SCHLUMBERGER LIMITED The following discussion and analysis contains forward-looking statements, including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and resources. Such forward-looking statements should be read in conjunction with our disclosures under "Item 1A. Risk Factors" of this Form 10-K. This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of Schlumberger's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 .
2019 Executive Overview
Schlumberger full-year 2019 revenue of
In the oil markets, sentiment was stable and positive for the first four months of 2019, with the Brent oil price moving from$55 per barrel at the beginning of the year to a high of$75 per barrel in late April.OECD crude and product stocks continued to increase through much of 2019, reversing a trend that persisted throughout the first half of 2018. Internationally, activity and investment continued to strengthen, particularly offshore. Activity inNorth America land was strong in the first half of 2019 but slowed in the second half of the year as a combination of budget exhaustion and cash flow constraints impacted our customers. Although the slowing activity in the second half of the year was consistent with the trend experienced in 2018, activity dropped earlier and steeper in the second half of 2019 as compared to the previous year. By midyear, concerns of a recession inthe United States and indications of well supplied global oil markets pushed the oil price to its low point for the year. These concerns abated over the latter part of the year as oil demand indicators trended positively. Though trade conflicts persisted, they did not create a significant drag on oil markets for the balance of the year. The attacks onSaudi Arabia oil infrastructure inSeptember 2019 caused a price increase of only$7 per barrel, and the price of Brent crude retreated to pre-attack levels over the course of the following week, demonstrating that the markets were well supplied. InDecember 2019 , OPEC+ agreed to further production cuts in 2020 to alleviate the projected oversupply. Global natural gas pricing was consistent with well-supplied markets during 2019. Liquified natural gas (LNG) supply capacity increased by an estimated 10% during 2019, and consequently LNG prices inAsia andEurope were less than half the prices seen in 2018. Domestically, USHenry Hub natural gas prices showed continued weakness during 2019 as North American gas production increased. Prices averaged$2.56 per million British thermal units ("mmbtu") for the year, with the peak of$4.25 per mmbtu occurring in March. The price fell to its lowest point of$1.75 per mmbtu in December. Schlumberger financial performance in 2019 was primarily driven by the international markets. Full-year 2019 international revenue of$21.8 billion increased 7% over 2018, again outpacingNorth America revenue and continuing a trend which began in the third quarter of 2018. This strong international performance was the result of increased activity on the part of operators, as they continued to invest in longer-term resource development following a sustained period of underinvestment and declining production. In contrast, after two years of strong growth, North American revenue fell sharply by 10% to$10.8 billion . This decrease was largely driven by the land market weakness affecting the OneStim pressure pumping business, as customers reached their budget limits earlier in the year and remained highly disciplined on capital spend.
Additionally, during the fourth quarter of 2019, Schlumberger completed two
major milestones: the formation of the Sensia joint venture and the divestiture
of the Drilling Tools business. Together these two transactions resulted in
Schlumberger receiving net cash proceeds of
From a macro perspective, the year ended with sentiment regarding 2020 oil demand growth turning positive as uncertainty reduced following the progress made toward a US-China trade deal. The fall in theNorth America production growth estimate of between 400,000 to 800,000 barrels-per-day should continue to support the thesis for international investment. The recent escalation of geopolitical risk should set the floor for the oil price going forward. In the near term, Schlumberger expects the OPEC+ production cuts agreed upon inDecember 2019 to limit investment and activity, particularly in theMiddle East andRussia , during the first half of 2020. As the year progresses, the effect of slowingNorth America production growth is likely to cause tightness in the market and further stimulate international operators to increase their investments in the second half of the year and beyond. 13 -------------------------------------------------------------------------------- Based on these factors, the expectation is for the 2020 exploration and production capex spending growth rate in the international markets to be in the mid-single-digit range. Schlumberger therefore expects its international portfolio revenue to grow at the same pace or higher, excluding the effects of the businesses transferred to the Sensia joint venture and the businesses divested in the Drilling Tools transaction. The businesses included in these transactions accounted for approximately 2% of Schlumberger's global revenue in 2019. International revenue growth will be more heavily weighted to the second half of the year with increasing offshore activity, improving activity mix from the early deepwater growth cycle, and increasing exploration work toward the end of the year and into 2021. InNorth America , Schlumberger is continuing to scale-to-fit its organization and portfolio by repurposing or exiting underperforming business units, focusing on asset-light operations, and expanding its technology access business models. Schlumberger is cautiously optimistic that the high-grading of its portfolio will promote margin expansion and the improvement of returns in theNorth America land market. Fourth Quarter 2019 Results (Stated in millions) Fourth Quarter 2019 Third Quarter 2019 Income (Loss) Income (Loss) Before Before Revenue Taxes Revenue Taxes Reservoir Characterization$ 1,643 $ 368$ 1,651 $ 360 Drilling 2,442 303 2,470 305 Production 2,867 253 3,153 288 Cameron 1,387 126 1,363 173 Eliminations & other (111 ) (44 ) (96 ) (30 ) 1,006 1,096 Corporate & other (1) (215 ) (231 ) Interest income (2) 8 7 Interest expense (3) (138 ) (151 ) Charges & credits (4) (209 ) (12,692 )$ 8,228 $ 452$ 8,541 $ (11,971 )
(1) Comprised principally of certain corporate expenses not allocated to the
segments, stock-based compensation costs, amortization expense associated
with certain intangible assets, certain centrally managed initiatives and
other nonoperating items.
(2) Excludes interest income included in the segments' income (fourth quarter
2019:
(3) Excludes interest expense included in the segments' income (fourth quarter
2019:
(4) Charges and credits are described in detail in Note 3 to the Consolidated
Financial Statements.
Fourth quarter revenue of$8.2 billion was 4% lower sequentially. International revenue of$5.7 billion grew 2% sequentially. However,North America revenue of$2.5 billion dropped 14% sequentially due to customer budget exhaustion and cash flow constraints.
Sequential international growth was led by the
The fourth quarter of 2019 delivered the first sequential growth in international margin in any fourth quarter since 2014. Schlumberger is therefore confident that it has turned the corner, particularly as it has experienced sequential international margin growth in each of the last three quarters. Meanwhile inNorth America land, margin compression from lower activity was minimized by implementing a scale-to-fit strategy, acting decisively in reducing capacity, and restructuring operations to protect margins. 14
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Reservoir Characterization
Fourth-quarter revenue of$1.6 billion decreased 1% sequentially following the end of the summer campaigns for Wireline and Testing activity in theNorth Sea andRussia , where the mild winter did not significantly disrupt activity.
Reservoir Characterization pretax operating margin of 22% increased 59 basis points ("bps") sequentially primarily driven by increased high-margin SIS digital software sales.
Drilling
Fourth-quarter revenue of$2.4 billion decreased 1% sequentially primarily due to the end of the summer drilling campaign inRussia and lower drilling activity inNorth America land.
Drilling pretax operating margin of 12% was flat sequentially as margin
improvements from drilling projects in the
Production Fourth-quarter revenue of$2.9 billion declined 9% sequentially driven by lower activity and pricing for OneStim inNorth America land due to expected customer budget limitations and cash flow constraints. Schlumberger continued to right-size its hydraulic fracturing capacity by stacking more fleets in light of lower demand. Production pretax operating margin of 9% contracted by 32 bps sequentially due to the lower OneStim activity, partially offset by strength in international margins from higher activity.
Cameron
Fourth-quarter revenue of$1.4 billion increased 2% sequentially from higher OneSubsea, Surface Systems, and Drilling Systems revenue primarily in the international markets. Valves & Process Systems was lower sequentially due to the reducedNorth America land activity and as a result of contributing the Valves & Process Systems measurement business to the Sensia joint venture, which closed onOctober 1, 2019 .
Cameron pretax operating margin of 9% contracted by 359 bps sequentially, driven largely by reduced margins in the OneSubsea project portfolio.
Full-Year 2019 Results
(Stated in millions)
2019 2018
Income (Loss) Income
Before Before
Revenue Taxes Revenue Taxes
Reservoir Characterization $ 6,312 $ 1,327 $ 6,173 $ 1,347
Drilling 9,721 1,216 9,250 1,239
Production 11,987 993 12,394 1,052
Cameron 5,336 613 5,520 653
Eliminations & other (439 ) (171 ) (522 ) (104 )
3,978 4,187
Corporate & other (1) (957 ) (937 )
Interest income (2) 33 52
Interest expense (3) (571 ) (537 )
Charges & credits (4) (12,901 ) (141 )
$ 32,917 $ (10,418 ) $ 32,815 $ 2,624 (1) Comprised principally of certain corporate expenses not allocated to the
segments, stock-based compensation costs, amortization expense associated
with certain intangible assets, certain centrally managed initiatives and
other nonoperating items.
(2) Excludes interest income included in the segments' income (2019:
2018:
(3) Excludes interest expense included in the segments' income (2019:
million; 2018:
(4) Charges and credits are described in detail in Note 3 to the Consolidated
Financial Statements.
15
-------------------------------------------------------------------------------- Full-year 2019 revenue of$32.9 billion was essentially flat year-on-year withNorth America revenue decreasing 10% and international revenue increasing 7%. The international results were underpinned by increased investment levels. In contrast, theNorth America results reflect a slowing production growth rate on land as operators maintained capital discipline and reduced drilling and hydraulic fracturing activity.
Reservoir Characterization
Full-year 2019 revenue of
Year-on-year, pretax operating margin decreased 79 bps to 21%.
Drilling
Full-year 2019 revenue of$9.7 billion increased 5% year-on-year primarily due to higher demand for drilling services, largely in the international markets that benefited Drilling & Measurements,M-I SWACO , and Integrated Drilling Services.
Year-on-year, pretax operating margin decreased 89 bps to 13% despite higher revenue as margins were affected by competitive pricing and higher costs associated with a number of integrated contracts internationally.
Production
Full-year 2019 revenue of$12.0 billion decreased 3% year-on-year with most of the revenue decline attributable to lower OneStim activity inNorth America as customers reduced spending due to higher cost of capital, lower borrowing capacity and expectation of better returns from their shareholders.
Year-on-year, pretax operating margin decreased 20 bps to 8% primarily due to
reduced profitability in OneStim in
Cameron
Full-year 2019 revenue of
Year-on-year, pretax operating margin decreased 35 bps to 11%.
Interest and Other Income
Interest & other income consisted of the following:
(Stated in millions)
2019 2018
Interest income $ 41 $ 60 Earnings of equity method investments 45 89
$ 86 $ 149
The decrease in interest income in 2019 compared to 2018 is primarily attributable to lower cash and short-term investment balances.
The decrease in earnings from equity income is associated with Schlumberger's equity investments in rig-and seismic-related businesses.
Interest Expense
Interest expense of
Other
Research & engineering and General & administrative expenses, as a percentage of Revenue, were as follows:
2019 2018
Research & engineering 2.2 % 2.1 %
General & administrative 1.4 % 1.4 %
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Income Taxes
The Schlumberger effective tax rate is sensitive to the geographic mix of
earnings. When the percentage of pretax earnings generated outside of
The Schlumberger effective tax rate was 3% in 2019 as compared to 17% in 2018. The lower effective tax rate was almost entirely due to the charges and credits described in Note 3 to the Consolidated Financial Statements, which primarily related to non-deductible goodwill.
Charges and Credits
Schlumberger recorded significant charges and credits during 2019 and 2018. These charges and credits, which are summarized below, are more fully described in Note 3 to the Consolidated Financial Statements.
The following is a summary of the 2019 charges and credits, of which the$247 million gain on the formation of the Sensia joint venture is classified in Gain on formation of Sensia in the Consolidated Statement of Income (Loss), while the$13.15 billion of charges are classified in Impairments & other. (Stated in millions) Pretax Tax Net Fourth quarter: North America restructuring$ 225 $ 51 $ 174 Other restructuring 104 (33 ) 137 Workforce reductions 68 8 60 Pension settlement accounting 37 8 29 Repurchase of bonds 22 5 17
Gain on formation of Sensia joint venture (247 ) (42 ) (205 )
Third quarter:
8,828 43 8,785
Intangible assets impairment 1,085 248 837
North America pressure pumping 1,575 344 1,231
Other North America-related 310 53 257
Argentina 127 - 127
Equity-method investments 231 12 219
Asset Performance Solutions 294 - 294
Other 242 13 229
$ 12,901 $ 710 $ 12,191
A significant portion of the third-quarter impairment charges were recorded
effective August 31, 2019 . Accordingly, the 2019 results reflect a $108 million
reduction in depreciation and amortization expense for the last four months of
2019. Approximately $84 million of this amount relates to the Production
segment. The remaining $24 million is reflected in the "Corporate & other" line
item.
The following is a summary of the 2018 charges and credits, of which the $215
million gain on the sale of the marine seismic acquisition business is
classified in Gain on sale of business in the Consolidated Statement of Income
(Loss), while the $356 million of charges are classified in Impairments & other.
(Stated in millions)
Pretax Tax Net
Gain on sale of marine seismic acquisition business $ (215 ) $ (19 ) $ (196 )
Workforce reductions 184 20 164
Asset impairments 172 16 156
$ 141 $ 17 $ 124
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Liquidity and Capital Resources
Schlumberger had total Cash and Short-term investments of
Details of the components of liquidity as well as changes in liquidity follow:
(Stated in millions)
Dec. 31, Dec. 31,
Components of Liquidity: 2019 2018
Cash $ 1,137 $ 1,433
Short-term investments 1,030 1,344Short-term borrowings and current portion of long-term debt (524 )
(1,407 )
Long-term debt (14,770 ) (14,644 )
Net debt (1) $ (13,127 ) $ (13,274 )
Changes in Liquidity: 2019 2018
Net income (loss) $ (10,107 ) $ 2,177
Impairments and other charges 13,148 356
Gain on formation of Sensia joint venture (247 ) -
Gain on sale of WesternGeco marine seismic business - (215 ) Depreciation and amortization (2) 3,589
3,556
Deferred taxes (1,011 )
(245 ) Earnings of equity method investments, less dividends received
6 (48 )
Stock-based compensation expense 405 345
Pension and other postretirement benefits funding (25 ) (83 ) Increase in working capital and other (3) (327 ) (130 ) Cash flow from operations 5,431 5,713 Capital expenditures (1,724 ) (2,160 ) APS investments (781 ) (981 ) Multiclient seismic data capitalized (231 ) (100 ) Free cash flow (4) 2,695 2,472 Dividends paid (2,769 ) (2,770 ) Stock repurchase program (278 ) (400 ) Proceeds from employee stock plans 219
261
Proceeds from sale ofWesternGeco marine seismic business, net of cash divested -
579
Net proceeds from divestiture and formation of Sensia joint venture
586 -
Business acquisitions and investments, net of cash acquired plus debt assumed
(23 ) (292 )
Other (283 ) (14 )
(Increase) decrease in Net Debt 147 (164 )
Net Debt, Beginning of period (13,274 ) (13,110 )
Net Debt, End of period $ (13,127 ) $ (13,274 )
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(1) "Net Debt" represents 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. Net Debt is a non-GAAP financial measure that should be considered in
addition to, not as a substitute for or superior to, total debt.
(2) Includes depreciation of property, plant and equipment and amortization of
intangible assets, multiclient seismic data costs and APS investments.
(3) Includes severance payments of approximately
(4) "Free cash flow" represents cash flow from operations less capital
expenditures, APS investments and multiclient seismic data costs capitalized.
Management believes that free cash flow is an important liquidity measure for
the Company and that it is useful to investors and management as a measure of
the ability of our business to generate cash. Once business needs and
obligations are met, this cash can be used to reinvest in the company for
future growth or to return to shareholders through dividend payments or share
repurchases. Free cash flow does not represent the residual cash flow
available for discretionary expenditures. Free cash flow is a non-GAAP
financial measure that should be considered in addition to, not as substitute
for or superior to, cash flow from operations.
Key liquidity events during 2019 and 2018 included:
• Cash flow from operations was
• On
program for Schlumberger common stock. Schlumberger had repurchased
billion of Schlumberger common stock under this program as of
2019.
The following table summarizes the activity under this share repurchase program during 2019 and 2018:
(Stated in thousands, except per share amounts)
Total Cost Total Number Average Price
of Shares of Shares Paid per
Purchased Purchased Share
2019 $ 278,162 6,968.3 $ 39.92
2018 $ 399,786 6,495.1 $ 61.55
• Dividends paid during each of 2019 and 2018 were $2.8 billion .
• Capital expenditures were
Capital expenditures during 2020 are expected to be similar to that of 2019.
• During the fourth quarter of 2019, Schlumberger repurchased the remaining
Senior Notes due 2021;
• During the fourth quarter of 2019, Schlumberger completed the sale of the
businesses and associated assets of DRILCO,
Remedial Services and received net cash proceeds of
businesses represented less than 1% of Schlumberger's consolidated 2019
revenue.
• During the fourth quarter of 2019, Schlumberger and Rockwell Automation
closed Sensia, their previously announced joint venture. Rockwell Automation
owns 53% of the joint venture and Schlumberger owns 47%. At closing,
Rockwell Automation made a
adjustments, to Schlumberger.
• During the third quarter of 2019, Schlumberger issued €500 million of 0.00%
Notes due 2024, €500 million of 0.25% Notes due 2027 and €500 million of
0.50% Notes due 2031.
• During the third quarter of 2019, Schlumberger repurchased
its 3.00% Senior Notes due 2020 and
due 2022.
• During the second quarter of 2019, Schlumberger completed a debt exchange
offer, pursuant to which it issued
Senior Notes due 2028 in exchange for
2020,
Senior Notes due 2025.
• During the first quarter of 2019, Schlumberger issued
Senior Notes due 2024 and
• During the fourth quarter of 2018, Schlumberger issued €600 million of 1.00%
Guaranteed Notes due 2026.
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• During the fourth quarter of 2018, Schlumberger completed the divestiture of
its marine seismic acquisition business for net proceeds of
(after considering
• During 2019 and 2018, Schlumberger made contributions of
million, respectively, to its postretirement benefit plans. The US pension
plans were 92% funded at December 31, 2019 and 88% funded at December 31,
2018 based on their projected benefit obligations.
Schlumberger's international defined benefit pension plans were a combined 97%
funded at both December 31, 2019 and December 31, 2018 based on their projected
benefit obligations.
Schlumberger expects to contribute approximately
As ofDecember 31, 2019 , Schlumberger had$2.2 billion of cash and short-term investments on hand. Schlumberger also has separate committed credit facility agreements aggregating$6.5 billion with commercial banks, of which$4.3 billion was available and unused as ofDecember 31, 2019 . The$6.5 billion of committed credit facility agreements support commercial paper programs. Schlumberger believes these amounts are sufficient to meet future business requirements for at least the next 12 months.
The total outstanding commercial paper borrowings were
Summary of Contractual Obligations
(Stated in millions)
Payment Period
Total 2020 2021-2022 2023-2024 After 2024
Debt (1) $ 15,294 $ 524 $ 4,224 $ 5,149 $ 5,397
Interest on fixed rate debt
obligations (2) 2,532 429 707 500 896
Operating leases 1,582 510 464 275 333
Purchase obligations (3) 4,501 4,371 110 17 3
$ 23,909 $ 5,834 $ 5,505 $ 5,941 $ 6,629 (1) Excludes future payments for interest.
(2) Excludes interest on
average interest rate of 2.3% as of
(3) Represents an estimate of contractual obligations in the ordinary course of
business. Although these contractual obligations are considered enforceable
and legally binding, the terms generally allow Schlumberger the option to
reschedule and adjust its requirements based on business needs prior to the
delivery of goods.
Refer to Note 17, Pension and Other Benefit Plans, of the Consolidated Financial Statements for details regarding Schlumberger's pension and other postretirement benefit obligations. As discussed in Note 13, Income Taxes, of the Consolidated Financial Statements, included in the Schlumberger Consolidated Balance Sheet atDecember 31, 2019 is approximately$1.3 billion of liabilities associated with uncertain tax positions in the over 100 tax jurisdictions in which Schlumberger conducts business. Due to the uncertain and complex application of tax regulations, combined with the difficulty in predicting when tax audits throughout the world may be concluded, Schlumberger cannot make reliable estimates of the timing of cash outflows relating to these liabilities. Schlumberger has outstanding letters of credit/guarantees that 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. 20
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Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted inthe United States requires Schlumberger to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent 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. Schlumberger bases its estimates on historical experience and on various 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.
Allowance for Doubtful Accounts
Schlumberger maintains an allowance for doubtful accounts in order to record accounts receivable at their net realizable value. Judgment is involved in recording and making adjustments to this reserve. Allowances have been recorded for receivables believed to be uncollectible, including amounts for the resolution of potential credit and other collection issues such as disputed invoices. Adjustments to the allowance may be required in future periods depending on how such potential issues are resolved, or if the financial condition of Schlumberger's customers were to deteriorate resulting in an impairment of their ability to make payments. As a large multinational company with a long history of operating in a cyclical industry, Schlumberger has extensive experience in working with its customers during difficult times to manage its accounts receivable. During weak economic environments or when there is an extended period of weakness in oil and gas prices, Schlumberger typically experiences delays in the payment of its receivables. However, except for a$469 million accounts receivable write-off during the fourth quarter of 2017 as a result of the political and economic conditions inVenezuela , Schlumberger has not had material write-offs due to uncollectible accounts receivable over the recent industry downturn. Schlumberger generates revenue in more than 120 countries. As ofDecember 31, 2019 , only three of those countries individually accounted for greater than 5% of Schlumberger's net receivables balance, of which only one (the United States ) accounted for greater than 10% of such receivables.
Schlumberger records the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed as goodwill. The goodwill relating to each of Schlumberger's reporting units is tested for impairment annually as well as when an event, or change in circumstances, indicates an impairment may have occurred. Under generally accepted accounting principles, Schlumberger has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one or more of its reporting units is greater than its carrying amount. If, after assessing the totality of events or circumstances, Schlumberger determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, there is no need to perform any further testing. However, if Schlumberger concludes otherwise, then it is required to perform a quantitative impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded based on that difference.
Schlumberger has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test.
During 2019, Schlumberger recorded an$8.8 billion goodwill impairment charge. Refer to Note 3 to the Consolidated Financial Statements for details regarding the facts and circumstances that led to this impairment and how the fair value of each reporting unit was estimated, including the significant assumptions used and other details. Long-lived assets, including fixed assets, intangible assets and investments in APS projects, 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. 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. 21
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Income Taxes
Schlumberger conducts business in more than 100 tax jurisdictions, a number of which have tax laws that are not fully defined and are evolving. Schlumberger's tax filings are subject to regular audits by the tax authorities. These audits may result in assessments for additional taxes that are resolved with the authorities or, potentially, through the courts. Schlumberger recognizes the impact of a tax position in its financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Tax liabilities are recorded based on estimates of additional taxes that 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, the ultimate resolution of audits may result in liabilities that could be materially different from these estimates. In such an event, Schlumberger will record additional tax expense or tax benefit in the period in which such resolution occurs.
Revenue Recognition for
Schlumberger recognizes revenue for certain long-term construction-type contracts over time. These contracts involve significant design and engineering efforts in order to satisfy custom designs for customer-specific applications. Under this method, revenue is recognized as work progresses on each contract. Progress is measured by the ratio of actual costs incurred to date on the project in relation to total estimated project costs. Approximately 5% of Schlumberger's revenue in each of 2019 and 2018, respectively, was recognized under this method. The estimate of total project costs has a significant impact on both the amount of revenue recognized as well as the related profit on a project. Revenue and profits on contracts can also be significantly affected by change orders and claims. Profits are recognized based on the estimated project profit multiplied by the percentage complete. Due to the nature of these projects, adjustments to estimates of contract revenue and total contract costs are often required as work progresses. Any expected losses on a project are recorded in full in the period in which they become probable.
Multiclient Seismic Data
Schlumberger capitalizes the costs associated with obtaining multiclient seismic data. The carrying value of the multiclient seismic data library atDecember 31, 2019 and 2018 was$568 million and$601 million , respectively. Such costs are charged to Cost of 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 circumstances will an individual survey carry a net book value greater than a 4-year, straight-line 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 carrying value are recorded when it is determined that estimated future revenues, which involve 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 cash flows could result in impairment charges in a future period. For purposes of performing the annual impairment test of the multiclient library, surveys are primarily analyzed for impairment on a survey-by-survey basis.
Pension and Postretirement Benefits
Schlumberger's pension and postretirement benefit obligations are described in detail in Note 17 to the Consolidated Financial Statements. The obligations and related costs are calculated using actuarial concepts, which include critical assumptions related to the discount rate, expected rate of 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, or upon the occurrence of significant events. The discount rate that Schlumberger uses reflects the prevailing market rate of a portfolio of high-quality debt instruments with maturities matching the expected timing of payment of the related benefit obligations. The following summarizes the discount rates utilized by Schlumberger for its various pension and postretirement benefit plans:
• The discount rate utilized to determine the liability for Schlumberger's
United States pension plans and postretirement medical plan was 3.30% atDecember 31, 2019 and 4.30% atDecember 31, 2018 .
• The weighted-average discount rate utilized to determine the liability for
Schlumberger's international pension plans was 3.27% at December 31, 2019
and 4.00% at December 31, 2018 .
• The weighted-average discount rate utilized to determine expense for
Schlumberger's United States pension plans and postretirement medical plan
increased from 3.70% in 2018 to 4.30% in 2019.
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• The weighted-average discount rate utilized to determine expense for
Schlumberger's international pension plans increased from 3.55% in 2018 to
4.00% in 2019.
The expected rate of return for Schlumberger's 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, with consideration given to the distribution of investments by asset class and historical rates of return for each individual asset class. The weighted average expected rate of return on plan assets forthe United States pension plans was 6.60% in 2019 and 7.25% in 2018. The weighted average expected rate of return on plan assets for the international pension plans was 7.22% in 2019 and 7.40% in 2018. A lower expected rate of return would increase pension expense. 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 to determine the 2019 postretirement medical expense and the postretirement medical liability atDecember 31, 2019 was 7.50%, graded to 4.5% over the next twelve years. The following illustrates the sensitivity to changes in certain assumptions, holding all other assumptions constant, for Schlumberger'sUnited States and international pension plans: (Stated in millions) Effect on Effect on 2019 Dec. 31, 2019 Change in Assumption Pretax Expense Liability 25 basis point decrease in discount rate+$35 +$567 25 basis point increase in discount rate -$31 -$535 25 basis point decrease in expected return on plan assets+$30 - 25 basis point increase in expected return on plan assets -$29 -
The following illustrates the sensitivity to changes in certain assumptions,
holding all other assumptions constant, for Schlumberger's
(Stated in millions)
Effect on
Effect on 2019 Dec. 31, 2019
Change in Assumption Pretax Expense Liability
25 basis point decrease in discount rate - +$44
25 basis point increase in discount rate - -$42 © Edgar Online, source
