SLB LIMITED/NV (SLB) FY 2021 MD&A

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.

This section of the Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.   Discussions of 2019 items and year-to-year comparison between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of Schlumberger’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

2021 Executive Overview

Continuing a broad recovery that began in 2020, oil markets were generally positive throughout the year, with Brent oil price starting 2021 at the year’s low of $51 per barrel, reaching a high of $85 in November.  Sentiment in oil markets was largely positive as global demand recovered and supply was managed by a combination of the reassurance of continued intervention from OPEC+, and ongoing capital discipline by publicly traded operators in North America.

Within the context of strengthening fundamentals across the year, there were several instances where the potential impact of COVID-19 variants raised concerns regarding demand growth. However, these periods were shorter lived than the prolonged decline in 2020, which was characterized by economic lockdowns, and oil prices soon rebounded. Pricing was initially supported by OPEC+ production agreements that had come into effect in 2020 and remained resilient as those production targets were gradually increased in the second half of 2021, as crude and product stocks continued a multiyear downward trend.

International activity grew broadly across geographies in the second half of the year, including offshore and deepwater, with operators investing in projects to meet long-term objectives and regional demand growth.

Activity in North America land also rebounded, albeit from a very low base in 2020, but did not return to prepandemic levels, as investment and production were subdued as a result of continued capital discipline on the part of larger producers.

International natural gas pricing, while following the traditional seasonal pattern, was volatile, swinging from pandemic-driven lows in 2020 to record highs around the world. Domestically, US Henry Hub natural gas prices rose dramatically, averaging $3.91 per million British thermal units on a monthly basis—as compared to $2.04 in 2020—and reaching a peak of $5.87 in October before ending the year at $3.73.

Against this backdrop, Schlumberger’s full-year 2021 revenue of $22.9 billion decreased 3% year-on-year as a result of the divestitures of the OneStim pressure pumping business and the North America low-flow artificial lift business during the fourth quarter of 2020.  These divestitures were consistent with Schlumberger’s strategy to focus on expanding margins, minimizing earnings volatility and focusing on less capital-intensive businesses by high-grading and rationalizing its business portfolio.  The divested businesses accounted for approximately 25% of Schlumberger’s North America revenue in 2020. Excluding the impact of these divestitures, which generated $1.3 billion of revenue during 2020 (all of which was in North America), full-year 2021 global revenue grew 3% year-on-year, driven by an 8% increase in North America and a 2% increase in international revenue.

Financial performance in 2021 was driven by global oil and gas activity growth in the second half of the year as investment spending experienced double-digit growth year-on-year. Consequently, Schlumberger’s revenue in the second half of 2021 grew 12% compared to the same period of 2020, and increased 18% when adjusted for the effects of the divestitures.  International revenue increased 12% year-on-year during the second half of 2021, and North America revenue increased 10%, or 44% when adjusted for the effects of the divestitures (which generated $0.5 billion of revenue during the second half of 2020).

Looking ahead into 2022, we believe the industry macro fundamentals are very favorable, due to the combination of projected steady demand recovery, an increasingly tight supply market, and supportive oil prices. Schlumberger expects this to result in a material step up in industry capital spending with double-digit growth in both the international and North American markets.  Absent any further significant COVID-related disruption, oil demand is expected to exceed prepandemic levels before the end of the year and further strengthen in 2023. We believe these favorable market conditions are similar to those experienced during the last industry supercycle, suggesting that resurgent global demand-led capital spending will result in an exceptional multiyear growth cycle.

Throughout 2021, Schlumberger continued to strengthen its core portfolio, enhanced its sustainability leadership, successfully advanced its digital journey, and expanded its new energy portfolio.  Schlumberger is well prepared to fully seize this growth ahead. Schlumberger is entering this cycle in a position of strength, having reset its operating leverage, expanded peer-leading margins across multiple quarters, and aligned its technology and business portfolio with the new industry imperatives.

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Fourth Quarter 2021 Results

Fourth-quarter revenue of $6.22 billion increased 6% sequentially as a result of broad-based growth across all geographies and Divisions.

International revenue of $4.90 billion grew 5% sequentially, driven primarily by strengthening activity, increased digital sales, and early benefits of pricing improvements. The sequential revenue increase was led by growth in Europe/CIS/Africa largely due to strong offshore activity in Africa. This growth was complemented by project startups and activity gains in the Middle East & Asia and sustained activity growth in Latin America.

In North America, revenue of $1.28 billion grew 13% sequentially, outperforming the rig count growth. The sequential growth was driven by strong offshore and land drilling activity and increased exploration data licensing.

Fourth-quarter pretax segment operating margin of 16% increased 31 basis points (bps) sequentially, reaching its highest quarterly level since 2015, largely as a result of the accretive effect of accelerating digital sales.

Digital & Integration

Fourth-quarter revenue of $889 million increased 10% sequentially, propelled by accelerated digital sales internationally, particularly in Europe/CIS/Africa and Middle East & Asia, and increased exploration data licensing sales in North America offshore and the Permian. These increases, however, were partially offset by the effects of a temporary production interruption in the APS projects in Ecuador due to pipeline disruption.

Digital & Integration pretax operating margin of 38% expanded 268 bps sequentially, primarily due to higher digital and exploration data licensing sales.

Reservoir Performance

Fourth-quarter revenue of $1.3 billion increased 8% sequentially, primarily due to higher intervention activity across the international offshore markets and activity gains in the Middle East & Asia.

Reservoir Performance pretax operating margin of 16% was essentially flat sequentially.

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Well Construction

Fourth-quarter revenue of $2.4 billion increased 5% sequentially, driven by higher measurements and drilling fluids activity and increased drilling equipment sales. North America revenue increased 15% due to higher rig count on land and increased well construction activity in the US Gulf of Mexico. International revenue growth of 3% was driven by growth in Latin America.

Well Construction pretax operating margin of 15% was essentially flat sequentially.

Production Systems

Fourth-quarter revenue of $1.8 billion increased 5% sequentially driven by a 6% increase in international revenue.  This growth was mainly in Europe/CIS/Africa as a result of strong project progress.

Production Systems pretax operating margin of 9% declined 85 bps sequentially due to an unfavorable mix and the impact of delayed deliveries due to global supply and logistics constraints.

Full-Year 2021 Results

Full-year 2021 revenue of $22.9 billion decreased 3% year-on-year primarily as a result of the divestitures of the OneStim pressure pumping business and the low-flow artificial lift business during the fourth quarter of 2020. Excluding the impact of these divestitures, which generated $1.3 billion of revenue (all of which was in North America) during 2020, global revenue increased 3% year-on-year.

In North America revenue declined 18% year-on-year; however, excluding the impact of the previously described divestitures, full-year revenue increased 8%.  International revenue also increased 2%.

The growth in 2021 was driven by strong global oil and gas activity in the second half of the year.  Schlumberger’s revenue in the second half of 2021 grew 12% compared to the same period of 2020 and increased 18% when adjusted for the effects of the divestitures.  This growth was pervasive across all geographies and Divisions.

Full-year 2021 pretax operating margin of 15% was 450 bps higher compared to 2020, primarily due to the divestiture of certain businesses in North America, which were previously dilutive to margins, combined with reduced depreciation and amortization expense following the asset impairment charges recorded during 2020 and the effects of cost reduction measures.

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Digital & Integration

Full-year 2021 revenue of $3.3 billion increased 7% year-on-year, primarily driven by robust APS project revenue from higher production and improved oil prices.

Year-on-year, pretax operating margin increased 11 percentage points to 35%.  Operating margin increased due to improved profitability from APS projects as a result of higher oil prices and reduced amortization expense following the asset impairment charges that were recorded during 2020 relating to certain APS investments.

Reservoir Performance

Full-year 2021 revenue of $4.6 billion decreased 18% year-on-year, largely reflecting the effects of the OneStim divestiture, which generated $1.2 billion of revenue during 2020.  Excluding the impact of the OneStim divestiture, revenue increased 5% year-on-year primarily driven by strong activity in Latin America.

Year-on-year, pretax operating margin increased by 779 bps to 14% despite the significant drop in revenue, primarily due to the divestiture of the OneStim business, which was previously dilutive to margins.

Well Construction

Full-year 2021 revenue of $8.7 billion increased 1% year-on-year.

Year-on-year, pretax operating margin increased 363 bps to 14% despite the relatively flat revenue, largely as a result of the implementation of cost control measures.

Production Systems

Full-year 2021 revenue of $6.7 billion increased 1% year-on-year, primarily driven by improved international activity that was largely offset by a decline in completions activity in North America as a result of the pandemic.

Year-on-year, pretax operating margin was essentially flat at 9%.

Interest and Other Income

Interest & other income consisted of the following:

The decrease in earnings of equity method investments in 2021 as compared to 2020 is primarily attributable to Schlumberger’s share of net losses associated with Schlumberger’s investment in Liberty.  Schlumberger records its share of Liberty’s net income or loss on a one-quarter lag.

During the fourth quarter of 2021 Schlumberger sold 9.5 million of its shares of Liberty and recognized a gain of $28 million.  See Note 3 to the Consolidated Financial Statements.

During the third quarter of 2021, a start-up company that Schlumberger previously invested in was acquired.  As a result of this transaction, Schlumberger’s ownership interest was converted into shares of a publicly traded company.  Schlumberger recognized an unrealized pretax gain of $47 million to increase the carrying value of this investment to its estimated fair value of approximately $55 million.  See Note 3 to the Consolidated Financial Statements.

During the fourth quarter of 2020, a start-up company that Schlumberger previously invested in completed an initial public offering.  As a result, Schlumberger recognized an unrealized gain of $39 million to increase the carrying value of this investment to its fair

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value of $43 million as of December 31, 2020.  See Note 3 to the Consolidated Financial Statements.  Schlumberger sold this investment during 2021, which did not result in a material gain or loss.

Interest Expense

Interest expense of $539 million in 2021 decreased $24 million compared to 2020 primarily as a result of the $2.7 billion year-on-year reduction in total debt outstanding.

Other

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

Income Taxes

The Schlumberger effective tax rate is 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.

The Schlumberger effective tax rate was 19% in 2021 as compared to 7% in 2020.  The increase in the effective tax rate was primarily due to the charges and credits described in Note 3 to the Consolidated Financial Statements. These charges and credits reduced the effective tax rate in 2020 by 12 percentage points as a significant portion of these charges were not tax-effective.

Charges and Credits

Schlumberger recorded charges and credits during 2021 and 2020. 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 2021 charges and credits.

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The following is a summary of the 2020 charges and credits.

As a result of the first quarter 2020 impairment charges, commencing with the second quarter of 2020, depreciation and amortization expense was reduced by approximately $95 million on a quarterly basis.  Approximately $33 million of this quarterly reduction is reflected in the Digital & Integration Division and $12 million is reflected in the Reservoir Performance Division.  The remaining $50 million is reflected in the “Corporate & other” line item.

As a result of the second quarter 2020 restructuring and impairment charges, commencing with the third quarter of 2020, depreciation and amortization expense was reduced by approximately $80 million and lease expense was reduced by $25 million on a quarterly basis.  Approximately $51 million of this quarterly reduction is reflected in the Digital & Integration Division and $31 million is reflected in the Reservoir Performance Division, with the remaining $23 million reflected among the Well Construction Division and Production Systems Division.

As a result of the third quarter 2020 restructuring charges, commencing with the fourth quarter of 2020, depreciation and lease expense was reduced by $15 million on a quarterly basis.  This quarterly reduction is reflected among all of the Divisions.

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Liquidity and Capital Resources

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

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Key liquidity events during 2021 and 2020 included:

As of December 31, 2021, Schlumberger had $3.14 billion of cash and short-term investments and committed credit facility agreements with commercial banks aggregating $6.60 billion, all of which was available and unused.  Schlumberger believes these amounts, along with cash generated by ongoing operations, will be sufficient to meet future business requirements for the next 12 months and beyond.

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The following table reflects the carrying amounts of Schlumberger’s debt at December 31, 2021 by year of maturity:

Interest payments on fixed rate debt obligations by year are as follows:

See Note 13, Leases of the Consolidated Financial Statements for details regarding Schlumberger’s lease obligations.

Schlumberger has outstanding letters of credit/guarantees that relate to business performance bonds, custom/excise tax commitments, facility lease/rental obligations, etc. These were entered into in the ordinary course of business and are customary practices in the various countries where Schlumberger operates.

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Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires Schlumberger to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expenses. The following accounting policies involve “critical accounting estimates” because they are particularly dependent on estimates and assumptions made by Schlumberger about matters that are inherently uncertain.

Schlumberger bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Allowance for Doubtful Accounts

Schlumberger maintains an allowance for doubtful accounts in order to record accounts receivable at their net realizable value.  Judgment is involved in recording and making adjustments to this reserve.  Allowances have been recorded for receivables believed to be uncollectible, including amounts for the resolution of potential credit and other collection issues such as disputed invoices.  Adjustments to the allowance may be required in future periods depending on how such potential issues are resolved, or if the financial condition of Schlumberger’s customers were to deteriorate resulting in an impairment of their ability to make payments.

As a large multinational company with a long history of operating in a cyclical industry, Schlumberger has extensive experience in working with its customers during difficult times to manage its accounts receivable.  During weak economic environments or when there is an extended period of weakness in oil and gas prices, Schlumberger typically experiences delays in the payment of its receivables.  However, except for a $469 million accounts receivable write-off during 2017 as a result of the political and economic condition in Venezuela, Schlumberger has not historically had material write-offs due to uncollectible accounts receivable.  Schlumberger generates revenue in more than 120 countries.  As of December 31, 2021, five of those countries individually accounted for greater than 5% of Schlumberger’s net accounts receivable balance, of which only one (the United States) accounted for greater than 10% of such receivables.

At times in recent periods, Schlumberger has experienced delays in payments from its primary customer in Mexico.  Included in Receivables, less allowance for doubtful accounts in the Consolidated Balance Sheet as of December 30, 2021 is approximately $0.5 billion of receivables relating to Mexico at December 31, 2021 ($0.7 billion at December 31, 2020).  Schlumberger’s receivables from its primary customer in Mexico are not in dispute and Schlumberger has not historically had any material write-offs due to uncollectible accounts receivable relating to this customer.

Goodwill, Intangible Assets and Long-Lived Assets

Schlumberger records the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed as goodwill. The goodwill relating to each of Schlumberger’s reporting units is tested for impairment annually as well as when an event, or change in circumstances, indicates an impairment may have occurred.

Under generally accepted accounting principles, Schlumberger has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one or more of its reporting units is greater than its carrying amount. If, after assessing the totality of events or circumstances, Schlumberger determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, there is no need to perform any further testing. However, if Schlumberger concludes otherwise, then it is required to perform a quantitative impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded based on that difference.

Schlumberger has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test.

Schlumberger elected to perform the qualitative assessment described above for purposes of its annual goodwill impairment test in 2021.  Based on this assessment, Schlumberger concluded it was more likely than not that the fair value of each of its reporting units was significantly greater than its carrying amount.  Accordingly, no further testing was required.

During 2020 and 2019, Schlumberger recorded goodwill impairment charges of $3.1 billion and $8.8 billion and intangible asset impairment charges of $3.3 billion and $1.1 billion, respectively.  Refer to Note 3 to the Consolidated Financial Statements for details regarding the facts and circumstances that led to this impairment and how the fair value of each reporting unit was estimated, including the significant assumptions used and other details.

Long-lived assets, including fixed assets, intangible assets and investments in APS projects, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual

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disposition. If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the long-lived asset to its estimated fair value. The determination of future cash flows as well as the estimated fair value of long-lived assets involves significant estimates on the part of management. If there is a material change in economic conditions or other circumstances influencing the estimate of future cash flows or fair value, Schlumberger could be required to recognize impairment charges in the future.

Income Taxes

Schlumberger conducts business in more than 100 tax jurisdictions, a number of which have tax laws that are not fully defined and are evolving. Schlumberger’s tax filings are subject to regular audits by the tax authorities. These audits may result in assessments for additional taxes that are resolved with the authorities or, potentially, through the courts. Schlumberger recognizes the impact of a tax position in its financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position.  Tax liabilities are recorded based on estimates of additional taxes that will be due upon the conclusion of these audits. Estimates of these tax liabilities are judgmental and are made based upon prior experience, and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of tax regulations, the ultimate resolution of audits may result in liabilities that could be materially different from these estimates. In such an event, Schlumberger will record additional tax expense or tax benefit in the period in which such resolution occurs.

Revenue Recognition for Certain Long-term Construction-type Contracts

Schlumberger recognizes revenue for certain long-term construction-type contracts over time.  These contracts involve significant design and engineering efforts in order to satisfy custom designs for customer-specific applications.  Under this method, revenue is recognized as work progresses on each contract. Progress is measured by the ratio of actual costs incurred to date on the project in relation to total estimated project costs.  Approximately 6% of Schlumberger’s revenue in 2021, and 5% in each of 2020 and 2019, respectively, was recognized under this method.

The estimate of total project costs has a significant impact on both the amount of revenue recognized as well as the related profit on a project.  Revenue and profits on contracts can also be significantly affected by change orders and claims.  Profits are recognized based on the estimated project profit multiplied by the percentage complete.  Due to the nature of these projects, adjustments to estimates of contract revenue and total contract costs are often required as work progresses.  Any expected losses on a project are recorded in full in the period in which they become probable.

Pension and Postretirement Benefits

Schlumberger’s pension and postretirement benefit obligations are described in detail in Note 16 to the Consolidated Financial Statements. The obligations and related costs are calculated using actuarial concepts, which include critical assumptions related to the discount rate, expected rate of return on plan assets and medical cost trend rates. These assumptions are important elements of expense and/or liability measurement and are updated on an annual basis, or upon the occurrence of significant events.

The discount rate that Schlumberger uses reflects the prevailing market rate of a portfolio of high-quality debt instruments with maturities matching the expected timing of payment of the related benefit obligations. The following summarizes the discount rates utilized by Schlumberger for its various pension and postretirement benefit plans:

The expected rate of return for Schlumberger’s retirement benefit plans represents the average rate of return expected to be earned on plan assets over the period that benefits included in the benefit obligation are expected to be paid, with consideration given to the distribution of investments by asset class and historical rates of return for each individual asset class. The average expected rate of return on plan assets for the United States pension plans was 6.60% in both 2021 and 2020. The weighted average expected rate of return on plan assets for the international pension plans was 6.73% in 2021 and 6.71% in 2020. A lower expected rate of return would increase pension expense.

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The following illustrates the sensitivity to changes in certain assumptions, holding all other assumptions constant, for Schlumberger’s United States and international pension plans:

The following illustrates the sensitivity to changes in certain assumptions, holding all other assumptions constant, for Schlumberger’s United States postretirement medical plans:

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