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Charges and Credits

9 Months Ended

Sep. 30, 2020

Restructuring And Related Activities [Abstract]

2. Charges and Credits

Schlumberger recorded the following charges and credits during 2020, all of which are classified in Impairments & other in the Consolidated Statement of Loss:

	(Stated in millions)

	Pretax			Tax			Net
First quarter:
Goodwill	$	3,070		$	-		$	3,070
Intangible asset impairments		3,321			(815	)		2,506
Asset Performance Solutions investments		1,264			4			1,268
North America pressure pumping impairment		587			(133	)		454
Workforce reductions		202			(7	)		195
Other		79			(9	)		70
Valuation allowance		-			164			164
Second quarter:
Workforce reductions		1,021			(71	)		950
Asset Performance Solutions investments		730			(15	)		715
Fixed asset impairments		666			(52	)		614
Inventory write-downs		603			(49	)		554
Right-of-use asset impairments		311			(67	)		244
Costs associated with exiting certain activities		205			25			230
Multiclient seismic data impairment		156			(2	)		154
Repurchase of bonds		40			(2	)		38
Postretirement benefits curtailment gain		(69	)		16			(53	)
Other		60			(4	)		56
Third quarter:
Facility exit charges		254			(39	)		215
Workforce reductions		63			-			63
Other		33			(1	)		32
	$	12,596		$	(1,057	)	$	11,539

First quarter 2020:

•

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 have been 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 relating to 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.

•

$202 million of severance.

•

$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 deferred tax assets.

Second quarter 2020:

•

As previously noted, late in the first quarter of 2020 geopolitical events that increased the supply of low-priced oil to the global market occurred at the same time as demand weakened due to the worldwide effects of the COVID-19 pandemic, which led to a collapse in oil prices. As a result, the second quarter of 2020 was the most challenging quarter in decades. Schlumberger responded to these market conditions by taking actions to restructure its business and rationalize its asset base during the second quarter of 2020. These actions included reducing headcount, closing facilities and exiting business lines in certain countries. Additionally, due to the resulting activity decline, Schlumberger had assets that would no longer be utilized. As a consequence of these circumstances and decisions, Schlumberger recorded the following restructuring and asset impairment charges:

$1.021 billion of severance associated with reducing its workforce by more than 21,000 employees.

$730 million relating to the carrying value of certain APS projects in Latin America.

$666 million of fixed asset impairments primarily relating to equipment that would no longer be utilized and facilities it exited.

$603 million write-down of the carrying value of inventory to its net realizable value.

$311 million write-down of right-of-use assets under operating leases associated with leased facilities Schlumberger exited and excess equipment.

$205 million of costs associated with exiting certain activities.

$156 million impairment of certain multiclient seismic data.

$60 million of other costs, including a $42 million increase in the allowance for the doubtful accounts.

•

During the second quarter of 2020, Schlumberger repurchased certain Senior Notes (see Note 9 – Long-term Debt), which resulted in a $40 million charge.

•

As a consequence of the workforce reductions described above, Schlumberger recorded a curtailment gain of $69 million relating to its US postretirement medical plan. See Note 13 – Pension and Other Postretirement Benefit Plans for further details.

The fair value of the impaired intangible assets, fixed assets, APS investments, right-of-use assets and multiclient seismic data 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 judgement.

Third quarter 2020:

•

During the third quarter of 2020 Schlumberger recorded the following restructuring charges:

$254 million of facility exit charges as Schlumberger continued to rationalize its real estate footprint relating to both leased and owned facilities.

$63 million of severance.

$33 million of other charges.

As market conditions evolve and Schlumberger continues to develop its strategy to deal with such conditions, it may result in further restructuring and/or impairment charges in future periods.

2019

In connection with the preparation of its third quarter 2019 financial statements, Schlumberger recorded the following charges, all of which are classified as Impairments & other in the Consolidated Statement of Loss:

	(Stated in millions)

	Pretax		Tax			Net
Goodwill	$	8,828	$	(43	)	$	8,785
Intangible assets		1,085		(248	)		837
North America pressure pumping		1,575		(344	)		1,231
Other North America-related		310		(53	)		257
Argentina		127		-			127
Equity-method investments		231		(12	)		219
Asset Performance Solutions investments		294		-			294
Other		242		(13	)		229
	$	12,692	$	(713	)	$	11,979

•

During August 2019, Schlumberger’s market capitalization deteriorated significantly compared to the end of the second quarter of 2019. Schlumberger’s stock price reached a low not seen since 2005. Additionally, the Philadelphia Oil Services Sector Index, which is comprised of companies involved in the oil services sector, reached an 18-year 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 as of August 31, 2019.

As of August 31, 2019, Schlumberger had 17 reporting units with goodwill balances aggregating $25.0 billion. Schlumberger determined that the fair value of seven of its reporting units, representing approximately $13.8 billion of the goodwill, was substantially in excess of their carrying value. Schlumberger performed a detailed quantitative impairment assessment of the remaining 10 reporting units, which represented $11.2 billion of goodwill. As a result of this assessment, Schlumberger concluded that the goodwill associated with nine of the 10 reporting units was impaired, resulting in an $8.8 billion goodwill impairment charge. This charge primarily relates to Schlumberger’s Drilling and Cameron segments.

Following the $8.8 billion goodwill impairment charge relating to these nine reporting units, only three had a remaining goodwill balance. These three reporting units had goodwill balances which ranged between $0.4 billion and $0.6 billion and aggregated to $1.5 billion as of August 31, 2019. The tenth reporting unit, which was determined not to be impaired, had $0.9 billion of goodwill.

Schlumberger primarily 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, 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 12.5% and 14.0%, depending on the risks and uncertainty inherent in the respective 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 in the discount rate assumption would have increased the goodwill impairment charge by approximately $0.3 billion. Conversely, assuming all other assumptions and inputs used in each of the respective discounted cash flow analysis were held constant, a 50 basis point decrease in the discount rate assumption would have decreased the goodwill impairment charge by approximately $0.4 billion.

•

The negative market indicators described above, combined with deteriorating market conditions in North America, as well as the results of the previously mentioned fair value determinations of certain of Schlumberger’s reporting units and the appointment of a new Chief Executive Officer (as described below), were all triggering events that indicated that certain of Schlumberger’s long-lived tangible and intangible assets may have been impaired.

Recoverability testing, which was performed as of August 31, 2019, indicated that long-lived assets associated with certain asset groups were impaired. The estimated fair value of these asset groups was determined to be below their carrying value. As a result, Schlumberger recorded the following impairment and related charges:

$1.085 billion of intangible assets, of which $842 million related to Schlumberger’s 2010 acquisition of Smith International, Inc. The remaining $243 million primarily related to other acquisitions in North America.

$1.575 billion of charges relating to Schlumberger’s pressure pumping business in North America. This amount consisted of $1.324 billion of pressure pumping equipment and related assets; $98 million of right-of-use assets under operating leases; $121 million relating to a supply contract; $19 million of inventory; and $13 million of severance.

$310 million of charges primarily relating to other businesses in North America, consisting of $230 million of fixed asset impairments, $70 million of inventory write-downs and $10 million of severance.

•

As a result of the ongoing economic challenges in Argentina, Schlumberger recorded $127 million of charges during the third quarter of 2019. This consisted of $72 million of asset impairments, a $26 million devaluation charge and $29 million of severance.

•

Schlumberger also recorded the following impairment and restructuring charges:

$231 million relating to certain equity method investments that were determined to be other-than-temporarily impaired.

$294 million impairment relating to the carrying value of certain smaller APS projects.

$242 million of restructuring charges consisting of: $62 million of severance; $57 million relating to the acceleration of stock-based compensation expense associated with certain individuals; $49 million of business divestiture costs; $29 million relating to the repurchase of certain Senior Notes (see Note 9 - Long-term Debt); and $45 million of other provisions.

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

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