Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2012

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

10. Derivative Instruments and Hedging Activities

Schlumberger is exposed to market risks related to fluctuations in foreign currency exchange rates, commodity prices and interest rates. To mitigate these risks, Schlumberger utilizes derivative instruments. Schlumberger does not enter into derivative transactions for speculative purposes.

Foreign Currency Exchange Rate Risk

As a multinational company, Schlumberger conducts business in approximately 85 countries. Schlumberger’s functional currency is primarily the US dollar, which is consistent with the oil and gas industry. However, outside the United States, a significant portion of Schlumberger’s expenses is incurred in foreign currencies. Therefore, when the US dollar weakens (strengthens) in relation to the foreign currencies of the countries in which Schlumberger conducts business, the US dollar–reported expenses will increase (decrease).

Schlumberger is exposed to risks on future cash flows to the extent that local currency expenses exceed revenues denominated in local currency that are other than the functional currency. Schlumberger uses foreign currency forward contracts and foreign currency options to provide a hedge against a portion of these cash flow risks. These contracts are accounted for as cash flow hedges, with the effective portion of changes in the fair value of the hedge recorded on the Consolidated Balance Sheet and in Accumulated Other Comprehensive Loss. Amounts recorded in Accumulated Other Comprehensive Loss are reclassified into earnings in the same period or periods that the hedged item is recognized in earnings. The ineffective portion of changes in the fair value of hedging instruments, if any, is recorded directly to earnings.

At March 31, 2012, Schlumberger recognized a cumulative net $19 million gain in Equity relating to revaluation of foreign currency forward contracts and foreign currency options designated as cash flow hedges, the majority of which is expected to be reclassified into earnings within the next twelve months.

Schlumberger is also exposed to changes in the fair value of assets and liabilities, including certain of its long-term debt, which are denominated in currencies other than the functional currency. Schlumberger uses foreign currency forward contracts and foreign currency options to hedge this exposure as it relates to certain currencies. These contracts are accounted for as fair value hedges with the fair value of the contracts recorded on the Consolidated Balance Sheet and changes in the fair value recognized in the Consolidated Statement of Income along with the change in fair value of the hedged item.

At March 31, 2012, contracts were outstanding for the US dollar equivalent of $5.2 billion in various foreign currencies, of which $3.9 billion relate to hedges of debt denominated in currencies other than the functional currency.

Commodity Price Risk

Schlumberger is exposed to the impact of market fluctuations in the price of certain commodities, such as metals and fuel. Schlumberger utilizes forward contracts to manage a small percentage of the price risk associated with forecasted metal purchases. The objective of these contracts is to reduce the variability of cash flows associated with the forecasted purchase of those commodities. These contracts do not qualify for hedge accounting treatment and therefore, changes in the fair value of the forward contracts are recorded directly to earnings.

At March 31, 2012, $23 million of commodity forward contracts were outstanding.

Interest Rate Risk

Schlumberger is subject to interest rate risk on its debt and its investment portfolio. Schlumberger maintains an interest rate risk management strategy that uses a mix of variable and fixed rate debt combined with its investment portfolio and occasionally interest rate swaps to mitigate the exposure to changes in interest rates.

During the third quarter of 2009, Schlumberger entered into an interest rate swap relating to a certain debt instrument. The swap was for a notional amount of $450 million in order to hedge changes in the fair value of Schlumberger’s $450 million 3.00% Notes due 2013. Under the terms of this swap, Schlumberger receives interest at a fixed rate of 3.0% annually and will pay interest quarterly at a floating rate of three-month LIBOR plus a spread of 0.765%. This interest rate swap is designated as a fair value hedge of the underlying debt. This derivative instrument is marked to market with gains and losses recognized currently in income to offset the respective losses and gains recognized on changes in the fair value of the hedged debt. This results in no net gain or loss being recognized in the Consolidated Statement of Income.

At March 31, 2012, Schlumberger had fixed rate debt aggregating $7.7 billion and variable rate debt aggregating $2.5 billion, after taking into account the effects of the interest rate swaps.

Short-term investments and Fixed income investments, held to maturity, totaled $3.0 billion at March 31, 2012, and were comprised primarily of money market funds, eurodollar time deposits, certificates of deposit, commercial paper, euro notes and Eurobonds, and were substantially all denominated in US dollars. The carrying value of these investments approximated fair value, which was estimated using quoted market prices for those or similar investments.

The fair values of outstanding derivative instruments are summarized as follows:

	(Stated in millions)
	Fair Value of Derivatives				Consolidated Balance Sheet Classification
	Mar. 31, 2012		Dec. 31, 2011
Derivative Assets
Derivatives designated as hedges:
Foreign exchange contracts	$	9	$	2	Other current assets
Foreign exchange contracts		39		4	Other Assets
Interest rate swaps		8		9	Other Assets
	$	56	$	15
Derivatives not designated as hedges:
Foreign exchange contracts	$	6	$	8	Other current assets
Foreign exchange contracts		7		9	Other Assets
	$	13	$	17
	$	69	$	32
Derivative Liabilities
Derivatives designated as hedges:
Foreign exchange contracts	$	13	$	47	Accounts payable and accrued liabilities
Foreign exchange contracts		65		130	Other Liabilities
	$	78	$	177
Derivatives not designated as hedges:
Foreign exchange contracts	$	5	$	9	Accounts payable and accrued liabilities
Commodity contacts		—		3	Accounts payable and accrued liabilities
	$	5	$	12
	$	83	$	189

The fair value of all outstanding derivatives was determined using a model with inputs that are observable in the market or can be derived from or corroborated by observable data.

The effect on the Consolidated Statement of Income of derivative instruments designated as fair value hedges and those not designated as hedges was as follows:

	(Stated in millions)
	Gain (Loss) Recognized in Income
	First Quarter						Consolidated Statement of Income Classification
	2012			2011
Derivatives designated as fair value hedges:
Foreign exchange contracts	$	—		$	2			Cost of revenue -Oilfield Services
Interest rate swaps		1			—			Interest expense
	$	1		$	2
Derivatives not designated as hedges:
Foreign exchange contracts	$	(27	)	$	(21	)		Cost of revenue -Oilfield Services
Commodity contracts		2			1			Cost of revenue -Oilfield Services
	$	(25	)	$	(20	)

The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) was as follows:

	(Stated in millions)
	Gain (Loss) Reclassified from Accumulated OCI into Income
	First Quarter					Consolidated Statement of Income Classification
	2012			2011
Foreign exchange contracts	$	112		$	225	Cost of revenue -Oilfield Services
Foreign exchange contracts		(2	)		2	Research & engineering
	$	110		$	227

	(Stated in millions)
	Gain (Loss) Recognized in
	First Quarter
	2012		2011
Foreign exchange contracts	$	155	$	192