Energy Schlumberger Inc. (NYSE: SLB)at 6.60% in 2017 and trend around 5.80% growth in 2020.iii...

Krause Fund Research Fall 2016 Energy Recommendation: BUY Analysts Cory Paterson [email protected]

Kevin Docherty [email protected]

David Ballard [email protected]

Nico Chaidez [email protected]

Company Overview Schlumberger, (SLB) is the world’s leading supplier of technology, integrated project management and information solutions to the international oil and gas exploration and production industry. Schlumberger operates through five main product groups: Reservoir characterization, Drilling, Production, Surface and Valves and Measurement. Each Group consists of a number of technology-based service and product lines, or Technologies that cover the entire life cycle of the reservoir. After merging with competitor, Cameron international, SLB holds about 48% of market share. For the 2015 fiscal year, total revenues declined 26% to $35.5 billion. Stock Performance Highlights 52 week High $84.30 52 week Low $59.60 Beta Value 0.93 Average Daily Volume 5.76 m Share Highlights Market Capitalization $109.17 b Shares Outstanding 1.39 b Book Value per share $30.36 EPS (2015) $3.16 P/E Ratio 22.07 Dividend Yield per Share $2.00 Dividend Payout Ratio 34% Company Performance Highlights ROA 14.18% ROE 16.78% Sales $14.255 b Financial Ratios Current Ratio 1.93 Debt to Equity 0.75%

Current Price $80.98 Target Price $86.00-89.00

SLB looks to withstand and recover from oil slump

x Schlumberger’s fincancial standing and major market share of 48% against competitors will allow it to maintain it’s current value during this oil price slump. x Schlumberger provides technology and services to upstream companies that exceeds competitors of the Oil & Gas Equipment & Services industry. x With oil prices expected to rise in the next few years, companies will begin to increase their F&D spending shortly to meet future demand needs, leading to increase revenues for Schlumberger x A potential production limit on OPEC output will result in a decrease to the supply in the market balancing out with demand. x With the results of the US federal election and ideologies of different elected leaders, regulations on the oil industry could be relaxed leading to more emphasis on oil production in the US. x Synergies from the acquisition of Cameron International will benefit their future revenues and sales. One Year Stock Performance

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Schlumberger Inc. (NYSE: SLB)

October 31, 2016

Sschlumberger LTD (NYSE: SLB) Recommendaiton Buy

Schlumberger November 15, 2016 2

Economic Outlook Gross Domestic Product (GDP) Demand for crude oil is driven by global economic growth since it is the basic fuel for transportation and power source for countless industries. The chart below measures the consumption of all liquid fuels against world GDP growth and WTI prices. It is evident that changes in real GDP have a direct effect on oil demand and higher GDP growth has historically coincided with higher oil consumption.

EIA.gov This demand is driven by OECD countries which tend to be primarily service based and non-OECD countries which tend to have more of their economies in manufacturing industries. Historically OECD countries have consumed more oil, but between 2000 and 2010 OECD demand actually declined while whereas consumption by non-OECD increased 40% over that same time period.i This soar in demand was spurred mainly by countries such as China, India and Saudi Arabia due to their structural conditions. According to the EIA, much of the world increase in energy demand will continue to derive from non-OECD countries where stronger economic growth and expanding countries will outpace its peers. Demand from non-OECD countries is expected to rise by 71% through 2040, in contrast to 18% from slower-growing more mature energy consuming OECD countries during the same period.ii

EIA.gov

Looking forward, China’s GDP growth rates have been forecasted at 6.60% in 2017 and trend around 5.80% growth in 2020.iii Although China’s population continues to increase we believe the 5.8% growth is slightly overinflated due to depressed global trade, productivity and wages. A slower growth rate than normal for China indicates sluggish demand which contributed to falling oil prices in 2014. Future demand will have to stem from an unexpected pickup in the China economy or from another prospering non-OECD country. India’s GDP growth rates have been forecasted at 7.3% in 2017 and trend around 7.2% in 2020.iv We agree these estimates are in line provided India’s GDP composition differs from China having only 24.2% made up by manufacturing and majority made up by services at 57.9%.v In contrast, OECD growth rates have been forecasted at 2.07% in 2017 and the US GDP growth rate has been forecast at 2.21%.vi believe these growth rates are justifiable and will continue at the modest growth due to global economic uncertainty and their mature economic conditions. Higher realized growth rates in both country groups would result in climbing oil prices assuming supply is constant. Brent prices are expected to average $51 in 2017 with West Texas Intermediate average about $1 less than Brent prices.vii Since expected GDP growth is modest and expected supply from OPEC is uncertain we agree with EIA’s forecasts and estimate 2018 and 2019 barrel prices to be around $55-$60, respectively. We do not expect to oil to near the its past high prices in the $100s throughout 2020. Federal Funds and Interest Rate The federal funds, which currently sits at .50%, is a driver of interest rates throughout the economy. A spike in interest has seemed loomed for some time now, and there is a probability we will see an increase in December as the Federal Reserve Bank convenes. All sectors of the economy would be impacted, as borrowing costs would rise accordingly with the rate. The hike in rates would significantly impact the energy sector, as firms tend to be highly leveraged in the industry. Looking at the historical value of interest rates, it seems extremely likely that we will see an increase in the next year, if not sooner.

Fred.stlouisfed.org Interest rates are also a market driver in the Energy sector because of the inverse relationship that dollar value and oil and commodity



prices have. Over the past ten years it has been found that there is an inverse correlation between the two of about 60-70 percent. This means that as the dollar value raises, the prices of oil and commodities fall. The following chart shows the relationship between the strength of the US dollar and the price of the crude oil benchmark Brent.

Market Realist Regulations With the energy sector being one of the most regulated in the economy, a change in governmental policies will impact how firms in the sector operate. The unexpected election of Trump has shaken up the energy sector, as investors react to the changes they now anticipate. Trump has previously voiced his disapproval of costly fuel regulations, and the possibility of a decrease in regulations had led to much speculation. As republicans now control the presidency, house and senate, many environmental restrictions on energy projects will now most likely move forward, mainly the Keystone Pipeline. Oil Inventories The current state of the oil industry relies heavily on the inventory levels of oil. Companies are becoming more efficient in the searching, recovery, and production process of oil. With advancements in technology, and Schlumberger’s continued efficiency, supply comes to outpace demand. If oil prices are high, companies will spend more on drilling. When companies increase their spending, the rig count shoots up. There current rig count is decreasing to levels not seen since the 90s. The last time there was a dip in the rig count equivalent to recent trends was the recession of 2008.

Baker Hughes Rig Count

2016 data showed 1,567 rigs around the world, a sharp decline from 2014 and 2015 at 3,578 and 2,337.viii We believe the rig count will stabilize at its current count. Inventories continue to be high, which decreases rig count, with continued unsuccessful negotiations of OPEC. The daily rates to operate rigs also play into inventory levels. A decrease in day rates mean there’s less of a market demand for oil. There’s a current decreasing trend for day rates and utilization with Drillships, Semisubmersibles, and Jackups. The chart below shows the day rates along with the utilization rate for the world for the past three years.

HIS Markit The current day rate for a Drillship (4,000’+) is $477,000. The day rates have slowly been declining but have stabilized in 2016. Trends for Semisubmersibles and Jackups mirror that of the worldwide Drillship chart except with prices ranging from around $350,000 and $80,000.ix Inventory levels have had high volatility recently with a large drop of 14.5 million barrels on September 8th, potentially due to the hurricane conditions off the east coast. As well as a large increase of 14.4 million barrels in late on November 2nd as OPEC countries have not limited or cut their output.x The chart below shows the week over week change for crude oil inventories.

Energy Information System

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Worldwide Rig Count Yearly Average



Supply Total world oil production is derived from two distinct groups: OPEC and non-OPEC. Since 2014 oil supply by both groups have greatly outpaced global demand causing oil prices to fall from $100/barrel to $35/barrel to its current price of $43.41/barrel. The main contributors to the supply flood have been Saudi Arabia, U.S, Russia, and Iran. Global oil supplies raised by 0.6 mb/d in September to 97.2 mb/d due to higher Russia and Kazakh flows and OPEC crude record highs. OPEC has a responsibility to coordinate oil production policies to restore market stability. OPEC has agreed to limit the groups output to a range of 32.5 million to 33 million barrels a day compared with 33.64 million in October. Details including individual country targets are expected to be set during the scheduled meeting on Nov 30th. Libya, Nigeria and Iran are said to be exempt from any supply cuts. Due to the fact that the targets of the supply cuts have not been finalized however, there is the risk of these agreements falling through, or being altered

Oil Market Report Although OPEC has set Limits or quotas in the past, the countries within it have continuously produced higher. This calls into question the reliability and authenticity of limits that they are currently trying to set or may set in the future.

http://www.energyeconomist.com/a6257783p/opec/quota.html

Production from non-OPEC countries surged by 0.5 mb/d in September as Russian crude increased to a post-soviet high and Kazakh volumes recovered from maintenance. However, September production was down by 0.9 mb/d compared to the previous year due to sharp declines in the US and China. Non-OPEC supply is forecasted to decline by 0.9 mb/d in 2016 before rebounding back up by 0.4 mb/d in 2017. xi

Oil Market Report The Energy Industry has significant impacts on OPEC and non-OPEC countries as it can account for large portions of total revenue. This causes countries to be largely dependent on the sector and creates implications when prices drop and supplies must decrease. Some analysts forecast oil prices to be below $50 a barrel leading into the year 2017. We expect oil to hover around the $45/barrel mark for the next 6-8 months, but remain optimistic prices will rise above the $50 threshold in the next 2-3 years with current OPEC talks and slowing US production. Global oil exploration is an important factor for future supply because once resources are found it takes years for the new oil supplies to actually become available to the public. What is worrisome for global supply is that explorations of conventional oil are the lowest they’ve been since 1947. This is a reflection of falling oil prices, which led to companies cutting this expense to 40 billion this year from about 100 billion in 2014. As oil prices have remained relatively low these cuts in expenses are expected to continue in the short term.

Industry Analysis Capital Markets Outlook The energy sector, in particular the Oil and Gas drilling industry and the Oil and Gas equipment/services industry, has been a rollercoaster ride the last 10 years as oil has shown how volatile of a commodity it can be. Due to our research, we are optimistic about a rise in the near future of the industry.



As mentioned earlier, one of the main drivers of the Oil and Gas industry is companies Finding and Development (F&D) spending. This capital spending is a show of confidence by oil and gas companies, as they believe they can reap the benefits of obtaining more oil. However, since oil prices plummeted in Late 2014 from over $100/barrel to $35/barrel, companies have cut their F&D spending.xii According to Standard & Poors, capital spending was cut by 32% in 2015 from 2014, and we expect the 2016 spending to be low as well.xiii After 2016, we believe capital spending will pick up similar to historic rates. Oil and Gas companies cutting capital spending when the price of oil drops is nothing new, and quite frankly not unexpected either. We expect spending to increase, reflecting the increase in oil prices coming in the next two years. In 2009 when the U.S. saw its most dramatic drop in the price of oil, companies quickly cut back on their F&D spending. However, the cutbacks were short lived and companies looked long term despite continued declining prices. While we do not believe the increased F&D spending is the reason prices started to recover in 2010, it is a show of confidence by the industry with regards to the price of oil. The driving force behind the 2009 oil price drop was the ‘08 financial crises where demand for oil and consumer confidence dropped significantly. The reason for the decline in the price of oil is due to the massive supply the U.S has on hand. According to the EIA, US crude oil supplies are at 525.9 million barrels as of August 26th. For perspective, the April 26th inventory level of 543.3 million barrels was the highest level since 1929. OPEC has also been flooding the market with their continued production. According to a recent report by the EIA, US crude oil imports are at their highest level since September 2012 at 8.92 million barrels per week. xiv While we do not see a short term recovery in the price of oil, it is likely we will see a rise in the next two years. We anticipate the supply of oil will slowly fall, therefore bringing the price back up. OPEC came to an understanding that there needs to be a limit on production, but the member countries were unable to come to an agreement. They believed a limit of 32.5-33 million barrels of output was sufficient for the market, but they failed to go beyond words to actual action. Even in the past, when limits have been established, OPEC countries continue to ignore the agreed upon output. As shown below, quotas are continued to be ignored by OPEC.

Warren Pies Twitter Production in the U.S. is also already slowing down. 2016 is the first year since 2009 that has had a lower production each month than the previous year’s counterpart. xv

EIA.gov Overview Schlumberger, in the Oil & Gas Equipment & Services industry, provides the special technology required for the upstream companies that include reservoir characterization, drilling, and production. The industry as a whole includes numerous other equipment and services that we will breakdown in the following paragraphs. Equipment Offshore rigs are drilling units used to find oil and gas in open water with depths ranging from 550 ft. to 10,000 ft.xvi Most of these rigs are owned by the companies that function in the upstream. Jackup rigs, semisubmersible rigs, and drill ships are all examples of offshore rigs. Jackup rigs drill in shallow waters. Semisubmersible rigs are for deepwater drilling and have the potential to be moved to new drilling locations by a towboat or self-propellers. Drill ships are mainly used for exploration in deepwater and can move freely. Onshore drills form wells from 6,000 to 12,000 ft.xvii They have numerous utilities that add to the exploration and production of oil. The drill bit is the first piece of equipment that breaks ground to start the hole for the pipe and well. During the drilling, fluids are poured into the well to loosen up the ground and make for a more efficient process. To keep the well from caving in, pipes and tubing are placed in to be the connector between the surface and



the drill bit. They control the oil and gas flow, and prevent any overflow, companies use wellhead equipment. Services Before the drilling begins, seismic imaging and analysis must be conducted to get the geological layout of the ground or water. Some services offered by the companies of this industry include fracking and acidizing. These methods include pumping water or acid into wells to speed up the drilling process and create a more efficient discovery and extraction of oil. Wireline logging is essentially mapping out the area below the surface to ease the search for oil and gas. Another service used to create more efficient drilling is directional and measurement drilling. These services guide the drills to make adjustments to a certain angle to hit a more desired reservoir. New tech called rotary steerable allows the drill to change directions while it’s still drilling. Not having to stop mid-drill allows for faster discovery of reservoirs. Recent Developments The biggest factor weighing on the industry is the increased supply, without the increase in demand to keep up. Part of the blame has to fall on the oil & gas equipment & services because they are becoming too efficient at finding and extracting oil. They are obtaining more oil per well with new technology. Oil shale has also been easier to extract with new tech from the equipment and services companies. With this efficiency comes less need for rigs. The rig count is at the lowest levels since 2010.xviii Industry Trends Companies are finding it harder and harder to break even with oil prices falling. The North Dakota Department of Mineral Resources reported oil must be priced at roughly $24-48 in order to break even.xix Recent trends have kept oil around the $45-49 range. There is potential for prices to move up, weighing heavily on OPEC coming to a consensus on oil output. With this increased efficiency in the equipment & services and oversupply of oil, upstream companies are dramatically cutting down their investments. In 2015 capital spending dropped by almost a third compared to 2014.xx Companies are finishing their projects they have already invested in, but have shown no indication of making future investments this year considering the current price drought for oil looks to continue. Markets and competition The Oil & Gas Equipment & Services industry of the energy sector has global impacts as it supplies the equipment and technology that drilling companies use. Within this industry, 78% of the market cap is controlled by the 4 largest companies: Schlumberger, Halliburton, Baker Hughes and National Oilwell Varco. xxi The Oil & Gas Equipment & Services is currently on a downward trend this year because of its dependence on the oil industry. The oil industry is the buyer of the products and services that this industry provides. Due to the downward trend and decreased revenue from oil in recent years, it decreases the demand and revenue in the equipment and services industry.

Competitive Forces Threat of new entrants - Mature Industry The threat of new entrants in the oil & gas equipment services is relatively low because of the costs associated to the industry and the dominance of the major competitors. When the oil and gas markets decrease as they are now, it causes companies in the equipment and services industry to endure lower demand and incur losses at times. The losses and costs can be substantial making it difficult for new competitors to enter the market without sufficient capital and influence. Bargaining power of suppliers The global raw material costs could play a small part in the bargaining and costs in the production of equipment in the industry. Higher costs would hurt smaller firms more as the larger firms have larger capital to distribute costs. Bargaining power of buyers As the prices of oil and gas decrease, the revenues and capex available to the companies in the industry decrease as well. Due to this it creates the need for companies to decrease costs to minimize losses. This increases the bargaining for these buyers as they may not be able to afford the products and services offered by the sellers. This causes the sellers in the Oil and gas equipment and services industry to either decrease their prices and revenues or lose customers and market share. Threat of substitutes Threat of substitutes is rare considering the advanced technological and specific equipment needs of the oil and gas industry. For a company to come up with a substitutes product would take an excessive amount of capital that would negate all benefits that follow. Along with capital, there needs to be new innovations that outpace current methods. Renewable energy sources are making movements in the industry but continue to have a minor share of the energy sector. The table below shows the trend of amounts of energy consumed per source (in quadrillion Btu). As shown, there is minimal threat from renewable energy sources.

Year Natural Gas Petroleum Geothermal Solar Wind

2015 28.147 35.592 .224 .431 1.816 2014 27.383 34.881 .214 .321 1.728 2013 26.805 34.609 .214 .213 1.601 2012 26.089 34.016 .212 .148 1.340 2011 24.955 34.824 .212 .105 1.168

EIA.gov Competition Due to the 78% market cap dominance of the 4 leading Oil & Gas Equipment & Services, it is difficult for other firms to compete especially on a global scale. Furthermore, since Schlumberger merged with Cameron International Corporation it controls 48% of total market share, showing dominance in the industry. xxii



Schlumberger Halliburton Baker

Hughes National Oilwell Varco

Market Cap (Billions)

109.59 36.51 21.27 12.87

P/E -60.24 -6.37 -7.08 -7.5

Profit Margin

-5.64% -30.50% -25.14% -17.14%

Revenue % change

-27% -28% -36% -32%

Diluted EPS -1.31 -6.65 -7.02 -4.54

Debt to Equity

33% 30% 20% 19%

Market Share

48.4% 14.1% 9.3% 6%

EBIT 3227 -486 -489 -486

Interest Coverage Ratio

9.33 -4.72 -1.09 -4.72

Schlumberger 10k, Halliburton 10k, Baker Hughes 10k, National Oilwell Varco 10k Through analyzing the ratios of the 4 dominant firms, it is apparent that the declines in the oil industry over previous periods is causing negative impacts. Each company has been experiencing decreases in revenues and negative incomes, as well as increases in debt. With the decreased income and increased debt concerns are drawn on the interest coverage of the firms. Through the ratios above it can be determined that Schlumberger is handling the oil market impacts better than its competitors. A key concern for Halliburton, Baker Hughes and National Oilwell Varco is that with their decreased earnings and increased debt levels, they no longer have positive interest coverage ratios. This means that they are not able to pay their interest payments through their revenues and are forced to withdraw from other internal sources. In the long run this could pose financial issues to the firms as reserves may be stressed. With no clear sign as to when the oil industry will begin to rise again, Schlumberger is the firm best positioned going forward with the given economic outlook. With increased concern for other company financials and the positioning of Schlumberger an increase in consumer confidence could be portrayed through its stock price going forward.

Nasdaq Historical Prices Catalysts for Change Oil prices will forever be the main driver in this industry because all other factors are based of this price. If the price is high, upstream companies will be investing more in exploration with the equipment and services industry. If they’re low, investing will come to a halt. When companies aren’t investing, drilling activity will decrease and rigs will go unused. Rig count, which is influenced by oil prices, is a major indicator for the industry. As we described in the economic outlook, there is countless information provided about rigs from companies and the EIA regarding rigs in use, number of onshore versus offshore, what they’re drilling for, and how much they’re drilling. Rig count helps indicate whether companies are bullish, where they’ll increase spending, or bearish, cutting off spending, on the oil market. Tied into rig count and oil price, is a company’s upstream capital expenditures. If oil prices are high, companies will spend more, therefore increasing rig count. Key Investment Info Oil prices are low and remained low for 2016. When reading into the oil & gas industry, it’s not too difficult to find a report describing a poor outlook into the future. There has been no movement in the industry to get out of this price drought. OPEC has had continued unsuccessful solutions to attempt to solve this slump in oil prices. OPEC and many other oil producers are pumping out oil at record rates even though demand has stayed stagnant. Demand for oil cannot compete with the supply currently in the market. The EIA recently reported a decrease of 14.5 million barrels in the inventory, but that is believed to be caused by the current storms going on in the gulf. Oil shipments were not able to get to the coast to make their drops. xxiii Oil prices have the possibility to remain low if OPEC continues to pump out oil at record rates. Demand will not be able to keep up with the increasing supply. We are hopeful that OPEC realize the need to limit output to balance supply and demand.



Company Analysis General Information Founded in 1926, Schlumberger is the world’s leading supplier of technology, integrated project management and information solutions to the international oil and gas exploration and production industry. Having invented the cabling technology used by operators to lower equipment down oil wells, Schlumberger today provides the industry’s widest range of products and services from exploration through production.

Schlumberger operates through three main product groups: Reservoir characterization, Drilling and Production. Each Group consists of a number of technology-based service and product lines, or Technologies. These Technologies cover the entire life cycle of the reservoir and correspond to a number of markets in which Schlumberger holds leading positions. The role of the Groups and Technologies is to support Schlumberger in providing the best possible service to customers and that it remains at the forefront of technology development. The Groups and Technologies are collectively responsible for driving excellence in execution throughout their businesses, overseeing operational processes, resource allocation, personnel and delivering superior financial results.xxiv

On April 1, 2016, Schlumberger acquired all of the outstanding shares of Cameron International Corporation financed by stock and cash for $14.8 billion. Cameron stockholders received .716 shares of SLB and $14.44/share.xxv Cameron is a leading provider of flow equipment products, systems and services to the oil and gas industry worldwide.xxvi This merge allows for the combination and synergy of both industries products allowing Schlumberger to provide more products and services as well as increase efficiency for customers.

Corporate strategy Schlumberger has a strong presence in the entire Oil and Gas production life cycle. They add value to their customers in the oil and gas industry by providing the technology and expertise necessary for the upstream, midstream and downstream components of the market. With 125 research and engineering facilities worldwide, they place strong emphasis on developing innovative technology that adds value for their customersxxvii. After acquiring Cameron International Corporation, Schlumberger creates further value through technology-driven growth by integrating Schlumberger reservoir and well technologies with Cameron wellhead and surface equipment, flow control and processing technology. Financial summary Due to the acquisition of the final shares and merge with Cameron International Corporation, Schlumberger’s financial statements were adjusted to portray the combination of the two firms from a January 1st, 2015 timeframe. Second-quarter 2016 revenue of $7.2 billion increased 10% from the previous quarter. This included a full quarter of activity from the acquired Cameron businesses, which contributed revenue of $1.5 billion.xxviii

North America second-quarter revenue of $1.7 billion increased 19% due to the addition of the Cameron businesses, which contributed $0.6 billion of second-quarter revenue. There was a blow to Schlumberger’s portion of revenue due to a Canadian Spring break up and US land rig count decline. North American revenues were also affected due to lower offshore drilling activity. The offshore revenue fell more modestly however as rigs in the US Gulf of Mexico shifted from exploration to development work, although the overall market in North America was the weakest for oilfield services since 1986.xxix

Revenue for the International Areas of $5.4 billion increased 8% sequentially, including the effect of the acquired Cameron businesses, which contributed $1.0 billion in second-quarter revenue. The impact of OPEC lifting production targets to reach maximum rates has led to supply continuing to exceed increasing demand. This increase in supply led to oil dropping to a 12 year low by the end of 2015, and an overall decrease in customer’s capital expenditures. Revenues were affected due to customer budget cuts, continued pricing pressure and the scaling back of operations in Venezuela.xxx Products and Markets Schlumberger operates in each of the major oilfield service markets and manages its business through three primary segments: Reservoir characterization, Drilling and Production. The three segments respectively account for 27%, 38% and 35 % of their business and are each made of various sub segments of Schlumberger’s products. Reservoir Characterization Group – Consists of the principal Technologies involved in finding and defining hydrocarbon resources. These include WesternGeco, Wireline, Testing Services, Software Integrated Solutions (SIS) and Integrated Services Management (ISM). Our growth estimates have reservoir characterization declining 10% this year ending 2016. We expect this product segment to rebound back to 9-10% increases over the following four years.

Drilling Group – Consists of the principal Technologies involved in the drilling and positioning of oil and gas wells. This is comprised of Bits & Drilling Tools, M-I SWACO, Drilling & Measurements, Land Rigs and Integrated Drilling Services. Our forecasted growth has Drilling declining similar to Reservoir Characterization at 14%. Again, Drilling will rebound to positive growth at 6% the following year and 12% the next two years. Constant growth is estimated at 6%.

Production Group – Consists of the principal Technologies involved in the lifetime production of oil and gas reservoirs. This includes Well Services, Completions, Artificial Lift, Well Intervention, Water Services, Integrated Production Services and Schlumberger Production Management. We estimated Production’s decline for the fiscal year ending 2016 at 10%. We expect growth to grow around 10-14% the following four years.

Schlumberger also has a 40% equity ownership interest in OneSubseaTM with Cameron owning the other 60%, of which their share of net income is reflected in the results of the



Production group. The venture manufactures and develops products, systems and services for the subsea oil and gas market.xxxi The following chart breaks down their percentage of revenue by category.

ThompsonOne

The role of the Groups and Technologies is to support Schlumberger in providing the best possible service to customers and that it remains at the forefront of technology development. The Groups and Technologies are collectively responsible for driving excellence in execution throughout their businesses, overseeing operational processes, resource allocation, personnel and delivering superior financial results. xxxii

Product market They also manage their business through 35 GeoMarket regions and operate in more than 85 countries. These 35 GeoMarkets are spread across four geographic areas: North America, Latin America, Europe/CIS/Africa and the Middle East and Asia.xxxiii Through this GeoMarket system, it allows customers a single point of contact at the local level providing logical, technical and commercial coordination.

ThompsonOne Approximately 76% of consolidated revenue in 2015 was from non-United States operations.xxxiv This benefits Schlumberger due to the geographic diversity of their sales, helping to mitigate the effects of the lower oil market. However, this also subjects them to various risks/uncertainty in non-United States operations. Risks such as government type or changes, conflicts, strength of the economy and currency fluctuations all have different effects on sales and revenues Schlumberger experiences. Changing risk

factors can create adaption costs for these risks or create barriers in the locations that Schlumberger operates. Marketing strategy Schlumberger primarily uses its own personnel to market its offerings. The customer base, business risks and opportunities for growth are essentially uniform across all services. There is a sharing of manufacturing and engineering facilities as well as research centers, and the labor force is interchangeable. Technological innovation, quality of service and price differentiation are the principal methods of competition, which vary geographically with respect to the different services offered.xxxv

Significant customers Due to the size of its customer base and market share that Schlumberger controls, no single customer exceeded 10% of consolidated revenue.xxxvi This diversity in customer base allows for the diversification of the geographic revenue spread. Schlumberger has no significant backlog, other than the $602 million of WesternGeco, due to the nature of its businesses. This makes revenues dependent on current ongoing projects and future oil and gas related opportunities.

Analysis of recent earnings releases and managerial guidance In the second quarter 2016, Schlumberger presented revenues of 7,164 million, a 10% increase from first quarter, and a net loss 2160 million. Despite the increase in revenue, a net loss was incurred due to a 15% increase in cost of revenue. Schlumberger Chairman and CEO Paal Kibsgaard commented, “In the second quarter market conditions worsened further in most parts of our global operations, but in spite of the continuing headwinds we now appear to have reached the bottom of the cycle. As we continued to navigate this challenging environment, we again delivered robust pretax operating income, operating margin, and free cash flow. This performance came as a result of our strong execution and, in some cases, at the expense of revenue as we began shifting focus onto recovering our pricing concessions and high-grading our contract portfolio.” Due to the increase costs, Schlumberger management initiated restructuring plans to lower their cost base. This included letting 16,000 employees go and becoming more efficient with overhead, infrastructure, and asset base. Furthermore, as the oil downturn has developed, they have shifted their focus towards strengthening their already dominant market share and renegotiating contracts to reflect the optimistic oil market upturn.xxxvii Production and Distribution Manufacturing process and costs Due to current the bearish landscape of the oil & gas market, Schlumberger is forced to incur some of the market costs by decreasing their pricing contracts and strategy. To keep market share and customer relationships, they had to decrease the total revenue available to them.

38%

35%

27%

Revenue Breakdown by Products

Drilling

Production

ReservoirCharacterization

28%

28%

26%

17%

Revenue Breakdown by Geography

North America

Middle East & Asia

Europe/CIS/Africa

Latin America

Eliminations



Schlumberger also incurs, and expect to continue to incur, capital and operating costs to comply with environmental laws, regulations and tax codes. As global issues such as CO2 emissions and global warming increase, it forces Schlumberger to have to adapt their products and services to meet certain standards. With the new elected Republican President Trump, there is likely he will follow party values and start to deregulate emission outputs as their lack of belief in the global warming phenomenon.

Distribution Due to the Geographic diversity of which Schlumberger provides its products and services, they must be able to adapt to the customer needs in their GeoMarkets. Schlumberger has determined they are able to provide the same level of service with 70% of its asset fleet as they condensed the tools, facilities, and workers of six locations down to one location, Port Klang in Asia. This frees up the remaining 30% for deployment outside of the locations in which they originated.xxxviii Their customers benefit from cost savings resulting from increased tool reliability and better service delivery.

Suppliers and raw materials There was a decrease of $625 million in inventories in 2015 as decreased spending on inventories was needed to balance out demand Competitive Factors Schlumberger holds the largest market share within the industry holding 48.2% of the market. The major competitors are Halliburton, Baker Hughes, and National Oilwell Varco holding 14.1%, 9.3%, and 6.0% respectively.xxxix These three companies are direct competitors of Schlumberger and provide the same equipment and services. Schlumberger’s vast array of equipment and services far exceeds any of its direct competitors. It’s assets range from elite products in exploration to new technology for efficient drilling. Their operations span over 85 different countries covering every corner and culture of the world. Their diversity adds to their performance by providing unique outlooks on current situation in the market. Schlumberger has been in the industry for more than 80 years. That experience is immeasurable when taken into the industry. Some potential indirect competitors are those companies in the renewable energy industry. The US Energy Information Administration (EIA) projects solar power to increase 60% in 2016 and 25% in 2017 and wind power to increase 10% in 2016 and 11% in 2017.xl Renewables will be the largest grower in energy but their share is so minor right now, even these record growth rates won’t impact the oil and gas industry. Regulatory factors within the environment are a determinant of increased expenses associated with government regulations and potential lawsuits. There are new laws every year limiting the oil industry in fracking and waste management. There are many states that are adopting regulations to eliminate extraction of shale oil, one of the major sources of oil. With new technological advancements, it has been an efficient and effective way to drill

for oil. This company exposes itself to numerous lawsuits because of the excessive use of chemicals during production. Schlumberger competitive factors include its direct competitors, the substitute of renewable energy, and any implementation of new laws and regulations. These factors are overcome by their unmatched technological advancements, vast services provided, and years of experience. Research and Development Schlumberger outspends its competitors on research and development by spending between $240 and $324 million on R&D in the last five years.xli That continued investment would enhance the company’s growth with new technological developments equivalent to the founding brothers with the invention of wireline logging in 1927.xlii Foreign Affairs With their diversified company expanding over 85 countries, comes risk. In the past three years, roughly 70% of their consolidated revenue has come from non-US operations.xliii This makes most of their revenues vulnerable to outside economies and other political agendas. With recent changes in the government this year, new import and export taxes could increase their costs. Political unrest could lead to loss of materials. Having most of their revenue coming from other countries creates hard to control risk because of instability across the world as well as other country’s taxes and regulations. Major Stockholders Schlumberger currently has 1.39 billion shares outstanding mostly held by investment managers within the United States. No other corporations or government agencies hold any kind of stake within the company, which means no one other than the board of directors, can impact decisions. The two top investors are Capitol World Investors and Vanguard with passive index funds who hold roughly 6.4% of outstanding shares each.xliv Catalysts for Change Oil prices will forever be the main driver in this industry because all other factors are based off this price. If the price is high, companies will use Schlumberger resources and be invest more in exploration and services. If they’re low, Schlumberger’s resources become obsolete as drilling activity decreases. Innovations in exploration and technology will impact the future of Schlumberger’s competitive advantage. They excel at reservoir characterization within the industry. If another company were to replicate the technologies that Schlumberger provides in terms of seismic imaging, there will be detrimental results to their revenues of reservoir characterization. The current political state of the United States and other world countries determines certain regulations for the industry. With the recent election of President Trump, there is a high likelihood of uncertainty with his policies. He pledges to ramp up fossil fuel usage and looks to eliminate imports of Oil and Gas.xlv He hasn’t denounced renewable energy sources but he specifically looks to increase fossil fuel usage to put US workers back to work.



Trump’s policies will be in place for the next four years with the potential to be eight years given his reelection. If there is a new President elect that is Democratic, there will be regulations put back in place for oil companies. Given the Democratic party’s views on global warming, they will subsidize renewable energy sources rather than fossil fuels. Key Investment Information Given these dismal outlooks within the oil industry leads to an opportunity for the contrarian mind. Oil prices are low, and will most likely remain low for the coming years. With these low oil prices also comes a cheap price to invest in the current industry. Now, an investment within the industry would buy a vast amount more stocks than two years ago. Yes, the industry outlook is poor, but it also makes for a prime time to find a company that could survive the price drought and thrive in the years to come like Schlumberger.

Analysis of Valuation Methods

Overview We are issuing a buy rating for Schlumberger based on our valuation model and analysis of the industry. Our model indicates a price around the price range of $86-90 with a specific adjusted intrinsic value of $89.87. We believe the SLB will withstand the current slump in the oil industry with their major market share and competitive advantages against the industry. They will rebound within the year as oil prices climb back to historical prices. Discounted Cash Flow (DCF) – Economic Profit (EP) Model Our DCF model calculates SLB’s intrinsic value as of 11/1, to be $89.34. The DCF/EP model is the best representation of the current value of the Schlumberger to shareholders. At the current price of $78.71 (as of 11/1), compared to our valuation range of $87 to $91 it represents a 10 to 15 percent premium. The major contributors to this premium are the assumptions on carrying value growth, carrying value of return on invested capital (ROIC), the components determining the weighted average cost of capital (WACC), and the cost of equity, as well as the short term growth forecasts of NOPLAT and Invested Capital components. Dividend Discount Model and Relative Valuation The DCF/EP model for Schlumberger is the best indicator of the growth and value to shareholders due to the uncertainty in the market. In historical averages, Schlumberger’s dividend has been significantly lower than the Earnings per share and what they could pay. The earnings not paid out as dividends have been reinvested to create growth and maintain market share in a very volatile industry. In the 2016-2018 we do not predict any increase in the dividends paid out due to the market variables and the internal costs that we have forecasted. Because they do not distribute dividends that more accurately portray their earnings the DDM model is not an accurate picture of the future growth and value of the firm. In regards to a relative valuation, with the current oil prices and uncertainty in the market, Schlumberger’s comparable competitors are all reacting differently. Because of

this using ratios of comparable firms would not create an accurate estimate to the intrinsic value of SLB for 2016. As the industry recovers in 2017 the comparable firms EPS become more reliable it creates a better representation of the intrinsic value, pricing Schlumberger at $91.46. Forecasted Summary In creating the forecast for many of the accounts of Schlumberger LTD., we used either a historical common sized average in comparison to revenue or historical change in the account. Without management’s guidance on different accounts, it is difficult to determine or predict large changes in Schlumberger’s structure. Unusual costs related to the merger with Cameron International will be expensed in 2016 and 2017 as management transition and synergies of the companies are realized. The cash account is used as the “plug” account in our forecast to represent the costs of management’s predictions and our assumptions of Schlumberger’s future. We chose 2020 as our continuing value year based on our expectations for the oil prices to recover and the industry to begin to stabilize. Assumptions CV Growth We used a CV growth assumption of 2% because we believe the effects of the decreased oil prices and uncertainty will slowly subside creating a low stable growth rate. The growth rate is relatively low because of the market share Schlumberger controls and the characteristics of the industry. It is difficult to maintain a large long-term growth due to this. Weighted Average Cost of Capital Schlumberger’s cost structure consists of 82.64% Equity and 17.36% debt corresponding to market values of 109 and 23 billion. When applying these weights to the determined cost of equity, cost of debt and tax rate, our WACC calculation yielded 7.36%. Cost of Equity Under the Capital Asset Pricing Model (CAPM) we determined a cost of equity of 8.06% using the risk free rate, a Market risk premium and Schlumberger’s Beta. 1) The risk free rate of 2.48% was determined using the 30-year treasury. 2) the market risk premium of 6% was determined based on the current uncertainty of conditions in the market. 3) Schlumberger’s current Beta of 0.93 was used based on the risk or lack-there-of it imposes to investors. Cost of Debt We used an after tax cost of debt of 4%. Due to the fact that Schlumberger does not have any outstanding bonds issued longer than 2024, we utilized Cameron Internationals longest Bond of 5.13%, which matures in 2043. The tax rate used in calculating the after tax cost of debt was Schlumberger’s marginal tax rate of 22%. Revenue Forecast We forecast a continued decrease in revenue from 2015 through 2016 based on the continued downturn in the oil commodity



prices. In 2017, however Schlumberger’s clients are predicted to increase their F&D spending as oil prices begin to rise, increasing revenue. These increases will continue until steady state growth as F&D spending continues and oil prices stabilize further. These revenue assumptions are broken down based on the segments Schlumberger operates within, as they are affected by different factors. COGS Cost of Goods Sold is forecasted as a historical average of COGS to sales with an additional premium in 2016. The additional premium is added on to the historical average to take into account the negative impacts of oil prices and other factors in the market that cause additional costs. Debt When forecasting debt, we used current portion of Long-term debt and Long-term debt. The current portion of long-term debt was forecasted based on Schlumberger’s annual maturity of debt schedule. Long-term debt was forecasted as a percentage of long-term debt to non-cash assets at 22%. This amount was then adjusted and increased because of the economic downturn of the sector/industry and the aggressive stock buyback plan that management approved. Equity and Treasury Stock Schlumberger’s board of directors recently announced in the 10k a new share buyback program of $10 billion to be utilized through 2018. When forecasting, this $10 billion was split evenly between fiscal years 2016, 2017 and 2018 causing significant cash outflows on the financing portion. This treasury stock buyback significantly decreases in 2019 and 2020 as the buyback program is exhausted. The common stock portion of our forecast is driven by share change and the employee stock options that are available. By 2018-2020 we predict that the Schlumberger share price will recover from the economic downturn in the industry. Once this occurs they will begin to sell the treasury stock acquired over the periods allowing for additional funding opportunities and reducing the company’s leverage. Sensitivity Analysis Beta and Risk Premium The variables of beta and risk premium showed very low volatility for the price. An increase of ten basis point of the beta while risk premium remains constant increased the price by .60%. If there were an increase of the risk premium by .50% and beta remains constant, there is an increase of .40% to the stock price. Cost of Debt and Risk Free Rate Any adjustments to the cost of debt or risk free rate showed little volatility to their stock price. Even with changes of .40% +/- to the cost of debt, while the risk free rate remained constant, showed changes of less than $0.10. If cost of debt were to remain constant while the risk free rate changes by .40% +/- resulted in less than $0.10 to their stock price. These two variable showed little impact on their stock price.

CV Growth of NOPLAT and Revenue Growth When analyzing the changes of the revenue growth while CV growth of NOPLAT remains constant, little volatility showed. There is less than a percentage point of change when the revenue growth changes by .40% points +/-. When CV growth of NOPLAT increases by .20% and revenue growth remains constant, there’s an increase in stock price of 2.2%. Production Growth and Surface Growth We decided to look into how the surface growth revenues change their stock price relative to production growth. When surface growth increase by 5% and production growth remains constant, there was an increase in stock price of .40%. An increase of 5% to production growth while surface growth remained constant showed a price increase of 2.9% to their stock price. ROIC and WACC Our final two variable we looked into were the impact of ROIC and WACC to the stock price. An increase of 5% to the ROIC while WACC remains constant results in an increase of 1.8%. An increase of .40% to the WACC while ROIC remains constant resulted in a decrease of the stock price by 8.3%. The change of the WACC has shown to bring the highest voloatility to the stock price. Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) 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.



i “What Drives Crude Oil Prices.” U.S. Energy Information Administration. https://www.eia.gov/finance/markets/demand-nonoecd.cfm ii “International Energy Outlook.” U.S. Energy Information Administration. http://www.eia.gov/forecasts/ieo/world.cfm iii “China GDP Annual Growth Rate.” Trading Economics. http://www.tradingeconomics.com/china/gdp-growth-annual/forecast iv “India GDP Growth Forecast 2015-2020.” Knoema. https://knoema.com/xxnxggb/india-gdp-growth-forecast-2015-2020-and-up-to-2060-data-and-charts v “Sector-wise contribution of GDP of India.” Statistics Times. http://statisticstimes.com/economy/sectorwise-gdp-contribution-of-india.php vi “Real GDP Forecast.” OECD Data. https://data.oecd.org/gdp/real-gdp-forecast.htm vii “Short-Term Energy Outlook.” U.S. Energy Information Administration. http://www.eia.gov/forecasts/STEO/ viii “International Rig Count.” Baker Hughes. http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-rigcountsintl ix “Offshore Rig Day Rates.” Rigzone. http://www.ww.oilskills.com/data/dayrates/ x “EIA Petroleum Status Report.” Bloomberg Calendar. https://www.bloomberg.com/markets/economic-calendar xi Oil Market Report xii “Short-Term Energy Outlook.” U.S. Energy Information Administration. November 8, 2016. http://www.eia.gov/forecasts/steo/ xiii “Industry Survey” Net Advantage Standard & Poors Database. netadvantage.standardandpoors.com xiv “Short-Term Energy Outlook.” U.S. Energy Information Administration. November 8, 2016. http://www.eia.gov/forecasts/steo/ xv “Short-Term Energy Outlook.” U.S. Energy Information Administration. November 8, 2016. http://www.eia.gov/forecasts/steo/ xvi How the Industry Operates.” NetAdvantage. http://www.netadvantage.standardandpoors.com.proxy.lib.uiowa.edu/NASApp/NetAdvantage/simpleSearchRun.do?ControlName=HomePageSearch xvii How the Industry Operates.” NetAdvantage. http://www.netadvantage.standardandpoors.com.proxy.lib.uiowa.edu/NASApp/NetAdvantage/simpleSearchRun.do?ControlName=HomePageSearch xviii How the Industry Operates.” NetAdvantage. http://www.netadvantage.standardandpoors.com.proxy.lib.uiowa.edu/NASApp/NetAdvantage/simpleSearchRun.do?ControlName=HomePageSearch

xix How the Industry Operates.” NetAdvantage. http://www.netadvantage.standardandpoors.com.proxy.lib.uiowa.edu/NASApp/NetAdvantage/simpleSearchRun.do?ControlName=HomePageSearch xx How the Industry Operates.” NetAdvantage. http://www.netadvantage.standardandpoors.com.proxy.lib.uiowa.edu/NASApp/NetAdvantage/simpleSearchRun.do?ControlName=HomePageSearch xxi How the Industry Operates.” NetAdvantage. http://www.netadvantage.standardandpoors.com.proxy.lib.uiowa.edu/NASApp/NetAdvantage/simpleSearchRun.do?ControlName=HomePageSearch xxii How the Industry Operates.” NetAdvantage. http://www.netadvantage.standardandpoors.com.proxy.lib.uiowa.edu/NASApp/NetAdvantage/simpleSearchRun.do?ControlName=HomePageSearch xxiii Smith, Grant. “IEA Changes View on Oil Glut, Sees Surplus Enduring in 2017.” Bloomberg. September 13, 2016. http://www.bloomberg.com/news/articles/2016-09-13/iea-changes-view-on-oil-glut-sees-oversupply-persisting-in-2017 xxiv Schlumberger 10 K xxv “Schlumberger Completes Merger with Cameron” http://www.slb.com/news/press_releases/2016/2016_0401_cameron_merger_complete.aspx xxvi Schlumberger 10Q pg. 20 xxvii Schlumberger. (n.d.) Corporate Profile http://www.slb.com/about/who.aspx xxviii Schlumberger 10Q pg. 20 xxix Schlumberger 10Q pg. 21 xxx Schlumberger 10Q pg. 21 xxxi Schlumberger 10K pg. 4 xxxii Schlumberger 10 K pg. 3 xxxiii Schlumberger. (n.d.) About us http://www.slb.com/about.aspx xxxiv Schlumberger 10 K pg. 10 xxxv Schlumberger 10K pg. 3 xxxvi Schlumberger 10 K pg. 6 xxxvii Schlumberger. (n.d.) Second Quarter http://www.slb.com/news/press_releases/2016/2016_0721_q2_earnings.aspx xxxviii Annual Report 2015 pg. 19 xxxix S&P Capital IQ Industry Survey xl IEA Short-term Energy Outlook xli YCharts xlii Schlumberger Website xliii Schlumberger 10K xliv Thomson One SLB xlv Dalrymple, Amy. “Trump ready to unleash oil industry.” The Dickinson Press. http://www.thedickinsonpress.com/news/north-dakota/4041606-trump-ready-unleash-oil-industry

Schlumberger

Revenue DecompositionNote: Cameron International Statements combined(Stated in Millions)

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Revenue 53775 58962 44256 38862 42716 48012 53317 57932

YoY Growth % 17.52% 9.65% -24.94% -12.19% 9.92% 12.40% 11.05% 8.66%

Business Segmentation

Reservoir Characterization 12463 12905 9501 8551 9491 10536 11589 12632

YoY Growth % 9% 4% -26% -10.00% 11.00% 11.00% 10.00% 9.00%

Drilling 19426 21177 16271 13993 14973 16769 18782 20096

YoY Growth % 22% 9% -23% -14.00% 7.00% 12.00% 12.00% 7.00%

Production 18740 20830 15301 13465 15081 17192 19083 20991

YoY Growth % 26% 11% -27% -12.00% 12.00% 14.00% 11.00% 10.00%

Surface 1465 2411 1957 1761 1955 2170 2387 2602

YoY Growth % 0.00% 64.57% -18.83% -10.00% 11.00% 11.00% 10.00% 9.00%

Valves and Meaurement 2086 2125 1548 1393 1546 1717 1888 2058

YoY Growth % -2.61% 1.87% -27.15% -10.00% 11.00% 11.00% 10.00% 9.00%

Eliminations & Other -406 -487 -321 -301 -331 -372 -413 -449

YoY Growth % 235.54% 19.95% -34.09% -6.21% 9.91% 12.40% 11.05% 8.66%

TOTAL 53775 58962 44256 38862 42716 48012 53317 57932

Business Segmentation Common Sized (% of Revenue)

Reservoir Characterization 23.18% 21.89% 21.47% 22.00% 22.22% 21.94% 21.74% 21.81%

Drilling 36.12% 35.92% 36.77% 36.01% 35.05% 34.93% 35.23% 34.69%

Production 34.85% 35.33% 34.57% 34.65% 35.30% 35.81% 35.79% 36.23%

Surface 2.72% 4.09% 4.42% 4.53% 4.58% 4.52% 4.48% 4.49%

Valves and Meaurement 3.88% 3.60% 3.50% 3.59% 3.62% 3.58% 3.54% 3.55%

Eliminations & Other -0.76% -0.83% -0.73% -0.77% -0.77% -0.77% -0.77% -0.77%

TOTAL 100.00% 100.00% 100.00% 100.01% 100.00% 100.00% 100.00% 100.01%

Georgraphic Segmentation

North America 17304 19890 13178

YoY Growth % 1.50% 14.94% -33.75%

Latin America 8376 8482 6590

YoY Growth % 3.27% 1.27% -22.31%

Europe/CIS/Africa 14662 15872 11527

YoY Growth % 11.02% 8.25% -27.38%

Middle East and Asia 12802 14209 12345

YoY Growth % 23.12% 10.99% -13.12%

Other 631 508 617

YoY Growth % -17.08% -19.49% 21.46%

TOTAL 53775 58962 44256

Geographic Segmentation Common Sized (% of Revenue)

North America 32.18% 33.73% 29.78%

Latin America 15.58% 14.39% 14.89%

Europe/CIS/Africa 27.27% 26.92% 26.05%

Middle East and Asia 23.81% 24.10% 27.89%

Other 1.17% 0.86% 1.39%

TOTAL 100.00% 100.00% 100.00%

Schlumberger

Income Statement

Note: Cameron International Statements combined


Sales 53,774.54 58,961.90 44,255.78 38,861.71 42,715.83 48,012.10 53,316.60 57,931.68

COGS excluding D&A 38,239.00 40,673.00 30,215.00 29,103.84 29,133.96 32,746.23 36,364.12 38,737.05

Depreciation & Amortization Expense 3,964.00 4,442.00 4,420.00 3,124.31 3,446.41 3,582.84 3,684.63 3,789.92

Depreciation 3,100.00 3,200.00 3,200.00 2,789.31 2,774.41 2,931.84 3,073.63 3,202.92

Amortization of Intangibles 566.00 894.00 878.00 335.00 672.00 651.00 611.00 587.00

Gross Income 11,571.54 13,846.90 9,620.78 6,633.56 10,135.46 11,683.03 13,267.85 15,404.71

Research & Development 1,166.00 1,217.00 1,094.00 1,083.42 1,190.87 1,338.52 1,486.40 1,615.07

Other SG&A 1,783.00 1,786.00 1,710.00 1,322.42 1,453.57 1,633.80 1,814.31 1,971.35

EBIT (Operating Income) 8,622.54 10,843.90 6,816.78 4,227.72 7,491.02 8,710.71 9,967.15 11,818.29

Nonoperating Income - Net 1,151.00 (181.00) 236.00 207.24 227.79 256.03 284.32 308.93

Interest Expense 506.00 416.00 420.00 1,142.47 1,277.74 1,246.94 1,152.97 1,119.78

Unusual Expense - Net 351.00 1,522.00 3,432.00 2,000.00 600.00 0.00 0.00 0.00

Pretax Income 8,916.54 8,724.90 3,200.78 1,292.48 5,841.07 7,719.80 9,098.49 11,007.44

Income Taxes 2,044.00 2,186.00 930.00 284.34 1,285.04 1,698.36 2,001.67 2,421.64

Consolidated Net Income 6,872.54 6,538.90 2,270.78 1,008.13 4,556.04 6,021.45 7,096.82 8,585.81

Minority Interest 42.00 68.00 63.00 57.67 57.67 57.67 57.67 57.67

Net Income 6,830.54 6,470.90 2,207.78 950.47 4,498.37 5,963.78 7,039.15 8,528.14

EPS (recurring) 5.23 4.57 3.16 0.70 3.38 4.57 5.37 6.49

Total Shares Outstanding 1,465.87 1,414.91 1,393.25 1,359.49 1,329.08 1,304.84 1,309.76 1,314.84Dividends per Share 1.25 1.60 2.00 2.00 2.00 2.00 2.20 2.40

Schlumberger

Balance SheetNote: Cameron International Statements combined


Assets

Cash Only 5,285.00 4,643.00 4,568.00 1,760.40 1,555.18 388.33 552.52 3,173.88

Total Short Term Investments 4,939.00 4,484.00 10,825.00 9,742.50 8,768.25 7,014.60 6,313.14 5,681.83

Accounts Receivables, Net 14,216.00 13,560.00 10,744.00 9,832.69 10,807.85 12,147.90 13,490.03 14,657.72

Inventories 7,736.00 7,557.00 6,116.00 6,071.85 6,674.02 7,501.53 8,330.31 9,051.39

Other Current Assets 2,218.00 2,002.00 1,777.00 1,536.50 1,688.89 1,898.29 2,108.02 2,290.49

Total Current Assets 34,394.00 32,246.00 34,030.00 28,943.94 29,494.19 28,950.64 30,794.02 34,855.30

Net Property, Plant & Equipment 17,133.00 17,360.00 15,132.00 15,051.19 15,905.24 16,674.43 17,375.85 18,023.48

Property, Plant & Equipment - Gross 35,164.00 40,544.00 40,581.00 43,289.50 46,917.96 50,618.99 54,394.04 58,244.59

Total Investments and Advances 3,680.00 3,677.00 3,729.00 3,793.14 3,858.38 3,924.74 3,992.25 4,060.92

Intangible Assets 23,911.00 24,123.00 23,546.00 24,023.24 24,559.58 25,169.20 25,869.68 26,682.85

Net Goodwill 17,631.00 17,948.00 17,369.00 17,369.00 17,369.00 17,369.00 17,369.00 17,369.00

Net Other Intangibles 5,613.00 5,382.00 5,151.00 5,382.00 5,613.00 5,844.00 6,075.00 6,306.00

MultiClient Seismic Data 667.00 793.00 1,026.00 1,272.24 1,577.58 1,956.20 2,425.68 3,007.85

Other Assets 2,231.00 2,390.00 3,068.00 2,720.32 2,990.11 3,360.85 3,732.16 4,055.22Total Assets 81,349.00 79,796.00 79,505.00 74,531.83 76,807.49 78,079.86 81,763.97 87,677.76

Liabilities & Shareholders' Equity

Short Term Debt 964.00 1,521.00 1,546.00 1,572.59 1,599.64 1,627.15 1,655.14 1,683.61

Current Portion Long Term Debt 2,116.00 1,597.00 3,297.00 1,799.00 2,876.00 1,370.00 1,591.00 2,697.00

Accounts Payable & Accrued Liabilities 12,720.00 12,994.00 10,520.00 8,901.05 9,783.82 10,996.90 12,211.86 13,268.92

Income Tax Payable 1,570.00 1,815.00 1,330.00 1,197.00 1,077.30 969.57 872.61 785.35

Other Current Liabilities 415.00 518.00 634.00 399.35 438.96 493.38 547.89 595.32

Total Current Liabilities 17,785.00 18,445.00 17,327.00 13,868.99 15,775.71 15,457.00 16,878.51 19,030.20

Long-Term Debt 12,956.00 13,384.00 16,984.00 20,493.19 22,055.46 22,960.46 20,906.06 19,152.27

Post Retirement Benefits 670.00 1,501.00 1,434.00 1,761.80 1,936.53 2,176.63 2,417.11 2,626.34

Deferred Tax Liabilities 1,985.00 1,489.00 1,287.00 1,007.46 788.63 617.34 483.25 378.29

Other Liabilities 1,402.00 1,484.00 1,178.00 1,008.57 1,108.60 1,246.05 1,383.72 1,503.49

Total Liabilities 34,798.00 36,303.00 38,210.00 38,140.01 41,664.94 42,457.49 42,068.66 42,690.59

Common Stock Par/Carry Value 15,402.00 15,753.00 15,961.00 16,497.76 17,034.53 17,571.29 18,108.05 18,644.81

Retained Earnings 42,786.00 46,964.00 47,002.00 45,233.49 47,073.70 50,427.79 54,585.47 59,958.00

Cumulative Translation Adjustment/Unrealized For. Exch. Gain (1,148.00) (2,071.00) (2,930.00) (3,309.00) (3,641.81) (4,058.39) (4,484.39) (4,905.26)

Unrealized Gain/Loss Marketable Securities 176.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00

Other Appropriated Reserves (1,662.00) (2,685.00) (2,505.00) (2,555.10) (2,606.20) (2,658.33) (2,711.49) (2,765.72)

Treasury Stock (10,233.00) (15,566.00) (17,341.00) (20,641.00) (23,941.00) (26,941.00) (27,141.00) (27,341.00)

Total Shareholders' Equity 45,321.00 42,405.00 40,187.00 35,226.15 33,919.22 34,341.36 38,356.65 43,590.83

Accumulated Minority Interest 1,230.00 1,088.00 1,108.00 1,165.67 1,223.33 1,281.00 1,338.67 1,396.33

Total Equity 46,551.00 43,493.00 41,295.00 36,391.82 35,142.55 35,622.36 39,695.31 44,987.17

Total Liabilities & Shareholders' Equity 81,349.00 79,796.00 79,505.00 74,531.83 76,807.49 78,079.86 81,763.97 87,677.76

Schlumberger

Cash Flow Statement


Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

Cash From Operating Activities

Net Income / Starting Line 950.47 4498.37 5963.78 7039.15 8528.14Depreciation, Depletion & Amortization 3124.31 3446.41 3582.84 3684.63 3789.92Deferred Taxes & Investment Tax Credit -279.54 -218.82 -171.29 -134.09 -104.96Receivables 911.31 -975.16 -1340.05 -1342.13 -1167.70Inventories 44.15 -602.18 -827.50 -828.79 -721.07Accounts Payable -1618.95 882.77 1213.08 1214.96 1057.06Income Taxes Payable -133.00 -119.70 -107.73 -96.96 -87.26Other Assets/Liabilities 5.85 -112.78 -154.98 -155.22 -135.04Net Operating Cash Flow 3004.60 6798.91 8158.15 9381.57 11159.08

Cash From Investing Activitiesshort term investments 1082.50 974.25 1753.65 701.46 631.31long term investments -64.14 -65.24 -66.36 -67.51 -68.67capital expenditures -2708.50 -3628.46 -3701.03 -3775.05 -3850.55capitalization of intangible assets -812.24 -1208.34 -1260.62 -1311.49 -1400.16business acquisitions 0.00 0.00 0.00 0.00 0.00change in other assets 347.68 -269.79 -370.74 -371.31 -323.06Change in Other Liabilities -169.43 100.03 137.45 137.67 119.77Net Investing Cash Flow -2324.13 -4097.55 -3507.65 -4686.23 -4891.35

Cash From Financing Activitiesproceeds from Issuance (payment) of S-T Debt 26.59 27.05 27.51 27.99 28.47Current Portion of Long Term Debt -1498.00 1077.00 -1506.00 221.00 1106.00proceeds from issuance (payment) of L-T Debt 3509.19 1562.28 905.00 -2054.40 -1753.79Change In post retirment Benefits 327.80 174.73 240.11 240.48 209.23payment of dividends -2718.98 -2658.15 -2609.69 -2881.48 -3155.61proceeds from issuance of Common stock 536.76 536.76 536.76 536.76 536.76Repurchases of common stock -3300.00 -3300.00 -3000.00 -200.00 -200.00Change in Gain or Loss -379.00 -332.81 -416.59 -425.99 -420.87Change in other appropriated loss -50.10 -51.10 -52.12 -53.17 -54.23Change in Minority Interest 57.67 57.67 57.67 57.67 57.67Net Financing Cash Flow -3488.07 -2906.58 -5817.35 -4531.14 -3646.38

Net Change in cash -2807.60 -205.22 -1166.85 164.20 2621.35

Beginning Cash 4,568.00 1,760.40 1,555.18 388.33 552.52Ending Cash 1,760.40 1,555.18 388.33 552.52 3,173.88

Schlumberger

Common Size Income Statement



Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

COGS excluding D&A 71.11% 68.98% 68.27% 66.87% 66.87% 66.87% 66.87% 66.87%

Depreciation & Amortization Expense 7.37% 7.53% 9.99% 8.80% 8.80% 8.80% 8.80% 8.80%

Gross Income 21.52% 23.48% 21.74% 24.33% 24.33% 24.33% 24.33% 24.33%

Research & Development 2.17% 2.06% 2.47% 2.79% 2.79% 2.79% 2.79% 2.79%

Other SG&A 3.32% 3.03% 3.86% 3.40% 3.40% 3.40% 3.40% 3.40%

EBIT (Operating Income) 16.03% 18.39% 15.40% 19.05% 19.05% 19.05% 19.05% 19.05%

Nonoperating Income - Net 2.14% -0.31% 0.53% 0.94% 0.94% 0.94% 0.94% 0.94%

Interest Expense 0.94% 0.71% 0.95% 0.90% 0.90% 0.90% 0.90% 0.90%

Unusual Expense - Net 0.65% 2.58% 7.75% 1.14% 1.14% 1.14% 1.14% 1.14%

Pretax Income 16.58% 14.80% 7.23% 17.94% 17.94% 17.94% 17.94% 17.94%

Income Taxes 3.80% 3.71% 2.10% 3.97% 3.97% 3.97% 3.97% 3.97%

Consolidated Net Income 12.78% 11.09% 5.13% 13.98% 13.98% 13.98% 13.98% 13.98%

Minority Interest 0.08% 0.12% 0.14% 0.06% 0.06% 0.06% 0.06% 0.06%

Net Income 12.70% 10.97% 4.99% 13.91% 13.91% 13.91% 13.91% 13.91%

Schlumberger

Common Size Balance Sheet



Assets

Cash Only 9.83% 7.87% 10.32% 4.53% 3.64% 0.81% 1.04% 5.48%

Total Short Term Investments 9.18% 7.60% 24.46% 12.91% 20.53% 14.61% 11.84% 9.81%

Accounts Receivables, Net 26.44% 23.00% 24.28% 25.30% 25.30% 25.30% 25.30% 25.30%

Inventories 14.39% 12.82% 13.82% 11.16% 15.62% 15.62% 15.62% 15.62%

Other Current Assets 4.12% 3.40% 4.02% 3.95% 3.95% 3.95% 3.95% 3.95%

Total Current Assets 63.96% 54.69% 76.89% 58.43% 69.05% 60.30% 57.76% 60.17%

Net Property, Plant & Equipment 31.86% 29.44% 34.19% 35.56% 37.23% 34.73% 32.59% 31.11%

Property, Plant & Equipment - Gross 65.39% 68.76% 91.70% 79.99% 109.84% 105.43% 102.02% 100.54%

Total Investments and Advances 6.84% 6.24% 8.43% 7.24% 9.03% 8.17% 7.49% 7.01%

Intangible Assets 44.47% 40.91% 53.20% 42.68% 57.50% 52.42% 48.52% 46.06%

Net Goodwill 32.79% 30.44% 39.25% 32.03% 40.66% 36.18% 32.58% 29.98%

Net Other Intangibles 10.44% 9.13% 11.64% 9.69% 13.14% 12.17% 11.39% 10.89%

MultiClient Seismic Data 1.24% 1.34% 2.32% 1.37% 3.69% 4.07% 4.55% 5.19%

Other Assets 4.15% 4.05% 6.93% 7.00% 7.00% 7.00% 7.00% 7.00%

Total Assets 151.28% 135.33% 179.65% 147.26% 179.81% 162.63% 153.36% 151.35%

Liabilities & Shareholders' Equity

Short Term Debt 1.79% 2.58% 3.49% 2.20% 3.74% 3.39% 3.10% 2.91%

Current Portion Long Term Debt 3.93% 2.71% 7.45% 5.22% 6.73% 2.85% 2.98% 4.66%

Accounts Payable & Accrued Liabilities 23.65% 22.04% 23.77% 22.90% 22.90% 22.90% 22.90% 22.90%

Income Tax Payable 2.92% 3.08% 3.01% 3.68% 2.52% 2.02% 1.64% 1.36%

Other Current Liabilities 0.77% 0.88% 1.43% 1.03% 1.03% 1.03% 1.03% 1.03%

Total Current Liabilities 33.07% 31.28% 39.15% 32.91% 36.93% 32.19% 31.66% 32.85%

Long-Term Debt 24.09% 22.70% 38.38% 22.06% 51.63% 47.82% 39.21% 33.06%

Post Retirement Benefits 1.25% 2.55% 3.24% 4.53% 4.53% 4.53% 4.53% 4.53%

Deferred Tax Liabilities 3.69% 2.53% 2.91% 2.56% 1.85% 1.29% 0.91% 0.65%

Other Liabilities 2.61% 2.52% 2.66% 2.60% 2.60% 2.60% 2.60% 2.60%

Total Liabilities 64.71% 61.57% 86.34% 64.87% 97.54% 88.43% 78.90% 73.69%

Common Stock Par/Carry Value 28.64% 26.72% 36.07% 27.62% 39.88% 36.60% 33.96% 32.18%

Retained Earnings 79.57% 79.65% 106.21% 82.77% 110.20% 105.03% 102.38% 103.50%

Cumulative Translation Adjustment/Unrealized For. Exch. Gain -2.13% -3.51% -6.62% -3.45% -8.53% -8.45% -8.41% -8.47%

Unrealized Gain/Loss Marketable Securities 0.33% 0.02% 0.00% 0.08% 0.00% 0.00% 0.00% 0.00%

Other Appropriated Reserves -3.09% -4.55% -5.66% -5.63% -6.10% -5.54% -5.09% -4.77%

Treasury Stock -19.03% -26.40% -39.18% -19.99% -56.05% -56.11% -50.91% -47.20%

Total Shareholders' Equity 84.28% 71.92% 90.81% 81.39% 79.41% 71.53% 71.94% 75.25%

Accumulated Minority Interest 2.29% 1.85% 2.50% 1.00% 2.86% 2.67% 2.51% 2.41%

Total Equity 86.57% 73.76% 93.31% 82.39% 82.27% 74.19% 74.45% 77.66%

Total Liabilities & Shareholders' Equity 151.28% 135.33% 179.65% 147.26% 179.81% 162.63% 153.36% 151.35%

Schlumberger

Value Driver Estimation



Marginal Tax Rate 23% 24% 22% 22% 22% 22% 22% 22%

NOPLAT

EBITARevenue 53774.54 58961.90 44255.78 38861.71 42715.83 48012.10 53316.60 57931.68

COGS excluding D&A 38239.00 40673.00 30215.00 29103.84 29133.96 32746.23 36364.12 38737.05

Depreciation 3100.00 3200.00 3200.00 2789.31 2774.41 2931.84 3073.63 3202.92

Amortization of Intangibles 566.00 894.00 878.00 335.00 672.00 651.00 611.00 587.00

Research & Development 1166.00 1217.00 1094.00 1083.42 1190.87 1338.52 1486.40 1615.07

Other SG&A 1783.00 1786.00 1710.00 1322.42 1453.57 1633.80 1814.31 1971.35

Implied Interest On Operating Leases 67.51 68.17 59.14 61.76 65.27 68.42 71.30 73.96

EBITA 8988.05 11260.07 7217.92 4289.48 7556.29 8779.13 10038.45 11892.25

Adjusted Taxes

Provision for Income Taxes 2044.00 2186.00 930.00 284.34 1285.04 1698.36 2001.67 2421.64

Tax Shield on Interest Expense 116.38 99.84 92.40 251.34 281.10 274.33 253.65 246.35

Tax on Lease Interest 69.19 71.97 60.31 67.16 66.48 64.65 66.09 65.74

Tax Non-Operating Income/Interest 264.73 -43.44 51.92 45.59 50.11 56.33 62.55 67.96

Tax Shield on Unusual Expense 80.73 365.28 755.04 440.00 132.00 0.00 0.00 0.00

Total Adjusted Taxes 2045.57 2766.53 1785.83 997.25 1714.50 1981.00 2258.87 2665.76

Deferred Taxes

Deferred Tax Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Deferred Tax Liability 1985.00 1489.00 1287.00 1007.46 788.63 617.34 483.25 378.29

Change in Deferred Taxes 492.00 -496.00 -202.00 -279.54 -218.82 -171.29 -134.09 -104.96

NOPLAT 7434.48 7997.54 5230.09 3012.68 5622.96 6626.83 7645.49 9121.52

Invested Capital

Operating Current Assets

Normal Cash 455.65 499.60 374.99 329.29 361.94 406.82 451.77 490.87

Accounts Receivable 14216.00 13560.00 10744.00 9832.69 10807.85 12147.90 13490.03 14657.72

Inventory 7736.00 7557.00 6116.00 6071.85 6674.02 7501.53 8330.31 9051.39

Other Current Assets 2218.00 2002.00 1777.00 1536.50 1688.89 1898.29 2108.02 2290.49

Operating Current Assets 24625.65 23618.60 19011.99 17770.33 19532.70 21954.53 24380.13 26490.47

Operating Current Liabilities

Accounts Payable 12720.00 12994.00 10520.00 8901.05 9783.82 10996.90 12211.86 13268.92

Income Tax Payable 1,570.00 1,815.00 1,330.00 1,197.00 1,077.30 969.57 872.61 785.35Other Current Liabilities 415.00 518.00 634.00 399.35 438.96 493.38 547.89 595.32

Operating Current Liabilities 14705.00 15327.00 12484.00 10497.40 11300.07 12459.85 13632.37 14649.59

Operating Working Capital 9920.65 8291.60 6527.99 7272.92 8232.63 9494.68 10747.76 11840.88

Net PPE 17133.00 17360.00 15132.00 15051.19 15905.24 16674.43 17375.85 18023.48

Other L-T Operating Assets

Nt Intangible Assets (Non-Goodwill) 5613.00 5382.00 5151.00 5382.00 5613.00 5844.00 6075.00 6306.00

Present Value of Operating Leases 1317.18 1330.12 1153.87 1205.10 1273.48 1335.07 1391.23 1443.08

Other Assets 2,231.00 2,390.00 3,068.00 2,720.32 2,990.11 3,360.85 3,732.16 4,055.22

Other L-T Operating Assets 9161.18 9102.12 9372.87 9307.42 9876.59 10539.91 11198.39 11804.30

Other L-T Operating Liabilities

Other Liabilities 1402.00 1484.00 1178.00 1008.57 1108.60 1246.05 1383.72 1503.49

Other L-T Operating Liabilities 1402.00 1484.00 1178.00 1008.57 1108.60 1246.05 1383.72 1503.49

Invested Capital

Operating Working Capital 9920.65 8291.60 6527.99 7272.92 8232.63 9494.68 10747.76 11840.88

Net PPE 17133.00 17360.00 15132.00 15051.19 15905.24 16674.43 17375.85 18023.48

Other L-T Operating Assets 9161.18 9102.12 9372.87 9307.42 9876.59 10539.91 11198.39 11804.30

Other L-T Operating Liabilities 1402.00 1484.00 1178.00 1008.57 1108.60 1246.05 1383.72 1503.49

Invested Capital 34812.83 33269.72 29854.87 30622.96 32905.86 35462.97 37938.28 40165.16

NOPLAT 7434.48 7997.54 5230.09 3012.68 5622.96 6626.83 7645.49 9121.52

Beg. Invested Capital 28,711.22 34,812.83 33,269.72 29,854.87 30,622.96 32,905.86 35,462.97 37,938.28

ROIC 25.89% 22.97% 15.72% 4.79% 18.36% 20.14% 21.56% 24.04%

NOPLAT 7434.48 7997.54 5230.09 3012.68 5622.96 6626.83 7645.49 9121.52

Change in invested capital 6,101.61 (1,543.11) (3,414.86) 768.09 2,282.90 2,557.11 2,475.31 2,226.88

FCF 1333 9541 8645 2245 3340 4070 5170 6895

Beg. Invested Capital 28711 34813 33270 29855 30623 32906 35463 37938

ROIC 25.89% 22.97% 15.72% 4.79% 18.36% 20.14% 21.56% 24.04%

WACC 7.36% 7.36% 7.36% 7.36% 7.36% 7.36% 7.36% 7.36%EP 5322 5437 2783 -768 3370 4206 5037 6331

Schlumberger

Weighted Average Cost of Capital (WACC) EstimationNote: Cameron International Statements combined

Cost of Debt

Bond Yield 5.13%

Tax Rate 22.00%

After Tax Cost of Debt 4.00%

Cost Of Equity

Risk Free Rate 2.48%

Risk Premium 6.00%

Beta 0.93

Cost of Equity 8.06%

Weights

# of Shares 1,393.25

Share Price 78.66

Enterprise Value 109,593.20

Total Debt 22,980.87

Weight of Equity 82.67%

Weight of Debt 17.33%

WACC 7.36%

Schlumberger

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation ModelsNote: Cameron International Statements combined

Key Inputs:

CV Growth 2.00%

CV ROIC 15.00%

WACC 7.36%


Fiscal Years Ending Dec. 31 2015 2016E 2017E 2018E 2019E 2020E

DCF Model

NOPLAT 5230 3013 5623 6627 7645 9122

Change in Invested Captial -1543 -3415 768 2283 2557 2475

FCF 8645 2245 3340 4070 5170 6895

Continuing Value 147597.412

Period to Discount 1 2 3 4 4

Present Value of Future Cash Flows 2091 2898 3289 3892 111115

Value of Operating Assets 123285

Add: Excess Cash 4193

Add: Marketable securities 10825

Add: LT Investment - Affiliate Companies 3311

Add: Other Long-Term Investments 418.00

Less: STD and Current Portion LTD 4843

Less: LTD 16984

Less: PV of Operating Leases 1154

Less: Employee Stock options 1038

Less: Underfunded Retirement plans 1434

Value of Equity 116580

Shares Outstanding 1393

Intrinsic Value 83.67

Intrinsic Value (Adjusted) 87.61

EP Model

Beginning Invested Capital 33270 29855 30623 32906 35463 37938

ROIC 15.72% 4.79% 18.36% 20.14% 21.56% 24.04%

Economic Profit -768 3370 4206 5037 6331

Continuing Value 109659

Periods to Discount 1 2 3 4 4

PV of Cash Flows -715 2924 3400 3792 82554

Present Value of Economic Profit 91955

Plus: Beginning Invested Capital 29855

Value of Operating Assets 121810

Add: Excess Cash 4193

Add: Marketable securities 10825

Add: LT Investment - Affiliate Companies 3311

Add: Other Long-Term Investments 418

Less: STD and Current Portion LTD 4843

Less: LTD 16984

Less: PV of Operating Leases 1154

Less: Employee Stock options 1038

Less: Underfunded Retirement plans 1434

Value of Equity 115104

Shares Outstanding 1393

Intrinsic Value 82.62

Intrinsic Value (Asjusted) 86.50

Schlumberger

Relative Valuation ModelsNote: Cameron International Statements combined

EPS EPS Est. 5yrTicker Company Price 2016E 2017E P/E 16 P/E 17 EPS gr. PEG 16 PEG 17

BHI Baker Hughes $57.68 ($1.81) $0.26 (31.9) 221.8 10.0 (3.19) 22.18 HAL Halliburton $47.24 ($0.06) $0.97 (787.3) 48.7 10.0 (78.73) 4.87 NOV National Oilwell Varco $33.56 ($0.91) ($0.39) (36.9) (86.1) 10.0 (3.69) (8.61) CLB Core Laboratories $101.20 $1.51 $2.10 67.0 48.2 10.0 6.70 4.82 RES RPC, Inc. $17.98 ($0.76) ($0.21) (23.7) (85.6) 10.0 (2.37) (8.56) OII Oceaneering international $23.54 $0.86 $0.46 27.4 51.2 10.0 2.74 5.12 SPN Superior Energy Services $14.54 ($2.35) ($1.60) (6.2) (9.1) 10.0 (0.62) (0.91)

Average (113.1) 27.0 (11.3) 2.7

SLB Schlumberger $81.32 $0.70 $3.38 116.3 24.0 0.6 202.8 41.9

Implied Value:

Relative P/E (EPS16) $ (79.06)

Relative P/E (EPS17) 91.46$

PEG Ratio (EPS16) (4.53)$

PEG Ratio (EPS17) 5.24$

Schlumberger

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model


Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

EPS 0.70$ 3.38$ 4.57$ 5.37$ 6.49$

Key Assumptions

CV growth 2.00%

CV ROE 15.26%


Future Cash Flows

P/E Multiple (CV Year) 14.3389175

EPS (CV Year) 6.49$

Future Stock Price 93.00$

Dividends Per Share 2.00 2.00 2.00 2.20 2.40

Periods 1 2 3 4 4

Discount Factor 1.0806 1.1677 1.2618 1.3635 1.3635

Discounted Cash Flows 1.85082362 1.71277403 1.58502131 1.61347718 68.21$

Intrinsic Value 73.12$

Schlumberger

Key Management Ratios


Liquidity Ratios Definition

Quick Ratio Cash +Short Term Investments + Receivables / Current Liabilities 1.37 1.23 1.51 1.54 1.34 1.26 1.21 1.24

Current Ratio Current Assets / Current Liabilities 1.93 1.75 1.96 2.09 1.87 1.87 1.82 1.83

Cash Ratio Cash + Short Term Investments / Current Liabilities 0.57 0.49 0.89 0.83 0.65 0.48 0.41 0.47

Activity or Asset-Management Ratios

Inventory Turnover Net Sales / Average Inventory 6.95 7.80 7.24 6.40 6.40 6.40 6.40 6.40

Net Working Capital Turnover Net Sales / Average Net Working Capital 5.42 7.11 6.78 5.34 5.19 5.06 4.96 4.89

Reveivables Turnover Net Sales / Receivables 3.78 4.35 4.12 3.95 3.95 3.95 3.95 3.95

Total Asset Turnover Net Sales / total Assets 0.66 0.74 0.56 0.52 0.56 0.61 0.65 0.66

Financial Leverage Ratios

Debt Ratio Total Debt / Total Assets 0.43 0.45 0.48 0.51 0.54 0.54 0.51 0.49

Debt to Equity Ratio Total Debt / Total Equity 0.75 0.83 0.93 1.05 1.19 1.19 1.06 0.95

Equity Ratio Total Equity / Total Assets 0.57 0.55 0.52 0.49 0.46 0.46 0.49 0.51

Profitability Ratios

Gross Margin Revenue - COGS / Revenue 28.89% 31.02% 31.73% 25.11% 31.80% 31.80% 31.80% 33.13%

Profit Margin Net Income / Revenue 12.70% 10.97% 4.99% 2.45% 10.53% 12.42% 13.20% 14.72%

Return on Assets Net Income / Average Assets 14.18% 11.00% 3.74% 1.62% 7.74% 10.00% 11.72% 13.70%

Return on Equity Net Income / Average Shareholders Equity 16.78% 14.37% 5.21% 2.45% 12.58% 16.86% 18.69% 20.14%

Payout Policy Ratios

Dividend Payout Dividend Per Share / Earnings Per Share 23.88% 34.99% 63.32% 286.07% 59.09% 43.76% 40.93% 37.00%

Total Payout Dividends + Stock Repurchases / Net Income 61.55% 102.71% 208.40% 633.27% 132.45% 94.06% 43.78% 39.35%

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 OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases2016 261 2015 330 2014 318 2013 3712017 205 2016 259 2015 246 2014 2502018 162 2017 197 2016 195 2015 1922019 145 2018 156 2017 165 2016 1542020 129 2019 134 2018 136 2017 129Thereafter 526 Thereafter 554 Thereafter 558 Thereafter 519Total Minimum Payments 1428 Total Minimum Payments 1630 Total Minimum Payments 1618 Total Minimum Payments 1615Less: Interest 274 Less: Interest 300 Less: Interest 301 Less: Interest 287PV of Minimum Payments 1154 PV of Minimum Payments 1330 PV of Minimum Payments 1317 PV of Minimum Payments 1328

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

Pre-Tax Cost of Debt 5.13% Pre-Tax Cost of Debt 5.13% Pre-Tax Cost of Debt 5.13% Pre-Tax Cost of Debt 5.13%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 LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 261 248.3 1 330 313.9 1 318 302.5 1 371 352.92 205 185.5 2 259 234.4 2 246 222.6 2 250 226.23 162 139.4 3 197 169.6 3 195 167.8 3 192 165.34 145 118.7 4 156 127.7 4 165 135.1 4 154 126.15 129 100.5 5 134 104.4 5 136 105.9 5 129 100.56 & beyond 129 361.5 6 & beyond 134 380.2 6 & beyond 136 383.2 6 & beyond 129 357.1PV of Minimum Payments 1153.9 PV of Minimum Payments 1330.1 PV of Minimum Payments 1317.2 PV of Minimum Payments 1328.1

Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2010) Present Value of Operating Lease Obligations (2009) Present Value of Operating Lease Obligations (2008)

Operating Operating Operating OperatingFiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases2012 313 2011 325 2010 247 2009 2932013 239 2012 242 2011 187 2010 1842014 181 2013 167 2012 126 2011 1342015 150 2014 124 2013 78 2012 942016 105 2015 99 2014 62 2013 62Thereafter 441 Thereafter 377 Thereafter 258 Thereafter 258Total Minimum Payments 1429 Total Minimum Payments 1334 Total Minimum Payments 958 Total Minimum Payments 1025Less: Interest 252 Less: Interest 223 Less: Interest 156 Less: Interest 397PV of Minimum Payments 1177 PV of Minimum Payments 1111 PV of Minimum Payments 802 PV of Minimum Payments 1422

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

Pre-Tax Cost of Debt 5.13% Pre-Tax Cost of Debt 5.13% Pre-Tax Cost of Debt 5.13% Pre-Tax Cost of Debt 5.13%Number Years Implied by Year 6 Payment 4.2 Number Years Implied by Year 6 Payment 3.8 Number Years Implied by Year 6 Payment 4.2 Number Years Implied by Year 6 Payment 4.2

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 313 297.7 1 325 309.2 1 247 235.0 1 293 278.72 239 216.3 2 242 219.0 2 187 169.2 2 184 166.53 181 155.8 3 167 143.7 3 126 108.5 3 134 115.34 150 122.8 4 124 101.5 4 78 63.9 4 94 77.05 105 81.8 5 99 77.1 5 62 48.3 5 62 48.36 & beyond 105 302.2 6 & beyond 99 260.8 6 & beyond 62 176.9 6 & beyond 258 736.3PV of Minimum Payments 1176.6 PV of Minimum Payments 1111.3 PV of Minimum Payments 801.7 PV of Minimum Payments 1422.1

Present Value of Operating Lease Obligations (2007)

OperatingFiscal Years Ending Leases2008 2132014 1652015 1102016 772017 58Thereafter 279Total Minimum Payments 902Less: Interest 559PV of Minimum Payments 1461

Capitalization of Operating Leases

Pre-Tax Cost of Debt 5.13%Number Years Implied by Year 6 Payment 4.8

Lease PV LeaseYear Commitment Payment1 213 202.62 165 149.33 110 94.74 77 63.05 58 45.26 & beyond 279 906.1PV of Minimum Payments 1461.0

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

Number of Options Outstanding (shares): 41Average Time to Maturity (years): 6.03Expected Annual Number of Options Exercised: 7

Current Average Strike Price: 78.73$ Cost of Equity: 9.00%Current Stock Price: $81.32

2016E 2017E 2018E 2019E 2020EIncrease in Shares Outstanding: 7 7 7 7 7Average Strike Price: 78.73$ 78.73$ 78.73$ 78.73$ 78.73$ Increase in Common Stock Account: 537 537 537 537 537

Change in Treasury Stock -3,300 -3,300 -3,000 -200 -200Expected Price of Repurchased Shares: 81.32$ 88.64$ 96.62$ 105.31$ 114.79$ Number of Shares Repurchased: (41) (37) (31) (2) (2)

Shares Outstanding (beginning of the year) 1,393 1,359 1,329 1,305 1,310Plus: Shares Issued Through ESOP 7 7 7 7 7Less: Shares Repurchased in Treasury 40.58- 37.23- 31.05- 1.90- 1.74- Shares Outstanding (end of the year) 1,359 1,329 1,305 1,310 1,315

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol SLBCurrent Stock Price $81.32Risk Free Rate 2.48%Current Dividend Yield 2.46%Annualized St. Dev. of Stock Returns 36.00%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 4,882 51.61 2.50 32.03$ 156,393$ Range 2 7,499 69.81 5.60 27.09$ 203,132$ Range 3 8,927 73.56 7.00 27.29$ 243,591$ Range 4 7,585 84.17 4.40 20.62$ 156,375$ Range 5 12,194 95.48 8.00 22.81$ 278,112$ Total 41,087 78.73$ 6.03 32.38$ 1,037,603$

87.61 0.63 0.73 0.83 0.93 1.03 1.13 1.23

4.50% 160.38 141.89 127.01 114.76 104.50 95.79 88.31

5.00% 147.01 129.59 115.63 104.19 94.64 86.56 79.62

5.50% 135.57 119.12 105.99 95.26 86.33 78.79 72.34

Risk Premium 6.00% 125.67 110.10 97.71 87.61 79.24 72.17 66.14

6.50% 117.03 102.24 90.52 81.00 73.11 66.46 60.80

7.00% 109.41 95.35 84.23 75.21 67.76 61.49 56.15

7.50% 102.65 89.24 78.67 70.11 63.05 57.12 52.07

87.61 4.68% 4.83% 4.98% 5.13% 5.28% 5.43% 5.58%

2.03% 96.36 95.90 95.45 95.00 94.55 94.11 93.67

2.18% 93.71 93.27 92.84 92.41 91.99 91.57 91.15

2.33% 91.18 90.77 90.36 89.95 89.55 89.14 88.75

Risk Free Rate 2.48% 88.78 88.38 87.99 87.60 87.22 86.83 86.45

2.63% 86.48 86.10 85.73 85.36 84.99 84.62 84.26

2.78% 84.29 83.93 83.57 83.21 82.86 82.51 82.16

2.93% 82.19 81.85 81.50 81.16 80.83 80.49 80.16

87.61 1.40% 1.60% 1.80% 2.00% 2.20% 2.40% 2.60%

7.46% 81.40 82.94 84.59 86.36 88.28 90.34 92.58

7.86% 81.79 83.34 85.00 86.78 88.70 90.78 93.03

8.26% 82.18 83.74 85.41 87.20 89.13 91.22 93.48

Revenue Growth 8.66% 82.57 84.14 85.81 87.61 89.55 91.65 93.93

9.06% 82.97 84.54 86.23 88.04 89.99 92.09 94.38

9.46% 83.36 84.94 86.64 88.45 90.41 92.53 94.83

9.86% 83.76 85.34 87.04 88.87 90.84 92.97 95.28

87.61 -27% -22% -17% -12% -7% -2% 3%

-25.00% 79.08 81.61 84.15 86.68 89.22 91.75 94.29

-20.00% 79.39 81.92 84.46 86.99 89.53 92.06 94.60

-15.00% 79.70 82.23 84.77 87.30 89.84 92.37 94.91

Surface Growth -10.00% 80.01 82.54 85.08 87.61 90.15 92.68 95.22

-5.00% 80.32 82.86 85.39 87.92 90.46 92.99 95.53

0.00% 80.63 83.17 85.70 88.24 90.77 93.31 95.84

5.00% 80.94 83.48 86.01 88.55 91.08 93.62 96.15

87.61 12% 11% 13% 15% 17% 19% 21%

6.26% 109.96 108.01 111.61 114.25 116.26 117.86 119.14

6.66% 99.20 97.45 100.69 103.06 104.88 106.31 107.47

6.96% 92.28 90.65 93.66 95.87 97.55 98.89 99.96

WACC 7.36% 84.34 82.85 85.60 87.61 89.15 90.37 91.35

7.76% 77.37 76.01 78.52 80.37 81.78 82.89 83.79

8.16% 71.38 70.13 72.44 74.14 75.44 76.47 77.30

8.56% 66.13 64.97 67.11 68.68 69.89 70.84 71.60

Beta

Cost of Debt

CV Growth of NOPLAT

Production Growth

ROIC

Energy Schlumberger Inc. (NYSE: SLB)at 6.60% in 2017 and trend around 5.80% growth in 2020.iii...

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