Charges and Credits

3 Months Ended

Mar. 31, 2020

Restructuring And Related Activities [Abstract]

Charges and Credits

2.   Charges and Credits

In connection with the preparation of its first-quarter 2020 financial statements, Schlumberger recorded the following charges:

	(Stated in millions)
	Pretax		Tax			Net
Goodwill	$	3,070	$	-		$	3,070
Intangible assets		3,321		(815	)		2,506
APS investments		1,264		4			1,268
North America pressure pumping		587		(133	)		454
Severance		202		(7	)		195
Other		79		(9	)		70
Valuation allowance		-		164			164
	$	8,523	$	(796	)	$	7,727

All of the pretax charges presented above are classified in Impairments & other in the Consolidated Statement of Income (Loss).

• Geopolitical events that increased the supply of low-priced oil to the global market occurred at the same time that demand weakened due to the worldwide effects of the COVID-19 pandemic, leading to a collapse in oil prices during March 2020.  As a result, Schlumberger’s market capitalization deteriorated significantly compared to the end of 2019.  Schlumberger’s stock price reached a low during the first quarter of 2020 not seen since 1995.  Additionally, the Philadelphia Oil Services Sector index, which is comprised of companies involved in the oil services sector, reached an all-time low.  As a result of these facts, Schlumberger determined that it was more likely than not that the fair value of certain of its reporting units were less than their carrying value.  Therefore, Schlumberger performed an interim goodwill impairment test.

Schlumberger had 11 reporting units with goodwill balances aggregating $16.0 billion.  Schlumberger determined that the fair value of four of its reporting units, representing $4.5 billion of the goodwill, was substantially in excess of their carrying value.  Schlumberger performed a detailed quantitative impairment assessment of the remaining seven reporting units, which represented $11.5 billion of goodwill. As a result of this assessment, Schlumberger concluded that the goodwill associated with each of these seven reporting units was impaired, resulting in a $3.1 billion goodwill impairment charge.  This charge primarily relates to goodwill associated with the Drilling and Production segments.

Following the $3.1 billion goodwill impairment charge relating to these seven reporting units, six of these reporting units had a remaining goodwill balance.  These six reporting units had goodwill balances which ranged between $0.2 billion and $5.0 billion and aggregated to $8.4 billion as of March 31, 2020.

Schlumberger used the income approach to estimate the fair value of its reporting units, but also considered the market approach to validate the results.  The income approach estimates the fair value by discounting each reporting unit’s estimated future cash flows using Schlumberger’s estimate of the discount rate, or expected return, that a marketplace participant would have required as of the valuation date.  The market approach includes the use of comparative multiples to corroborate the discounted cash flow results.  The market approach involves significant judgement involved in the selection of the appropriate peer group companies and valuation multiples.

Some of the more significant assumptions inherent in the income approach include the estimated future net annual cash flows for each reporting unit and the discount rate.  Schlumberger selected the assumptions used in the discounted cash flow projections using historical data supplemented by current and anticipated market conditions and estimated growth rates.  Schlumberger’s estimates are based upon assumptions believed to be reasonable.  However, given the inherent uncertainty in determining the assumptions underlying a discounted cash flow analysis, particularly in the current volatile market, actual results may differ from those used in Schlumberger’s valuations which could result in additional impairment charges in the future.

The discount rates utilized to value Schlumberger’s reporting units were between 12.0% and 13.5%, depending on the risks and uncertainty inherent in the respective reporting unit as well as the size of the reporting unit.  Assuming all other assumptions and inputs used in each of the respective discounted cash flow analysis were held constant, a 50-basis point increase or decrease in the discount rate assumptions would have changed the fair value of the seven reporting units, on average, by less than 5%.

• The negative market indicators described above were triggering events that indicated that certain of Schlumberger’s long-lived intangible and tangible assets may be impaired.  Recoverability testing indicated that certain long-lived assets were impaired.  The estimated fair value of these assets was determined to be below their carrying value.  As a result, Schlumberger recorded the following impairment charges:

- $3.3 billion of intangible assets, of which $2.2 billion relates to Schlumberger’s 2016 acquisition of Cameron International Corporation and $1.1 billion relates to Schlumberger’s 2010 acquisition of Smith International, Inc.  Following this impairment charge, the carrying value of the impaired intangible assets was approximately $0.9 billion.

- $1.3 billion relating to the carrying value of certain Asset Performance Solutions (“APS”) projects in North America.

- $0.6 billion of fixed assets associated with the pressure pumping business in North America.  

The fair value of these impaired assets was estimated based on the present value of projected future cash flows that the underlying assets are expected to generate.  Such estimates included unobservable inputs that required significant judgment.

• $202 million of severance, the vast majority of which is expected to be paid during the second quarter of 2020.

• $79 million of other restructuring charges, primarily consisting of the impairment of an equity method investment that was determined to be other-than-temporarily impaired.

• $164 million relating to a valuation allowance against certain foreign tax credits in the US.

Schlumberger expects to record a significant charge relating to severance during the second quarter of 2020.  However, at this time the amount cannot be reasonably estimated.  Additionally, as market conditions evolve and Schlumberger further develops its strategy to deal with such conditions, it may result in further restructuring and/or impairment charges in future periods relating to, among other things, inventory, fixed assets and other assets.

There were no charges or credits recorded during the first three months of 2019.