million after-tax), which is classified in Interest Expense in the Consolidated Statement of Income.

 

    Schlumberger recorded a pretax and after-tax charge of $11 million related to a vacated leased facility in the UK, which is classified in Cost of goods sold & services in the Consolidated Statement of Income.

 

    Schlumberger recorded a pretax and after-tax credit of $5 million related to the release of a litigation reserve which was no longer required and is classified in Cost of goods sold & services in the Consolidated Statement of Income.

 

First quarter of 2004:

 

    Schlumberger Technology Corporation paid off its commercial paper program in the US. As a result, the $500 million US interest-rate swaps that were designated as cash-flow hedges became ineffective. Schlumberger recorded a pretax non-cash charge of $73 million ($46 million after-tax) to recognize unrealized losses previously recorded in Other Comprehensive Income. The pretax charge is classified in Interest expense in the Consolidated Statement of Income.

 

    Schlumberger sold 9.6 million ordinary shares of Atos Origin SA at a price of €52.95 per share. The net proceeds for the sale were $625 million and Schlumberger recorded a pretax and after-tax loss of $14 million on this transaction, which reflects both banking fees and currency effect. The pretax charge is classified in Interest and other income in the Consolidated Statement of Income.

 

    Schlumberger had commenced a restructuring program in order to reduce overhead. Consequently, a pretax charge of $20 million ($14 million after-tax) was taken in the quarter related to a voluntary early retirement program in the United States and is classified in Cost of goods sold & services in the Consolidated Statement of Income.

 

23


The following is a summary of the above 2004 charges:

 

     (Stated in millions)  
     Pretax

    Tax

    Min Int

   Net

 

Charges & Credits:

                               

- Debt extinguishment costs

   $ 115     $ 14     $ —      $ 101  

- Restructuring program charges

     27       6       —        21  

- Intellectual Property settlement charge

     11       1       —        10  

- Loss on sale of Atos Origin shares

     21       —         —        21  

- US interest-rate swap settlement gain

     (10 )     (4 )     —        (6 )

- Vacated leased facility reserve

     11       —         —        11  

- Litigation reserve release

     (5 )     —         —        (5 )

- Loss recognized on interest-rate swaps

     73       27       —        46  
    


 


 

  


     $ 243     $ 44     $ —      $ 199  
    


 


 

  


 

2003

 

In December 2003, Schlumberger recorded a pretax gain of $32 million ($20 million after-tax) resulting from the sale of the Hanover Compressor note. The pretax gain is classified in Interest and other income in the Consolidated Statement of Income.

 

In December 2003, Schlumberger recorded a pretax and after-tax charge of $81 million relating to the write-down to fair market value of Schlumberger’s investment in Hanover Compressor common stock. This charge is classified in Cost of goods sold and services in the Consolidated Statement of Income.

 

In September 2003, Schlumberger recorded a pretax multiclient library impairment charge of $398 million ($204 million, after a tax credit of $74 million and a minority interest of $120 million), following an evaluation of current and expected future conditions in the seismic sector, a pretax seismic vessel impairment charge of $54 million ($38 million, after a minority interest credit of $16 million) and a $31 million pretax and after-tax gain on the sale of a drilling rig. The pretax amounts are classified in Cost of goods sold and services in the Consolidated Statement of Income.

 

The following is a summary of the above 2003 charges:

 

     (Stated in millions)  
     Pretax

    Tax

    Min Int

    Net

 

Charges & Credits:

                                

- Debt extinguishment costs

   $ 168     $ —       $ —       $ 168  

- Gain on sale of Hanover Compressor note

     (32 )     (12 )     —         (20 )

- Write-down of Hanover Compressor stock

     81       —         —         81  

- Multiclient seismic library impairment

     398       74       (120 )     204  

- Seismic vessel impairment

     54       —         (16 )     38  

- Gain on sale of rig

     (31 )     —         —         (31 )
    


 


 


 


     $ 638     $ 62     $ (136 )   $ 440  
    


 


 


 


 

2002

 

In the fourth quarter of 2002, Schlumberger recorded net pretax charges of $256 million ($182 after-tax and minority interest). Schlumberger recorded severance and other costs in an effort to reduce costs at WesternGeco. These costs related to expenses that offered no future benefit to the ongoing operations of this business. The severance costs related to a reduction in workforce of approximately 1,700 employees. 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 valuation allowance against a deferred tax asset in Europe, a gain on the sale of drilling rigs and other costs. These pretax charges are classified in Cost of goods sold and services in the Consolidated Statement of Income.

 

24


In March 2002, Schlumberger recorded a charge of $26 million (pretax $27 million and minority interest credit of $1 million) related to the financial/economic crisis in Argentina where in January 2002, the government eliminated all US dollar contracts and converted US dollar denominated accounts receivable into pesos. As a result, Schlumberger’s currency exposure increased significantly. With currency devaluation, an exchange loss (net of hedging) on net assets, primarily customer receivables, was incurred. This pretax charge is classified in Cost of goods sold and services in the Consolidated Statement of Income.

 

The following is a summary of the above 2002 charges:

 

     (Stated in millions)  
     Pretax

    Tax

    Min Int

    Net

 

Charges & Credits:

                                

- Multiclient seismic library impairment

   $ 184     $ —       $ (55 )   $ 129  

-WesternGeco severance and other

     117       7       (38 )     72  

-Valuation allowance

     —         (42 )     —         42  

- Gain on sale of drilling rigs

     (87 )     —         —         (87 )

- Other

     42       16               26  

- Argentina exchange loss

     27               (1 )     26  
    


 


 


 


     $ 283     $ (19 )   $ (94 )   $ 208  
    


 


 


 


 

Business Divestitures – Discontinued Operations

 

During 2004, Schlumberger divested the following businesses which are accounted for as Discontinued Operations:

 

    In January, the sale of the SchlumbergerSema business was completed. Schlumberger received €393 million after adjustments ($495 million) in cash and 19.3 million shares of common stock of Atos Origin with a value of €1.02 billion ($1.27 billion), which represented approximately 29% of the outstanding common shares of Atos Origin after the transaction was completed. The results of SchlumbergerSema include, in the first quarter of 2004, a gain of $26 million on the sale and in the second quarter of 2004, a credit of $15 million related to adjustments to several accruals. The net assets were approximately $2.2 billion, including $1.3 billion of goodwill.

 

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. The equity in earnings representing Schlumberger’s interest in Atos Origin for the four days ending February 2, 2004 was not material. This investment was accounted for using the cost method as of February 2, 2004. On April 30, 2004 Schlumberger sold its remaining holding of 9.7 million Atos Origin shares for consideration of €465 million ($551 million), net of expenses. The losses on the sales of the Atos Origin shares of $21 million are classified in Interest and other income in the Consolidated Statement of Income.

 

    In February, Schlumberger sold its Telecom Billing Software business for $37 million in cash, excluding potential future cash proceeds of up to $10 million, of which $7 million was received in the third quarter. A $17 million gain on the sale was recognized in the first quarter of 2004 and a gain of $7 million related to the additional cash proceeds received was recognized in the third quarter. The net assets were approximately $17 million.

 

    In March, Schlumberger sold its Infodata business for $104 million in cash. A $48 million gain on the sale was recognized in the first quarter of 2004. The net assets were approximately $47 million, including goodwill of $42 million

 

    In April, Schlumberger completed the sale of its Business Continuity (BCO) business for $237 million in cash. A $48 million gain on the sale was recognized in the second quarter of 2004. The net assets were approximately $160 million, including goodwill of $83 million.

 

25


    In May, Schlumberger’s wholly owned subsidiary Schlumberger BV sold, via a public offering, 34.8 million ordinary shares that it had held in its smart card business Axalto Holding NV, which represented 87% of the total ordinary shares outstanding. The sale price was €14.80 per share, resulting in net proceeds, after expenses, of $606 million, including a subsequent placement of 166,250 shares. A $7 million loss on the sale was recognized in the second quarter of 2004.

 

In the third quarter, a gain of $18 million was recognized consisting of (1) a $9 million gain on the sale of Schlumberger’s residual investment of 5.1 million shares in Axalto (the sale price was €16.59 per share resulting in net proceeds, after expenses, of $99 million) and (2) a $9 million reversal of a liability related to the sale. The net assets were approximately $700 million, including goodwill of $415 million.

 

    In July, Schlumberger completed the sale of its Electricity Metering North America business for $248 million in cash. The results of Electricity Metering North America included a net gain of $25 million, including a US tax valuation allowance release of $49 million related to a tax loss carry forward associated with the sale of SchlumbergerSema (which is also included in Discontinued Operations) in the second quarter of 2004. This transaction allowed for the recognition of a deferred tax asset that was previously offset by a valuation allowance. Excluding the reversal of the valuation allowance, the transaction would have resulted in a loss of $24 million. The net assets were approximately $146 million, including goodwill of $94 million.

 

    In July, Schlumberger completed the sale of its Telecom Messaging business for $15 million, consisting of $6 million in cash and $9 million in future payments, of which an initial payment of $3 million was received in November 2004. A $4 million loss on the sale was recognized in the third quarter of 2004. The net assets were approximately $15 million.

 

    During the first quarter of 2005, Schlumberger completed the sales of its Global Tel*Link, Public Phones and Essentis activities. The results of these businesses are reported as Discontinued Operations in the Consolidated Statement of Income and, in the fourth quarter of 2004 include accruals of approximately $15 million relating to the net losses on the sale of Public Phones and Essentis and a $17 million impairment charge relating to goodwill and intangible assets associated with the Essentis business.

 

During 2003, Schlumberger divested the following businesses which are accounted for as Discontinued Operations:

 

    In July, Schlumberger completed the sale of its NPTest semiconductor testing business to a partnership led by Francisco Partners and Shah Management. The proceeds received were $220 million in cash resulting in a $12 million loss on the sale. Additionally, the partnership has a contingent obligation to make a further payment to Schlumberger under certain circumstances. The net assets were $202 million.

 

    In August, Schlumberger completed the sale of its Verification Systems business by a proceed-free management buyout resulting in an $18 million loss on the sale. The net assets were $17 million.

 

    In October, Schlumberger completed the sale of its e-City ‘pay & display’ parking solutions business to Apax Partners. The proceeds received were $84 million in cash resulting in a $56 million loss on the sale. The net assets were $120 million, including $65 million of goodwill.

 

During 2002, Schlumberger divested the following business which was accounted for as Discontinued Operations:

 

    In December, Schlumberger completed the sale of its Reed Hycalog drillbits business. The proceeds received included $259 million in cash and 9.7 million shares of Grant Prideco common stock with a value of $103 million, resulting in a $66 million gain on the sale. The net assets were $185 million.

 

26


The following table summarizes the results of these discontinued operations:

 

     (Stated in millions)  
     2004

   2003

    2002

 

Revenues

   $ 467    $ 4,367     $ 4,311  

Income (loss) before taxes

   $ 63    $ 103     $ (2,844 )

Tax expense

     16      32       31  

Gains (losses) on disposal, net of tax

     162      (86 )     66  
    

  


 


Income (loss) from discontinued operations

   $ 209    $ (15 )   $ (2,809 )
    

  


 


 

SchlumbergerSema Goodwill and Other Charges – Discontinued operations

 

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 constituted significant events that required an impairment analysis to be performed in accordance with SFAS No. 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, a $2.638 billion pretax and after-tax goodwill impairment charge was recorded. This impairment reflected the difficulties of the telecommunications industry and the severely depressed market values of the IT companies serving SchlumbergerSema’s sector at the time of the charge. Certain intangible assets were also identified and written down as part of this process, resulting in a $147 million pretax charge ($132 million after-tax). Additional charges recorded included $97 million ($78 million after-tax) of severance, facility and other costs in an effort to reduce costs at SchlumbergerSema and a $52 million valuation allowance against a deferred tax asset in Europe.

 

The following is a summary of the above 2002 charges included in loss from discontinued operations:

 

     (Stated in millions)
     Pretax

   Tax

    Min Int

   Net

Charges & Credits:

                            

- Goodwill impairment

   $ 2,638    $ —       $ —      $ 2,638

- Intangibles impairment

     147      15       —        132

- SchlumbergerSema severance and other

     97      19       —        78

- Valuation allowance

     —        (52 )     —        52
    

  


 

  

     $ 2,882    $ (18 )   $ —      $ 2,900
    

  


 

  

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires Schlumberger to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. The following accounting policies involve “critical accounting estimates” because they are particularly dependent on estimates and assumptions made by Schlumberger about matters that are inherently uncertain. A summary of all of Schlumberger’s significant accounting policies, including those discussed below, are included in Note 2 to the Consolidated Financial Statements.

 

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.

 

27


Multiclient Seismic Data

 

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 the percentage of the total costs to the estimated total revenue that Schlumberger expects to receive from the sales of such data. However, under no circumstance will an individual survey carry a net book value greater than a 4-year straight-lined amortized value.

 

The carrying value of surveys is reviewed for impairment annually as well as when an event or change in circumstance indicates an impairment may have occurred. Adjustments to the value are recorded when it is determined that estimated future revenues, which involves significant judgment on the part of Schlumberger, would not be sufficient to recover the carrying value of the surveys. Significant adverse changes in Schlumberger’s estimated future revenues could result in impairment charges in a future period. For purposes of performing the annual impairment test of the multiclient library, future cash flows are analyzed based on two pools of surveys: US and non-US. The US and non-US pools were determined to be the most appropriate level at which to perform the impairment review based upon a number of factors including (i) various macroeconomic factors that influence the ability to successfully market surveys and (ii) the focus of the sales force and related costs.

 

Schlumberger recorded impairment charges relating to the multiclient library of $398 million in 2003 and $184 million in 2002. The carrying value of the library at December 31, 2004 and 2003 was $347 million and $506 million, respectively. Following the 2003 impairment charge, Schlumberger will generally not commence a multiclient project unless the project is significantly pre-funded by one or more customers. The reduction in the carrying value of the library from 2003 to 2004 is primarily attributable to a cautious approach to new investment combined with the significant pre-funding requirement.

 

Allowance for Doubtful Accounts

 

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.

 

Inventory Reserves

 

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 write-downs may be required.

 

Goodwill, Intangible Assets and Long-Lived Assets

 

Schlumberger records as goodwill the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired. Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), requires goodwill to be tested for impairment annually as well as when an event or change in circumstance indicates an impairment may have occurred. Goodwill is tested for impairment using a two-step approach. The first step tests for impairment by comparing the fair value of Schlumberger’s individual reporting units to their carrying amount to determine if there is a potential goodwill impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value.

 

28


For purposes of performing the impairment test for goodwill as required by SFAS 142 Schlumberger’s reporting units are the four geographic areas comprising the Oilfield Services segment and the WesternGeco segment. Schlumberger estimates the fair value of these reporting units using a discounted cash flow analysis and/or applying various market multiples. From time to time a third party valuation expert may be utilized to assist in the determination of fair value. Determining the fair value of a reporting unit is judgmental and often involves the use of significant estimates and assumptions. Schlumberger’s estimates of the fair value of each of its previously mentioned reporting units was significantly in excess of their carrying value during 2004, 2003 and 2002.

 

Long-lived assets, including fixed assets and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the long-lived asset to its estimated fair value. The determination of future cash flows as well as the estimated fair value of long-lived assets involves significant estimates on the part of management. In order to estimate the fair value of a long-lived asset, Schlumberger may engage a third-part to assist with the valuation. If there is a material change in economic conditions or other circumstances influencing the estimate of future cash flows or fair value, Schlumberger could be required to recognize impairment charges in the future. Schlumberger evaluates the remaining useful life of its intangible assets on a periodic basis to determine whether events and circumstances warrant a revision to the remaining estimated amortization period.

 

Investments

 

Schlumberger and Smith International Inc. operate a drilling fluids joint venture of which Schlumberger owns a 40% interest and records income using the equity method of accounting. Schlumberger’s investment at December 31, 2004 and 2003 was $716 million and $657 million, respectively. The carrying value of this joint venture is evaluated for impairment annually as well as when an event or change in circumstance indicates that a decline in the fair value of this investment that is other than temporary has occurred. Fair value is generally estimated by comparing the significance of this joint venture to Smith International Inc., a publicly traded company, and then referencing the market capitalization of Smith International Inc. To date, Schlumberger has not recorded any impairment charges relating to this investment as this analysis has indicated that the fair value of this investment is significantly in excess of its carrying value.

 

Losses on Contracts

 

Losses on contracts are provided for when such losses become known and can be reasonably estimated. Historically, losses on contracts that have had a material impact on Schlumberger’s consolidated results of operations have been rare.

 

Income Taxes

 

Schlumberger’s tax filings are subject to regular audit by the tax authorities in most of the jurisdictions in which it conducts business. These audits may result in assessments for additional taxes which are resolved with the authorities or, potentially, through the courts. Tax liabilities are recorded based on estimates of additional taxes which will be due upon the conclusion of these audits. Estimates of these tax liabilities are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities which could be materially different from these estimates. In such an event, Schlumberger will record additional tax expense or tax benefit in the year in which such resolution occurs.

 

29


Schlumberger had net deferred tax assets of $583 million at December 31, 2004, which excluded $312 million relating to net operating losses in certain countries 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.

 

Contingencies

 

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 material where it is probable that Schlumberger has incurred a liability and such amount can be reasonably estimated. 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.

 

The Consolidated Balance Sheet included accruals for estimated future expenditures associated with business divestitures which have been completed. It is possible that the ultimate expenditures may differ from the amounts recorded. In the opinion of management, such differences are not expected to be material relative to consolidated liquidity, financial position or future results of operations.

 

In December 2004, WesternGeco and Schlumberger received grand jury subpoenas from the US Attorney’s office in the Southern District of Texas seeking documents relating to possible fraud in obtaining visas for non-US citizens working as crewmembers on vessels operating in the Gulf of Mexico. We are in the process of responding to the investigation, including providing information sought by the subpoenas. Schlumberger is currently unable to predict the outcome of this matter and the related impact it might have on Schlumberger’s financial position and results of operations.

 

Pension and Postretirement Benefits

 

Schlumberger’s pension benefit and postretirement medical benefit obligations and related costs are calculated using actuarial concepts, which include critical assumptions related to the discount rate, expected return on plan assets and medical cost trend rates. These assumptions are important elements of expense and/or liability measurement and are updated on an annual basis at the beginning of each fiscal year, or more frequently upon the occurrence of significant events.

 

The discount rate we use reflects the prevailing market rate of a portfolio of high-quality debt instruments with maturities matching the expected timing of the payment of the benefit obligations. The discount rate utilized to determine the projected benefit obligation for Schlumberger’s US pension plan was reduced from 6.25% at December 31, 2003 to 6.00% at December 31, 2004. The discount rate utilized to determine the projected benefit obligation for Schlumberger’s UK pension was reduced from 5.60% at December 31, 2003 to 5.40% at December 31, 2004. These changes were made to reflect market interest rate conditions. A lower discount rate increases the present value of benefit obligations and increases pension expense. A change of 25 basis points in the discount rate assumption would have an estimated $12 million impact on annual pension expense.

 

The expected rate of return for our retirement benefit plans represents the average rate of return expected to be earned on plan assets over the period that benefits included in the benefit obligation, are expected to be paid. Schlumberger’s expected rate of return has been determined based upon expectations regarding future rates of return for the investment portfolio, with consideration given to the distribution of investments by asset class and historical rates of return for each individual asset class. The expected rate of return on plan assets was 8.50% in both 2004 and 2003. A lower expected rate of return would increase pension expense. A change of 25 basis points in the expected rate of return would impact annual pension expense by approximately $4 million.

 

30


Schlumberger’s medical cost trend rate assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. The overall medical cost trend rate assumption utilized in 2004 was 10% graded to 5% over the next five years and 5% thereafter. If the assumed medical cost trend rate was increased by one percentage point, health care cost in 2004 would have increased by $15 million, and the accumulated postretirement obligation would have increased by $137 million on December 31, 2004. If the assumed medical cost trend rate was decreased by one percentage point, health care cost in 2004 would have decreased by $13 million, and the accumulated postretirement obligation would have decreased by $113 million on December 31, 2004.

 

Cash Flow

 

In 2004, cash provided by operations was $1.85 billion as net income plus depreciation & amortization and net charges, including the extinguishment of US and European debt, were only partially offset by increases in customer receivables and inventories, due to higher operating revenues.

 

Cash provided by investing activities was $1.68 billion as the proceeds from non-oilfield business divestitures ($1.66 billion) and the proceeds from the sale Schlumberger’s investment of 19.3 million shares in of Atos Origin ($1.16 billion) was partially offset by investments in fixed assets ($1.22 billion) and multiclient seismic data ($63 million).

 

Cash used in financing activities was $3.59 billion with the proceeds from employee stock plans ($278 million) offset by the payment of dividends to shareholders ($441 million), the costs related to the extinguishment of certain US and European debt ($111 million), the repurchase of 5.15 million shares of Schlumberger stock ($320 million) and an overall reduction in debt of $2.93 billion.

 

“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 change in Net Debt follows:

 

31


     (Stated in millions)  
     2004

    2003

    2002

 

Net Debt, beginning of year

   $ (4,176 )   $ (5,021 )   $ (5,037 )

Income from continuing operations

     1,014       398       489  

Excess of equity income over dividends received

     (66 )     (75 )     (38 )

Gain on sale of drilling rigs

     —         —         (87 )

Net charges

     199       440       295  

Depreciation & amortization1

     1,308       1,341       1,309  

(Increase) decrease in working capital

     (492 )     (186 )     (118 )

Proceeds from business divestitures

     1,729       299       259  

Proceeds from the sale of Axalto shares

     99       —         —    

Proceeds from the sale of Atos Origin shares

     1,165       —         —    

Stock repurchase program

     (320 )     —         —    

Proceeds from sale of drilling rigs

     —         58       119  

Fixed asset additions1

     (1,279 )     (1,021 )     (1,515 )

Dividends paid

     (441 )     (437 )     (433 )

US pension plan contributions

     (254 )     (119 )     —    

Proceeds from employee stock plans

     278       172       175  

Debt extinguishment costs

     (111 )     (168 )     —    

Settlement of US interest rate swap

     (70 )     —         —    

Sale of Grant Prideco stock

     —         106       —    

Sale of Hanover Compressor note

     —         177       —    

Acquisition of Sema plc

     —         —         (132 )

Other business acquisitions

     (31 )     —         (44 )

Acquisition related payments

     —         —         (70 )

Investment in PetroAlliance

     (12 )     —         —    

Translation effect on net debt

     (75 )     (461 )     (507 )

Discontinued operations

     41       19       133  

Other

     35       302       181  
    


 


 


Net Debt, end of year

   $ (1,459 )   $ (4,176 )   $ (5,021 )
    


 


 


 

1. Includes Multiclient seismic data costs.

 

     Dec. 31
2004


    Dec. 31
2003


    Dec. 31
2002


 

Components of Net Debt

                        

Cash and short term investments

   $ 2,997     $ 3,109     $ 1,736  

Fixed income investments, held to maturity

     204       223       408  

Bank loans and current portion of long-term debt

     (716 )     (1,411 )     (1,136 )

Long-term debt

     (3,944 )     (6,097 )     (6,029 )
    


 


 


     $ (1,459 )   $ (4,176 )   $ (5,021 )
    


 


 


 

At December 31, 2004, the cash and short-term investments of $3.0 billion and the remaining credit facilities of $4.5 billion are sufficient to meet future business requirements.

 

Summary of Major Contractual Commitments

 

     (Stated in millions)
     Payment Period

Contractual Commitments


   Total

   2005

   2006 - 2007

   2008 - 2009

   After
2009


                                    

Debt

   $ 4,660    $ 716    $ 992    $ 1,512    $ 1,440

Operating Leases

   $ 384    $ 102    $ 151    $ 71    $ 60

 

Schlumberger has outstanding letters of credit/guarantees which relate to business performance bonds, custom/excise tax commitments, facility lease/rental obligations, etc. These were entered into in the ordinary course of business and are customary practices in the various countries where Schlumberger operates.

 

32


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 2004 and 2003, were:

 

     Price Range

  

Dividends

Declared


     High

   Low

  

2004

                    

QUARTERS

                    

First

   $ 66.750    $ 52.530    $ 0.1875

Second

     64.700      54.750      0.1875

Third

     67.850      58.640      0.1875

Fourth

     69.890      61.010      0.1875

2003

                    

QUARTERS

                    

First

   $ 43.330    $ 35.620    $ 0.1875

Second

     50.150      36.080      0.1875

Third

     52.100      44.500      0.1875

Fourth

     56.240      45.460      0.1875

 

The number of holders of record of Schlumberger common stock at December 31, 2004, was approximately 22,500. 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. Under current legislation, US stockholders are not subject to any Netherlands Antilles withholding or other Netherlands Antilles taxes attributable to ownership of such shares.

 

On January 25, 2005, Schlumberger announced that the Board of Directors had approved a 12% increase in the quarterly dividend, to $0.21 per share. The increase is effective commencing with the dividend payable on April 8, 2005.

 

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 Standard

 

In December 2004, the Financial Accounting Standards Board issued SFAS 123R (Share-Based Payment.) The standard amends SFAS 123 (Accounting for Stock Based Compensation) and concludes that services received from employees in exchange for stock-based compensation results in a cost to the employer that must be recognized in the financial statements. The cost of such awards should be measured at fair value at the date of grant. SFAS 123R provides public companies with a choice of transition methods to implement the standard. Schlumberger anticipates applying the modified prospective method whereby companies would recognize compensation cost for the unamortized portion of vested awards outstanding at the effective date of SFAS 123R (July 1, 2005 for Schlumberger) and granted after January 1, 1995. Such cost will be recognized in Schlumberger’s financial statements over the remaining vesting period. As described in Note 19, in 2003 Schlumberger adopted the fair value recognition provisions of SFAS Nos. 123 and 148 on a prospective basis for grants after January 1, 2003. Therefore, effective July 1, 2005, Schlumberger will have to apply the provisions of SFAS 123R to the unvested portion of awards granted during the period of January 1, 1995 to December 31, 2002. The adoption of this standard is currently expected to reduce Schlumberger’s 2005 diluted earnings per share by approximately $0.03.

 

33


Forward-looking Statements

 

This report 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; growth for Schlumberger as a whole and for each of Oilfield Services and WesternGeco; oil and natural gas demand and production growth; operating and capital expenditures by Schlumberger and the oil and gas industry; the business strategies of Schlumberger’s customers; expected depreciation and amortization expense; expected pension funding; and future results of operations. These statements involve risks and uncertainties, including, but not limited to, the global economy; changes in exploration and production spending by Schlumberger’s customers and changes in the level of oil and natural gas exploration and development; general economic and business conditions in key regions of the world; political and economic uncertainty and socio-political unrest; and other factors detailed in our fourth quarter and full year 2004 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.

 

Item 7A Quantitative and Qualitative Disclosures About Market Risk

 

Schlumberger is subject to market risk primarily associated with changes in foreign currency exchange rates, interest rates and equity prices.

 

As a multinational company, Schlumberger conducts its business in over 80 countries. Schlumberger’s functional currency is primarily the US dollar, which is consistent with the oil and gas industry. Approximately 85% of Schlumberger’s operating revenue in 2004 was denominated in US dollars. However, outside the US, a significant portion of Schlumberger’s expenses are incurred in foreign currencies. Therefore, when the US dollar strengthens in relation to the foreign currencies of the countries in which Schlumberger conducts business, the US dollar-reported expenses will decrease.

 

A 5% change in the average exchange rates of all the foreign currencies in 2004 would have changed operating revenue by approximately 1%. If the 2004 average exchange rates of the US dollar against all foreign currencies had increased by 5%, Schlumberger’s income from continuing operations would have increased by 8%. Conversely, a 5% weakening of the US dollar average exchange rates would have decreased income from continuing operations by 11%.

 

Schlumberger maintains a foreign-currency risk management strategy that uses derivative instruments to protect its interests from unanticipated fluctuations in earnings and cash flows caused by volatility in currency exchange rates. Forward currency contracts provide a hedge against currency fluctuations either on assets/liabilities denominated in other than a functional currency or on expenses. Option contracts are usually entered into as a hedge against currency variations on firm commitments generally involving the construction of long-lived assets.

 

On December 31, 2004, contracts were outstanding for the US dollar equivalent of $1.1 billion in various foreign currencies. These contracts mature on various dates in 2005.

 

Schlumberger does not enter into foreign currency or interest rate derivatives for speculative purposes.

 

34


Schlumberger is subject to interest rate risk on its debt. Schlumberger maintains an interest rate risk management strategy that uses a mix of variable- and fixed-rate debt together with interest rate swaps, where appropriate, to fix or lower borrowing costs.

 

At December 31, 2004, Schlumberger had fixed rate debt aggregating approximately $2.9 billion and variable rate debt aggregating $1.8 billion.

 

Schlumberger’s exposure to interest rate risk associated with its debt is also somewhat mitigated by its investment portfolio. Both Short-term investments and Fixed income investments, held to maturity, which totaled approximately $3.0 billion at December 31, 2004, are comprised primarily of eurodollar time deposits, certificates of deposit and commercial paper, euronotes and eurobonds, and are substantially all denominated in US dollars. The average return on investment was 2% in 2004.

 

The following table represents principal amounts of Schlumberger’s debt at December 31, 2004 by year of maturity:

 

     (Stated in millions)
     Expected Maturity Dates

     2005

   2006

   2007

   2008

   2009

   Thereafter

   Total

Fixed rate debt

                                                

1.5% Series A Convertible Debentures

                        $ 975                  $ 975

6.5% Notes due 2012

                                      $ 648      648

2.125% Series B Convertible Debentures

                                        450      450

5.875% Guaranteed Bonds due 2011 (Euro denominated)

                                        342      342

5.25% Guaranteed Bonds (Euro denominated)

                          327                    327

7.0% Notes (Canadian dollar denominated)

          $ 101                                  101

6.25% Guaranteed Bonds (British pound denominated)

                          33                    33
    

  

  

  

  

  

  

Total fixed rate debt

   $ —      $ 101    $ —      $ 1,335    $ —      $ 1,440    $ 2,876

Variable rate debt

   $ 716    $ 246    $ 645    $ 13    $ 164    $ —      $ 1,784
    

  

  

  

  

  

  

Total

   $ 716    $ 347    $ 645    $ 1,348    $ 164    $ 1,440    $ 4,660
    

  

  

  

  

  

  

 

On or after June 6, 2008 (in the case of the Series A Convertible Debentures) or June 6, 2010 (in the case of the Series B Convertible 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 (defined as a change in control or a termination of trading of Schlumberger’s common stock), 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.

 

The fair market value of the outstanding fixed rate debt was approximately $3.1 billion as of December 31, 2004. The weighted average interest rate on the variable rate debt as of December 31, 2004 was approximately 3.7%.

 

35


On December 31, 2004, interest rate swap arrangements outstanding were pay floating/receive fixed on US dollar debt of $117 million. These arrangements mature at various dates to December 2009. Interest rate swap arrangements increased consolidated interest expense in 2004 by $60 million including the $73 million charge recorded in the first quarter of 2004 for the settlement and cancellation of $500 million outstanding interest rate swaps in the US.

 

With respect to equity market risks, Schlumberger’s investment portfolio includes equity investments in publicly held companies that are classified as available-for-sale (our investment in the Hanover Compressor Company) and other strategic equity holdings in privately held companies. These securities are exposed to price fluctuations. As of December 31, 2004, the fair market value of Schlumberger’s investment in Hanover Compressor of $123 million, exceeded its cost basis by approximately $31.6 million. At December 31, 2003, Schlumberger wrote down the cost basis of this investment to its fair market value of $91.4 million at December 31, 2003 and recorded a pretax and after-tax impairment charge of $81.2 million. No investment impairment charges were recorded in 2004. Schlumberger’s policy is not to hedge equity price risk.

 

36


Item 8 Financial Statements and Supplementary Data

 

SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS ANTILLES)

AND SUBSIDIARY COMPANIES

 

CONSOLIDATED STATEMENT OF INCOME

 

     (Stated in thousands except per share amounts)  

Year Ended December 31,


   2004

    2003

    2002

 

Operating revenue

   $ 11,480,165     $ 10,017,215     $ 9,657,407  

Interest and other income

     128,698       166,493       139,068  

Expenses

                        

Cost of goods sold and services

     9,041,972       8,428,631       7,935,757  

Research & engineering

     467,354       430,801       451,527  

Marketing

     40,310       47,589       70,917  

General & administrative

     344,448       317,326       315,284  

Debt extinguishment costs

     114,894       167,801       —    

Interest

     272,448       334,336       367,973  
    


 


 


Income from Continuing Operations before taxes and minority interest

     1,327,437       457,224       655,017  

Taxes on income

     276,949       210,381       251,632  
    


 


 


Income from Continuing Operations before minority interest

     1,050,488       246,843       403,385  

Minority interest

     (36,436 )     151,326       85,472  
    


 


 


Income from Continuing Operations

     1,014,052       398,169       488,857  

Income (Loss) from Discontinued Operations

     209,818       (15,167 )     (2,808,852 )
    


 


 


Net Income (Loss)

   $ 1,223,870     $ 383,002     $ (2,319,995 )
    


 


 


Basic earnings per share:

                        

Income from Continuing Operations

   $ 1.72     $ 0.68     $ 0.84  

Income (Loss) from Discontinued Operations

     0.36       (0.03 )     (4.85 )
    


 


 


Net Income (Loss)

   $ 2.08     $ 0.66     $ (4.01 )
    


 


 


Diluted earnings per share:

                        

Income from Continuing Operations

   $ 1.70     $ 0.68     $ 0.84  

Income (Loss) from Discontinued Operations

     0.34       (0.03 )     (4.83 )
    


 


 


Net Income (Loss)

   $ 2.04     $ 0.65     $ (3.99 )
    


 


 


Average shares outstanding

     589,089       583,904       578,588  

Average shares outstanding assuming dilution

     612,872       586,491       581,933  

 

See the Notes to Consolidated Financial Statements

 

37


SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS ANTILLES)

AND SUBSIDIARY COMPANIES

 

CONSOLIDATED BALANCE SHEET

 

           (Stated in thousands)  

December 31,


   2004

    2003

 

ASSETS

                

Current Assets

                

Cash

   $ 223,503     $ 234,192  

Short-term investments

     2,773,922       2,874,781  

Receivables less allowance for doubtful accounts (2004 - $114,403; 2003 - $128,199)

     2,663,642       2,568,425  

Inventories

     819,745       796,559  

Deferred taxes

     239,111       315,350  

Other current assets

     274,647       341,973  

Assets held for sale

     65,179       3,237,841  
    


 


       7,059,749       10,369,121  

Fixed Income Investments, held to maturity

     203,750       223,300  

Investments in Affiliated Companies

     883,598       776,965  

Fixed Assets less accumulated depreciation

     3,761,729       3,799,711  

Multiclient Seismic Data

     346,522       505,784  

Goodwill

     2,789,048       3,377,583  

Intangible Assets

     346,833       403,319  

Deferred Taxes

     343,584       316,277  

Other Assets

     265,964       269,266  
    


 


     $ 16,000,777     $ 20,041,326  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Current Liabilities

                

Accounts payable and accrued liabilities

   $ 2,980,790     $ 3,247,545  

Estimated liability for taxes on income

     858,785       807,938  

Dividend payable

     111,136       110,511  

Long-term debt - current portion

     143,385       889,678  

Bank & short-term loans

     572,487       521,490  

Liabilities held for sale

     34,617       1,217,568  
    


 


       4,701,200       6,794,730  

Long-term Debt

     3,944,180       6,097,418  

Postretirement Benefits

     670,765       614,850  

Other Liabilities

     151,457       254,709  
    


 


       9,467,602       13,761,707  
    


 


Minority Interest

     416,438       398,330  
    


 


Stockholders’ Equity

                

Common Stock

     2,454,219       2,258,488  

Income retained for use in the business

     6,287,905       5,505,744  

Treasury stock at cost

     (1,684,394 )     (1,508,239 )

Accumulated other comprehensive loss

     (940,993 )     (374,704 )
    


 


       6,116,737       5,881,289  
    


 


     $ 16,000,777     $ 20,041,326  
    


 


 

See the Notes to Consolidated Financial Statements

 

38


SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS ANTILLES)

AND SUBSIDIARY COMPANIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

           (Stated in thousands)  

Year Ended December 31,


   2004

    2003

    2002

 

Cash flows from operating activities:

                        

Income from continuing operations

     1,014,052       398,169       488,857  

Adjustments to reconcile net income to net cash provided by operating activities:

                        

Depreciation and amortization 1

     1,307,931       1,341,102       1,308,658  

Gain on the sale of Grant Prideco stock

     —         (1,320 )     —    

Charges, net of tax & minority interest 2

     198,801       439,976       295,281  

Gain on sale of drilling rigs

     —         —         (86,858 )

Earnings of companies carried at equity, less dividends received

     (65,748 )     (74,596 )     (38,280 )

Decrease (increase) deferred taxes

     6,774       (12,286 )     (48,702 )

Stock based compensation expense

     26,466       13,229       —    

Provision for losses on accounts receivable

     25,744       53,303       66,425  

Change in operating assets and liabilities:

                        

(Increase) decrease in receivables

     (414,856 )     (34,668 )     657,340  

(Increase) decrease in inventories

     (166,698 )     56,639       (3,715 )

Decrease (increase) in other current assets

     7,856       (57,206 )     112,499  

Decrease in accounts payable and accrued liabilities

     (295,633 )     (303,513 )     (897,124 )

Increase in estimated liability for taxes on income

     87,470       98,994       (53,318 )

Increase in postretirement benefits

     54,998       70,394       39,659  

Other - net

     58,721       27,171       39,842  
    


 


 


NET CASH PROVIDED BY OPERATING ACTIVITIES

     1,845,878       2,015,388       1,880,564  
    


 


 


Cash flows from investing activities:

                        

Purchases of fixed assets

     (1,215,847 )     (871,539 )     (1,169,978 )

Multiclient seismic data capitalized

     (63,206 )     (149,765 )     (344,705 )

Capitalization of intangible assets

     (77,171 )     (94,639 )     (125,622 )

Proceeds from sale of fixed assets & other

     48,304       171,895       276,022  

Sale of Grant Prideco stock

     —         105,590       —    

PIGAP settlement

     —         58,000       —    

Proceeds from the sale of Hanover Compressor note

     —         176,955       —    

Acquisition of Sema plc

     —         —         (132,155 )

Other business acquisitions

     (42,834 )     —         (44,431 )

Other acquisition related payments

     —         —         (70,340 )

Proceeds from business divestitures

     1,664,310       298,674       259,271  

Proceeds from the sale of Atos shares

     1,164,662       —         —    

Proceeds from the sale of Axalto shares

     98,851       —         —    

Proceeds from the sale of drilling rigs

     —         58,100       95,000  

Option payment on sale of drilling rigs

     —         —         24,900  

Sale (purchase) of investments, net

     104,820       (1,145,700 )     51,334  
    


 


 


NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     1,681,889       (1,392,429 )     (1,180,704 )
    


 


 


Cash flows from financing activities:

                        

Dividends paid

     (441,219 )     (437,023 )     (433,134 )

Proceeds from employee stock purchase plan

     71,565       132,741       107,810  

Proceeds from exercise of stock options

     206,543       39,752       67,275  

Proceeds from issuance of convertible debentures (net of fees)

     —         1,375,612       —    

Stock repurchase program

     (320,224 )     —         —    

Debt extinguishment costs

     (111,034 )     (167,801 )     —    

Settlement of US Interest Rate Swap

     (70,495 )     —         —    

Proceeds from issuance of commercial paper

     4,085,486       2,041,304       933,709  

Payments of principal on commercial paper and long-term debt

     (7,075,402 )     (3,399,773 )     (1,216,321 )

Net increase (decrease) in short-term debt

     64,364       (167,150 )     (308,623 )
    


 


 


NET CASH USED IN FINANCING ACTIVITIES

     (3,590,416 )     (582,338 )     (849,284 )
    


 


 


Discontinued operations

     50,787       19,006       133,244  
    


 


 


Net (decrease) increase in cash before translation effect

     (11,862 )     59,627       (16,180 )

Translation effect on cash

     1,173       6,455       6,586  

Cash, beginning of year

     234,192       168,110       177,704  
    


 


 


Cash, end of year

   $ 223,503     $ 234,192     $ 168,110  
    


 


 


 

1. Includes multiclient seismic data costs, excluding impairment charges.

 

2. See Note 5 Charges – Continuing Operations.

 

See the Notes to Consolidated Financial Statements

 

39


SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS

ANTILLES) AND SUBSIDIARY COMPANIES

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

                                        (Stated in thousands)  
                 Accumulated Other Comprehensive Income (Loss)

       
     Common Stock

   

Retained

Income


   

Marked to

Market


   

Pension

Liability


    Translation
Adjustment


    Comprehensive
Income (Loss)


 
     Issued

   In Treasury

           

Balance, January 1, 2002

   $ 2,045,437    $ (1,694,884 )   $ 8,314,766     $ (49,569 )   $ —       $ (237,269 )   $ 374,583  
                                                   


Translation adjustment

                                            (55,422 )   $ (55,422 )

Reed Hycalog disposition

                                            22,063       22,063  

Derivatives marked to market, net of tax

                            (33,291 )                     (33,291 )

Minimum pension liability (US/UK Plans)

                                    (313,564 )             (313,564 )

Tax benefit on minimum pension liability

                                    110,000               110,000  

Investment in Grant Prideco stock, net of tax

                            9,871                       9,871  

Shares sold to optionees less shares exchanged

     25,410      41,671                                          

Shares granted to Directors

     129      65                                          

Proceeds from employee stock plans

     58,056      49,754                                          

Net loss

                    (2,319,995 )                             (2,319,995 )

Dividends declared ($0.75 per share)

                    (434,059 )                                

Technoguide acquisition

     34,496      25,036                                          

Tax benefit on stock options

     7,437                                                 
    

  


 


 


 


 


 


Balance, December 31, 2002

     2,170,965      (1,578,358 )     5,560,712       (72,989 )     (203,564 )     (270,628 )   $ (2,580,338 )
                                                   


Translation adjustment

                                            201,503     $ 201,503  

Derivatives marked to market, net of tax

                            60,356                       60,356  

Minimum pension liability (US/UK Plans)

                                    (114,236 )             (114,236 )

Tax benefit on minimum pension liability

                                    34,725               34,725  

Sale of investment in Grant Prideco stock, net of tax

                            (9,871 )                     (9,871 )

Shares sold to optionees less shares exchanged

     15,335      24,271                                          

Shares granted to Directors

     81      65                                          

Proceeds from employee stock plans

     51,302      45,783                                          

Stock based compensation cost

     13,229                                                 

Net income

                    383,002                               383,002  

Dividends declared ($0.75 per share)

                    (437,970 )                                

Tax benefit on stock options

     7,576                                                 
    

  


 


 


 


 


 


Balance, December 31, 2003

     2,258,488      (1,508,239 )     5,505,744       (22,504 )     (283,075 )     (69,125 )   $ 555,479  
                                                   


Translation adjustment

                                            (27,370 )   $ (27,370 )

Derivatives marked to market, net of tax

                            1,097                       1,097  

Hanover stock marked to market, net of tax

                            31,618                       31,618  

Interest rate swap cancellation, net of tax

                            42,562                       42,562  

Sale of SchlumbergerSema

                                    75,346       (552,000 )     (476,654 )

Sale of Axalto

                                            (110,000 )     (110,000 )

Minimum pension liability (US/UK Plans)

                                    (44,337 )             (44,337 )

Tax benefit on minimum pension liability

                                    16,795               16,795  

Shares sold to optionees less shares exchanged

     101,329      105,214                                          

Shares granted to Directors

     560      270                                          

Proceeds from employee stock plans

     46,812      30,747                                          

Stock repurchase plan

            (320,224 )                                        

Purchase of PetroAlliance

     16,430      7,838                                          

Stock based compensation cost

     26,466                                                 

Shares issued on conversion of debentures

     2                                                 

Net income

                    1,223,870                               1,223,870  

Dividends declared ($0.75 per share)

                    (441,709 )                                

Tax benefit on stock options

     4,132                                                 
    

  


 


 


 


 


 


Balance, December 31, 2004

   $ 2,454,219    $ (1,684,394 )   $ 6,287,905     $ 52,773     $ (235,271 )   $ (758,495 )   $ 657,581  
    

  


 


 


 


 


 


 

See the Notes to Consolidated Financial Statements

 

40


SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS

ANTILLES) AND SUBSIDIARY COMPANIES

 

SHARES OF COMMON STOCK

 

     Issued

   In Treasury

    Shares
Outstanding


 

Balance, January 1, 2002

   667,094,178    (91,203,780 )   575,890,398  

Shares sold to optionees less shares exchanged

   10,490    2,243,400     2,253,890  

Shares granted to Directors

   —      3,500     3,500  

Employee stock plan

   —      2,677,842     2,677,842  

Acquisition of Technoguide

   —      1,347,485     1,347,485  
    
  

 

Balance, December 31, 2002

   667,104,668    (84,931,553 )   582,173,115  

Shares sold to optionees less shares exchanged

   1,320    1,306,305     1,307,625  

Shares granted to Directors

   —      3,500     3,500  

Employee stock plan

   —      2,464,088     2,464,088  
    
  

 

Balance, December 31, 2003

   667,105,988    (81,157,660 )   585,948,328  

Shares sold to optionees less shares exchanged

   —      5,610,259     5,610,259  

Shares granted to Directors

   —      14,500     14,500  

Employee stock plan

   —      1,654,879     1,654,879  

Stock repurchase plan

   —      (5,148,200 )   (5,148,200 )

Purchase of PetroAlliance

   —      421,870     421,870  

Shares issued on conversion of debentures

   27    —       27  
    
  

 

Balance, December 31, 2004

   667,106,015    (78,604,352 )   588,501,663  
    
  

 

 

See the Notes to Consolidated Financial Statements

 

41


Notes to Consolidated Financial Statements

 

1. Business Description

 

Founded in 1927, Schlumberger Limited (Schlumberger) the world’s leading oilfield services company, supplying technology, project management, and information solutions that optimize performance in the oil and gas industry. Schlumberger consists of two business segments: Oilfield Services and WesternGeco. Oilfield Services is the world’s premier oilfield service company supplying a wide range of technology services and solutions to the international petroleum industry. The Oilfield Services segment provides virtually all exploration and production services required during the life of an oil and gas reservoir. WesternGeco provides comprehensive worldwide reservoir imaging, monitoring, and development services, with extensive seismic crews and data processing centers as well as a large multiclient seismic library. Services range from 3D and time-lapse (4D) seismic surveys to multi-component surveys for delineating prospects and reservoir management. WesternGeco is 70% owned by Schlumberger and 30% owned by Baker Hughes.

 

2. Summary of Accounting Policies

 

The Consolidated Financial Statements of Schlumberger Limited have been prepared in accordance with accounting principles generally accepted in the United States of America.

 

Principles of Consolidation

 

The Consolidated Financial Statements include the accounts of majority-owned subsidiaries. Significant 20% - 50% owned companies are carried on the equity method and classified in Investments in Affiliated Companies. The pro rata share of Schlumberger after-tax earnings is included in Interest and other income. All inter-company accounts and transactions have been eliminated.

 

Reclassifications

 

Certain items from prior years have been reclassified to conform to the current year presentation.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, Schlumberger evaluates its estimates, including those related to bad debts, valuation of inventories and investments, recoverability of goodwill and intangible assets, income taxes, multiclient seismic data, contingencies 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.

 

Revenue Recognition

 

Oilfield Services

 

Products and Services Revenue

 

Schlumberger’s products and services are sold based upon purchase orders, contracts or other persuasive evidence of an arrangement with the customer that include fixed or determinable prices and that do not include right of return or other similar provisions or other significant post delivery obligations. Revenue is recognized for products upon delivery, customer acceptance and when collectibility is reasonably assured. Sale of product represented less than 10% of Schlumberger’s operating revenue in 2004. Revenue is recognized when services are rendered and collectibility is reasonably assured. Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimated.

 

42


Software Revenue

 

Revenue derived from the sale of licenses of Schlumberger software, maintenance and related services may include installation, consulting and training services.

 

If services are not essential to the functionality of the software, the revenue for each element of the contract is recognized separately based on its respective vendor specific objective evidence of fair value when all of the following conditions are met: a signed contract is obtained, delivery has occurred, the fee is fixed or determinable and collectibility is probable.

 

If an ongoing vendor obligation exists under the license arrangement, or if any uncertainties with regard to customer acceptance are significant, revenue for the related element is deferred based on its vendor specific objective evidence of fair value. Vendor specific objective evidence of fair value is determined as being the price for the element when sold separately. If vendor specific objective evidence of fair value does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered.

 

The percentage of completion method of accounting is applied to contracts whereby software is being customized to a customer’s specifications.

 

WesternGeco

 

Revenues from all services are recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable and collectibility is reasonably assured. Revenues from contract services performed on a dayrate basis are recognized as the service is performed. Revenues from other contract services, including pre-funded multiclient surveys, are recognized as the seismic data is acquired and/or processed on a proportionate basis as work is performed. This method requires revenue to be recognized based upon quantifiable measures of progress, such as square kilometers acquired. Multiclient data surveys are licensed or sold to customers on a non-transferable basis. Revenues on completed multiclient data surveys are recognized upon obtaining a signed licensing agreement and providing customers access to such data. Losses on contracts are recognized during the period in which the loss first becomes probable and can be reasonably estimated.

 

Multiple Deliverable Arrangements

 

Sales in both segments may be generated from contractual arrangements that include multiple deliverables. Revenues from these arrangements are recognized as each item is delivered based on their relative fair value and when the delivered items have stand-alone value to the customer.

 

Translation of Non-US Currencies

 

Schlumberger’s functional currency is primarily the US dollar. All assets and liabilities recorded in functional currencies other than US dollars are translated at current exchange rates. The resulting adjustments are charged or credited directly to the Stockholders’ Equity section of the Consolidated Balance Sheet. Revenue and expenses are translated at the weighted-average exchange rates for the period. All realized and unrealized transaction gains and losses are included in income in the period in which they occur. Schlumberger’s policy is to hedge against unrealized gains and losses on a monthly basis. Included in the 2004 results were transaction losses of $9 million, compared with gain of $1 million in 2003 and a loss of $2 million in 2002.

 

43


Currency exchange contracts are entered into as a hedge against the effect of future settlement of assets and liabilities denominated in other than the functional currency of the individual businesses. Gains or losses on the contracts are recognized when the currency exchange rates fluctuate, and the resulting charge or credit partially offsets the unrealized currency gains or losses on those assets and liabilities. On December 31, 2004, contracts were outstanding for the US dollar equivalent of $1.1 billion in various foreign currencies. These contracts mature on various dates in 2005.

 

Investments

 

Both Short-term investments and Fixed income investments, held to maturity are comprised primarily of eurodollar time deposits, certificates of deposit and commercial paper, euronotes and eurobonds, and are substantially denominated in US dollars. They are stated at cost plus accrued interest, which approximates market. Short-term investments that are designated as trading are stated at market. The unrealized gains/losses on such securities at both December 31, 2004 and 2003 were not significant.

 

For purposes of the Consolidated Statement of Cash Flows, Schlumberger does not consider short-term investments to be cash equivalents as a significant portion of them has original maturities in excess of three months.

 

Inventories

 

Inventories are stated at average cost or at market, whichever is lower. Inventory consists of materials, supplies and finished goods. Costs included in inventories consist of materials, direct labor and manufacturing overhead.

 

Fixed Assets and Depreciation

 

Fixed assets are stated at cost less accumulated depreciation, which is provided for by charges to income over the estimated useful lives of the assets using the straight-line method. Fixed assets include the manufacturing cost of oilfield technical equipment manufactured or assembled by subsidiaries of Schlumberger. Expenditures for renewals, replacements and improvements are capitalized. Maintenance and repairs are charged to operating expenses as incurred. Upon sale or other disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to income.

 

Multiclient Seismic Data

 

The multiclient library consists of completed and in-process seismic surveys that are licensed on a nonexclusive basis. This data may be acquired and/or processed by Schlumberger or subcontractors. Multiclient surveys are primarily generated utilizing Schlumberger resources. Schlumberger capitalizes costs directly incurred in acquiring and processing the multiclient seismic data. Such costs are charged to Cost of goods sold and services based on the percentage of the total costs to the estimated total revenue that Schlumberger expects to receive from the sales of such data. However, under no circumstance will an individual survey carry a net book value greater than a 4- year straight-lined amortized value.

 

The carrying value of the multiclient library is reviewed for impairment annually as well as when an event or change in circumstance indicating impairment may have occurred. Adjustments to the value are recorded when it is determined that estimated future revenues, which involves significant judgment on the part of Schlumberger, would not be sufficient to recover the carrying value of the surveys. Significant adverse charges in Schlumberger’s estimated future revenues could result in impairment charges in a future period.

 

44


Goodwill, Other Intangibles and Long-lived Assets

 

Schlumberger records as goodwill the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired. Statement of Financial Accounting Standards 142, “Goodwill and Other Intangible Assets” (SFAS 142), requires goodwill to be tested for impairment annually as well as when an event or change in circumstance indicates an impairment may have occurred. Goodwill is tested for impairment using a two-step approach. The first step tests for impairment by comparing the fair value of Schlumberger’s individual reporting units to their carrying amount to determine if there is a potential goodwill impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value.

 

For purposes of performing the impairment test for goodwill as required by SFAS 142 Schlumberger’s reporting units are the four geographic areas comprising the Oilfield Services segment in addition to the WesternGeco segment. Schlumberger estimates the fair value of these reporting units using a discounted cash flow analysis and/or applying various market multiples. From time to time a third party valuation expert may be utilized to assist in the determination of fair value. Determining the fair value of a reporting unit is judgmental and often involves the use of significant estimates and assumptions. Schlumberger’s estimates of the fair value of each of its previously mentioned reporting units was significantly in excess of their carrying value during 2004, 2003 and 2002. Schlumberger performs the annual goodwill impairment test of its WesternGeco reporting unit on October 1st of every year while the reporting units comprising the Oilfield Services segment are tested as of December 31st.

 

Long-lived assets, including fixed assets and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the long-lived asset to its estimated fair value. The determination of future cash flows as well as the estimated fair value of long-lived assets involves significant estimates on the part of management. In order to estimate the fair value of a long-lived asset, Schlumberger may engage a third-party to assist with the valuation. If there is a material change in economic conditions or other circumstances influencing the estimate of future cash flows or fair value, Schlumberger could be required to recognize impairment charges in the future.

 

Schlumberger evaluates the remaining useful life of its intangible assets on a periodic basis to determine whether events and circumstances warrant a revision to the remaining estimated amortization period.

 

Schlumberger capitalizes certain costs of internally developed software. Capitalized costs include purchased materials and services, payroll and payroll related costs and interest costs. The costs of internally developed software are amortized on a straight-line basis over the estimated useful life, which is principally 5 years.

 

Taxes on Income

 

Schlumberger and its subsidiaries compute taxes on income in accordance with the tax rules and regulations of the many taxing authorities where the income is earned. The income tax rates imposed by these taxing authorities vary substantially. Taxable income may differ from pretax income for financial accounting purposes. To the extent that differences are due to revenue or expense items reported in one period for tax purposes and in another period for financial accounting purposes, an appropriate provision for deferred income taxes is made. Any effect of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. When it is more likely than not that a portion or all of the deferred tax asset will not be realized in the future, Schlumberger provides a corresponding valuation allowance against deferred tax assets.

 

45


Schlumberger’s tax filings are subject to regular audit by the tax authorities in most of the jurisdictions in which it conducts business. These audits may result in assessments for additional taxes which are resolved with the authorities or, potentially, through the courts. Tax liabilities are recorded based on estimates of additional taxes which will be due upon the conclusion of these audits. Estimates of these tax liabilities are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of tax regulation, it is possible that the ultimate resolution of audits may result in liabilities which could be materially different from these estimates. In such an event, Schlumberger will record additional tax expense or tax benefit in the year in which such resolution occurs.

 

Approximately $3.0 billion of consolidated income retained for use in the business on December 31, 2004 represented undistributed earnings of consolidated subsidiaries and the pro rata Schlumberger share of 20%-50% owned companies. No provision is made for deferred income taxes on those earnings considered to be indefinitely reinvested or earnings that would not be taxed when remitted.

 

Concentration of Credit Risk

 

Schlumberger’s financial instruments which potentially subject the company to concentration of credit risk consist primarily of accounts receivable. Schlumberger maintains an allowance for uncollectible accounts receivable based on expected collectibility and performs ongoing credit evaluations of its customers’ financial condition.

 

Earnings per Share

 

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing net income, as adjusted for the interest on convertible debentures unless the adjustment is anti-dilutive, by the weighted average number of common shares outstanding assuming dilution, the calculation of which assumes (i) that all stock options which are in the money are exercised at the beginning of the period and the proceeds used by Schlumberger to purchase shares at the average market price for the period, and (ii) the convertible debentures have been converted unless the effect is anti-dilutive.

 

The following is a reconciliation from basic earnings per share to diluted earnings per share from continuing operations for each of the last three years:

 

46


     (Stated in thousands except per share amounts)  
     Income from
Continuing
Operations


    Weighted
Average
Shares
Outstanding


    Earnings Per
Share from
Continuing
Operations


 

2004

                      

Basic

   $ 1,014,052     589,089     $ 1.72  
                  


Assumed conversion of debentures

     28,788     19,105          

Assumed exercise of stock options

           4,678          
    


 

       

Diluted

   $ 1,042,840     612,872     $ 1.70  
    


 

 


2003

                      

Basic

   $ 398,169     583,904     $ 0.68  
                  


Assumed conversion of debentures

     15,938     10,566          

Assumed exercise of stock options

           2,587          
    


 

       
     $ 414,107     597,057     $ 0.69  

less: Anti-dilutive effect of assumed conversion of debentures

     (15,938 )   (10,566 )     (0.01 )
    


 

 


     $ 398,169     586,491     $ 0.68  
    


 

 


2002

                      

Basic

   $ 488,857     578,588     $ 0.84  
                  


Assumed exercise of stock options

           3,345          
    


 

       

Diluted

   $ 488,857     581,933     $ 0.84  
    


 

 


 

Employee stock options to purchase approximately 8.7 million, 24.8 million and 28.1 million shares of common stock at December 31, 2004, 2003 and 2002, respectively, were outstanding but not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common stock, and therefore, the effect on diluted earnings per share would have been anti-dilutive. In addition, computation of diluted earnings per share at December 31, 2003 also excludes the effects of approximately 19.1 million common shares issuable upon conversion of the 1.5% Series A Convertible Debentures and the 2.125% Series B Convertible Debentures as their inclusion would have also had an anti-dilutive effect.

 

Research & Engineering

 

All research and engineering expenditures are expensed as incurred, including costs relating to patents or rights that may result from such expenditures.

 

New Accounting Standard

 

In December 2004, the Financial Accounting Standards Board issued SFAS 123R (Share-Based Payment.) The standard amends SFAS 123 (Accounting for Stock Based Compensation) and concludes that services received from employees in exchange for stock-based compensation results in a cost to the employer that must be recognized in the financial statements. The cost of such awards should be measured at fair value at the date of grant. SFAS 123R provides public companies with a choice of transition methods to implement the standard. Schlumberger anticipates applying the modified prospective method whereby companies would recognize compensation cost for the unamortized portion of vested awards outstanding at the effective date of SFAS 123R (July 1, 2005 for Schlumberger) and granted after January 1, 1995. Such cost will be recognized in Schlumberger’s financial statements over the remaining vesting period. As described in Note 19, in 2003 Schlumberger adopted the fair value recognition provisions of SFAS Nos. 123 and 148 (Accounting for Stock-Based Compensation – Transition and Disclosure) on a prospective basis for grants after January 1, 2003. Therefore, effective July 1, 2005, Schlumberger will have to apply the provisions of SFAS 123R to the unvested portion of awards granted during the period of January 1, 1995 to December 31, 2002. The adoption of this standard is currently expected to reduce Schlumberger’s 2005 diluted earnings per share by approximately $0.03.

 

47


3. Discontinued Operations

 

The results of the following businesses are reported as Discontinued Operations in the Consolidated Statement of Income. All gains and losses disclosed below are presented net of related income taxes, where applicable.

 

2004

 

    The sale of the SchlumbergerSema business was completed in January 2004. Schlumberger received €393 million after adjustments ($495 million) in cash and 19.3 million shares of common stock of Atos Origin with a value of €1.02 billion ($1.27 billion), which represented approximately 29% of the outstanding common shares of Atos Origin after the transaction was completed. The results of SchlumbergerSema include, in the first quarter of 2004, a gain of $26 million on the sale and in the second quarter of 2004, a credit of $15 million related to adjustments to several accruals. The net assets were approximately $2.2 billion, including $1.3 billion of goodwill.

 

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. The equity in earnings representing Schlumberger’s interest in Atos Origin for the four days ending February 2, 2004 was not material. This investment was accounted for using the cost method as of February 2, 2004. On April 30, 2004 Schlumberger sold its remaining holding of 9.7 million Atos Origin shares for consideration of €465 million ($551 million) net of expenses. The losses on the sales of the Atos Origin shares of $21 million are classified in Interest and other income in the Consolidated Statement of Income (see Note 5).

 

At December 31, 2003, the assets and liabilities of the SchlumbergerSema business that were subsequently eliminated from Schlumberger’s Consolidated Balance Sheet, were aggregated and presented as Assets held for sale ($3.24 billion) and Liabilities held for sale ($1.22 billion).

 

The components of the Assets and Liabilities held for sale as of December 31, 2003 is as follows:

 

     (Stated in millions)

Assets held for sale

      

Receivables

   $ 978

Inventories

     37

Other current assets

     159

Fixed assets

     481

Goodwill

     1,334

Intangible assets

     158

Deferred taxes

     35

Other assets

     56
    

     $ 3,238
    

Liabilities held for sale

      

Accounts payable and accrued liabilities

   $ 1,066

Liability for taxes on income

     14

Other liabilities

     133

Minority interest

     5
    

     $ 1,218
    

 

    In February 2004, Schlumberger sold its Telecom Billing Software business for $37 million in cash, excluding potential future cash proceeds of up to $10 million, of which $7 million was received in the third quarter. A $17 million gain on the sale was recognized in the first quarter of 2004 and a gain of $7 million related to the additional cash proceeds received was recognized in the third quarter. The net assets were approximately $17 million.

 

48


    In March 2004, Schlumberger sold its Infodata business for $104 million in cash. A $48 million gain on the sale was recognized in the first quarter of 2004. The net assets were approximately $47 million, including goodwill of $42 million.

 

    In April 2004, Schlumberger completed the sale of its Business Continuity (BCO) business for $237 million in cash. A $48 million gain on the sale was recognized in the second quarter of 2004. The net assets were approximately $160 million, including goodwill of $83 million.

 

    In May 2004, Schlumberger’s wholly owned subsidiary Schlumberger BV sold, via a public offering, 34.8 million ordinary shares that it had held in its smart card business Axalto Holding NV, which represented 87% of the total ordinary shares outstanding. The sale price was €14.80 per share, resulting in net proceeds, after expenses, of $606 million, including a subsequent placement of 166,250 shares. A $7 million loss on the sale was recognized in the second quarter of 2004.

 

In the third quarter of 2004 a gain of $18 million was recognized consisting of (1) a $9 million gain on the sale of Schlumberger’s residual investment of 5.1 million shares in Axalto (the sale price was €16.59 per share giving net proceeds, after expenses, of $99 million) and (2) a $9 million reversal of a liability related to the sale. The net assets were approximately $700 million, including goodwill of $415 million.

 

    In July 2004, Schlumberger completed the sale of its Electricity Metering North America business for $248 million, in cash. The results of Electricity Metering North America included a net gain of $25 million including a US tax valuation allowance release of $49 million related to a tax loss carry forward associated with the sale of SchlumbergerSema (which is also included in Discontinued Operations) in the second quarter of 2004. This transaction allowed for the recognition of a deferred tax asset that was previously offset by a valuation allowance. Excluding the reversal of the valuation allowance, the transaction would have resulted in a loss of $24 million. The net assets were approximately $146 million, including goodwill of $94 million.

 

    In July, 2004, Schlumberger completed the sale of its Telecom Messaging business for $15 million, consisting of $6 million in cash and $9 million in future payments, of which an initial payment of $3 million was received in November 2004. A $4 million loss on the sale was recognized in the third quarter of 2004. The net assets were approximately $15 million.

 

    During the first quarter of 2005, Schlumberger completed the sales of its Global Tel*Link, Public Phones and Essentis activities. The results of these businesses are reported as Discontinued Operations in the Consolidated Statement of Income and, in the fourth quarter of 2004 include accruals of approximately $15 million relating to the net losses on the sale of Public Phones and Essentis and a $17 million impairment charge relating to goodwill and intangible assets associated with the Essentis business.

 

The assets and liabilities which will be eliminated from the Schlumberger Consolidated Balance Sheet in the first quarter of 2005 have been aggregated and presented on the Consolidated Balance Sheet at December 31, 2004 as Assets held for sale ($65 million) and Liabilities held for sale ($35 million).

 

49


An analysis of the Assets and Liabilities held for sale at December 31, 2004 is as follows:

 

     (Stated in millions)

Assets held for sale

      

Cash

   $ 7

Receivables

     18

Other current assets

     13

Other assets

     27
    

     $ 65
    

Liabilities held for sale

      

Accounts payable and accrued liabilities

   $ 26

Other liabilities

     9
    

     $ 35
    

 

2003

 

    In July 2003, Schlumberger completed the sale of its NPTest semiconductor testing business to a partnership led by Francisco Partners and Shah Management. The proceeds received were $220 million in cash, resulting in a $12 million loss on the sale. Additionally, the partnership has a contingent obligation to make a further payment to Schlumberger under certain circumstances. The net assets were $202 million.

 

    In August 2003, Schlumberger completed the sale of its Verification Systems business by a proceed-free management buyout resulting in an $18 million loss on the sale. The net assets were $17 million.

 

    In October 2003, Schlumberger completed the sale of its e-City ‘pay & display’ parking solutions business to Apax Partners. The proceeds received were $84 million in cash resulting in a $56 million loss on the sale. The net assets were $120 million, including $65 million of goodwill.

 

2002

 

    In December 2002, Schlumberger completed the sale of its Reed Hycalog drillbits business. The proceeds received included $259 million in cash and 9.7 million shares of Grant Prideco common stock with a value of $103 million, resulting in a $66 million gain on the sale. The net assets were $185 million.

 

The following table summarizes the results of these discontinued operations:

 

     (Stated in millions)  
     2004

   2003

    2002

 

Revenues

   $ 467    $ 4,367     $ 4,311  

Income (loss) before taxes

   $ 63    $ 95     $ (2,841 )

Tax expense

     16      34       31  

Gains (losses) on disposal, net of tax

     163      (76 )     63  
    

  


 


Income (loss) from discontinued operations

   $ 210    $ (15 )   $ (2,809 )
    

  


 


 

50


SchlumbergerSema Goodwill and Other Charges – Discontinued operations

 

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 constituted 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, a $2.638 billion pretax and after-tax goodwill impairment charge was recorded. This impairment reflected the difficulties of the telecommunications industry and the severely depressed market values of the IT companies serving SchlumbergerSema’s sector at the time of the charge. Certain intangible assets were also identified and written down as part of this process resulting in a $147 million pretax charge ($132 million after-tax). Additional charges recorded included $97 million ($78 million after-tax) of severance, facility and other costs in an effort to reduce costs at SchlumbergerSema and a $52 million valuation allowance against a deferred tax asset in Europe.

 

The following is a summary of the above 2002 charges included in loss from discontinued operations:

 

     (Stated in millions)
     Pretax

   Tax

    Min Int

   Net

Charges & Credits:

                            

- Goodwill impairment

   $ 2,638    $ —       $ —      $ 2,638

- Intangibles impairment

     147      15       —        132

- SchlumbergerSema severance and other

     97      19       —        78

- Valuation allowance

     —        (52 )     —        52
    

  


 

  

     $ 2,882    $ (18 )   $    $ 2,900
    

  


 

  

 

4. 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 was restricted from sale until August 30, 2004, and a $150 million long-term subordinated note maturing December 15, 2005. Schlumberger’s investment in Hanover Compressor, which is classified as an available-for-sale security, is stated at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity, net of tax. This investment is included in Other Assets in the Consolidated Balance Sheet.

 

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).

 

At December 31, 2003, the carrying value of Schlumberger’s investment in Hanover Compressor common stock exceeded the market value. As the decline in the market value of the Stock was deemed to be “other than temporary”, Schlumberger wrote down the cost basis of its investment to the fair market value of $91.4 million at December 31, 2003 and recorded a pretax and after-tax charge of $81.2 million in accordance with generally accepted accounting principles (SFAS No. 115).

 

At December 31, 2004, the fair market value of Schlumberger’s investment in Hanover Compressor was $123 million.

 

5. Charges – Continuing Operations

 

Schlumberger recorded the following charges/credits in continuing operations:

 

Debt Extinguishment Costs

 

In June 2004, Schlumberger Technology Corporation bought back and retired $351 million of its outstanding $1 billion 6.5% Notes due 2012. As a result, Schlumberger recorded a pretax charge of $37 million ($23 million after-tax), which included market premium and transaction costs.

 

51


In March 2004, Schlumberger plc (SPLC) accepted tenders for the outstanding £175 million SPLC 6.50% Guaranteed Bonds due 2032. In addition, Schlumberger SA (SSA) bought back €25 million of the outstanding €274 million SSA 5.25% Guaranteed Bonds due 2008 and €7 million of the outstanding €259 million SSA 5.875% Guaranteed Bonds due 2011. As a result, Schlumberger recorded a pretax and after-tax charge of $77 million, which included market and tender premiums, and transaction costs.

 

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 pretax and after-tax 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.

 

The above pretax charges are classified in Debt extinguishment costs in the Consolidated Statement of Income.

 

Other Charges

 

2004

 

Third quarter of 2004:

 

    In connection with its ongoing restructuring program in order to reduce overhead, Schlumberger recorded, a pretax and after-tax charge of $3 million related to employee severance. This charge is classified in Cost of goods sold & services in the Consolidated Statement of Income.

 

    Schlumberger recorded a pretax charge of $11 million ($10 million after-tax ) related to an Intellectual Property settlement which is classified in Cost of goods sold & services in the Consolidated Statement of Income.

 

Second quarter of 2004:

 

    Schlumberger sold 9.7 million ordinary shares of Atos Origin SA at a price of €48.50 per share. The net proceeds for the sale were $551 million and Schlumberger recorded a pretax and after-tax loss of $7 million on this transaction which reflects both banking fees and currency effect. The pretax charge is classified in Interest and other income in the Consolidated Statement of Income. As a result of this transaction Schlumberger does not have any remaining ownership interest in Atos Origin SA.

 

    In connection with its continuing restructuring program in order to reduce overhead Schlumberger recorded a pretax and after-tax charge of $4 million related to employee terminations. This charge is classified in Cost of goods sold & services in the Consolidated Statement of Income.

 

    Schlumberger Technology Corporation settled its US Interest Rate Swaps resulting in a pretax gain of $10 million ($6 million after-tax) which is classified in Interest Expense in the Consolidated Statement of Income.

 

    Schlumberger recorded a pretax and after-tax charge of $11 million related to a vacated leased facility in the UK which is classified in Cost of goods sold & services in the Consolidated Statement of Income.

 

    Schlumberger recorded a pretax and after-tax credit of $5 million related to the release of a litigation reserve which was no longer required and is classified in Cost of goods sold & services in the Consolidated Statement of Income.

 

52


First quarter of 2004:

 

    Schlumberger Technology Corporation paid off its commercial paper program in the US. As a result, the $500 million US interest-rate swaps that were designated as cash-flow hedges became ineffective. Schlumberger recorded a pretax non-cash charge of $73 million ($46 million after-tax) to recognize unrealized losses previously recorded in Other Comprehensive Income. The pretax charge is classified in Interest expense in the Consolidated Statement of Income.

 

    Schlumberger sold 9.6 million ordinary shares of Atos Origin SA at a price of €52.95 per share. The net proceeds for the sale were $625 million and Schlumberger recorded a pretax and after-tax loss of $14 million on this transaction which reflects both banking fees and currency effect. The pretax charge is classified in Interest and other income in the Consolidated Statement of Income.

 

    Schlumberger has commenced a restructuring program in order to reduce overhead. Consequently, a pretax charge of $20 million ($14 million after-tax) was taken in the quarter related to a voluntary early retirement program in the United States and is classified in Cost of goods sold & services in the Consolidated Statement of Income.

 

The following is a summary of the above 2004 charges:

 

     (Stated in millions)  
     Pretax

    Tax

    Min Int

   Net

 

Charges & Credits:

                               

- Debt extinguishment costs

   $ 115     $ 14     $ —      $ 101  

- Restructuring program charges

     27       6       —        21  

- Intellectual Property settlement charge

     11       1       —        10  

- Loss on sale of Atos Origin shares

     21       —         —        21  

- US interest-rate swap settlement gain

     (10 )     (4 )     —        (6 )

- Vacated leased facility reserve

     11       —         —        11  

- Litigation reserve release

     (5 )     —         —        (5 )

- Loss recognized on interest-rate swaps

     73       27       —        46  
    


 


 

  


     $ 243     $ 44     $ —      $ 199  
    


 


 

  


 

2003

 

In December 2003, Schlumberger recorded a pretax gain of $32 million ($20 million after-tax) resulting from the sale of the Hanover Compressor note. The pretax gain is classified in Interest and other income in the Consolidated Statement of Income.

 

In December 2003, Schlumberger recorded a pretax and after-tax charge of $81 million relating to the write-down to fair market value of Schlumberger’s investment in Hanover Compressor common stock. This charge is classified in Cost of goods sold and services in the Consolidated Statement of Income.

 

In September 2003, Schlumberger recorded a pretax multiclient library impairment charge of $398 million ($204 million, after a tax credit of $74 million and a minority interest of $120 million), following an evaluation of current and expected future conditions in the seismic sector, a pretax seismic vessel impairment charge of $54 million ($38 million, after a minority interest credit of $16 million) and a $31 million pretax and after-tax gain on the sale of a drilling rig. The pretax amounts are classified in Cost of goods sold and services in the Consolidated Statement of Income.

 

53


The following is a summary of the above 2003 charges:

 

     (Stated in millions)  
     Pretax

    Tax

    Min Int

    Net

 

Charges & Credits:

                                

- Debt extinguishment costs

   $ 168     $ —       $ —       $ 168  

- Gain on sale of Hanover Compressor note

     (32 )     (12 )     —         (20 )

- Write-down of Hanover Compressor stock

     81       —         —         81  

- Multiclient seismic library impairment

     398       74       (120 )     204  

- Seismic vessel impairment

     54       —         (16 )     38  

- Gain on sale of rig

     (31 )     —         —         (31 )
    


 


 


 


     $ 638     $ 62     $ (136 )   $ 440  
    


 


 


 


 

2002

 

In the fourth quarter of 2002, Schlumberger recorded net pretax charges of $256 million ($182 after-tax and minority interest). Schlumberger recorded severance and other costs in an effort to reduce costs at WesternGeco. These costs related to expenses that offer no future benefit to the ongoing operations of this business. The severance costs related to a reduction in workforce of approximately 1,700 employees. 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 valuation allowance against a deferred tax asset in Europe, a gain on the sale of drilling rigs and other costs. These pretax charges are classified in Cost of goods sold and services in the Consolidated Statement of Income.

 

In March 2002, Schlumberger recorded a charge of $26 million (pretax $27 million and minority interest credit of $1 million) related to the financial/economic crisis in Argentina where in January, the government eliminated all US dollar contracts and converted US dollar denominated accounts receivable into pesos. As a result, Schlumberger’s currency exposure increased significantly. With currency devaluation, an exchange loss (net of hedging) on net assets, primarily customer receivables, was incurred. This pretax charge is classified in Cost of goods sold and services in the Consolidated Statement of Income.

 

The following is a summary of the above 2002 charges:

 

     (Stated in millions)  
     Pretax

    Tax

    Min Int

    Net

 

Charges & Credits:

                                

- Multiclient seismic library impairment

   $ 184     $ —       $ (55 )   $ 129  

- WesternGeco severance and other

     117       7       (38 )     72  

- Valuation allowance

     —         (42 )     —         42  

- Gain on sale of drilling rigs

     (87 )     —         —         (87 )

- Other

     42       16               26  

- Argentina exchange loss

     27               (1 )     26  
    


 


 


 


     $ 283     $ (19 )   $ (94 )   $ 208  
    


 


 


 


 

6. Acquisitions

 

On December 9, 2003, Schlumberger announced that it had signed an agreement to acquire PetroAlliance Services Company Limited (“PetroAlliance Services”), Russia’s largest independent oilfield service company, over a 3-year period. Schlumberger acquired 26% of PetroAlliance Services in the second quarter of 2004 for $12 million in cash and 421,870 shares of Schlumberger common stock valued at $24 million. Under the terms of the agreement a further 25% interest may be acquired in the second quarter of 2005 and the remaining interest one year later. Completion of each stage of the acquisition is subject to performance requirements, regulatory approval and other customary conditions. The total acquisition price will be determined by a performance-based formula, and paid one-third in cash and two-thirds in Schlumberger stock.

 

As of December 31, 2004, Schlumberger’s investment in PetroAlliance Services is accounted for under the equity method. During in the second quarter of 2005, when it is expected Schlumberger’s ownership

 

54


interest may increase to 51% at which time Schlumberger will consolidate the results of PetroAlliance Services.

 

Other Acquisitions

 

During 2004, subsidiaries of Schlumberger acquired the following:

 

    In October, AOA Geomarine Operations, LLC (AGO), a US based provider of marine controlled-source electromagnetic and marine magnetotelluric services for use in offshore exploration activities. The acquisition price was $6 million in cash. A further payment of up to $3 million is payable during the ten month period ending January 15, 2006 provided certain technology-related milestones are achieved. Additional payments of up to $17 million will be made in 2007 provided AGO achieves certain milestones relating to revenue, net income and technology. Assets acquired included approximately $5 million of intangible assets (intellectual property).

 

    In May, Siberian Geophysical Company, a Russian based provider of oilfield services in West Siberia and manufacturer of drilling and measurement equipment. The acquisition price was $7 million in cash and the assumption of $21 million of debt. Assets acquired included $14 million of goodwill.

 

During 2002, subsidiaries of Schlumberger acquired the following:

 

    In March, Inside Reality, a Norwegian based company specializing in virtual reality technology for the oil and gas industry. The acquisition price was $18 million in cash. Assets acquired included intangible assets of $18 million.

 

    In April, DBR International Inc., a Canadian based company which manufacturers fluid analysis equipment and provides fluid analysis consulting services to the oil and gas industry. The acquisition price was $12 million in cash. Assets acquired included $6 million of goodwill.

 

    In April, A. Comeau and Associates, a Canadian based provider of electrical engineering products and services for artificially lifted wells. The purchase price was $6 million in cash. Assets acquired included goodwill of $6 million.

 

    In December, Technoguide AS, a software leader in the reservoir modeling domain. The purchase price was $68 million comprising of $8 million in cash and 1.35 million shares of Schlumberger stock valued at $60 million. Assets acquired included goodwill of $23 million and $44 million of intangible assets (primarily Intellectual Property).

 

These acquisitions were accounted for using the purchase method of accounting.

 

Pro forma results pertaining to the above acquisitions are not presented as the impact was not significant.

 

7. Investments in Affiliated Companies

 

Schlumberger and Smith International Inc. operate a drilling fluids joint venture of which Schlumberger owns a 40% interest and records income using the equity method of accounting. Schlumberger’s investment on December 31, 2004 and 2003 was $716 million and $657 million, respectively. Schlumberger’s equity income from this joint venture in 2004 was $68 million, $52 million in 2003 and $48 million in 2002.

 

The carrying value of this joint venture is evaluated for impairment annually as well as when an event or change in circumstance indicates that a decline in the fair value of this investment that is other than temporary has occurred. Fair value is generally estimated by comparing the significance of this joint venture to Smith International Inc., a publicly-traded company, and then referencing the market capitalization of Smith International Inc. To date, Schlumberger has not recorded any impairment charges relating to this investment as this analysis has indicated that the fair value of this investment is significantly in excess of its carrying value.

 

55


8. Investments

 

The Consolidated Balance Sheet reflects the Schlumberger investment portfolio separated between current and long term, based on maturity. Under normal circumstances it is the intent of Schlumberger to hold the investments until maturity, with the exception of investments that are considered trading (December 31, 2004 - $153 million; December 31, 2003 - $151 million).

 

Long-term fixed income investments of $204 million mature as follows: $64 million in 2006, $59 million in 2007, $36 million in 2008 and $45 million in 2009.

 

On December 31, 2004, there were no interest rate swap arrangements outstanding related to investments.

 

9. Securitization

 

In September 2000, a wholly owned subsidiary of Schlumberger entered into an agreement to sell, on an ongoing basis, up to $220 million of an undivided interest in its accounts receivable, which was subsequently amended up to $250 million. The amount of receivables sold under this agreement totaled $236 million at December 31, 2004. Unless extended by amendment, the agreement expires in September 2005. Schlumberger does not have any retained interest in the accounts receivable sold under this agreement.

 

10. Inventory

 

A summary of inventory follows:

 

     (Stated in millions)

As at December 31


   2004

   2003

Raw Materials & Field Materials

   $ 812    $ 721

Work in Process

     59      74

Finished Goods

     74      141
    

  

       945      936

Less reserves for obsolescence

     125      139
    

  

     $ 820    $ 797
    

  

 

11. Fixed Assets

 

A summary of fixed assets follows:

 

     (Stated in millions)

As at December 31,


   2004

   2003

Land

   $ 58    $ 56

Buildings & Improvements

     1,135      1,239

Machinery & Equipment

     9,876      9,682
    

  

Total cost

     11,069      10,977

Less accumulated depreciation

     7,307      7,177
    

  

     $ 3,762    $ 3,800
    

  

 

The estimated useful lives of Buildings & Improvements are primarily 30 to 40 years. For Machinery & Equipment, 8% is being depreciated over 16 to 25 years, 5% over 10 to 15 years and 87% over 2 to 9 years.

 

56


12. Multiclient Seismic Data

 

The change in the carrying amount of multiclient seismic data is as follows:

 

     (Stated in millions)  
     2004

    2003

 

Balance at beginning of year

   $ 506     $ 1,018  

Capitalized in year

     63       150  

Charged to cost of sales

     (222 )     (263 )

Impairment, charged to income

     —         (399 )
    


 


Balance at end of year

   $ 347     $ 506  
    


 


 

13. Goodwill

 

The changes in the carrying amount of goodwill by business segment in 2004 is as follows:

 

     (Stated in millions)  
     Oilfield
Services


   Western -
Geco


   Other

    Total

 

Balance at beginning of year

   $ 2,495    $ 229    $ 654     $ 3,378  

Additions

     15      15      —         30  

Impact of change in exchange rates

     35      —        (8 )     27  

Businesses divested

     —        —        (634 )     (634 )

Reclassified to Assets held for sale

     —        —        (12 )     (12 )
    

  

  


 


Balance at end of year

   $ 2,545    $ 244    $ —       $ 2,789  
    

  

  


 


 

The changes in the carrying amount of goodwill by business segment in 2003 is as follows:

 

     (Stated in millions)  
     Oilfield
Services


   Western -
Geco


   Schlumberger
Sema


    Other

    Total

 

Balance at beginning of year

   $ 1,877    $ 215    $ 1,562     $ 670     $ 4,324  

Other 1

     486      14      (516 )     (84 )     (100 )

Impact of change in exchange rates

     132      —        288       68       488  

Reclassified to Assets held for sale

     —        —        (1,334 )     —         (1,334 )
    

  

  


 


 


Balance at end of year

   $ 2,495    $ 229    $ —       $ 654     $ 3,378  
    

  

  


 


 


 

1. Including other acquisitions and divestitures.

 

In conjunction with the formation of WesternGeco in November 2000, Schlumberger and Baker Hughes entered into an agreement whereby Schlumberger or Baker Hughes will make a cash true-up payment to the other party based on a formula comparing the ratio of the net present value of sales revenue from each party’s contributed multiclient seismic data libraries during the four-year period ending November 30, 2004 and the ratio of those libraries as of November 30, 2000. The maximum payment that eit