Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2015

Derivative Instruments And Hedging Activities Disclosure [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 and interest rates.  To mitigate these risks, Schlumberger utilizes derivative instruments.  Schlumberger does not enter into derivative transactions for speculative purposes.

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 fourth quarter of 2013, Schlumberger entered into a cross currency swap for a notional amount of €0.5 billion in order to hedge changes in the fair value of Schlumberger’s €0.5 billion 1.50% Guaranteed Notes due 2019.  Under the terms of this swap, Schlumberger will receive interest at a fixed rate of 1.50% on the euro notional amount and pay interest at a floating rate of three-month LIBOR plus approximately 64 basis points on the US dollar notional amount.

This cross currency swap is designated as a fair value hedge of the underlying debt.  This derivative instrument is marked to market with gains and losses recognized in income to largely offset the respective gains and losses recognized on changes in the fair value of the hedged debt.  

At September 30, 2015, Schlumberger had fixed rate debt of $8.9 billion and variable rate debt of $3.3 billion, after taking into account the effect of the swap.

Short-term investments and Fixed income investments, held to maturity, totaled $3.9 billion at September 30, 2015.  The carrying value of these investments approximated fair value, which was estimated using quoted market prices for those or similar investments.

Foreign Currency Exchange Rate Risk

As a multinational company, Schlumberger conducts its business in more than 85 countries. Schlumberger’s functional currency is primarily the US dollar.  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 the local currency is not the functional currency and expenses denominated in local currency are not equal to revenues denominated in local currency.  Schlumberger is also exposed to risks on future cash flows relating to certain of its fixed rate debt which is denominated in currencies 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 September 30, 2015, Schlumberger recognized a cumulative net $58 million loss in Accumulated other comprehensive loss 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 12 months.

Schlumberger is exposed to changes in the fair value of assets and liabilities which are denominated in currencies other than the functional currency.  While Schlumberger uses foreign currency forward contracts and foreign currency options to economically hedge this exposure as it relates to certain currencies, these contracts are not designated as hedges for accounting purposes.  Instead, the fair value of the contracts is recorded on the Consolidated Balance Sheet, and changes in the fair value are recognized in the Consolidated Statement of Income as are changes in fair value of the hedged item.

At September 30, 2015, contracts were outstanding for the US dollar equivalent of $5.6 billion in various foreign currencies, of which $2.5 billion relate to hedges of debt denominated in currencies other than the functional currency.

The fair values of outstanding derivative instruments were as follows:

			(Stated in millions)
	Fair Value of Derivatives				Consolidated Balance Sheet Classification
	Sept. 30,		Dec. 31,
	2015		2014
Derivative Assets
Derivatives designated as hedges:
Foreign exchange contracts	$	4	$	3	Other current assets
Foreign exchange contracts		23		32	Other Assets
	$	27	$	35
Derivatives not designated as hedges:
Foreign exchange contracts	$	4	$	5	Other current assets
	$	31	$	40
Derivative Liabilities
Derivatives designated as hedges:
Foreign exchange contracts	$	49	$	80	Accounts payable and accrued liabilities
Foreign exchange contracts		94		105	Other Liabilities
Cross currency swap		24		42	Other Liabilities
	$	167	$	227
Derivatives not designated as hedges:
Foreign exchange contracts	$	17	$	28	Accounts payable and accrued liabilities
	$	184	$	255

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

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

							(Stated in millions)
	Gain (Loss) Recognized in Income
	Third Quarter						Nine Months
	2015			2014			2015			2014			ConsolidatedStatement  of Income Classification
Derivatives designated as fair value hedges:
Cross currency swap	$	(2	)	$	(8	)	$	(53	)	$	(9	)	Interest
Derivatives not designated as hedges:
Foreign exchange contracts	$	(48	)	$	(8	)	$	(109	)	$	5		Cost of revenue