UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

For the fiscal year ended December 31, 2018

OR

For the transition period from __________ to __________

Commission File Number 1-4601

 

Schlumberger N.V.

(Schlumberger Limited)

(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number in the United States, including area code, is: (713) 513-2000

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

 

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☑ NO ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☑ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) YES ☑ NO ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☑

As of June 30, 2018, the aggregate market value of the common stock of the registrant held by non-affiliates of the registrant was approximately $92.72 billion.

As of December 31, 2018, the number of shares of common stock outstanding was 1,382,964,324.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required to be furnished pursuant to Part III of this Form 10-K is set forth in, and is incorporated by reference from, Schlumberger’s definitive proxy statement for its 2019 Annual General Meeting of Stockholders, to be filed by Schlumberger with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after December 31, 2018 (the “2019 Proxy Statement”).

 

 

 

 

 

 

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SCHLUMBERGER LIMITED

Table of Contents

Form 10-K

 

 

 

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PART I

 

Item 1. Business.

All references in this report to “Registrant,” “Company,” “Schlumberger,” “we” or “our” are to Schlumberger Limited (Schlumberger N.V., incorporated in Curaçao) and its consolidated subsidiaries.

Founded in 1926, Schlumberger is the world’s leading provider of technology for reservoir characterization, drilling, production and processing to the oil and gas industry.  Having invented wireline logging as a technique for obtaining downhole data in oil and gas wells, today Schlumberger supplies the industry’s most comprehensive range of products and services, from exploration through production, and integrated pore-to-pipeline solutions that optimize hydrocarbon recovery to deliver reservoir performance.  As of December 31, 2018, the Company employed approximately 100,000 people of over 140 nationalities operating in more than 85 countries. Schlumberger has executive offices in Paris, Houston, London and The Hague.

Schlumberger operates in each of the major oilfield service markets, through four segments: Reservoir Characterization, Drilling, Production and Cameron.  Each segment 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 Technologies is to support Schlumberger in providing the best possible service to customers and to ensure that Schlumberger remains at the forefront of technology development and services integration.  The Technologies are collectively responsible for driving excellence in execution throughout their businesses; overseeing operational processes, resource allocation and personnel; and delivering superior financial results.

The segments are as follows:

Reservoir Characterization – Consists of the principal Technologies involved in finding and defining hydrocarbon resources.  These include WesternGeco^®, Wireline, Testing Services, OneSurface^®, Software Integrated Solutions (“SIS”) and Integrated Services Management (“ISM”).

 

 

 

 

 

 

Drilling – Consists of the principal Technologies involved in the drilling and positioning of oil and gas wells and comprises Bits & Drilling Tools, M-I SWACO, Drilling & Measurements, Land Rigs and Integrated Drilling Services (“IDS”).

 

 

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Production – Consists of the principal Technologies involved in the lifetime production of oil and gas reservoirs and includes Well Services, OneStim^®, Completions, Artificial Lift, and Schlumberger Production Management (“SPM”).

 

 

 

 

 

 

SPM creates alignment between Schlumberger and the asset holder and/or the operator whereby Schlumberger receives remuneration in line with its value creation.  These projects are generally focused on developing and co-managing production of customer assets under long-term agreements.    Schlumberger will invest its own services and products, and in some cases cash, into the field development activities and operations.  Although in certain arrangements Schlumberger is paid for a portion of the services or products it provides, generally Schlumberger will not be paid at the time of providing its services or upon delivery of its products.  Instead, Schlumberger is generally compensated based upon cash flow generated or on a fee-per-barrel basis.  This includes certain arrangements whereby Schlumberger is only compensated based upon incremental production that it helps deliver above a mutually agreed baseline.  SPM represented less than 5% of Schlumberger’s consolidated revenue during each of 2018, 2017 and 2016.

Cameron – Consists of the 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 Valves & Measurement.

 

 

 

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Supporting the Technologies is a global network of research and engineering centers.  Through this organization, Schlumberger is committed to advanced technology programs that enhance oilfield efficiency, lower finding and producing costs, improve productivity, maximize reserve recovery and increase asset value while accomplishing these goals in a safe and environmentally sound manner.

A network of GeoMarket* regions, within each of four major geographic areas of North America, Latin America, Europe/CIS/Africa and Middle East & Asia, provides logistical, technical and commercial coordination.

The GeoMarket structure offers customers a single point of contact at the local level for field operations and brings together geographically focused teams to meet local needs and deliver customized solutions.  The GeoMarkets are responsible for providing the most efficient and cost-effective support possible to the operations.

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 and products.  Manufacturing and engineering facilities as well as research centers are shared, 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 and products offered.  While Schlumberger has numerous competitors, both large and small, Schlumberger believes it is an industry leader in providing geophysical equipment and  services, wireline logging, well production testing, exploration and production software, rig equipment, surface equipment, subsea equipment, artificial lift, hydraulic fracturing, cementing, coiled-tubing services, drilling and completion fluids, solids control and waste management, drilling pressure control, drill bits, measurement-while-drilling, logging-while-drilling, directional-drilling services, and surface data (mud) logging.

GENERAL

Intellectual Property

Schlumberger owns and controls a variety of intellectual property, including but not limited to patents, proprietary information and software tools and applications that, in the aggregate, are material to Schlumberger’s business. While Schlumberger seeks and holds numerous patents covering various products and processes, no particular patent or group of patents is material to Schlumberger’s business.

Seasonality

Seasonal changes in weather and significant weather events can temporarily affect the delivery of oilfield services. For example, the spring thaw in Canada and consequent road restrictions can affect activity levels, while the winter months in the North Sea, Russia and China can produce severe weather conditions that can temporarily reduce levels of activity. In addition, hurricanes and typhoons can disrupt coastal and offshore operations. Furthermore, customer spending patterns for multiclient data, software and other oilfield services and products generally result in higher activity in the fourth quarter of each year as clients seek to fully utilize their annual budgets.

Customers and Backlog of Orders

For the year ended December 31, 2018, no single customer exceeded 10% of consolidated revenue. Other than the OneSubsea, Drilling Systems and WesternGeco businesses, Schlumberger has no significant backlog due to the nature of its businesses.  The combined backlog of these businesses was $2.7 billion at December 31, 2018 (of which approximately 50% is expected to be recognized as revenue during 2019) and $2.5 billion at December 31, 2017.

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Executive Officers of Schlumberger

The following table sets forth, as of January 23, 2019, the names and ages of the executive officers of Schlumberger, including all offices and positions held by each for the past five years.

 

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Available Information

The Schlumberger Internet website is www.slb.com. Schlumberger uses its Investor Relations website, www.slb.com/ir, as a routine channel for distribution of important information, including news releases, analyst presentations, and financial information. Schlumberger makes available free of charge through its Investor Relations website at www.slb.com/ir access to its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, its proxy statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers, and amendments to each of those reports, as soon as reasonably practicable after such material is filed with or furnished to the Securities and Exchange Commission (“SEC”). Alternatively, you may access these reports at the SEC’s Internet website at www.sec.gov.  Copies are also available, without charge, from Schlumberger Investor Relations, 5599 San Felipe, 17^th Floor, Houston, Texas 77056.  Unless expressly noted, the information on our website or any other website is not incorporated by reference in this Form 10-K and should not be considered part of this Form 10-K or any other filing Schlumberger makes with the SEC.

Item 1A. Risk Factors.

The following discussion of risk factors known to us contains important information for the understanding of our “forward-looking statements,” which are discussed immediately following Item 7A. of this Form 10-K and elsewhere. These risk factors should also be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and related notes included in this Form 10-K.

We urge you to consider carefully the risks described below, as well as in other reports and materials that we file with the SEC and the other information included or incorporated by reference in this Form 10-K. If any of the risks described below or elsewhere in this Form 10-K were to materialize, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected. In such case, the trading price of our common stock could decline and you could lose part or all of your investment. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially adversely affect our financial condition, results of operations and cash flows.

Demand for our products and services is substantially dependent on the levels of expenditures by our customers.  A substantial or an extended decline in oil and gas prices could result in lower expenditures by our customers, which could have a material adverse impact on our financial condition, results of operations and cash flows.

Demand for our products and services depends substantially on expenditures by our customers for the exploration, development and production of oil and natural gas reserves. These expenditures are generally dependent on our customers’ views of future oil and natural gas prices and are sensitive to our customers’ views of future economic growth and the resulting impact on demand for oil and natural gas.  Declines, as well as anticipated declines, in oil and gas prices could result in project modifications, delays or cancellations, general business disruptions, and delays in payment of, or nonpayment of, amounts that are owed to us.  These effects could have a material adverse effect on our financial condition, results of operations and cash flows.

Historically, oil and natural gas prices have experienced significant volatility and can be affected by a variety of factors, including:

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The oil and gas industry has historically experienced periodic downturns, which have been characterized by diminished demand for our products and services as well as and downward pressure on the prices we charge.  Sustained market uncertainty can also result in lower demand and pricing for our products and services.  A significant downturn or sustained market uncertainty could result in a reduction in demand for oilfield services and could adversely affect our financial condition, results of operations and cash flows.

A significant portion of our revenue is derived from our non-United States operations, which exposes us to risks inherent in doing business in each of the over 85 countries in which we operate.

Our non-United States operations accounted for approximately 69% of our consolidated revenue in 2018, 74% in 2017 and 80% in 2016.  Operations in countries other than the United States are subject to various risks, including:

Our failure to comply with complex US and foreign laws and regulations could have a material adverse effect on our operations.

We are subject to complex US and foreign laws and regulations, such as the FCPA, the U.K. Bribery Act and various other anti-bribery and anti-corruption laws.  We are also subject to trade control regulations and trade sanctions laws that restrict the movement of certain goods to, and certain operations in, various countries or with certain persons.  Our ability to transfer people, products and data among certain countries is subject to maintaining required licenses and complying with these laws and regulations.  The internal controls, policies and procedures, and employee training and compliance programs we have implemented to deter prohibited practices may not be effective in preventing employees, contractors or agents from violating or circumventing such internal policies or violating applicable laws and regulations.  Any determination that we have violated or are responsible for violations of anti-bribery, trade control, trade sanctions or anti-corruption laws could have a material adverse effect on our financial condition.  Violations of international and US laws and regulations or the loss of any required licenses may result in fines and penalties, criminal sanctions, administrative remedies or restrictions on business conduct, and could have a material adverse effect on our reputation and our business, operating results and financial condition.

Demand for our products and services could be reduced by existing and future legislation or regulations.

Environmental advocacy groups and regulatory agencies in the United States and other countries have been focusing considerable attention on the emissions of carbon dioxide, methane and other greenhouse gasses and their potential role in climate change.  Existing or future legislation and regulations related to greenhouse gas emissions and climate change, as well as government initiatives to conserve energy or promote the use of alternative energy sources, may significantly curtail demand for and production of fossil fuels such as oil and gas in areas of the world where our customers operate, and thus adversely affect future demand for our products and services.  This may, in turn, adversely affect our financial condition, results of operations and cash flows.

Some international, national, state and local governments and agencies have also adopted laws and regulations or are evaluating proposed legislation and regulations that are focused on the extraction of shale gas or oil using hydraulic fracturing. Hydraulic fracturing is a stimulation treatment routinely performed on oil and gas wells in low-permeability reservoirs.  Specially engineered

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fluids are pumped at high pressure and rate into the reservoir interval to be treated, causing cracks in the target formation.  Proppant, such as sand of a particular size, is mixed with the treatment fluid to keep the cracks open when the treatment is complete.  Future hydraulic fracturing-related legislation or regulations could limit or ban hydraulic fracturing, or lead to operational delays and increased costs, and therefore reduce demand for our pressure pumping services.  If such additional international, national, state or local legislation or regulations are enacted, it could adversely affect our financial condition, results of operations and cash flows.

Environmental compliance costs and liabilities could reduce our earnings and cash available for operations.

We are subject to increasingly stringent laws and regulations relating to importation and use of hazardous materials, radioactive materials, chemicals and explosives and to environmental protection, including laws and regulations governing air emissions, hydraulic fracturing, water discharges and waste management. We incur, and expect to continue to incur, capital and operating costs to comply with environmental laws and regulations. The technical requirements of these laws and regulations are becoming increasingly complex, stringent and expensive to implement. These laws may provide for “strict liability” for remediation costs, damages to natural resources or threats to public health and safety. Strict liability can render a party liable for damages without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances.

We use and generate hazardous substances and wastes in our operations. In addition, many of our current and former properties are, or have been, used for industrial purposes. Accordingly, we could become subject to material liabilities relating to the investigation and cleanup of potentially contaminated properties, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances. In addition, stricter enforcement of existing laws and regulations, new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs or become the basis for new or increased liabilities that could reduce our earnings and our cash available for operations.

We could be subject to substantial liability claims, including catastrophic well incidents, which could adversely affect our financial condition, results of operations and cash flows.

The technical complexities of our operations expose us to a wide range of significant health, safety and environmental risks. Our offerings involve production-related activities, radioactive materials, chemicals, explosives and other equipment and services that are deployed in challenging exploration, development and production environments. An accident involving these services or equipment, or a failure of a product, could cause personal injury, loss of life, damage to or destruction of property, equipment or the environment, or suspension of operations. Catastrophic well incidents, including blow outs at a well site, may expose us to additional liabilities.  Generally, we rely on contractual indemnities, releases, limitations on liability with our customers and insurance to protect us from potential liability related to such events.  However, our insurance may not protect us against liability for certain kinds of events, including events involving pollution, or against losses resulting from business interruption. Moreover, we may not be able to maintain insurance at levels of risk coverage or policy limits that we deem adequate. Any damages caused by our services or products that are not covered by insurance, or are in excess of policy limits or subject to substantial deductibles, could adversely affect our financial condition, results of operations and cash flows.

If we are unable to maintain technology leadership, this could adversely affect any competitive advantage we hold.

The oilfield service industry is highly competitive.  Our ability to continually provide competitive technology and services can impact our ability to defend, maintain or increase prices for our products and services, maintain market share, and negotiate acceptable contract terms with our customers.  If we are unable to continue to develop and produce competitive technology or deliver it to our clients in a timely and cost-competitive manner in the various markets we serve, it could adversely affect our financial condition, results of operations and cash flows.

Limitations on our ability to protect our intellectual property rights, including our trade secrets, could cause a loss in revenue and any competitive advantage we hold.

Some of our products or services, and the processes we use to produce or provide them, have been granted patent protection, have patent applications pending, or are trade secrets. Our business may be adversely affected if our patents are unenforceable, the claims allowed under our patents are not sufficient to protect our technology, our patent applications are denied or our trade secrets are not adequately protected. Our competitors may be able to develop technology independently that is similar to ours without infringing on our patents or gaining access to our trade secrets, which could adversely affect our financial condition, results of operations and cash flows.

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We may be subject to litigation if another party claims that we have infringed upon its intellectual property rights.

The tools, techniques, methodologies, programs and components we use to provide our services may infringe upon the intellectual property rights of others. Infringement claims generally result in significant legal and other costs, and may distract management from running our business. Royalty payments under licenses from third parties, if available, would increase our costs. Additionally, developing non-infringing technologies would increase our costs. If a license were not available, we might not be able to continue providing a particular service or product, which could adversely affect our financial condition, results of operations and cash flows.

Failure to obtain and retain skilled technical personnel could impede our operations.

We require highly skilled personnel to operate and provide technical services and support for our business. Competition for the personnel required for our businesses intensifies as activity increases. In periods of high utilization it may become more difficult to find and retain qualified individuals. This could increase our costs or have other adverse effects on our operations.

Severe weather may adversely affect our operations.

Our business may be materially affected by severe weather in areas where we operate. This may entail the evacuation of personnel and stoppage of services. In addition, if particularly severe weather affects platforms or structures, this may result in a suspension of activities. Any of these events could adversely affect our financial condition, results of operations and cash flows.

Cyberattacks could have a material adverse impact on our business and results of operation.

We rely heavily on information systems to conduct our business, including systems operated by or under the control of third parties.  Although we devote significant resources to protect our systems and proprietary data, we have experienced and will continue to experience varying degrees of cyber incidents in the normal conduct of our business. There can be no assurance that the systems we have designed to prevent or limit the effects of cyber incidents or attacks will be sufficient to prevent or detect such incidents or attacks, or to avoid a material adverse impact on our systems when such incidents or attacks do occur.  If our systems, or the systems of third parties for protecting against cybersecurity risks are circumvented or breached, or we are subject to ransomware or other attacks,  this could result in disruptions to our business operations; unauthorized access to (or the loss of Company access to) competitively sensitive, confidential or other critical data or systems; loss of customers; financial losses; regulatory fines; misuse or corruption of critical data and proprietary information.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Schlumberger owns or leases numerous manufacturing facilities, administrative offices, service centers, research centers, data processing centers, mines, ore, drilling fluid and production chemical processing centers, sales offices and warehouses throughout the world. Schlumberger views its principal manufacturing, mining and processing facilities, research centers and data processing centers as its “principal owned or leased facilities.”

The following sets forth Schlumberger’s principal owned or leased facilities:

Taubate, Brazil; Beijing and Shanghai, China; Clamart, France; Pune, India; Johor, Malaysia; Veracruz, Mexico;  Stavanger, Norway; Singapore; Campina, Romania; Abingdon, Cambridge and Stonehouse, United Kingdom and within the United States: Little Rock, Arkansas; Ville Platte, Louisiana; Boston, Massachusetts; Houston, Katy, Rosharon and Sugar Land, Texas.

Item 3. Legal Proceedings.

The information with respect to this Item 3. Legal Proceedings is set forth in Note 16 of the Consolidated Financial Statements.

Item 4. Mine Safety Disclosures.

Information concerning mine safety violations or other regulatory matters required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Form 10-K.

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PART II

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

As of December 31, 2018, there were 26,720 stockholders of record. The principal United States market for Schlumberger’s common stock is the New York Stock Exchange (“NYSE”), where it is traded under the symbol “SLB.”

The following graph compares the cumulative total stockholder return on Schlumberger common stock with the cumulative total return on the Standard & Poor’s 500 Index (“S&P 500 Index”) and the cumulative total return on the Philadelphia Oil Service Index. It assumes $100 was invested on December 31, 2013 in Schlumberger common stock, in the S&P 500 Index and in the Philadelphia Oil Service Index, as well as the reinvestment of dividends on the last day of the month of payment. The stockholder return set forth below is not necessarily indicative of future performance. The following graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Schlumberger specifically incorporates it by reference into such filing.

 

Comparison of Five-Year Cumulative Total Return Among

Schlumberger Common Stock, the S&P 500 Index and the

Philadelphia Oil Service Index

 

 

Share Repurchases

On July 18, 2013, the Schlumberger Board of Directors (the “Board”) approved a $10 billion share repurchase program for Schlumberger common stock, to be completed by June 30, 2018.  This program was completed during May 2017.  On January 21, 2016, the Board approved a new $10 billion share repurchase program for Schlumberger common stock.  

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Schlumberger’s common stock repurchase program activity for the three months ended December 31, 2018 was as follows:

  

Unregistered Sales of Equity Securities

None.

Item 6. Selected Financial Data.

The following selected consolidated financial data should be read in conjunction with both “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of this Form 10-K in order to understand factors, such as business combinations and charges and credits, which may affect the comparability of the Selected Financial Data.

 

 

During 2018, Schlumberger adopted ASU No. 2016-02, Leases. Prior year amounts reflected in the table above have not been adjusted and continue to be reflected in accordance with Schlumberger’s historical accounting.  Refer to Note 15 to the Consolidated Financial Statements for further details.

 

 

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

The following discussion and analysis contains forward-looking statements, including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and resources. Such forward-looking statements should be read in conjunction with our disclosures under “Item 1A. Risk Factors” of this Form 10-K.

2018 Executive Overview

Schlumberger full-year 2018 revenue of $32.8 billion increased 8% over 2017. This revenue growth was driven almost entirely by increased activity in North America against a backdrop of increasing oil prices throughout most of the year.  

In the oil markets, sentiment was stable and positive for the first three quarters of 2018, providing a rising oil price environment. OECD crude and product stocks continued a downward trend that began in the third quarter of 2016. Production cuts from OPEC and Russia in 2017 served to strengthen the oil price. Activity picked up globally and, as oil reached its peak price for the year in October, production from major producers, including unconventional US production, began to surprise to the upside. Output in Libya rebounded sharply; Saudi Arabia and the United Arab Emirates each recorded record production output; and dispensations from the Iran export sanctions generated aggregate production that more than offset declines elsewhere.

As a result, the market became oversupplied at the beginning of the fourth quarter despite the anticipated slowdown in the Permian Basin production growth due to capacity takeaway constraints. This, coupled with concerns about global oil demand, caused oil prices to plummet by more than 40% during the fourth quarter of 2018 and led to a sudden and sharp decrease in US land well completion activity during the final months of the year.

In the natural gas markets, consumption of liquified natural gas (“LNG”) continued to rise enabled by vast sources of new supply. The US became a LNG exporter in 2016, when the first shipment left Sabine Pass in Louisiana. US export capacity grew to 37 million tonnes in 2018 and is set to nearly double in 2019. Underground gas storage in the US was below average through most of 2018, however, rising gas production from unconventional oil and gas wells in the US Northeast, Midcontinent and the Permian Basin helped to keep Henry Hub prices well below international prices. This will allow the US to join Australia and the Middle East as significant exporters.

Schlumberger financial performance in 2018 was driven largely by North America, where revenue of $12.0 billion grew 26% year-over-year, despite the steep fall-off in activity during the fourth quarter of the year.  This growth was driven by increased land activity that primarily benefited Schlumberger’s OneStim business, where revenue grew 41%.  

Full-year 2018 international revenue of $20.4 billion was essentially flat  compared with 2017.  During the third quarter of 2018, international revenue grew faster than North America revenue for the first time since 2014, marking the beginning of a positive activity trend after three consecutive years of declining revenue.  This was driven by the increased activity of national oil companies (“NOCs”), as they began to invest in longer-term resource development following a sustained period of deep underinvestment and declining production.

The dramatic fall in oil prices in the fourth quarter was largely driven by higher-than-expected US shale production as a result of the surge in activity earlier in the year, and as geopolitics negatively impacted the global demand- and supply-balance sentiments. The combination of these two factors, together with a large sell-off in the equity markets due to concerns around global growth and increasing US interest rates, created a near-perfect storm to close out 2018.

Looking ahead to 2019, Schlumberger expects a more positive supply- and demand-balance sentiment to lead to a gradual recovery in the price of oil over the course of the year, as the OPEC and Russia production cuts take full effect; the effect of lower activity in North America land in the second half of 2018 impacts production growth; the dispensations from the Iran export sanctions expire and are not renewed; and as the US and China continue to work toward a solution to their ongoing trade dispute.

In the meantime, the recent oil price volatility has introduced more uncertainty around the global exploration and production (“E&P”) spending outlook for 2019, with customers generally taking a more conservative approach at the start of the year.  However, based on recent discussions with customers, Schlumberger is seeing clear signs that E&P investments are starting to normalize and reflect a more sustainable financial stewardship of the global resource base. For the North America land E&P operators, this means that future investments will likely be much closer to the level that can be covered by free cash flow. Conversely, in the international markets apart from the Middle East and Russia, after four years of underinvestment and a focus on maximizing cash flow, the NOCs and independents are starting to see the need to invest in their resource base simply to maintain production at current levels.

This means that even with the current oil price levels, Schlumberger expects solid, single-digit growth in the international markets, while in North America land the increased cost of capital and focus on aligning investments closer to free cash flow has introduced more uncertainty to the outlook for both drilling and production activity.

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Fourth Quarter 2018 Results

 

 

Fourth-quarter revenue of $8.2 billion declined 4% sequentially driven by lower activity and pricing for most Production- and Cameron-related businesses in North America land. Lower revenue from OneSubsea also contributed to the decline. International activity remained resilient despite the oil price drop, with revenue increasing 1% sequentially. The seasonal slowdown in Russia was offset by increased revenue in the Middle East, Asia and Africa. Revenue from Europe and Latin America was flat compared with the previous quarter.   Sequential performance was heavily impacted by Production- and Cameron-related activity declines in North America land, as seen by the 12% sequential decrease of revenue in North America. OneStim revenue dropped 25% sequentially as a number of fleets were warm-stacked during the latter part of the quarter, and as Schlumberger focused on securing dedicated contracts for the first half of 2019 early in the fourth-quarter tendering cycle.

Reservoir Characterization

Fourth-quarter revenue of $1.7 billion decreased 1% sequentially driven by the seasonal decline in Wireline activity in Russia, lower Wireline exploration activity offshore North America, and reduced OneSurface activity in the Middle East. These effects were partially offset by year-end sales of SIS software. 

Reservoir Characterization pretax operating margin of 22% was essentially flat compared with the previous quarter as the effect of high-margin SIS software sales was offset by the seasonal decline in higher-margin Wireline revenue.

Drilling

Fourth-quarter revenue of $2.5 billion increased 1% sequentially driven primarily by international growth in Drilling & Measurements and M-I SWACO, while Drilling revenue remained resilient in North America land.

Drilling pretax operating margin of 13% decreased 105 basis points (“bps”) sequentially due to a seasonal activity decline in Russia and the increased cost of mobilizing additional resources as IDS project activity scaled up across international operations.

Production

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Fourth-quarter revenue of $2.9 billion declined 10% sequentially. OneStim revenue in North America land dropped 25%, accounting for the vast majority of the Production revenue decrease, as a number of fleets were warm-stacked during the latter part of the quarter  due to market oversupply conditions.

Production pretax operating margin of 7% decreased 310 bps sequentially due to reduced pricing and activity in the OneStim business in North America land.

Cameron

Cameron revenue of $1.3 billion declined 3% sequentially as increased international sales in Surface Systems were more than offset by lower revenue from the OneSubsea and Valves & Measurement product lines.  OneSubsea booked more than $600 million in new project orders during the fourth quarter of 2018, indicating that it is now close to the cycle trough of backlog-driven activity.

Cameron pretax operating margin of 10% declined 140 bps sequentially due to lower OneSubsea margins.

Full-Year 2018 Results

 

Full-year 2018 revenue of $32.8 billion increased 8% year-on-year and grew for the second successive year. Performance was driven by North America where revenue of $12.0 billion increased 26% due to the OneStim business, which grew by 41%. Full-year international revenue of $20.4 billion was essentially flat compared with 2017.

Full-year 2018 pretax operating income of $4.2 billion grew 7% year-on-year. Pretax operating margin of 13% was essentially flat with the previous year, as the impact of higher revenue was offset by reactivation and mobilization costs associated with the ramp-up and strategic positioning for increased activity in both North America and internationally.

Reservoir Characterization

Full-year 2018 revenue of $6.5 billion decreased 4% year-on-year primarily due to reduced OneSurface revenue following the end of the first phase of an integrated production system project in the Middle East and reduced WesternGeco activity as marine seismic acquisition contracts wound down during 2018 following the fourth quarter 2017 decision to cease all future marine seismic acquisition activities after satisfying Schlumberger’s remaining commitments. 

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Year-on-year, pretax operating margin increased 303 bps to 21% primarily as a result of reduced depreciation and amortization following the WesternGeco impairment charges recorded in the fourth quarter of 2017.

Drilling

Full-year 2018 revenue of $9.3 billion increased 10% year-on-year primarily due to higher demand for directional drilling technologies on land in North America and the start of new integrated drilling projects internationally. This benefited Drilling & Measurements, Bits & Drilling tools, M-I SWACO and Integrated Drilling Services.

Year-on-year, pretax operating margin declined 32 bps to 13%.

Production

Full-year 2018 revenue of $12.4 billion increased 17% year-on-year with most of the revenue increase attributable to the accelerated land activity growth in North America that benefited the OneStim pressure pumping businesses in North America land for the first three quarters of 2018. Growth was driven by the deployment of additional hydraulic fracturing capacity, market share gains, operational efficiency improvements and improved pricing.

Year-on-year, pretax operating margin declined 32 bps to 8%. 

Cameron

Full-year 2018 revenue of $5.2 billion decreased 1% year-on-year.  A 15% revenue increase in the short-cycle business of Surface Systems, driven by higher North America land activity, was offset by a 12% decline in the long-cycle OneSubsea business.

Year-on-year, pretax operating margin of 12% declined 232 bps due primarily to the decline in high-margin OneSubsea project volumes.

Full-Year 2017 Results

 

 

 

Full-year 2017 revenue of $30.4 billion increased 9% year-on-year.  This included a full year of activity from the acquired Cameron businesses versus nine months of activity for the same period in 2016.  Excluding the impact of Cameron, revenue increased 7% year-

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on-year.  The growth was primarily driven by North America, where the land rig count increased more than 80% versus the same period last year.  

Full-year 2017 pretax operating margin was expanded 111 bps to 13%, as improved profitability in North America due to the land activity growth that benefited Production and Drilling was offset by margin declines in Reservoir Characterization and Cameron.

Reservoir Characterization

Full-year 2017 revenue of $6.8 billion increased 2% year-on-year primarily due to higher WesternGeco and Wireline revenue on projects in the Middle East & Asia Area, North America land, Russia and Mexico.  

Year-on-year, pretax operating margin was essentially flat at 18%.

Drilling

Full-year 2017 revenue of $8.4 billion decreased 2% year-on-year primarily due to the rig count declines internationally and in offshore North America combined with pricing pressure.  Revenue also declined as a result of Schlumberger’s decision in April 2016 to reduce its activities in Venezuela to align operations with cash collections.

 

Year-on-year, pretax operating margin increased 210 bps to 14% primarily due to improved profitability in North America due to accelerated land activity and improved pricing. This improvement was partially offset by the negative impact of reduced activity in Venezuela.

Production

Full-year 2017 revenue of $10.6 billion increased 21% year-on-year with most of the revenue increase attributable to the accelerated land activity growth in North America that benefited the pressure pumping business which grew 44%. Lower SPM production levels in Ecuador partially offset the revenue increase.

Year-on-year, pretax operating margin increased 298 bps to 9% as a result of improved profitability in North America due to the accelerated land activity and improved pricing.  This was partially offset by reduced margins in SPM due to lower production in Ecuador.

Cameron

Cameron contributed full-year revenue of $5.2 billion.  Cameron revenue for 2016 included only nine months of revenue following the April 2016 closing of the acquisition. Revenue in 2017 was impacted by a declining project backlog, particularly for the long-cycle businesses of Drilling Systems and OneSubsea.

Year-on-year, pretax operating margin of 14% decreased 142 bps as a result of lower Drilling Systems project volumes.

Interest and Other Income

Interest & other income consisted of the following:

 

 

The decrease in interest income in 2018 compared to 2017 is primarily attributable to lower cash and short-term investment balances.

Interest Expense

Interest expense of $575 million in 2018, $566 million in 2017 and $570 million in 2016 has been essentially flat.

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Other

Research & engineering and General & administrative expenses, as a percentage of Revenue, were as follows:

 

 

Research & engineering costs have decreased in terms of both absolute dollars and as a percentage of Revenue over the past two years as a result of cost control measures.

Income Taxes

The Schlumberger effective tax rate was 17% in 2018, (28)% in 2017, and 15% in 2016.

The Schlumberger effective tax rate has historically been sensitive to the geographic mix of earnings. When the percentage of pretax earnings generated outside of North America increases, the Schlumberger effective tax rate generally decreases. Conversely, when the percentage of pretax earnings generated outside of North America decreases, the Schlumberger effective tax rate generally increases.

As discussed in further detail in Note 3 to the Consolidated Financial Statements, on December 22, 2017 the US enacted the Tax Cuts and Jobs Act (the “Act”).  The Act, which is also commonly referred to as “US tax reform,” significantly changed US corporate income tax laws by, among other things, reducing the US corporate income tax rate from 35% to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of US subsidiaries.

The effective tax rate for each of 2017 and 2016 was significantly impacted by the charges and credits described in Note 3 to the Consolidated Financial Statements because they were only partially tax-effective.  Excluding the impact of these charges and credits, the effective tax rate was 17% in 2018, 18% in 2017 and 16% in 2016.  The decrease in the effective tax rate in 2018 as compared to 2017, excluding the impact of charges and credits, was primarily due to the impact of US tax reform.  The increase in the effective tax rate in 2017 as compared to 2016, excluding the impact of charges and credits, was primarily attributable to a change in the geographic mix of earnings as the percentage of pretax earnings generated in North America increased compared to 2016.  

Charges and Credits

Schlumberger recorded significant charges and credits during 2018, 2017 and 2016. These charges and credits, which are summarized below, are more fully described in Note 3 to the Consolidated Financial Statements.

The following is a summary of the 2018 charges and credits, of which the $215 million gain on the sale of the marine seismic acquisition business is classified in Gain on sale of business in the Consolidated Statement of Income (Loss), while the remaining $356 million of other charges are classified in Impairments & other.

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The following is a summary of the 2017 charges and credits, of which $3.211 billion were classified in Impairments & other, $245 million were classified in Cost of sales and $308 million were classified in Merger & integration in the Consolidated Statement of Income (Loss):

The following is a summary of the 2016 charges and credits, of which $3.172 billion were classified in Impairments & other, $349 million were classified in Merger & integration and $299 million were classified in Cost of sales in the Consolidated Statement of Income (Loss):

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Liquidity and Capital Resources

Schlumberger had total Cash, Short-term investments and Fixed income investments, held to maturity of $2.8 billion, $5.1 billion and $9.5 billion at December 31, 2018, 2017 and 2016, respectively.  Total debt was $16.1 billion, $18.2 billion and $19.6 billion at December 31, 2018, 2017 and 2016, respectively.

Details of the components of liquidity as well as changes in liquidity follow: