DBRS Confirms Schlumberger Limited at A (high)

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of Schlumberger Limited (Schlumberger or the Company) at A (high).

Schlumberger is the largest, most diversified oilfield service company in the world because of its market-leading positions in a number of technology and growth sectors of the industry. Schlumberger’s products are complimentary (including its 40% investment in the Smith International, Inc. drillings fluids subsidiary MI Swaco), offering a full range of exploration and development services, providing one-stop shopping for customers such as national oil companies (NOCs). Strong commodity prices and limited access to new equipment and labour are driving record results across the oilfield service industry. DBRS expects these conditions to prevail over the medium term.

In April 2006, Schlumberger completed the $2.4 billion acquisition of the remaining 30% share that it did not own of WesternGeco, the world leader in geophysical (seismic) services, from Baker Hughes Incorporated. The Company funded the acquisition with 50% cash and 50% short-term debt from existing credit facilities. The transaction increased leverage at June 30, 2006, measured by net debt-to-capital and net debt-to-cash flow, to 26% and 0.7 times (x), respectively, from 8.5% and 0.2x at March 31, 2006. These levels are manageable given the Company’s strong cash flow of $4.3 billion for the 12-months ended June 30, 2006, and good liquidity. DBRS expects Schlumberger to use excess cash flow to restore balance sheet liquidity in line with pre-acquisition levels and then for distribution to shareholders through share repurchases.

Schlumberger is the most geographically diverse oilfield services company. While all of its largest competitors have grown out of the North American market, where it has a strong presence, Schlumberger has historically been more focused internationally. North American activity has been strong, though international growth should outstrip North American growth over the long term.

Tied to commodity prices, oilfield service activity has historically been volatile and is expected to remain so, especially in North America, where high volume drilling programs will fluctuate with natural gas prices. Following a warm winter in 2005/2006, the prospect of full gas storage prior to the onset of winter has driven down prices this year. Catalysts for weaker oil prices could include worldwide economic weakness or increased Middle East oil production. Schlumberger’s flexible balance sheet and operating diversity should allow it to manage the volatility better than most of its competitors.

The oilfield services industry remains an adjunct to the far larger oil and gas production business, which limits pricing power in weaker markets. The major oil and gas companies could represent the greatest competition to Schlumberger, as they have the capital and scope to develop competing technologies, though they have generally left this function to the service companies.
Schlumberger intends to spend $2.4 billion on capex in 2006, which should result in substantial free cash flow. Despite some near-term weakness in the North American gas market, the Company’s medium-term outlook is strong.

Note:
All figures in U.S. dollars.
This rating is based on public information.