Krause Fund Research Fall 2017 Energy Schlumberger Ltd (NYSE: … · 2017-12-04 · Industry Trends...

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Krause Fund Research Fall 2017

Energy Schlumberger Ltd (NYSE: SLB)

November 10, 2017

Recommendation: BUY Analysts Cheick Ndiaye Robert Gill [email protected] [email protected]

John Akpan [email protected]

Schlumberger Ltd. (NYSE: SLB) is an oil and gas equipment and services company founded in 1926 in France. SLB employs approximately 100,000 people who represent over 140 nationalities and operates in more than 85 countries. The company’s workforce provides a wide range of services, including technology, project management, and information solutions to the oil and gas exploration and production (E&P) companies. Prior to April of 2016, Schlumberger operated through 3 product Groups: Reservoir Characterization, Drilling, and Production. Each of its group consists of several technology-based service and product lines, or Technologies. On April 1, 2016, Schlumberger added to its product Groups by completing a $14.8 billion acquisition of Cameron International Corporation. Cameron is the leading provider of flow equipment products, systems and services to the oil and gas industry worldwide.

• OPEC production cuts have been extended through March 2018 and possibly further. Crack spread is widening between raw and refined oil products. These factors signal continued oil price recovery.

• As final investment decisions (FIDs) roll in at twice the levels of 2016, we foresee increased capital expenditures from client E&P companies.

• With new client projects set to increase next year, we expect revenue growth of approximately 13% in 2018.

• Through recent M&A activity paired with industry leading R&D expenditures, SLB is poised to meet oilfield service demand, especially in shale plays as well as industrializing countries.

Stock Performance Highlights 52 week High $87.84 52 week Low $61.40 Beta 1.07 Average Daily Volume 7.15 M Share Highlights Market Capitalization 91.07 Shares Outstanding 1.39 B Book Value per share 28.54 P/E Ratio 24.54 Dividend Yield 2.98% Dividend Payout Ratio Company Performance Highlights ROA 10.10% ROE 17.09% Revenue 27.8 B Financial Ratios Current Ratio 1.94 Debt to Equity .69

One Year SLB Performance

Current Price $65.74

Target Price $75 - $82

Company Overview

SLB Readies to Capitalize on Oil Recovery


Real Gross Domestic Product Gross Domestic Product (GDP), as a proxy for the state of national/global economies, measures the monetary value of all the goods and services produced over a period (typically a year). At our calculation of .43, we believe that oil demand is inelastic to GDP. However, the following Energy Information Administration (EIA) graph demonstrates a strong correlation between world liquid fuels consumption, world GDP, and WTI crude prices. These factors tend to move in the same direction.

Source: EIA.gov1

Looking forward, we expect Real GDP to grow to 4.58% for non-Organization for Economic Cooperation and Development (OECD) countries through our continuing value year 2022, but stay relatively flat in OECD countries.

Source: OECD.org2

Essentially, demand will come primarily from developing countries through our forecast period. Interest Rates

Corporate borrowing costs are effectively reflected through U.S. treasury yields (prior to their individual debt spread). Using a long horizon valuation perspective, the current yield on a 30-year T-bond is 2.88%. Interest rates largely dictate the behavior of firms and investors. For the energy industry, a rising interest rate environment causes the sector to suffer because energy firms tend to be highly levered. As the cost of debt increases, it makes it more difficult to justify capital expenditure projects. Furthermore, as oil prices are negatively correlated with currencies, profits will decline. The opposite tends to be true when interest rates decline. Lower borrowing costs and rising oil prices increase profitability. Looking forward, due to leadership changes in the Federal Reserve next year, we expect a hawkish approach to interest rates resulting in a 3.32% yield in 2020 for the 30 Year Treasury Bond3.

Oil Prices

The price of crude oil is arguably the biggest driver in the earnings performance of the energy sector companies. Over the last decade, the price of crude has fallen dramatically due to oversupply factors, including a U.S. shale boom and geopolitical tensions.

Source: MacroTrend 4

2.0% 2.2% 1.8% 2.1% 2.1%

4.6%3.9% 4.1% 4.6% 4.8%

0.0%

2.0%

4.0%

6.0%

2014 2015 2016 2017 2018

OECD vs Non-OECD Real GDP Growth

OECD Non-OECD

Historical Price of Crude oil per barrel, 10-Yr

Economic Analysis


We foresee the price of crude to remain relatively stable over next year between $48 and $52 per barrel as the Organization of Petroleum and Exporting Countries (OPEC) has decided to extend their production cuts through March 2018. Paired with continuing shale oil production growth, we expect a neutralizing effect.

Source: EIA5

Crude Inventory

Growing inventory levels are a leading indicator of oil prices, as they signal supply-demand gaps which affect energy prices. Growing levels show that either oil demand is falling, or production is outpacing demand both of which suppress oil prices.

Source: EIA5

U.S. commercial oil inventories are projected to remain slightly volatile over the next year resulting in a

minimal aggregate change in the price of oil. Other important price indicators for crude include refinery utilization (supply side) and energy consumption (demand side). Refinery utilization

The refinery utilization rate is a percent measurement of how close to maximum capacity oil refineries are operating at. In theory, a refinery rate near 100% suggests high demand for oil and thus higher oil prices. Refineries rates fell to low-mid 80% in the wake of the Great Recession. However, having now climbed back to pre-recession levels in the low 90% suggests that low oil prices are due to oversupply rather than low demand as oil prices have not recovered in line with utilization rates.

Source: EIA6

We expect refinery utilization to remain near maximum as global oil demand continues to rise, largely driven by increased consumption in emerging economies. Oil Consumption

Higher consumption, holding production levels equal, tends to raise oil prices. According to the EIA, in 2016 global consumption was roughly 97 million barrels per day and is expected to rise to over 100 million barrels per day by the end of 2018.

78.00%80.00%82.00%84.00%86.00%88.00%90.00%92.00%

U.S. Percent Utilization of Operating Capacity

U.S. Percent Utilization of Operating Capacity


Source: EIA5

After several years of excess supply over demand, the two have reached an effective equilibrium over the past year and are expected to track closely through 2018, suggesting market stabilization.

Source: EIA5

An important contingency to this: prices may fall if demand in emerging countries were to falter. They are more subject to demand shocks and oil consumption in the United States and Europe has arguably peaked. Geopolitical Events & Factors

The Organization of Petroleum Exporting Countries (OPEC) is an intergovernmental cartel consisting of fourteen developing nations. Their mission is to coordinate and unify the petroleum policies of its member countries and ensure stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to customers, a steady

income to producers, and a fair return on capital for those investing in the petroleum industry. OPEC has power in manipulating the global oil supply. Collectively they account for 40% of oil production and 60% of global oil trade. However, their ability to stabilize oil markets compared to historical cartels such as Standard Oil or the Texas Railroad Commission and the Seven Sisters, has been called into question, especially since Saudi Arabia refused to oil production cuts in November 2014. Saudi Aramco, their state oil giant, is also in the wake of a potential IPO. A shift towards a market orientation would further erode OPEC’s agency and position as a supply regulator. They have suffered from political tensions as well as individual countries cheating on production quotas. Geopolitical tensions inevitably lead to supply disruptions in the global oil trade.

Source: NYMEX 20

Price Wars In the face of growing shale competition, this has led to price wars. OPEC will lower supply to bleed out competitors. Competitors innovate better processes to reduce the cost of extraction as well explore other energy alternatives. Overall, OPEC is losing leverage in dictating the price of oil. While there is no single break-even price for shale per barrel, it ranges between $29-$39 for major shale plays.


Source: Seeking Alpha16

Shale is a solid short-term threat receiving investment, especially in the United States. However, long-term, OPEC expects more demand that shale can satisfy. Shale gas has risen 35% in the US (in terms of natural gas production), but cost inflation and environmental lobbying may stagnate growth.

Source: EIA15

We share the view that in the long-term shale gas will be unsustainable at a high growth rate. Natural Disasters Natural disasters during 2017 posed for supply disruptions across the oil supply chain. However, given the usage of emergency reserves to ease gas prices, the net effect has been minimal. Fiscal and Governmental Policy Fiscal and governmental policy also affects the stock market as individuals often trade on policy sentiments of newly elected officials. The fiscal and monetary

policies of the Trump administration center around deregulation and tax cuts. Given the long-time horizon before actualization, we do not see current noise on tax reform as a sound economic projection.

The energy sector is an integral part of the global economy. It consists of companies that explore, transport, refine and market energy resources (notably, oil and gas) that are required for the production and transportation of all goods and services in the world. Energy companies are referred to as upstream, midstream, or downstream based on depending on their role within the supply chain. Oil giants such as British Petroleum, Chevron, and ExxonMobil are classified as integrated oil and gas companies as they operate in multiple, if not all 3 parts of the supply chain. Upstream companies identify deposits, drill wells, and recover raw materials from underground. These companies are often called Exploration & Production companies. Crude oil is the main energy resource that is explored and produced by the upstream operators as it makes up 59.4% of the segment’s total revenue.

Source: IBISWORLD 7

Midstream operations are mostly involved in transporting energy resources from exploration and production sites to refineries. Pipeline is the most popular transportation medium used to by midstream companies, but ships, railroads and trucks are also used. Downstream is the stage of the value process where the raw materials are refined and brought to market as

Industry Analysis


usable products such as gasoline, jet fuel, and other petroleum based products.

Industry Trends

Production Cuts OPEC is currently in a phase of production cuts in order to bolster oil prices. We expect this to continue through at least March 2018, given managerial guidance. New Entrants Another important trend has been the emergence of US shale into the energy mix. US Shale gas has risen 35% in terms of natural gas production. Long term, cost inflation and environmental lobbying threaten high growth; however, shale production is expected to increase to 900,000 barrels/day in 2017 according to IHS Markit19. This could offset OPEC’s production cuts. With a breakeven price at less than $40/barrel, shale is competitive in a low-price environment. Mergers and Acquisitions Recent consolidation of the industry can be attributed to a survival response to the low oil prices. Particularly in the Oilfield services sector, it appears firms are shifting their operations towards more specific capabilities/specialties. As increasing global capital expenditures are being justified by increasing oil prices, rig activity has also been on the rise.

Source: PwC 8

Forward-looking firms are increasing M&A activity to position themselves for an inevitably changing energy

landscape, especially with oil prices stabilizing and making the valuation process easier. Markets and Competition

The competitive landscape that firms compete in is largely defined by OPEC and non-OPEC suppliers. Previous monopolization of the energy industry by OPEC is eroding, thus leading way to growing competition. On the demand side, our forward-looking analysis expects demand to come primarily from quickly industrializing countries. Downstream firms have higher profit margins when oil profits are lower, compared to midstream and upstream firms. As a result, they are more sensitive to oil price volatility compared to firms farther in the supply chain. Crack spread, the price difference between crude oil and refined petroleum products, is a large determinant in the competitiveness of downstream firms.

Source: HSNO 14

A widening crack spread over the course of the last year signals that refined oil products are outpacing the price of oil. Holding all else equal, we expect oil prices to rise, which will benefit the industry. Industry Classification The industry is matured within its life cycle. Thus, industry trends are highly correlated with the overall economy. Competition lies in garnering market share of this stable industry. This industry reacts to business

Gulf Coast Crack Spread, TTM


cycles quite defensively. It experiences more stable performance during stages of the business cycle. Major Players (Large Cap, Publicly Traded Oil & Gas & Equipment) The oilfield services sector is highly capital intensive and cyclical. Therefore, it is important to consider company credit metrics, liquidity, and leverage. Furthermore, given that they are further along the supply chain, their revenues are largely tied to final investment decisions (FIDs) which dictate the capital expenditures of client exploration and production companies. As a result, there is typically a lag effect which firms must be able to weather before they capitalize on rising oil prices.

Source: Bloomberg Terminal12

We assume a <40% Debt/Capital ratio to be ideal. Based on size and ability to meet short term financing requirements, we see Schlumberger and Tenaris as best positioned among these major players. They both have the ability to meet their financing obligations. Porter’s Five Forces Potential Entrants: Shale in the US has been the largest contributor to new oil production. It challenges rival crude oil extraction. Suppliers: The alignment of interests among member countries of OPEC greatly solidifies their bargaining power as a collective. While high barriers to entry, regulatory burden, and the finite existence of resources keeps competition at bay, it also creates a level of inflexibility for firms to deal with significant demand or supply shocks.

Rivalry intensity: This industry is characterized by large capital requirements which make the threat of entry low. The industry is also highly saturated and mature. Customers: Energy demand is driven by rapid industrialization of growing countries. Their bargaining power is relatively low as global oil benchmarks determine the oil price and information is mostly symmetrical. Moreover, growing countries need energy. We expect consumption growth from industrializing non-OECD countries to be 10.96% through 2018.

Source: EIA5

Substitutes: A threat of perceived substitutes is present with alternative and renewable energy. This is due to changing social factors, namely environmental sustainability; however, main growth is more attribute to the decline in coal consumption. Fossil fuels still dominate the energy mix and the noise around renewables is overstated. 77% of the world energy mix is expected come from fossil fuels in 2040, according to the EIA 2017 International Energy Outlook. This analysis leads us to believe that competition among firms is primarily for market share. Competition has been recently characterized by mergers and acquisitions which enable businesses to divest and position themselves strategically for what we believe is going to be a changing energy mix with slightly more prioritization placed on low carbon. Recovering oil prices have helped to justify this. Oilfield services in particular are competing through specialization in

Company Market

Cap Debt to Capital

Debt to FCF

EBITDA/ Interest

Schlumberger 91.07B 32.08% 2.21 4.49 Halliburton 38.9B 56.71% -7.56 Baker Hughes* 37.74B Tenaris 17.56B 6.86% -8.91 27.02 TechnipFMC 13.49B 22.19% Wood Group 6.4B 29.60% 2.21 10.06 RPC Inc. 5.36B 0.00% -26.29 Average 30.07B 24.57% -1.49 1.54 * Lack of data due to recent merger with GE


offerings or fully integrated services such as Schlumberger’s SPM initiative. In the face of rising oil prices, we believe that it is paramount for E&P client companies to increase capital expenditures due to growing demand. This directly impacts oilfield service companies and their revenues.

General Domestic Product

Schlumberger Ltd. (NYSE: SLB) is an oil and gas equipment and services company founded in 1926. SLB employs approximately 100,000 people who represent over 140 nationalities and operates in more than 85 countries. The company’s workforce provides a wide range of services, including technology, project management, and information solutions to the oil and gas exploration and production companies. Schlumberger manages its business through 35 GeoMarket regions, which are grouped into four geographic areas: North America, Latin America, Europe & Africa, Russia, Middle East and Asia. This GeoMarket structure enables SLB to provide customized solutions to its customers and meet local needs promptly.

Source: Form 10-k 201611

On April 1, 2016, Schlumberger completed a $14.8 billion13 acquisition of the leading provider of flow equipment products, systems and services to the oil and gas industry worldwide, Cameron International Corporation. With the addition of Cameron to its portfolio, Schlumberger now operates through four product Groups: Reservoir Characterization (RC),

Drilling, Production, and Cameron. Each of these groups consists of several technology-based service and product lines.

Source: Form 10-k 201611

Financial Summary

Schlumberger reported a revenue of $27.8 billion in 2016. This figure represented a 34% drop from 2015, but, with the inclusion of Cameron, the company’s revenue dropped 22%. Across its product groups, Drilling saw the biggest drop in revenue (37%). The Reservoir Characterization and Production Group’s revenue also dropped by 31% and 30%, respectively. From a geographic standpoint, North America, Europe/CIS/Africa, Latin America, and Middle East & Asia revenues dropped 32%, 26%, 22%, and 17% respectively. SLB’s large revenue drops in 2016 were mainly caused by cuts in oil and gas exploration and production spending (CAPEX) from key E&P partners and sharp drops in land rig counts globally. As oil prices stabilize, we expect E&P spending to steadily pick up, but not at rate that outpaces previous boom.

Source: Mckinsey Energy Inshights10

Company Analysis


This expectation agrees with consensus as recent surveys indicate that E&P investments will increase by approximately 30% in the near term. Company Strategy

SLB creates value through researching and developing new innovative technologies that help optimize the efficiency and yield in exploration and production of oil. Compared to its peers, Schlumberger is more committed to increasing its research and development capabilities.

Source: Bloomberg Terminal12

We believe that this positions the company well to meet oilfield service demand, particularly for shale and unconventional plays currently receiving investment as well as offshore plays. The company also creates value by engaging in synergistic business combinations such as the Cameron acquisition, and partnering with other businesses through joint ventures. Products and Markets

Through its four product groups, Schlumberger provides expertise, technology, manpower and project management that enables E&P operators to explore, drill and develop oil and gas fields. Reservoir Characterization Group

Consists of principal technologies involved in finding and defining hydrocarbon resources. These include WesternGeco, Wireline, Testing & Process, Software

Integrated Solutions, and Integrated Services Management. The Reservoir Characterization Group contributes approximately 24% of Schlumberger’s revenue. This segment saw a 31% drop in revenue from 2015. This large drop was largely due to sustained cuts in exploration and discretionary spending. Going forward we expect SLB’s customers to ramp up their CAPEX spending which will lead this group’s revenue to growth in the 6-10% region annually through 2021. Drilling Group

Consists of principal technologies involved in the drilling and positioning of oil and gas wells. These include Bits & Drilling tools, M-I Swaco, Drilling & Measurements, Land Rigs and Integrated Drilling Services. The key driver in this group is rig count and utilization which is, again, largely driven by E&P operator’s spending. Due to weak capital expenditures in 2016, the North America market was a sharp 46% drop in rig counts.

Source: EIA6

This drop led Schlumberger’s Drilling group to a 37% decrease in revenue. As oil prices stabillize, though, we anticipate Drilling revenue to recover and grow by 8% in 2018 and hold stead around 5-8% through the investment horizon.


Production Group Consists of principal technologies involved in the lifetime production of oil and gas reservoirs. This group consists of Well Services, Completions, Artificial Lift, Integrated Production Services, and Schlumberger Production Management (SPM). Close to 31% of SLB’s revenue in 2016 were attributable to the production group. Despite the fact that the group saw a 29% decrease in revenue, we feel that this is one of the areas along the oil and gas supply chain in which Schlumberger does a strong job of demonstrating its expertise and leadership. We foresee this segment expanding due management’s aggressive plan to grow its SPM product line18. Schlumberger Production Management (SPM) With SPM projects, the company uses its own expertise, technologies, and funds to develop and co-manage oil production on the behalf of its customers under long-term contracts. SLB recognizes revenue based on cash flow generated or on a fee-per-barrel basis. Since its first SPM project in 2004, Schlumberger has gradually expanded this business which currently manages 15 projects in 7 countries. In 2016, SPM generated revenue of $1.4 billion. In the last 12 months, Schlumberger announced several of new SPM projects, including a multi-year plan to invest $390 million with YPF in the Vaca Muerta shale development in Argentina; $700 million with FIRST E&P and NNPC in Nigeria; and a project with OneLNG, SM Energy. Moreover, Schlumberger also revealed two new projects in North America with SM Energy (SM) in the Powder River Basin in the U.S. and a project in Western Canada. Looking forward we feel that SPM projects will continue to grow steadily as management’s recent guidance signaled that it plans to double its SPM revenue over the next couple of years and eventually making SPM an integral part of its portfolio.

Cameron Group Consists of principal technologies involved in pressure and flow control for drilling and intervention rigs, oil and gas wells and production facilities and includes OneSubsea, Surface Systems, Drilling Systems, and Vales & Measurement. We feel that the recent addition of Cameron to Schlumberger’s product mix, will lead to a synergistic result. We also believe that the timing of the purchase near the bottom of business cycle resulted in a heavily discounted price tag, whose value will truly mature when offshore drilling will be driving oil production. This sentiment is reflected by the fact that the combination created a pore-to-pipeline one-stop shop for oilfield services onshore and offshore. Also, since 2014, OneSubsea saw a 25% increase in its Subsea Tree (equipment used to monitor and control production, they are placed on top of well heads) market share which gives Schlumberger a position in the Deepwater drilling market.

Source: Forbes9

Significant Customers In 2016, no single customer exceeded 10% of Schlumberger’s consolidated revenue (10K). This suggests that their customer base is well diversified.


Competition As the leader in the slowly recovering oil services industry, Schlumberger has not taken a passive approach in protecting its market share.

Source: Forbes9

The green boxes indicate a leading position held by the respective company. Schlumberger holds a leading position in 13 of 25 oilfield service segments. Since its consolidation with Cameron, SLB’s addressable market has increased by 45% (Forbes). The following graphic In July 2017, Baker Hughes merged with General Electric making it the 2nd largest oilfield services firm in terms of revenue. Catalyst for Growth and Change Management believes the market bottomed out and is in recovery mode. Looking forward it is focusing on four areas: The need for higher E&P spending to meet growing hydrocarbon demand, encouraging R&D investment, new business models which foster technical collaboration between operators and suppliers, and more integrated technology platforms. SWOT Analysis Strengths Schlumberger is the market leader in the oil and gas services industry. SLB continues to expand its R&D

investments paired with strategic M&A activity. Compared to its peers, SLB is positioned well to meet short term financing obligation based upon our industry analysis. Weaknesses The majority (71%, 76%, 80% over the last three years, respectively) of their revenues come from outside the United States. While most of demand will come from developing regions, these countries are subject to political and economic volatility. Exclusive risks include repatriation of profits, currency exchange rates, and trade sanctions. SLB manages exchange rate risk through derivative instruments. Opportunities

Schlumberger has the opportunity to capitalize upon recovering oil prices and rig activity. They can strengthen their portfolio through a suite of offerings from specialty services to integrated project management. According to their recent 3rd quarter earnings call, management expects the total number of final investment decisions (FIDs) to be double that of 2016. This implies activity tailwinds in 2018. Threats Schlumberger requires highly skilled personnel to provide their services; therefore, they are dependent on rates of unemployment. Also, they must compete for workers as activity increases. This sort of environment may make it difficult to attract and retain employees. This risk is amplified in developing countries where most of the company’s revenues come from. As part of their SPM initiative, SLB is entering into longer contracts which can span 20+ years. This can delay return on investment or call into question altogether. Schlumberger has had problems with its receivables in Ecuador. Expansion to some degree requires compromising credit worthiness which poses collection risk. Severe weather conditions can also have big impacts on SLB’s financial and operational performance.

Oilfield Market Segments


Discounted Cash Flow & Economic Profit The DCF model is the soundest approach to estimating the value of oilfield service companies to shareholders. Our analysis calculates the intrinsic value of SLB (as of November 10th) to be $79.12. Compared to its current stock price, our estimated premium is primarily attributable to their return on invested capital (ROIC) outpacing their weighted average cost of capital (WACC) by nearly 3x. Dividend Discount Model

As a valuation model, DDM is highly dependent on dividend payout. While Schlumberger pays consistent dividends, they have historically been lower than what they can afford. This enables them to reinvest capital into value added projects. In positioning themselves for rising oil prices, and thus increased client E&P capital expenditures, we expect them to continue this growth approach rather than a dividend payout approach. Therefore, we do not place as much emphasis on this valuation model, as it does not adequately represent the intrinsic value of this firm. Relative Valuation Model

The oilfield services industry has been characterized by M&A activity which allows businesses to divest and strategically position themselves. This has looked like specialized offerings or fully integrated services across from project start to completion. The industry itself is also highly capital and infrastructure intensive. Currently, Schlumberger trades at premium compared to its peers based on our relative P/E. However, given their different approaches in oil price recovery and infrastructure differences between firms, we do not believe that this valuation model adequately represents the intrinsic value of the firm.

Revenue Growth

Our projected revenue is based upon the belief that the price of oil is stabilizing and set to recover. However,

there is large uncertainty when prices will truly recover. Moreover, there is a lag effect between price recovery, final investment decision/capital expenditure from client E&P companies and eventual oilfield service utilization, given Schlumberger’s upstream position in the supply chain. As a result, our projections are slightly conservative to consensus through our forecast period. We expect revenues to grow organically by 9.58% in 2018, primarily driven by the production group and drilling group. We also forecast the newly acquired Cameron group to be accretive to the firm, ultimately having the highest growth rate of all groups (20%) in 2018. Cost of Goods Sold (COGS)

We forecasted COGS as a percentage of revenues, because these costs are sales driven. Therefore, we expect these costs to grow in line with revenue growth. Share Purchases

On January 21, 2016, the Board of Directors approved a new $10 billion share repurchase program. We incorporated this into our model through share change and the employee stock option program which flows back into our treasury stock forecast on the balance sheet as well as the stock repurchase program on the statement of cash flows. Both of these items gradually increase as average shares outstanding gradually decreases. These changes have the effect of enabling the firm to secure more capital to reinvest into new projects. Key Assumptions

Continuing Value Growth

We expect a continuing value NOPLAT growth rate of 3.6%. At this point, we believe Schlumberger will grow in line with the overall economy. The nature of commodity sectors tends to create low inflation which we estimate to be 1.5% in 2022. GDP growth has only been above 3% for the last two quarters since the last economic recession; therefore, we are slightly below consensus on GDP estimates.

Analysis of Valuation Models


Weighted Average Cost of Capital (WACC) We calculated Schlumberger’s WACC to be 6.95%. We utilized the capital asset pricing model (CAPM) to determine the cost of equity. The inputs were the risk-free rate proxied by the 30-year Treasury bond, a market risk premium estimated by Damodaran historical data, and a raw equity beta derived through Bloomberg. The cost of debt was derived through Bloomberg New Issue Analytics using a comparable 30-year horizon. Schlumberger’s cost of capital is below the oilfield service sector’s average 8.33% making it relatively cheaper for them to engage in new projects17.

CV Growth of NOPLAT and BETA At terminal value, we foresee Schlumberger growing at a rate of 3.6%. Our valuation model is highly sensitive to this conservative outlook. In fact, a .6% increase in CV growth estimate will result in a stock price of $91.80. In contrast, a .6% decrease in our CV growth expectation will lead our valuation model to yield a DCF price of $70.31.

Beta and Risk-Free Rate With potential interest rate increases on the horizon, a variable to keep an eye on is the Risk-Free rate that we used to calculate our Cost of Equity, and ultimately our Weighted Average of Cost of Capital (WACC). The Risk-free rate that we use was 2.88% which was the yield of the 30Y U.S. Treasury Bond. A 75 basis point increase in our Risk-Free rate assumption will cause a $13 drop in our DCF target price ($66). Another variable that our model is highly sensitive to is the 1.07 Stock BETA that we used in deriving Schlumberger’s Cost of Equity. This variable has a

strong negative relationship with our DCF stock price. For instance, by lowering SLB’s BETA by .1, our valuation model yields a price of $89.9, while a .1 increase in BETA price Schlumberger at $70.54.

ROIC and WACC As the best poisoned company in the Oil field Services industry to gain from oil price recovery and E&P spending increases, we anticipate SLB will maintain its high ROIC level. In the worst-case scenario, we expect SLB to at least maintain a 10% CV ROIC which will could lead to a stock price of $15 deviation from our DCF intrinsic value, all else equal. In the best-case scenario, Schlumberger’s CV ROIC will rise 10% more than our valuation suggests which will lead to a $85 stock price.

R&D and SGA These variables did not noticeably impact our intrinsic value. The only time we could see strong price reaction to R&D and SGA spending is if SLB drastically changes its cost structure which we do not anticipate in the foreseeable future.

Sensitivity Analysis


1. What Drives Crude Oil Prices: Supply Non-OPEC.” U.S. Energy Information Administration(EIA), 10 Nov. 2017,www.eia.gov/finance/markets/crudeoil/supply-nonopec.php.

2. “Global Interim Economic Outlook, March2017” http://www.oecd.org/eco/outlook/general-assessment-of-the-macroeconomic-situation-oecd-economic-outlook-june-2017.pdf.

3. “United States 30 Year BondYield Forecast.” Trading Economics,https://tradingeconomics.com/united-states/30-year-bond-yield/forecast

4. Macrotrends. WTI Crude Oil Prices - 10 YearDaily Chart. MacroTrends, 4 Sept. 2017.

5. EIA. Short-Term Energy Outlook. U.S. EnergyInformation Administration, 10 Nov. 2017,https://www.eia.gov/outlooks/steo/report/us_oil.cfm

6. EIA. Petroleum & Other Liquids. U.S. EnergyInformation Administration, 10 Nov. 2017,https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WPULEUS3&f=W

7. IBISWORLD. Products & Markets. US IndustryReports. Oil Drilling & Gas Extraction.Accessed 13 September 2017.

8. Biscardini, Giorgio. “2017 Oil and GasTrends.”. Retrieved 10 Nov. 2017,https://www.strategyand.pwc.com/trend/2017-oil-and-gas-trends

9. Rapier, Robert. No. 3: ExxonMobil -Pg.4. Forbes, Forbes Magazine, 27 April 2016.https://www.forbes.com/sites/greatspeculations/2017/01/04/will-schlumberger-continue-to-be-an-industry-leader-in-2017/#661a00fc7bc5

10. Kutsal, ELif, and Jingrui Fang. “Oil ProductionCapex Is a Rebound in Sight.” Mckinsey EnergyInsights, Aug. 2016,www.mckinseyenergyinsights.com/insights/oil-production-capex-is-a-rebound-in-sight/.

11. Schlumberger’s 2016 Form 10-K.https://www.sec.gov/Archives/edgar/data/87347/000156459017000589/slb-10k_20161231.htm

12. Bloomberg Terminal retrival date is November10, 2017.

13. Offshore Technology. “SchlumbergerCompletes Cameron Acquisition for $14.8bn.”OffshoreTechnology.com, 4 Apr. 2016,www.offshore-technology.com/news/newsschlumberger-completes-cameron-acquisition-148bn-4854974.

14. “Wholesale Spot Petroleum and Crude OilPrices and Crack Spreads.” HSNO,www.hsno.com/energy-services/crack/.

15. EIA. Drilling Productivity Report. U.S. EnergyInformation Administration, 10 Nov. 2017,https://www.eia.gov/petroleum/drilling/#tabs-summary-1

16. Valores, Caiman. “Surprise Profitability OfShale Oil Is The Greatest Threat To Higher OilPrices.” Seeking Alpha, 5 June 2017,www.seekingalpha.com/article/4078951-surprise-profitability-shale-oil-greatest-threat-higher-oil-prices.

17. Damodaran, Aswath. “Cost of Capital by Sector(US).” Stern.nyu.edu, Jan. 2017,people.stern.nyu.edu/adamodar/New_Home_Page/datafile/wacc.htm.

18. Schlumberger’s 2016 Form 10-K.https://www.sec.gov/Archives/edgar/data/87347/000156459017019977/slb-10q_20170930.htm

19. Reed, Stanley. “OPEC, Fighting Market Forces,Extends Production Cuts.” The New YorkTimes, The New York Times, 25 May 2017,www.nytimes.com/2017/05/25/business/energy-environment/oil-opec-shale-renewables.html.

20. Kristopher, Gordon. “Will WTI Crude Oil Hit$32 per Barrel?” Market Realist, 15 Jan. 2015,marketrealist.com/2015/01/will-west-texas-intermediate-crude-oil-hit-32-per-barrel/.

Works Ci ted

http://www.eia.gov/finance/markets/crudeoil/supply-nonopec.php

http://www.eia.gov/finance/markets/crudeoil/supply-nonopec.php

http://www.oecd.org/eco/outlook/general-assessment-of-the-macroeconomic-situation-oecd-economic-outlook-june-2017.pdf



https://tradingeconomics.com/united-states/30-year-bond-yield/forecast

https://tradingeconomics.com/united-states/30-year-bond-yield/forecast

https://www.eia.gov/outlooks/steo/report/us_oil.cfm

https://www.eia.gov/outlooks/steo/report/us_oil.cfm

https://www.strategyand.pwc.com/trend/2017-oil-and-gas-trends

https://www.strategyand.pwc.com/trend/2017-oil-and-gas-trends

https://www.eia.gov/petroleum/drilling/#tabs-summary-1

https://www.eia.gov/petroleum/drilling/#tabs-summary-1

http://www.seekingalpha.com/article/4078951-surprise-profitability-shale-oil-greatest-threat-higher-oil-prices




Important Disclaimer This report was created by students enrolled in the Applied Equity Valuation (FIN:4250) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential Employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

Schlumberger Ltd (NYS: SLB)Key Assumptions of Valuation Model

Ticker Symbol SLBCurrent Share Price $65.74Current Model Date 11/10/2017FY End (month/day) Dec. 31

Pre-Tax Cost of Debt 3.94%Beta 1.070Risk-Free Rate 2.88%Equity Risk Premium 4.63%CV Growth of NOPLAT 3.60%CV Real GDP Growth 2.10%CV Inflation 1.50%

Current Dividend Yield 3.04%

Marginal Tax Rate 25.00%Effective Tax Rate 28.63%

Schlumberger Ltd (NYS: SLB)Revenue Decomposition

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022 (CV)Revenue 48,580 35,475 27,810 30,448 34,306 37,746 40,645 42,893 44,264

YoY Growth% 7.32% -26.98% -21.61% 9.49% 12.67% 10.03% 7.68% 5.53% 3.20%

Product GroupsReservoir Characterization 12,905 9,738 6,743 6,971 7,668 8,399 8,903 9,437 9,777

YoY Growth% -1.11% -24.54% -30.76% 3.38% 10.00% 9.53% 6.00% 6.00% 3.60%Drilling 18,128 13,563 8,561 8,549 9,233 10,064 10,768 11,320 11,727

YoY Growth% 7.96% -25.18% -36.88% -0.14% 8.00% 9.00% 7.00% 5.12% 3.60%Production 17,763 12,311 8,709 10,163 11,687 12,739 13,630 14,312 14,827

YoY Growth% 13.53% -30.69% -29.26% 16.69% 15.00% 9.00% 7.00% 5.00% 3.60%Cameron - - 4,211 5,264 6,317 7,264 8,208 8,865 9,184

YoY Growth% - - - 25.00% 20.00% 15.00% 13.00% 8.00% 3.60%Eliminations & Other (216) (137) (414) (498) (599) (720) (865) (1,040) (1,251)

YoY Growth% 2.70% 36.57% -202.19% 20.24% 20.24% 20.24% 20.24% 20.24% 20.24%Total 48,580 35,475 27,810 30,448 34,306 37,746 40,645 42,893 44,264

Group % of Total RevenueReservoir Characterization 26.56% 27.45% 24.25% 22.89% 22.35% 22.25% 21.90% 22.00% 22.09%Drilling 37.32% 38.23% 30.78% 28.08% 26.91% 26.66% 26.49% 26.39% 26.49%Production 36.56% 34.70% 31.32% 33.38% 34.07% 33.75% 33.54% 33.37% 33.50%Cameron 0.00% 0.00% 15.14% 17.29% 18.41% 19.24% 20.20% 20.67% 20.75%Eliminations & Other -0.44% -0.39% -1.49% -1.63% -1.74% -1.91% -2.13% -2.43% -2.83%Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Geographic Areas

North America 16,151 9,811 6,665 YoY Growth% 16.22% -39.25% -32.07%

Latin America 7,699 6,014 4,230 YoY Growth% -0.71% -21.89% -29.66%

Europe/CIS/Africa 12,515 9,284 7,351 YoY Growth% 0.84% -25.82% -20.82%

Middle East & Asia 11,875 9,898 9,286 YoY Growth% 10.29% -16.65% -6.18%

Eliminations & Other 340 468 278 YoY Growth% -22.20% 37.65% -40.60%

Total 48,580 35,475 27,810

Geographic Area % of Total Revenue

North America 33.25% 27.66% 23.97%Latin America 15.85% 16.95% 15.21%Europe/CIS/Africa 25.76% 26.17% 26.43%Middle East & Asia 24.44% 27.90% 33.39%Eliminations & Other 0.70% 1.32% 1.00%Total 100.00% 100.00% 100.00%

Schlumberger Ltd (NYS: SLB)Income Statement

Fiscal Years Ending Dec. 31 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022 (CV)Revenue 45,266 48,580 35,475 27,810 30,448 34,306 37,746 40,645 42,893 44,264

Interest & other income 165 291 236 200 212 205 211 216 220 223 Expenses

Cost of revenue 31,901 33,854 24,767 20,843 21,689 24,436 26,887 28,952 30,553 31,530 Depreciation Expense 3,100 3,200 3,200 2,700 2,663 2,546 2,572 2,767 2,971 3,164 Amortization Expense 330 344 354 567 677 669 647 606 581 788 Research & engineering expense 1,174 1,217 1,094 1,012 900 1,014 1,116 1,201 1,268 1,308 General & administrative expense 416 475 494 403 361 406 447 481 508 524 Impairment & other expenses 456 1,773 2,575 3,172 Interest expense 391 369 346 570 773 791 710 685 749 847

Income (loss) from continuing operations before taxes 8,691 7,639 2,881 (1,905) 3,598 4,649 5,579 6,168 6,482 6,326 Taxes on income (loss) 1,848 1,928 746 (278) 900 1,162 1,395 1,542 1,621 1,581

Net income (loss) 6,774 5,506 2,135 (1,627) 4,498 3,486 4,184 4,626 4,862 4,744 Net income (loss) attributable to noncontrolling interests 42 68 63 60 56 53 50 47 44 41

Net income attributable to Schlumberger 6,732 5,438 2,072 (1,687) 4,554 3,539 4,234 4,672 4,906 4,786

Basic Earnings Per Share of Schlumberger 5.09$ 4.20$ 1.63$ (1.24)$ 3.35$ 2.64$ 3.18$ 3.54$ 3.78$ 3.72$

Dividend Per Share of Schlumberger 1.25$ 1.60$ 2.00$ 2.00$ 2.00$ 2.00$ 2.16$ 2.21$ 2.31$ 2.46$

Average Shares Outstanding 1,323 1,295 1,267 1,357 1,327 1,313 1,314 1,298 1,277 1,275

Schlumberger Ltd (NYS: SLB)Balance Sheet

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022 (CV)ASSETSCurrent Assets

Cash 3,130 2,793 2,929 5,715 2,185 1,064 1,326 2,477 810 Short-term investments 4,371 10,241 6,328 5,438 6,127 6,741 7,259 7,661 7,906 Receivables, net 11,171 8,780 9,387 8,272 9,320 10,254 11,042 11,652 12,025 Inventories, Total 4,628 3,756 4,225 3,583 4,037 4,442 4,783 5,048 5,209 Other current assets 1,250 1,134 1,058 972 1,095 1,205 1,297 1,369 1,413

Total current assets 24,694 26,912 23,927 23,980 22,764 23,706 25,707 28,207 27,362 Fixed income investments, held-to-maturity 442 418 238 238 238 238 238 238 238 Investment in affiliated companies 3,235 3,311 1,243 1,272 1,302 1,333 1,364 1,396 1,429 Fixed assets, net 15,396 13,415 12,821 12,258 12,382 13,322 14,305 15,234 15,870 Multiclient Seismic Data 793 1,026 1,073 750 845 930 1,002 1,057 1,091 Goodwill 15,487 15,605 24,990 24,990 24,990 24,990 24,990 24,990 24,990 Intangible assets 4,654 4,569 9,855 9,178 8,509 7,862 7,256 6,675 5,887 Other assets 2,203 2,749 3,809 2,637 2,971 3,269 3,520 3,715 3,833

Total assets 66,904 68,005 77,956 75,304 74,001 75,650 78,382 81,511 80,700 LIABILITIESCurrent Liabilities

Accounts payable & accrued liabilities 9,246 7,727 10,016 7,798 8,786 9,667 10,409 10,985 11,336 Estimated liability for taxes on income 1,647 1,203 1,188 1,141 1,095 1,052 1,010 970 931 Long-term debt - current portion 1,244 3,011 1,975 3,153 2,041 1,304 2,606 4,762 1,951 Short-term borrowings 1,521 1,546 1,178 1,232 1,072 1,207 1,328 1,430 1,510 Dividend payable 518 634 702 546 615 677 729 769 793

Total current liabilities 14,176 14,121 15,059 13,869 13,609 13,906 16,082 18,916 16,521 Long-term debt 10,565 14,442 16,463 15,678 14,893 14,868 15,073 15,285 15,468 Postretirement benefits 1,501 1,434 1,495 1,295 1,122 972 842 729 632 Deferred taxes 1,296 1,075 1,880 1,465 1,141 889 692 539 420 Other liabilities 1,317 1,028 1,530 1,736 1,969 2,234 2,534 2,875 3,261

Total liabilities 28,855 32,100 36,427 34,043 32,733 32,869 35,223 38,344 36,302 EQUITY

Common stock 12,495 12,693 12,801 13,406 14,010 14,615 15,219 15,824 16,428 Retained earnings 41,333 40,870 36,470 38,098 39,000 40,409 42,182 44,085 45,712 Treasury stock (11,772) (13,372) (3,550) (6,050) (7,550) (8,050) (10,050) (12,550) (13,550) Accumulated other comprehensive income (loss) (4,206) (4,558) (4,643) (4,643) (4,643) (4,643) (4,643) (4,643) (4,643)

Schlumberger stockholders' equity 37,850 35,633 41,078 40,810 40,817 42,330 42,708 42,716 43,947 Non-controlling interests 199 272 451 451 451 451 451 451 451

Total equity 38,049 35,905 41,529 41,261 41,268 42,781 43,159 43,167 44,398 Total liabilities & stockholders' equity 66,904 68,005 77,956 75,304 74,001 75,650 78,382 81,511 80,700

Schlumberger Ltd (NYS: SLB)Cash Flow Statement

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E 2022 (CV)Cash flows from operating activities:

Net income (loss) 4,498 3,486 4,184 4,626 4,862 4,744 Non-Cash Operating Expense

Depreciation & amortization 3,340 3,215 3,219 3,373 3,552 3,952 Changes in Working Capital Accounts

Receivables, net 1,115 (1,048) (934) (787) (611) (372) Inventories, Total 642 (454) (405) (341) (265) (161) Other current assets 86 (123) (110) (93) (72) (44) Accounts payable & accrued liabilities (2,218) 988 881 742 576 351 Dividends payable (156) 69 62 52 40 25 Deferred taxes (415) (324) (252) (196) (153) (119) Estimated liability for taxes on income (47) (45) (44) (42) (40) (39) Multiclient Seismic Data 323 (95) (85) (71) (55) (34)

NET CASH FLOWS FROM OPERATING ACTIVITIES 7,166 5,670 6,516 7,262 7,834 8,303 Cash from investing activities:

Short-term investments 890 (689) (614) (518) (402) (245) Fixed income investments, held-to-maturity - - - - - - Investment in affiliated companies (29) (30) (31) (31) (32) (33) Capital expenditures (2,100) (2,670) (3,512) (3,750) (3,900) (3,800) Other cash flows from investing activities 1,378 (101) (33) 49 146 268

NET CASH FLOWS FROM INVESTING ACTIVITIES 138 (3,490) (4,190) (4,250) (4,188) (3,810) Cash flows from financing activities:

Short-term Borrowings 54 (160) 136 121 102 79 Proceeds from common stock issuance 605 605 605 605 605 605 Stock repurchase program (2,500) (1,500) (500) (2,000) (2,500) (1,000) Repayments/issuance of long-term 393 (1,897) (762) 1,507 2,368 (2,628) Dividends paid (2,870) (2,584) (2,775) (2,853) (2,958) (3,118) Post-retirement benefits (200) (173) (150) (130) (113) (98) Other cash flows from financing activities - - - - - -

NET CASH FLOWS FROM FINANCING ACTIIVITIES (4,519) (5,710) (3,447) (2,750) (2,496) (6,160)

Net Change in Cash 2,786 (3,530) (1,121) 262 1,151 (1,667)Cash, beginning of year 2,929 5,715 2,185 1,064 1,326 2,477 Cash, end of year 5,715 2,185 1,064 1,326 2,477 810

Schlumberger Ltd (NYS: SLB)Cash Flow Statement

Fiscal Years Ending Dec. 31 2013 2014 2015 2016Cash flows from operating activities:

Net income (loss) 6,774 5,506 2,135 (1,627) Income (loss) from discontinued operations 69 205 - -

Adjustments to reconcile net income (loss) to cash provided by operating activities - - -

Impairments & other charges 608 1,773 2,575 3,820 Depreciation & amortization 3,879 4,094 4,078 4,094 Pension & other postretirement benefits expense 518 355 438 187 Stock-based compensation expense 315 329 326 267 Pension & other postretirement benefits funding (538) (390) (346) (174) Earnings of equity method investments, less dividends received (71) (113) (125) (60)

Change in assets and liabilitiesReceivables (803) (187) 2,176 1,098 Inventories 188 (36) 625 800 Other current assets 17 119 76 308 Other assets (78) (134) 16 (488) Accounts payable & accrued liabilities 654 (36) (2,656) (1,680) Estimated liability for taxes on income 34 104 (699) (110) Other liabilities 60 (79) 24 77 Other operating assets & liabilities, net 92 (315) 162 (251)

NET CASH FLOWS FROM OPERATING ACTIVITIES 10,690 11,195 8,805 6,261 Cash from investing activities:

Capital expenditures (3,943) (3,976) (2,410) (2,055) SPM investments (902) (740) (953) (1,031) Multiclient seismic data capitalized (394) (321) (486) (630) Business acquisitions & investments, net of cash acquired (1,008) (1,008) (443) (2,398) Sale (purchase) of investments, net (648) 446 (5,848) 5,544 Other cash flows from investing activities 218 19 (112) (54)

NET CASH FLOWS FROM INVESTING ACTIVITIES (6,879) (5,580) (10,252) (624) Cash flows from financing activities:

Dividends paid (1,608) (1,968) (2,419) (2,647) Proceeds from employee stock purchase plan 270 295 296 231 Proceeds from exercise of stock options 267 530 152 184 Stock repurchase program (2,596) (4,678) (2,182) (778) Proceeds from issuance of long-term debt 4,554 2,289 9,565 3,640 Repayment of long-term debt (3,141) (2,878) (3,771) (5,630) Net increase (decrease) in short-term borrowings 37 552 (3) (387) Other cash flows from financing activities 18 (38) (264) (41)

NET CASH FLOWS FROM FINANCING ACTIIVITIES (2,199) (5,896) 1,374 (5,428) Cash flow from discontinued operations - operating activities (2) 24 (233) - Net increase (decrease) in cash before translation effect 1,582 (257) (306) 209 Translation effect on cash (15) (85) (31) (73) Cash, beginning of year 1,905 3,472 3,130 2,793 Cash, end of year 3,472 3,130 2,793 2,929

Schlumberger Ltd (NYS: SLB)Common Size Income Statement

Fiscal Years Ending Dec. 31 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022 (CV)Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Interest & other income 0.36% 0.60% 0.67% 0.72% 0.70% 0.60% 0.56% 0.53% 0.51% 0.50%Gain on formation of OneSubsea 2.27% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

ExpensesCost of revenue 70.47% 69.69% 69.82% 74.95% 71.23% 71.23% 71.23% 71.23% 71.23% 71.23%Depreciation Expense 6.85% 6.59% 9.02% 9.71% 8.75% 7.42% 6.81% 6.81% 6.93% 7.15%Amortization Expense 0.73% 0.71% 1.00% 2.04% 2.22% 1.95% 1.71% 1.49% 1.35% 1.78%Research & engineering expense 2.59% 2.51% 3.08% 3.64% 2.96% 2.96% 2.96% 2.96% 2.96% 2.96%General & administrative expense 0.92% 0.98% 1.39% 1.45% 1.18% 1.18% 1.18% 1.18% 1.18% 1.18%Impairment & other expenses 1.01% 3.65% 7.26% 11.41% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Merger & integration 0.00% 0.00% 0.00% 2.33% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Interest expense 0.86% 0.76% 0.98% 2.05% 2.54% 2.31% 1.88% 1.69% 1.75% 1.91%

Income (loss) from continuing operations before taxes 19.20% 15.72% 8.12% -6.85% 11.82% 13.55% 14.78% 15.17% 15.11% 14.29%Taxes on income (loss) 4.08% 3.97% 2.10% -1.00% 2.95% 3.39% 3.69% 3.79% 3.78% 3.57%

Income (loss) from continuing operations 15.12% 11.76% 6.02% -5.85% 8.86% 10.16% 11.08% 11.38% 11.33% 10.72%Income (loss) from discontinued operations -0.15% -0.42% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net income (loss) 14.96% 11.33% 6.02% -5.85% 14.77% 10.16% 11.08% 11.38% 11.33% 10.72%Net income (loss) attributable to noncontrolling interests 0.09% 0.14% 0.18% 0.22% 0.19% 0.15% 0.13% 0.11% 0.10% 0.09%

Net income attributable to Schlumberger 14.87% 11.19% 5.84% -6.07% 14.96% 10.32% 11.22% 11.50% 11.44% 10.81%

Schlumberger Ltd (NYS: SLB)Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022 (CV)ASSETSCurrent Assets

Cash 7.67% 6.44% 7.87% 10.53% 18.77% 6.37% 2.82% 3.26% 5.77% 1.83%Short-term investments 10.82% 9.00% 28.87% 22.75% 17.86% 17.86% 17.86% 17.86% 17.86% 17.86%Receivables, net 25.40% 23.00% 24.75% 33.75% 27.17% 27.17% 27.17% 27.17% 27.17% 27.17%Inventories, Total 10.17% 9.53% 10.59% 15.19% 11.77% 11.77% 11.77% 11.77% 11.77% 11.77%Other current assets 3.24% 2.57% 3.20% 3.80% 3.19% 3.19% 3.19% 3.19% 3.19% 3.19%

Total current assets 57.94% 50.83% 75.86% 86.04% 78.76% 66.36% 62.80% 63.25% 65.76% 61.82%Fixed income investments, held-to-maturity 0.80% 0.91% 1.18% 0.86% 0.78% 0.69% 0.63% 0.59% 0.55% 0.54%Investment in affiliated companies 7.33% 6.66% 9.33% 4.47% 4.18% 3.80% 3.53% 3.36% 3.25% 3.23%Fixed assets, net 33.35% 31.69% 37.82% 46.10% 40.26% 36.09% 35.29% 35.20% 35.52% 35.85%Multiclient Seismic Data 1.47% 1.63% 2.89% 3.86% 2.46% 2.46% 2.46% 2.46% 2.46% 2.46%Goodwill 32.49% 31.88% 43.99% 89.86% 82.07% 72.84% 66.21% 61.48% 58.26% 56.46%Intangible assets 10.40% 9.58% 12.88% 35.44% 30.14% 24.80% 20.83% 17.85% 15.56% 13.30%Other assets 4.46% 4.53% 7.75% 13.70% 8.66% 8.66% 8.66% 8.66% 8.66% 8.66%

Total assets 148.23% 137.72% 191.70% 280.32% 247.32% 215.71% 200.42% 192.85% 190.03% 182.31%LIABILITIES 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Current Liabilities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Accounts payable & accrued liabilities 19.52% 19.03% 21.78% 36.02% 25.61% 25.61% 25.61% 25.61% 25.61% 25.61%Estimated liability for taxes on income 3.29% 3.39% 3.39% 4.27% 3.75% 3.19% 2.79% 2.48% 2.26% 2.10%Long-term debt - current portion 4.02% 2.56% 8.49% 7.10% 10.36% 5.95% 3.45% 6.41% 11.10% 4.41%Short-term borrowings 2.13% 3.13% 4.36% 4.24% 4.05% 3.12% 3.20% 3.27% 3.33% 3.41%Dividend payable 0.92% 1.07% 1.79% 2.52% 1.79% 1.79% 1.79% 1.79% 1.79% 1.79%

Total current liabilities 29.88% 29.18% 39.81% 54.15% 45.55% 39.67% 36.84% 39.57% 44.10% 37.32%Long-term debt 22.96% 21.75% 40.71% 59.20% 51.49% 43.41% 39.39% 37.08% 35.63% 34.94%Postretirement benefits 1.48% 3.09% 4.04% 5.38% 4.25% 3.27% 2.57% 2.07% 1.70% 1.43%Deferred taxes 3.77% 2.67% 3.03% 6.76% 4.81% 3.33% 2.35% 1.70% 1.26% 0.95%Other liabilities 2.58% 2.71% 2.90% 5.50% 5.70% 5.74% 5.92% 6.23% 6.70% 7.37%

Total liabilities 60.67% 59.40% 90.49% 130.99% 111.80% 95.42% 87.08% 86.66% 89.39% 82.01%EQUITY 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Common stock 26.93% 25.72% 35.78% 46.03% 44.03% 40.84% 38.72% 37.44% 36.89% 37.11%Retained earnings 83.87% 85.08% 115.21% 131.14% 125.12% 113.68% 107.06% 103.78% 102.78% 103.27%Treasury stock -17.97% -24.23% -37.69% -12.77% -19.87% -22.01% -21.33% -24.73% -29.26% -30.61%Accumulated other comprehensive income (lo -5.64% -8.66% -12.85% -16.70% -15.25% -13.53% -12.30% -11.42% -10.82% -10.49%

Schlumberger stockholders' equity 87.19% 77.91% 100.45% 147.71% 134.03% 118.98% 112.15% 105.08% 99.59% 99.28%Non-controlling interests 0.37% 0.41% 0.77% 1.62% 1.48% 1.31% 1.19% 1.11% 1.05% 1.02%

Total equity 87.56% 78.32% 101.21% 149.33% 135.51% 120.29% 113.34% 106.19% 100.64% 100.30%Total liabilities & stockholders' equity 148.23% 137.72% 191.70% 280.32% 247.32% 215.71% 200.42% 192.85% 190.03% 182.31%

Schlumberger Ltd (NYS: SLB)Weighted Average Cost of Capital (WACC) Estimation

30-year T-Bond 2.88%Market Risk Premium 4.63%Beta 1.07Cost of Equity (RE) 7.83%

Cost of Debt (Rd) 3.94%

Last Year Shares Outstanding 1,391 Short-term Debt (ST Borrowings + Current Portion LTD) 3,153 Long-term Debt 16,463 Operating Lease 1,266

Market Value of Common Stock 91,476 Total Debt 20,882 Total Value 112,357

Weight of Equity 0.81Weight of Debt 0.19

Marginal Tax Rate 25.00%

WACC 6.93%

Schlumberger Ltd (NYS: SLB)Value Driver Estimation

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022 (CV)NOPLATEBITA

Revenues 48,580 35,475 27,810 30,448 34,306 37,746 40,645 42,893 44,264 Cost of Revenues (33,854) (24,767) (20,843) (21,689) (24,436) (26,887) (28,952) (30,553) (31,530)Depreciation Expense (3,200) (3,200) (2,700) (2,663) (2,546) (2,572) (2,767) (2,971) (3,164)Research & engineering expense (1,217) (1,094) (1,012) (900) (1,014) (1,116) (1,201) (1,268) (1,308)General & administrative expense (475) (494) (403) (361) (406) (447) (481) (508) (524)Implied Interest on Operating Leases 54 55 48 48 48 52 56 59 62

EBITA 8,115 3,400 (272) 4,884 5,951 6,776 7,299 7,652 7,799 Less: Adjusted Taxes:Marginal Tax Rate 24.00% 22.00% 16.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00%

Provision for Income Taxes 1,928 746 (278) 900 1,162 1,395 1,542 1,621 1,581 Tax Shield on Amortization Expense 83 78 91 169 167 162 152 145 197 Tax Shield on Interest Income (70) (52) (32) (53) (51) (53) (54) (55) (56) Tax Shield on Interest Expense 89 76 91 193 198 177 171 187 212 Tax Shield on Implied Lease Interest 13.04 12.06 7.63 11.93 12.05 12.96 13.92 14.82 15.44

Adjusted Taxes 2,042 860 (224) 1,221 1,488 1,694 1,825 1,913 1,950 Plus: Change in Deferred Tax (DT) Liabilities

DT Liabilities 1,296 1,075 1,880 1,465 1,141 889 692 539 420 Net DT Liabilities 1,152 867 1,880 1,465 1,141 889 692 539 420 Change in DT Liabilities (268) (285) 1,013 (415) (324) (252) (196) (153) (119) NOPLAT 5,805 2,255 965 3,247 4,140 4,830 5,278 5,586 5,730

INVESTED CAPITALOperating Current Assets

Normal Cash 364 266 209 228 257 283 305 322 332 Receivables, net 11,171 8,780 9,387 8,272 9,320 10,254 11,042 11,652 12,025 Inventories, Total 4,628 3,756 4,225 3,583 4,037 4,442 4,783 5,048 5,209 Other current assets 1,250 1,134 1,058 972 1,095 1,205 1,297 1,369 1,413

Total Current Assets 17,413 13,936 14,879 13,055 14,709 16,184 17,427 18,391 18,979 Non Interest-Bearing Current Liabilities

Accounts payable & accrued liabilities (9,246) (7,727) (10,016) (7,798) (8,786) (9,667) (10,409) (10,985) (11,336) Dividend Payable (518) (634) (702) (546) (615) (677) (729) (769) (793) Estimated liability for taxes on income (1,647) (1,203) (1,188) (1,141) (1,095) (1,052) (1,010) (970) (931)

Total Current Liabilitiies (11,411) (9,564) (11,906) (9,484) (10,496) (11,395) (12,148) (12,724) (13,061) Net Operating Working Capital 6,002 4,372 2,973 3,571 4,213 4,789 5,279 5,668 5,918 Plus: Net PPE 15,396 13,415 12,821 12,258 12,382 13,322 14,305 15,234 15,870 Plus: Net Other Operating Assets

Intangible Assets 4,654 4,569 9,855 9,178 8,509 7,862 7,256 6,675 5,887 Capitalized PV of Operating Assets 1,391 1,209 1,266 1,210 1,222 1,315 1,412 1,504 1,567 Multiclient Seismic Data 793 1,026 1,073 750 845 930 1,002 1,057 1,091 Other assets 2,203 2,749 3,809 2,637 2,971 3,269 3,520 3,715 3,833

Net Other Operating Assets 9,041 9,553 16,003 13,775 13,548 13,376 13,190 12,950 12,378 Less: Other Operating Liabiltiies

Other Liabiltiies 1,317 1,028 1,530 1,736 1,969 2,234 2,534 2,875 3,261 INVESTED CAPITAL 29,122 26,312 30,266 27,868 28,174 29,253 30,240 30,977 30,905

RETURN ON INVESTED CAPITALNOPLAT 5,805 2,255 965 3,247 4,140 4,830 5,278 5,586 5,730 Beg. Invested Capital 29,862 29,122 26,312 30,266 27,868 28,174 29,253 30,240 30,977

ROIC 19.44% 7.74% 3.67% 10.73% 14.85% 17.14% 18.04% 18.47% 18.50%

FREE CASH FLOWNOPLAT 5,805 2,255 965 3,247 4,140 4,830 5,278 5,586 5,730 Change in Invested Capital (740) (2,810) 3,954 (2,398) 305 1,080 986 737 (72)

FCF 6,545 5,065 (2,989) 5,645 3,835 3,750 4,291 4,849 5,803

ECONOMIC PROFITBeg. Invested Capital 29,862 29,122 26,312 30,266 27,868 28,174 29,253 30,240 30,977 ROIC 19.44% 7.74% 3.67% 10.73% 14.85% 17.14% 18.04% 18.47% 18.50%WACC 6.93% 6.93% 6.93% 6.93% 6.93% 6.93% 6.93% 6.93% 6.93%

EP 3,736 237 (858) 1,151 2,209 2,878 3,251 3,491 3,584

Schlumberger Ltd (NYS: SLB)Key Management Ratios

Fiscal Years Ending Dec. 31 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022 (CV)

Liquidity RatiosCurrent Ratio (CA/CL) 1.94 1.74 1.91 1.59 1.73 1.67 1.70 1.60 1.49 1.66Quick Ratio (Liquid Assets/CL) 1.47 1.32 1.54 1.24 1.40 1.30 1.30 1.22 1.15 1.26Operating Cash Flow Ratio (Cash flow from Operations/CL) 0.79 0.79 0.62 0.42 0.52 0.42 0.47 0.45 0.41 0.50

Activity or Asset-Management RatiosAsset Turnover Ratio (Sales/Average Total Assets) 0.17 0.18 0.12 0.09 0.10 0.11 0.12 0.13 0.13 0.14Receivables Turnover (Credit Sales/Receivables) 3.94 4.35 4.04 2.96 3.68 3.68 3.68 3.68 3.68 3.68Inventory Turnover Ratio (Sales/Average Total Inventory) 9.81 11.59 8.89 7.12 7.99 8.09 8.18 8.27 8.36 8.63

Financial Leverage RatiosDebt to Equity (ST debt+LT debt)/(SOE) 0.69 0.76 0.89 0.88 0.83 0.79 0.77 0.82 0.89 0.82Times Interest Earned (NI+Interest Expense)/Interest Expense 18.32 15.92 7.17 (1.85) 6.82 5.41 6.89 7.75 7.49 6.60

Profitability RatiosReturn on Equity (NI/SOE) 17.09% 14.47% 5.95% -3.92% 10.83% 8.45% 10.14% 10.81% 11.26% 10.99%Return on Assets (NI/Total Assets) 10.10% 8.23% 3.14% -2.09% 5.97% 4.71% 5.53% 5.90% 5.96% 5.88%Profit Margin (NI/Net Sales) 14.96% 11.33% 6.02% -5.85% 14.77% 10.16% 11.08% 11.38% 11.33% 10.72%Gross Profit Percentage (GP/Net Sales) 29.53% 30.31% 30.18% 25.05% 28.77% 28.77% 28.77% 28.77% 28.77% 28.77%Payout Policy RatiosPayout Ratio (Dividend per share/EPS) 1.25 1.60 2.00 2.00 $ 2.00 $ 2.00 $ 2.16 $ 2.21 $ 2.31 $ 2.46 Dividend Coverage Ratio (EPS/Dividend per share) 4.07 2.62 0.82 -0.62 1.68 1.32 1.47 1.60 1.63 1.51

Schlumberger Ltd (NYS: SLB)Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E 2022 (CV)

Key Assumptions CV growth 3.60% CV ROE 10.99% Cost of Equity 7.83%

EPS 3.35$ 2.64$ 3.18$ 3.54$ 3.78$ 3.72$ Discount Period 1 2 3 4 5 6

Future Cash Flows P/E Multiple (CV Year) 15.88 EPS (CV Year) 3.72$ Future Stock Price 59.05$

Dividends Per Share 2.00$ 2.00$ 2.16$ 2.21$ 2.31$ 2.46$ Discount Period 1 2 3 4 5 6 Discount Factor 1.08 1.16 1.25 1.35 1.46 1.46

Discounted Cash Flows 1.85$ 1.72$ 1.72$ 1.63$ 1.58$ 40.50$

Intrinsic Value 49.01$ Adj. Intrinsic Value 50.08$

Schlumberger Ltd (NYS: SLB)Relative Valuation Models

EPS EPS Est. 5yr Revenue P/STicker Company Market Cap (billions) Price 2018E 2019E P/E 18 P/E 19 EPS gr. PEG 17 PEG 18 (billions)HAL Halliburton 36.70 $42.06 $2.15 $2.92 19.56 14.40 10.0 1.96 1.44 15.89 2.65 BHGE Baker Hughes 35.01 $30.57 $1.15 $1.40 26.58 21.84 10.0 2.66 2.18 23.11 1.32 TEN IM Tenaris 15.63 $13.23 $0.46 $0.67 28.76 19.75 10.0 2.88 1.97 4.29 3.08 FTI TechnipFMC PLC 12.44 $26.63 $1.41 $1.74 18.89 15.30 10.0 1.89 1.53 13.76 1.94 WG/LN John Wood Group PLC 6.24 $9.23 $0.59 $0.76 15.64 12.14 10.0 1.56 1.21 4.12 2.24 RES RPC 5.03 $23.16 $1.48 $1.60 15.65 14.48 10.0 1.56 1.45 0.73 31.77

Average 20.85 16.32 2.19 1.67 2.25

SLB Schlumberger Ltd (NYS: SLB) 88.35 $65.74 $ 2.64 $ 3.18 24.9 20.6 2.09% 1,188.5 985.8 28 2.36

Implied Relative Value: P/E (EPS18) $ 55.07 P/E (EPS19) 51.97$ PEG (EPS17) 0.12$ PEG (EPS18) 0.11$

P/S 29.27$

Schlumberger Ltd (NYS: SLB)Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 3.60% CV ROIC 18.50% WACC 6.93% Cost of Equity 7.83%

Shares Outstanding 1,391

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E 2022(CV)Number of Periods 1 2 3 4 5 6DCF ModelNOPLAT 3,247 4,140 4,830 5,278 5,586 5,730 Change In IC (2,398) 305 1,080 986 737 (72) FCF 5,645 3,835 3,750 4,291 4,849 5,803 CV t=6 - - - - - 138,693 Discount Factor 1.07 1.14 1.22 1.31 1.40 1.40 PV of FCF 5,279 3,354 3,068 3,283 3,469 99,222

Value of Operating Assets 117,674 Adjustments:

Excess Cash 2,720 Short Term Investments 6,328 Investments in Affiliated Companies 1,243 Fixed Income Investments, Held-to-Maturity 238 Short Term Borrowings (1,178) Current Portion of LT Debt (1,975) LT Debt (16,463) PV of Op Leases (1,266) Underfunded Pension (1,214) ESOP (357)

Value of Equity 105,751 Intrinsic Value Per Share 76.00$ Adj. Intrinsic Value 79.12$

Fiscal Years Ending 2017E 2018E 2019E 2020E 2021E 2022 (CV)Number of Periods 1 2 3 4 5 6EP ModelBeg. Invested Capital - - - - - 30,266 NOPLAT - - - - - 5,730 EP 1,151 2,209 2,878 3,251 3,491 3,584 CV t=6 107,716 Discount Factor 1.07 1.14 1.22 1.31 1.40 1.40 PV of EP 1,076 1,932 2,354 2,487 2,498 77,061

Value of Operating Assets 117,674 Adjustments:

Excess Cash 2,720 Short Term Investments 6,328 Investments in Affiliated Companies 1,243 Fixed Income Investments, Held-to-Maturity 238 Short Term Borrowings (1,178) Current Portion of LT Debt (1,975) LT Debt (16,463) PV of Op Leases (1,266) Underfunded Pension (1,214) ESOP (357)

Value of Equity 105,751 Intrinsic Value Per Share 76.00$ Adj. Intrinsic Value 79.12$

DCF Stock Price 79.12$ EP Stock Price 79.12$ COGS 71.23%CV GROWTH OF NOPLAT 3.60%WACC 6.93%Inflation 1.50%Equity Risk Premium 4.63%CV ROE 10.99%Marginal Tax Rate 25.00%CV ROIC 18.50%P/E Price 49.01$

Last Year Shares Outstanding 1391CAPEX (3,800) BETA 1.07R&D % 2.96%SGA % 1.18%COST OF DEBT 3.94%COST OF EQUITY 7.83%Risk-Free Premium 2.88%

79.12$ 10.00% 17.50% 18.00% 18.50% 19.00% 19.50% 28.50% 79.12$ 1.96% 2.25% 2.50% 2.96% 3.25% 3.50% 3.96%5.00% 159.18 196.20 197.57 198.87 200.10 201.26 215.25 0.80% 86.49 84.94 83.61 81.15 79.60 78.27 75.81 5.50% 115.92 142.55 143.54 144.47 145.36 146.20 156.26 0.85% 86.22 84.68 83.34 80.88 79.34 78.00 75.54 5.93% 93.55 114.83 115.62 116.36 117.07 117.74 125.78 0.90% 85.96 84.41 83.07 80.62 79.07 77.73 75.28 6.33% 79.05 96.88 97.54 98.16 98.76 99.32 106.05 0.98% 85.53 83.98 82.65 80.19 78.64 77.31 74.85 6.93% 63.88 78.10 78.62 79.12 79.60 80.04 85.42 1.18% 84.46 82.91 81.58 79.12 77.57 76.24 73.78 7.33% 56.39 68.84 69.30 69.74 70.15 70.54 75.25 1.50% 82.75 81.20 79.87 77.41 75.86 74.53 72.07 7.93% 47.80 58.23 58.62 58.98 59.33 59.66 63.60 2.18% 79.12 77.57 76.24 73.78 72.23 70.90 68.44 8.10% 45.78 55.74 56.11 56.46 56.79 57.10 60.86 2.50% 77.41 75.86 74.53 72.07 70.52 69.19 66.73 8.30% 43.59 53.04 53.39 53.72 54.03 54.33 57.90 3.00% 74.74 73.19 71.86 69.40 67.85 66.52 64.06

79.12$ 2.75% 3.00% 3.30% 3.60% 4.20% 4.10% 4.60% 79.12$ 0.92 0.97 1.02 1.07 1.12 1.17 1.22 0.92 78.87 83.10 89.09 96.38 117.02 112.82 138.59 2.00% 131.92 120.38 110.62 102.28 95.05 88.73 83.160.97 74.67 78.39 83.61 89.89 107.27 103.78 124.79 2.25% 119.53 109.90 101.65 94.50 88.25 82.74 77.831.00 72.34 75.79 80.62 86.38 102.13 99.00 117.72 2.38% 113.93 105.11 97.51 90.89 85.07 79.91 75.311.02 70.86 74.15 78.73 84.18 98.96 96.03 113.42 2.50% 109.19 101.03 93.97 87.78 82.32 77.46 73.111.07 67.39 70.31 74.35 79.12 91.80 89.32 103.89 2.88% 96.38 89.89 84.18 79.12 74.60 70.54 66.871.12 64.22 66.83 70.41 74.60 85.57 83.44 95.79 3.40% 82.86 77.94 73.54 69.58 66.00 62.74 59.761.17 61.31 63.65 66.83 70.54 80.09 78.25 88.81 3.63% 77.96 73.56 69.59 66.01 62.75 59.77 57.041.22 58.64 60.73 63.58 66.87 75.23 73.63 82.74 4.00% 71.12 67.39 64.01 60.92 58.10 55.50 53.111.25 57.13 59.10 61.76 64.83 72.57 71.10 79.46 4.50% 63.47 60.43 57.64 55.08 52.72 50.53 48.50

CV ROICW

ACC

CV GROWTH OF NOPLAT

BETA

R&D %

SGA

%

BETA

Risk

-Fre

e Pr

emiu

m

Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases2016 292 2016 261 2015 330 2014 318 2013 3712017 220 2017 205 2016 259 2015 246 2014 2502018 195 2018 162 2017 197 2016 195 2015 1922019 167 2019 145 2018 156 2017 165 2016 1542020 132 2020 129 2019 134 2018 136 2017 129Thereafter 471 Thereafter 526 Thereafter 554 Thereafter 558 Thereafter 519Total Minimum Payments 1477 Total Minimum Payments 1428 Total Minimum Payments 1630 Total Minimum Payments 1618 Total Minimum Payments 1615Less: Interest 211 Less: Interest 219 Less: Interest 239 Less: Interest 240 Less: Interest 229PV of Minimum Payments 1266 PV of Minimum Payments 1209 PV of Minimum Payments 1391 PV of Minimum Payments 1378 PV of Minimum Payments 1386

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.94% Pre-Tax Cost of Debt 3.94% Pre-Tax Cost of Debt 3.94% Pre-Tax Cost of Debt 3.94% Pre-Tax Cost of Debt 3.94%Number Years Implied by Year 6 Payment 3.6 Number Years Implied by Year 6 Payment 4.1 Number Years Implied by Year 6 Payment 4.1 Number Years Implied by Year 6 Payment 4.1 Number Years Implied by Year 6 Payment 4.0

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 292 280.9 1 261 251.1 1 330 317.5 1 318 305.9 1 371 356.92 220 203.6 2 205 189.7 2 259 239.7 2 246 227.7 2 250 231.43 195 173.6 3 162 144.3 3 197 175.4 3 195 173.6 3 192 171.04 167 143.1 4 145 124.2 4 156 133.6 4 165 141.4 4 154 131.95 132 108.8 5 129 106.3 5 134 110.4 5 136 112.1 5 129 106.36 & beyond 132 355.7 6 & beyond 129 393.4 6 & beyond 134 413.9 6 & beyond 136 417.1 6 & beyond 129 388.6PV of Minimum Payments 1265.7 PV of Minimum Payments 1209.0 PV of Minimum Payments 1390.6 PV of Minimum Payments 1377.9 PV of Minimum Payments 1386.1

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 46,502Average Time to Maturity (years): 6.02Expected Annual Number of Options Exercised: 7,719

Current Average Strike Price: 78.31$ Cost of Equity: 7.83%Current Stock Price: $65.74

2017E 2018E 2019E 2020E 2021E 2022 (CV)Increase in Shares Outstanding: 8 8 8 8 8 8Average Strike Price: 78.31$ 78.31$ 78.31$ 78.31$ 78.31$ 78.31$ Increase in Common Stock Account: 605 605 605 605 605 605

Change in Treasury Stock 2,500 1,500 500 2,000 2,500 1,000Expected Price of Repurchased Shares: 65.74$ 70.89$ 76.44$ 82.43$ 88.89$ 95.85$ Number of Shares Repurchased: 38 21 7 24 28 10

Shares Outstanding (beginning of the year) 1,357 1,327 1,313 1,314 1,298 1,277Plus: Shares Issued Through ESOP 8 8 8 8 8 8Less: Shares Repurchased in Treasury 38 21 7 24 28 10 Shares Outstanding (end of the year) 1,327 1,313 1,314 1,298 1,277 1,275

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol SLBCurrent Stock Price $65.74Risk Free Rate 2.88%Current Dividend Yield 2.98%Annualized St. Dev. of Stock Returns 20.00%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price Granted$37.85 - $67.87 6,526 55.58 5.20 14.20$ 92,668$ $68.51 - $72.00 7,501 70.08 5.30 8.69$ 65,204$ $72.11 - $79.85 8,767 74.01 6.30 8.24$ 72,251$ $80.53 - $84.93 12,375 82.72 5.90 6.01$ 74,383$ $88.61-$114.83 11,333 95.37 6.90 4.59$ 52,035$ Total 46,502 78.31$ 6.02 11.90$ 356.54$

Krause Fund Research Fall 2017 Energy Schlumberger Ltd (NYSE: … · 2017-12-04 · Industry Trends...

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Transcript of Krause Fund Research Fall 2017 Energy Schlumberger Ltd (NYSE: … · 2017-12-04 · Industry Trends...