Schlumberger Debt Rating Lowered

S&P cites the oilfield services giant's recent change in business strategy for -- and restructuring of -- its SchlumbergerSema unit

On Dec. 11, 2002, Standard & Poor's lowered its corporate credit and senior unsecured debt ratings on leading international oilfield services provider Schlumberger (SLB ) to 'A+' from 'AA-'. At the same time, Standard & Poor's lowered its commercial paper rating to 'A-1' from 'A-1+'. The outlook remains negative.

Curacao, Netherlands Antilles-based Schlumberger group has roughly $7.5 billion of total debt outstanding and $5.5 billion of net debt.

The ratings downgrade reflects Standard & Poor's reassessment of the Schlumberger group's business profile. This follows the company's recent change in SchlumbergerSema's business strategy and restructuring of that business segment.

On Nov. 18, 2002, Standard & Poor's revised the Schlumberger group's outlook to negative based in part on concerns over SchlumbergerSema's long-term prospects. Although Standard & Poor's did not expect material near-term cash flow generation from the information technology segment, its ratings did incorporate expectations of longer-term growth potential. In addition, the Sema acquisition was expected to provide a measure of diversification.

Standard & Poor's believes that the announced change in strategy and restructuring, which included a $2.885 billion impairment charge, points to a significant deviation from Standard & Poor's expectations of SchlumbergerSema.

The Schlumberger group announced that SchlumbergerSema will focus on information technology (IT) consulting to the global energy market, reduce its workforce by 1,600 people, and evaluate options for its other IT-related units. In accordance with accounting rule FAS 142, Schlumberger will record a $2.6 billion impairment on the goodwill associated with its $5.2 billion mid-2001 acquisition of Sema.

The ratings on the Schlumberger group reflect its leading position in the international oilfield services industry and conservative financial policies. The Schlumberger group operates in all major oil and natural gas markets, providing a wide range of services to the petroleum industry. Although the oilfield services industry is intensely competitive and cyclical, the Schlumberger group benefits from technology-intensive product lines that supply all phases of the oil cycle, leading positions in each of its markets, broad geographic scope, and excellent relationships with major and national oil companies.

The Schlumberger group incurred roughly $5.0 billion of debt in 2001 in conjunction with its acquisition of Sema. Standard & Poor's ratings incorporate an expectation that the Schlumberger group will execute its debt reduction plan, targeting net debt of less than $4.0 billion (the company is expected to hold about $2.0 billion in cash and liquid investments) by year-end 2003. As of Sept. 30, 2002, the Schlumberger group had net debt of $5.5 billion. Given weakened fundamentals in the oilfield services industry, the company intends to reach its stated debt reduction objective through a greater reliance on asset sales and business line dispositions.

The Schlumberger group's profitability and cash flow protection measures remain strong, considering the recent downturn in the services sector of the petroleum industry. In addition, Standard & Poor's believes that the Schlumberger group is well positioned to benefit from a recovery in oilfield activity. EBIT and EBITDA interest coverage measures are expected to be around 4.0x and 9.0x, respectively, in the near-to-medium term. Funds from operations to net debt should be about 45%, improving as the debt reduction plan is executed.

The Schlumberger group has ample liquidity. The company has roughly $2.0 billion of cash, short-term investments, and liquid securities as of Sept. 30, 2002. The Schlumberger group's $2.6 billion of outstanding commercial paper is supported by various bank credit facilities, which are not subject to financial covenant tests. In addition, the company is able to significantly reduce capital expenditures during weak market conditions. Cash flow from operations in 2002 and 2003 are expected to cover capital expenditures and small acquisitions.

The negative outlook reflects Standard & Poor's concerns over the execution and timing of the Schlumberger group's debt reduction plan. Standard & Poor's believes that execution of the Schlumberger group's deleveraging plan faces increased challenges because of softness in the oilfield services markets and the timing of planned divestitures. The outlook could be revised to stable as the Schlumberger group makes progress on its debt reduction plan.

From Standard & Poor's CreditWire

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