Risks to Thesis A significant reduction in the oil prices from current level would have adverse impact on SLB s business

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1 The Henry Fund Henry B. Tippie School of Management Amit Shah [amitashok- Schlumberger Ltd. (SLB) September 21, 2015 Energy Oil & Gas Field Services Stock Rating Buy Investment Thesis Target Price $ DCF $ DDM $87.43 Relative Multiple $ Price Data Current Price $ wk Range $ Key Statistics Market Cap (B) $95.32 Shares Outstanding (B) 1.27 Institutional Ownership 80.0% Five Year Beta 1.13 Dividend Yield 2.5% Est. 5yr Growth 10.5% Price/Earnings (TTM) Price/Earnings (FY1) Price/Sales (TTM) 2.40 Price/Book 2.50 Profitability Operating Margin 16.9% Profit Margin 14.8% Return on Capital (TTM) 21.8% Return on Equity (TTM) 19.0% The best thing that happens to us is when a great company gets into temporary trouble We want to buy them when they re on the operating table. This quote by Warren Buffet summarizes our investment hypothesis for Slchlumberger Ltd (SLB). SLB is the largest and arguably the most efficiently managed company in the Oil & Gas Field Services (OFS) industry. We believe that with crude oil prices (WTI) at $46/barrel, a further significant price correction seems unlikely. However, a significant time correction is a distinct possibility. SLB is well positioned to survive through this time correction due to its strong track record, diversified service portfolio and presence across the major geographies in the world. We recommend BUY on SLB with a target price of $117, an upside of 56%. Drivers of Thesis SLB has a strong business portfolio with array of services offered by it to E&P companies. This along with its long track record makes it a partner of choice for E&P companies across the world. SLB s dependence on US oil and gas production sector is much lower than some of the other companies in the sector, which makes it less vulnerable to a downturn in the US E&P activities. The current downturn in the industry offers great opportunity for SLB to strengthen its position by acquiring other smaller but quality companies like Cameron. Such acquisitions will strengthen SLBs dominance in the industry. SLBs strong financial performance amid downturn in the industry speaks volume about the management s ability to protect the interest of shareholders. Risks to Thesis A significant reduction in the oil prices from current level would have adverse impact on SLB s business Earnings Estimates Year E 2016E 2017E P/E ROE Div Yield EPS $4.25 $4.77 $5.57 $3.53 $3.86 $4.10 Source: Yahoo finance; Growth 9.8% 12.3% 16.7% % 9.3% 6.1% 12 Month Performance Company Description SLB S&P 500 SLB is world s largest Oil Field Services (OFS) 30% company with presence across 85 countries and business value chain. It supplies technology, 10% integrated project management, and information solutions to the oil and gas exploration and - 10% production industries worldwide. The company - 30% operates through Reservoir Characterization Group, Drilling Group, and Production Group - 50% segments. The recent acquisition of Cameron International has strengthened its presence in - 70% products and offshore drilling segments. SLB is S O N D J F M A M J J A one of the most profitable companies in the Source: Yahoo Finance sector SLB Industry Sector

2 EXECUTIVE SUMMARY SLB is the unequivocal leader in the OFS industry with highest market share across most of its operating segments and in terms of earnings, which are more than double its closest competitor. As the technological and profit leader in the OFS industry, SLB s success can be attributed to its focus on technology innovation, extensive geographic presence and wide range of products and services. We believe SLB s strong financial position will continue to offer the company opportunities for organic/inorganic growth, through acquisitions and continued high R&D spending. We believe that with crude oil prices (WTI) at $46/barrel, further significant price correction seems unlikely. However, a significant time correction is a distinct possibility. SLB is well positioned to survive through this time correction due to its strong track record, diversified service portfolio and presence across the major geographies in the world. We recommend BUY on SLB with target price of $117, an upside of 56%. COMPANY DESCRIPTION SLB is world s largest OFS Company with presence across 85 countries and business value chain. It supplies technology, integrated project management, and information solutions to the oil and gas exploration and production industries worldwide. The company operates through Reservoir Characterization Group, Drilling Group, and Production Group segments. The recent acquisition of Cameron International has strengthened its presence in products and offshore drilling segments. The company was founded in France in 1926, with invention of wireline logging by the Schlumberger brothers. Over the period, SLB began performing logging and other well services in a number of different countries. SLB: Revenue by Business Segments Reservoir' Characteriza4o n' 26%' Reservoir' Produc4on' 35%' Source: Company filings - 10Q Drilling' 39%' The Reservoir Characterization Group This segment provides reservoir imaging, monitoring, and development services; wireline technology that offers open- hole and cased- hole services; exploration and production pressure and flow- rate measurement services; information solutions, such as software, consulting, information management, and IT infrastructure services that support oil and gas industry operational processes; interpretation and integration of exploration and production data types, as well as consulting services for reservoir characterization, field development planning production enhancement, and multi- disciplinary reservoir and production solutions; and multi client data library and industry petro- technical training solutions. We expect Reservoir Characterization Group to report 22.5% decline in revenue in 2015 due to decrease in exploration related capex in Europe/CIS/Africa, US Gulf of Mexico and Australia. It would impact the demand for wireline and testing services activities. SLB: Reservoir Characterization Group Revenue 14.0# 12.0# 10.0# 8.0# 6.0# 4.0# 2.0# 0.0# 6.5%# -22.5%# 9.9# 11.2# 12.5# 12.2# 9.5# 10.0# 10.8# Source: Company filings - 10K, HF estimates The Drilling Group 12.4%# 11.7%# -1.9%# 6.0%# 8.0%# 2011# 2012# 2013# 2014# 2015E# 2016E# 2017E# Revenue#(US$#B)#-#LHS# Growth#-#RHS# 15.0%# 10.0%# 5.0%# 0.0%# -5.0%# -10.0%# -15.0%# -20.0%# -25.0%# This segment designs, manufactures, and markets roller cone and fixed cutter drill bits, as well as provides drilling fluid systems, and environmental services and products; offers geo services, drilling and measurement services, and land drilling and related support services; and provides bottom hole assembly drilling tools, borehole enlargement technologies, impact tools, and tubular and tubular services. Revenue from Drilling Group is expected to fall by 23% in CY15 due to significant drop in rigs count in North America, which impacted the drilling activities. Lower drilling activity in Sub- Saharan Africa, Australia and Colombia are also expected to impact the sales Page 2

3 SLB: Drilling Group Revenue 20.0% 68.4%% 18.0% 16.0% 14.0% 12.0% 14.7%% 10.0% 7.6%% 8.0%% 4.0%% 8.5%% 8.0% 6.0% 4.0%.23.0%% 2.0% 13.9% 15.9% 17.1% 18.5% 14.2% 14.8% 16.0% 0.0% 2011% 2012% 2013% 2014% 2015E% 2016E% 2017E% Revenue%(US$%B)%.%LHS% Growth%.%RHS% Source: Company filings - 10K, HF estimates 80.0%% 60.0%% 40.0%% 20.0%% 0.0%%.20.0%%.40.0%% Technology Innovation: With a technological focus at the core of the SLB s culture and operations, it enjoys a technological lead over its competitors, which results in greater efficiency, productivity, and pricing power for the company and, hence, higher margins. Geographically Diversified Presence and Reach: Generating more than 71% of revenue outside North America and employing a multinational workforce, SLB is less vulnerable to market risk as a result of geographic diversification, a multinational workforce and the ability to pursue emerging markets as economic and political climates warrants. The Production Group segment This segment provides well services comprising pressure pumping, well cementing, stimulation, and intervention; well completion services and equipment, such as packers, safety valves, and sand control technology, as well as well completions technology and equipment; artificial lifts; and coiled tubing equipment and services, and slickline services, as well as engages in the development, management, and environmental protection of water resources. We expect Production Group revenue to decline by 25% in CY15 primarily due to decline in E&P activities in North America. Pressure pumping activity will be impacted. SLB: Production Group Revenue 20.0$ 18.0$ 16.0$ 14.0$ 12.0$ 10.0$ 8.0$ 6.0$ 4.0$ 2.0$ 0.0$ 45.1%$ 12.7%$ 7.6%$ 13.7%$ 4.0%$ Source: Company filings - 10K, HD estimates 8.5%$ 50.0%$ 40.0%$ 30.0%$ 20.0%$ 10.0%$ 0.0%$ Extensive Suite of Products: SLB offers the most extensive range of oilfield products and services in the industry, which offers the company with flexibility in serving its customers and allows it to benefit from the increasing movement by customers toward integrated services. SLB s less dependence on US E&P sector makes it less vulnerable The company s strong international footprint is a sustainable competitive advantage for the company. The scale and scope of the company s international operations are broader than any other company in the sector, with about 70% of revenues from outside of North America. This is a significant position, given that the international markets and the NOCs will drive the long- term industry growth. Additionally, SLB s critical mass in the regions provides operating efficiencies, and thus higher operating margins. SLB has been operating in many developing markets for many decades while most of its peers have only recently entered into the same regions. SLB: Production Group Revenue -10.0%$ -25.0%$ -20.0%$ 13.1$ 14.8$ 15.9$ 18.1$ 13.6$ 14.1$ 15.3$ -30.0%$ 2011$ 2012$ 2013$ 2014$ 2015E$ 2016E$ 2017E$ Middle&East/ Revenue$(US$$B)$-$LHS$ Growth$-$RHS$ Asia& North&America& 28%& 29%& Company Analysis Investment rationale Numero Uno in the sector In the OFS industry, we believe that SLB is widely considered the technological leader and it is the largest and most profitable company both in absolute and percentage terms. The company s strong position can be attributable to: Europe/CIS/ Africa& 26%& Source: Company filings 10Q La1n&America& 17%& Page 3

4 Due to the significant fall in oil prices over last year, most of the E&P companies have announced significant capex cuts over past year. International companies have announced capital expenditure reductions on the order of 15-20%, while USA and Canadian companies have decreased their 2015 spending levels by more than 30%. The capex cuts in the USA shale E&P activities were even more significant impacting the performance of OFS companies with large dependence on US E&P activities. products/services, including Wireline, LWD, Directional Drilling, Geophysical equipment & services, coiled tubing, production testing etc. Segmental Market Share of Top OFS Players We anticipate a significant time correction in oil prices and believe that OFS companies such as SLB, which have less dependence on North American E&P activities will be less vulnerable in the future. North American unconventional oil and gas reserves have substantially higher extraction and production cost compared to the conventional reserves in Middle East and Russia. So, we don t expect a significant decline in the E&P activities in rest of the world due to prolonged lower oil prices. SLB s strong presence in various markets across the world is likely to see steady demand for its services in the countries with conventional oil reserves. Land Drilling Rigs Portfolio Spanning Across the World Source: Company investor presentation Leading and highly technological intensive portfolio of products and services creates a deep moat SLB has a stated strategy to be a leading player in all of its operating services/product segments and has consistently invested in cutting edge technologies that create a better understanding of the reservoir. This is increasingly vital as reservoirs become more complex. SLB offers the highest exposure to Deepwater and is also a leader in carbonate, unconventional gas, and pre- salt. SLB is the leading company in a number of high- growth, high technology product lines, ahead of its peers by a wide margin (10% in some cases in terms of market share). The company is #1 in most of its Page 4 Source: Spears & Associates and JP Morgan Increasing technical challenges for E&P companies due to highly complex nature of Deepwater and tight oil reserves, are presenting opportunities for technically strong and operationally competent OFS companies like SLB. SLB s approach of providing integrated solution to the customers is gaining ground and would help SLB enhance its position in the industry further. A recent trend in the US industry is turning SLB from a mere service provider to E&P companies to being a partner in the project. Many US operators are asking SLB to underwrite their high- end solutions in exchange for production related financial incentives. We believe that technology remains the key growth drivers of revenue and margin growth in the future for the company. Cameron acquisition A marriage made in heaven Taking the advantage of current downturn in the industry, SLB s move to acquire Cameron International

5 (CAM), will significantly strengthen company s position in OFS industry. SLB expects to grow the combined business through integration of reservoir, well and surface technology with instrumentation and control to launch a new era of drilling and production system. SLB also expects the acquisition to be earnings accretive in very first year. It expects to generate cost synergies of $300M in first year and $600M in the second year. We believe that SLB will benefit from expansion in customer base through and broadening the product offering through this acquisition. The good thing about this acquisition is there is very little overlap between the services provided by SLB and CAM. New SLB Group Structure Unparalleled financial track record boosts confidence SLB has both an impressive financial track record and a solid balance sheet. Through its focus on delivering value- added technology and solutions, SLB has steadily increased its total revenue annually to $48.6B from its low point in 1987 of $4.4B, reporting a compounded annual growth rate of 9% over the past 28 years. Further, SLB has an extremely strong balance sheet, with net debt of just $5.7B, which should allow the company to continue to grow both organically and through acquisitions. Having a strong financial position historically has enabled the company to maintain R&D spending through difficult industry times, allowing the company to increase its technological advantage. SLB s RoIC is much higher than its peers due to strong presence in international markets. SLB s ability to generate strong free cash flow despite difficult industry dynamics is a big positive as it provides investors comfort and offers SLB to create shareholder value through share buyback and acquisitions. Stellar Financial Performance Across Business Cycles Source: Company Investor Presentation CAM, with its 90- year history that began in pressure- control technology, is one of the premier engineering and manufacturing companies in our industry, with a broad portfolio of surface- related drilling and production products, which is well- balanced between offshore and land markets. Today, CAM holds well- established market leadership positions in each of their product lines, and has an unprecedented global installed- base with Cameron wellheads, found on one- third of the world s accessible producing wells. CAM: Revenue Contribution by Business Segments V&M' 20%' Subsea' 29%' 8000$ 22.1%$ 21.8%$ 21.2%$ 7000$ 19.7%$ 19.2%$ 19.7%$ 6000$ 15.3%$ 5000$ 4000$ 3000$ 2000$ 1000$ 2162$ 1849$ 6747$ 7219$ 6196$ 1993$ 6138$ 0$ 2011$ 2012$ 2013$ 2014$ 2015E$ 2016E$ 2017E$ FCF$(US$$M)$ RoIC$ Source: Company financials 10K, HF estimates Strong Balance Sheet despite Various Acquisitions 14000% 12.6%% 12.2%% 12000% 10.5%% 10.9%% 11.2%% 10000% 8000% 7.0%% 7.1%% 25.0%$ 20.0%$ 15.0%$ 10.0%$ 5.0%$ 0.0%$ 14.0%% 12.0%% 10.0%% 8.0%% 6000% 6.0%% Drilling' 28%' Surface' 23%' 4000% 2000% 0% 5291% 5480% 8112% 9933% 11630% 13176% 13330% 2008% 2009% 2010% 2011% 2012% 2013% 2014% 4.0%% 2.0%% 0.0%% Debt%(US$%M)% Leverage% Source: CAM Company filings - 10K Source: Company financials 10K Page 5

6 Extraordinary ability to weather the storm in the industry We are highly impressed with SLB s exceptional ability to contain the damage in the period of turbulence. As compared to the previous downturn of 2009, SLB has been able to keep margin reduction contained. Even though the revenue decline in 1H2015 is higher compared to 1H2009, the margins decline is much lower. This has been possible due to timely reduction in the workforce. SLB believes that its workforce is now right- sized to match the current depressed activity environment. Significant Operational Efficiency Improvement premium paid by SLB is just 26% to CAM s year old price. The acquisition gives SLB a strong presence into subsea equipment segment and strengthens in presence in offshore/subsea segment. We think that the timing of this acquisition was great given the bad state of the industry and generally low interest in this sector. Though we believe that the SLB could have bought CAM at lower price. CAM's products include a wide range of pressure control and rig systems for onshore and offshore drilling; land and platform production systems for conventional and unconventional applications; separation, processing, and treatment systems; subsea production and processing systems; measurement systems; and a wide variety of valves and actuators. The combined entity will generate revenue of $48B and net income of $5.7B as per our estimates Source: Company Presentation Through a combination of proactive cost reduction measures, excellent execution, and the acceleration of its transformation initiatives, SLB s margins have significantly exceeded other players through the downturn so far. We believe that SLB is well positioned to weather future pricing reductions through further efficiency gains. RECENT DEVELOPMENTS SLB announces the acquisition of CAM Towards the end of August 2015, SLB announced the acquisition of CAM. SLB agreed to pay to the shareholders of CAM $14.44 cash and shares of SLB per share of CAM held. The acquisition values CAM at US$14.8B or $66/per share, a premium of 56% to CAM s most recent closing share price. On TTM EV/EBITDA basis, the valuation stands at 8.8x. CAM shareholders will own ~10% of all outstanding shares of SLB post the acquisition. The deal is expected to close in 1Q2016. Though the premium of 56% looks a bit on higher side, we note that the price of CAM shares have declined substantially in last one year. In other words, the Page 6 2QCY15 result was above consensus estimates SLB reported better results than consensus estimates although there was a decline both on QoQ and YoY basis in both revenue and earnings. The company reported adjusted EPS of US$0.88, above consensus estimates of $0.79. The revenue declined 12% sequentially and 25% YoY to US$9B while EPS declined 17% sequentially. The revenue decline was led by sharp 39% YoY decline in North American business while international revenues declined by 19% YoY. Operating margins of North American business declined 777bps YoY while operating margins in international business increased by 44bps YoY despite decline in revenues. Despite the much more challenging market conditions, overall pretax operating margins were maintained at levels well above the previous downturns as the company continued to proactively manage costs and resources. Despite challenging environment the company generated $1.5 billion in free cash flow, representing 132% of earnings for the quarter. In the first half of 2015, YoY revenue dropped 26% in North America and 14% internationally. In spite of these declines being more severe than those of the 2009 downturn, SLB delivered first- half decremental margins of 37% in North America and 18% internationally. These results represent a marked improvement over the

7 equivalent figures that were both in excess of 70% for the same period in Among the business segments, Production Group revenue declined 18% sequentially driven by the unprecedented drop in both activity and pricing for pressure pumping services on land in North America. Drilling Group and Reservoir Characterization Group revenues fell by 11% and 5%, respectively, as the declines in development drilling activity and exploration- related services moderated. Reservoir Characterization Group revenue of $2.4 billion declined 5% sequentially, primarily due to sustained cuts in exploration spending that impacted Wireline and Testing Services activities in Europe/CIS & Africa, the US Gulf of Mexico, and Australia. This decline was partially offset by increased software license sales and by WesternGeco revenue that improved slightly on higher land seismic activity in North Africa and in the United Arab Emirates. Drilling Group revenue of $3.5 billion decreased 11% sequentially, primarily due to a further drop in rig count in North America that impacted activities of Drilling & Measurements and M- I SWACO. Lower drilling activity in Sub- Saharan Africa, Australia and Colombia also contributed to the decline. Production Group revenue of $3.1 billion decreased 18% sequentially with more than 80% of the decrease attributable to North America land. Pressure pumping activity continued to fall and pricing pressure increased as land rig count in North America extended its decline. The company gave a negative outlook for 2HCY15 and CY16 led by expectation of continued low oil prices for some time. Management expects that the E&P investment in North America is expected to fall by more than 35% in 2015 driven by lower land activity and increased pricing pressure. It believes that the North American rig count may now be touching the bottom, and that a slow increase in both land drilling and completion activity could occur in the second half of the year. In the international market, management expects the E&P spending to drop more than 15%. It does not expect any upward adjustment to existing 2015 budgets but sees a continuation of first- half trends with low exploration activity, tight management of development- related spend, and continued pricing pressure. 2QCY15 Revenue Breakup 2QCY15 2QCY14 Change (%) Revenue by Business Segment Reservoir Characterization Drilling Production Eliminations & other Revenue by Geographic Segment North America Latin America Europe/CIS/Africa Middle East & Asia Eliminations & other Source: Company SEC Filings 10Q INDUSTRY TRENDS Deepwater and tight oil reserves offer opportunity in the long term In the long term, Deepwater exploration is a very attractive opportunity. Deepwater accounted for more than 50% of the conventional new reserves added between 2007 and Substantial discoveries were made in the Gulf of Mexico, Brazil, West Africa, East Africa as well as Mediterranean. With most of these currently in the discovery, appraisal and development phase, the proportion of oil produced from Deepwater fields is expected to grow significantly. The World Energy Outlook estimates that Brazil s offshore oil discoveries will triple oil production to 6M barrels per day by This will make Brazil the 6 th largest oil producer in the world. Further, Deepwater projects are among the riskiest and most technologically complex. As a result they are highly capital intensive and typically takes 5 to 8 years to bring into production. Further, the countries like China and Russia have significant shale oil and gas reserves. However due to political and regulatory issues the progress on extracting these reserves has been slow. We believe that in the longer term, these unconventional reserves offer great opportunities for all OFS companies and especially for SLB given its strong foothold in those countries. E&P companies announcing significant capex cuts Many large oil production and exploration companies operating in US have cut down the capex for 2015 to the tune of 30-35% of their earlier budgets. It is expected that if the prices remains at current level for next 2 quarters, these companies will announce further capex cuts as at Page 7

8 current oil price, the production becomes economically unviable in most parts of the USA. We have also seen the capex cuts announced by companies operating in RoW markets to the tune of 15%. This is something unusual and did not happen in last oil downturn in This makes us believe that the industry is envisaging a sustained low oil prices for next couple of years. Rigs count stabilizing around the world After a massive 60% decline in North American active rigs count over the past one year, the rigs count is stabilizing. We have not witnessed significant closure of active rigs over past 2 months. In fact there has been marginal increase in number of active rigs over past 3 months in North America. The active rigs in Rest of the World geographies witnessed just 15% decline over past year led by Europe, which reported ~30% decline in active rigs count. Active Drilling Rigs Around The World 2500" 2000" 1500" 1000" 500" 0" Sep" Oct" Nov" Dec" Jan" Feb" Mar" Apr" May" Jun" Jul" Aug" Source: Baker Hughes RoW" MARKETS AND COMPETITION The oil and gas field services industry is a large industry consisting many diversified service providers and niche service providers. The industry generated total revenue of $96B with profit of $12B in US alone in latest financial year. According to industry estimates, the industry has growth at a rate of 0.3% CAGR over past 5 years. The industry is expected to see ~17% decline in revenue in 2015 due to decline in oil prices. Highly fragmented industry North"Am" Oil & Gas field services industry is fragmented with top 3 players holding 32% market share. These three companies are Halliburton Company (11.8% market share), Schlumberger Ltd (10.7% market share) and Baker Hughes Inc. (9.5% market share). Concentration is particularly low among companies that supply support services for oil drilling and gas extraction on land. Conversely, concentration is higher in the offshore oil and gas extraction services segment, because these services have greater capital requirements. Market Share Data of Key Players Others,+60.0%+ Source: Though global companies like Schlumberger and Halliburton dominate the industry, there are many small companies in the industry that operate successfully. The largest operators in the industry have the advantage of working on a wide variety of projects across the globe, which has provided them with experience that smaller companies typically lack in managing a range of projects. Smaller companies can provide similar services, but they typically do not have the capital or scale to manage the largest projects in the United States. Oil drilling services is single largest sub segment of oil and gas field services with revenue share of 22%. USA Oil and Gas Field Services industry sub segments Source: Highly cyclical nature of the industry Halliburton+ Company,+ 11.8%+ Schulmberger+ Ltd,+10.7%+ Baker+ Hughes+ Inc,+9.5%+ Nabors,+3.20%+ Helmerich+&+ Payne,+2.4%+ PTEN,+2.4%+ Like the energy sector, the Oil & Gas field services industry is cyclical over a long term. Ultimately, the industry is clearly dependent on commodity cycles. Page 8

9 However, the industry is highly volatile and sensitive to the short- term changes in oil prices. Source: Competition is fierce Competition in this industry is high because companies all provide similar services and must therefore compete on price and quality. Competition for contracts is fierce in the industry, as upstream oil and gas companies typically rely on the largest operators for complex and large oil and gas field projects. As a result, small scale and regional companies must compete for available projects. Fortunately for these smaller companies, the emergence of hydraulic fracturing and horizontal drilling techniques has spurred high levels of production and investment in oil and gas field services. Consequently, the number of industry operators has increased at an annualized rate of 2.9% to 11,848, as companies have entered the industry. Contracts secured by industry companies are largely awarded on a competitive bid basis. Price competition is often the primary factor in determining which contractor is awarded a contract, although quality of service, operational and safety performance, equipment suitability and availability, location of equipment, reputation and technical expertise are also factors. These non- price factors depend on skill levels within an organization. In the area of oil and gas well servicing, an important competitive factor in establishing and maintaining long- term customer relationships is having an experienced, skilled and well- trained workforce. Industry consolidation taking place due to recent downturn in industry There has been some industry consolidation over the past five years, with the merger of Smith International and Schlumberger being the most significant in this industry. Decreasing downstream demand, driven by low natural gas prices, has also put pressures on industry players to consolidate and improve operating efficiency. In November 2014, Halliburton announced plans to acquire its competitor, Baker Hughes, for $34.6 billion. This acquisition would drastically alter the global landscape of oil and gas field service companies. Halliburton cited its need to better compete with SLB as a primary reason for acquiring Baker Hughes, and their combined catalogs of technology, products and research and development projects will enable them to more aggressively compete in the industry. Recently, SLB acquired CAM in a $14.8B deal. Consequently, small companies will have a difficult time competing for large- scale contracts. Nonetheless, small companies will still be able to acquire contracts for small- scale oil and gas extraction projects, as the largest operators typically only focus on the most complex and large- scale extraction projects. Medium barriers to entry Barriers to entry in the Oil and Gas Field Services industry vary depending on the services being provided. For example, simple exploration and geological services have fewer barriers than offshore drilling services. Overall, the level of barriers to entry into the industry is considered medium, mostly because small operators can participate in this industry by providing information, research and management services. Barriers to entry are very high for companies that provide comprehensive oil and gas drilling services. Work tends to be won by operators that offer not only competitive prices but also established track records, making it difficult for new entrants to establish themselves, particularly for contracts relating to ongoing well maintenance or life- of- mine management. A brief profile of key players Halliburton Company Halliburton Company (HAL) is one of the world s largest products and services provider to the energy sector. The company is headquartered in Houston and has 77,000 employees in about 80 countries. Halliburton serves the upstream oil and gas industry throughout the life cycle of a reservoir, from locating hydrocarbons and managing geological data to drilling and formation evaluation, well construction, completion and optimizing production. The company operates through its completion and production segment and its drilling and evaluation segment. Page 9

10 Baker Hughes Inc. Baker Hughes Incorporated (BHI) is a comprehensive oil and gas drilling services provider founded in 1987 as a result of a merger between Baker International and Hughes Tool Company. The company is headquartered in Houston and operates in several other markets across the world. Baker Hughes has about 60,000 employees serving customers in over 80 countries. The company provides drill technology, drilling services and drilling fluids to oil and gas extractors. BHI also offers well completion, production optimization and pressure pumping services. In 2013, BHI generated $22.4 billion in total revenue. BHI s products and services are segmented into two broad business segments: drilling and evaluation and completion and production. Weatherford International Plc Ireland- based Weatherford International (WFT) is a major worldwide OFS provider. The company currently employs about 67,000 people in more than 100 countries. Weatherford s primary product segments include artificial lift systems, stimulation and chemicals, drilling services and well construction. Artificial lift systems are used to extract oil and gas from wells that lack sufficient pressure. The stimulation and chemicals segment provides drilling fluids and chemical compounds that increase well output. This business segment also provides hydraulic- fracturing technology. Weatherford s US oilfield services business is anticipated to generate about $4.2 billion in Revenue has increased during the past five years due to the recovery from recessionary lows. However, similar to other industry operators, company profitability has suffered over the past five years due to low domestic natural gas and oil prices. Key Financials (US$ B) Company Mkt+Cap Sales PAT RoE Schlumberger % Baker7Hughes % Cameron % Weatherford D0.6 D Halliburton % Source: Bloomberg, Yahoo Finance We compared SLB with the key players in the industry based on certain financial and valuation parameters in the tables above. We note that the financial and valuation parameters are not strictly comparable due to complex portfolio of business each of these players have and different weightage of each business in their portfolio. We believe that SLB is the best player in OFS industry based on financial and operational parameters. The company has strong presence across geographies and it is either #1 or #2 player in most of the business segments and geographies it operates in. However, we think that, all the players are likely to hit by the persistent downturn in the global oil prices and the dependence on USA oil production. However, SLB will be lease impacted among all because is low exposure to the US business as compared to other players. ECONOMIC OUTLOOK We believe that the key economic indicators for oil pipeline industry are the global demand and supply of oil and the global prices of oil. If the prices of oils drop globally, it results into reduced domestic production. World oil production and consumption balance Peer Comparisons Company Price P/E:16 P/B:16 EV/E:16 Schlumberger $75.0 ::::::::: 19.4 ::::::::::: Baker:Hughes $53.4 :::::::::: J ::::::::::: Cameron $65.0 ::::::::: 22.0 ::::::::::: Weatherford $9.7 :::::::::: J ::::::::::: Halliburton $37.1 ::::::::: 21.6 ::::::::::: Source: Bloomberg, Yahoo Finance Source: EIA Energy short- term outlook April 7, 2015 Give the low growth in fuel consumption growth over next 2 years and continuous production growth in Latin America and OPEC countries will keep the world oil prices at below the cost of production of majority USA oilfields Page 10

11 ($60-65) making things difficult for oil pipeline companies. The forecast of decline in stock of crude oil inventory over next 2 years suggests that the production levels will at best maintained at current level if not curtailed. Also the world oil demand and supply are expected to go hand in hand and unlikely to cause a scarcity of oil. This indicates that oil prices are unlikely to go up in hurry. The oil prices below $55-60 range does not augur well for the growth of US oil production industry. We expect US oil production to decline by 10-15% over next 1 year. World Bank expects the policy rates in the developed world to start going up from 2015 onwards. The interest rates in USA are expected to show steep rise in year 2016 compared to other developed countries. We expect 40bps increase in 10- year US treasury yield by the end of High capital- intensive industries including Oil Production and Exploration will probably find it difficult to undertake new projects limiting the production growth. Government policy rates forecast US Crude oil Inventory Source: EIA Energy short- term outlook April 7, 2015 Further, if the global GDP growth rate is higher, it augurs well for the demand of oil. However, World Bank report projects only incremental growth in world GDP and it is unlikely to result in significant demand for oil in medium term. GDP Growth forecast for world Source: World Bank, January 2015 Global economic prospects Further interest rates are the key economic driver for this industry, as due to its high capital intensity, the higher interest rates will increase the cost of capital for the companies in this industry. Source: World Bank, Bloomberg CATALYSTS FOR GROWTH The key value drivers for this industry are price of crude oil, production of oil, and demand of oil. Essentially, a lower demand of oil will result into lower oil prices, which in turn reduce the production of oil. Reduction in production of oil results into lower demand for oil and gas equipment and services industry. The prices of oil globally are not only decided by demand and supply economics, but other factors like political stability in major oil producing regions as well as international politics are other key important drivers of oil prices. We believe that the industry is likely to slow down if the current low oil prices persist for longer period. The key catalyst for this industry to report reasonable growth would be continuous increase in production of oil by USA. This is only possibly if the global oil prices bounce back to about $80 per barrel over next 2 quarters. The increase in oil prices is possible over next few months if OPEC decides to cut its production to spruce up the prices. Page 11

12 Drivers of investment thesis SLB has a strong business portfolio with array of services offered by it to E&P companies. This along with its long track record makes it a partner of choice for E&P companies across the world. SLB s dependence on US oil and Gas production sector is much lower than some of the other companies in the sector, which makes it less vulnerable to a downturn in the US E&P activities. The current downturn in the industry offers great opportunity to SLB to strengthen its position by acquiring other smaller but quality companies like Cameron. Such acquisitions will strengthen SLBs dominance in the industry. SLBs strong financial performance amid downturn in the industry talks volume about the management s ability to protect the interest of shareholders. Risks to investment thesis A significant reduction in the oil prices from current level would have adverse impact on SLB s business Increase in competitive from the merger of HAL and BHI may impact the business. VALUATION Our investment thesis is the outcome of careful analysis of OFS industry, macro economic outlook and preparation of detailed financial modeling. In this part of the report we will explain you briefly about the key assumptions behind the financial model and investment thesis. Key assumptions in financial model Revenue to decline over next 2 years We expect the revenue of SLB to decline by 24% to US$37.1B in 2015 led by decline in all major business segments due to significant reduction in E&P activities across the world. However the revenue will increase significantly in 2016 on the back of acquisition of CAM. We expect the revenue to grow by 29% yoy in 2016 to US$48B. Without the consolidation of CAM, the revenue is expected to remain flat in The decline in revenue in 2015 will be primarily led by North America, which is likely to see 35% decrease followed by Europe/CIS/Africa region, which is likely to report 24% decline for the period. We forecast revenue growth to normalize from FY17 onwards due to steady increase in USA oil production and exploration activities. We expect terminal growth of 4.5% for SLB from Significant operating profit margin contraction We estimate operating profit margins of SLB to contract by 260 bps in 2015 led by North America region, which is expected to see ~6% drop in margins. Margins are expected to drop significantly by 80bps in 2016 due to low margin profile of CAM. However, we expect operating margins to start inching up from 2017 onwards on the back of recovery in industry. Return to fall in 2015; Cash flows to remain firm We expect that RoIC will be contracted temporarily in 2015 due to sharp 38% fall in net income. However, we expect return ratios to start improving 2016 onwards on the back of cost synergies generated from CAM merger. We expect FCF to fall to US$2B in 2015 from US$6.1B in However, FCF will substantially improve from 2016 onwards. Discounted Cash Flow/Economic Profit (DCF/EP) The DCF/EP model generates a target price of $117. This model is based on a 4.5% CV growth rate discounted at a weighted average cost of capital (WACC) of 7.29%. This represents a 56% price premium to the closing price on 9/17/15. The recent sell off in the energy sector was driven by a ~50% decline in WTI and Brent crude oil prices due to street sentiment regarding ongoing headwinds facing the global economy combined with record levels of crude oil production and supply. We believe that this is a great opportunity to buy SLB at significant discount to its intrinsic value. Dividend Discount Model (DDM) The DDM returned a current target price of $87.43, a 16.57% premium to the current market price and 25.3% lower than the DCF/EP model. SLB has maintained it dividend payout ratio constant between 25-30% over past 6 years despite significant growth in profits. It has rather utilized the excess free cash flow to keep strong balance sheet and grow inorganically. We like this approach as the size of SLB has helped it become more Page 12

13 profitable and gain market share from competitors. We estimate the per share dividend to increase from current level of $1.5 to $6 in FY21 if it does not go for big acquisitions in the future. Relative valuation We have compared SLB with other large, multinational OFS companies like HAL, BHI and WFT. All these companies have presence in many international markets. We understand that these companies are not strictly comparable with each other given their relative difference in size and business model. We have compared the valuation of these companies based on EV/EBITDA, and price/book method because earnings of BHI and HAL are expected to be negative/very low. The relative P/B model and EV/EBITDA model returned a target price of $62 and $77 respectively. However, we believe that the target price arrived based on relative valuation does not differentiate many qualitative and quantitative differences factors. We believe that SLB should trade at least a 50% premium multiple to its peers given its superior balance sheet, historical growth and return ratios. So the target prices based on relative valuation works out to be $105/share. Overall, we reference the DCF/EP and DDM valuation model in deriving our target price range as that valuation most accurately captures SLBs current operating profile and the underlying revenue growth components. The Relative valuation models provide supporting evidence and may help substantiate assumptions used in our DCF and DDM analysis. KEYS TO MONITOR There is couple of key things to monitor for investors in this industry. Global oil prices: Oil price is the significant determinant of the performance of this industry in the medium term basis. Currently, the oil prices are multi year low. The movement of oil prices over next 2 quarters will be a key thing to monitor Domestic production level of oil: The performance of oil & gas equipment and services industry is directly related to the domestic oil production levels. REFERENCES 1) Short- term Energy Outlook, U.S. Energy Information Administration, April 17, ) Effect of declining crude oil prices on U.S. production = ) IBISWorld U.S. Industry Reports Oil & Gas Field Services 4) Bloomberg Historical Volatility, Beta, Relative Valuation 5) Factset 6) Company fillings of SLB, BHI, HAL, WFT 7) Baker Hughes 8) 9) SLB 2QFY15 Earnings Transcript 10) JP Morgan Analyst report IMPORTANT DISCLAIMER Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report. Page 13

14 Schlumberger+Ltd Key$Assumptions$of$Valuation$Model Ticker'Symbol SLB Current'Share'Price $73.70 Current'Model'Date 18/11/15 Fiscal'Year'End Dec.+31 PreGTax'Cost'of'Debt 2.80% Post'tax'cost'of'Debt 1.82% Beta 1.2 RiskGFree'Rate 2.20% Equity'Risk'Premium 4.85% CV'Growth 5% Current'Dividend'Yield 2.13% Marginal'Tax'Rate 35% Cost'of'equity 8.0% WACC 7.29% CV'ROE 13.2% Stock'Price'DCFGEP'Method Stock'Price'DDM'Method Stock'Price'relative'valuation' Method Page 14

15 Schlumberger+Ltd Revenue&Decomposition Fiscal'Years'Ending'Dec.' E 2016E 2017E 2018E 2019E 2020E 2021E Revenue Model Oil Field Services % of Total Sales % change Drilling % change % of OFS Reservoir Production % change % of OFS Reservoir Characterization % of OFS % change Elimination/Others % of OFS % change 41, , , , , , , , , , % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 12.9% 8.5% 7.3% -23.6% 4.3% 8.4% 7.1% 6.5% 5.5% 4.5% 15, , , , , , , , , , % 7.6% 8.0% -23.0% 4.0% 8.5% 7.0% 6.0% 5.0% 4.5% 38.1% 37.8% 38.0% 38.3% 38.2% 38.2% 38.2% 38.0% 37.8% 37.8% 14, , , , , , , , , , % 7.6% 13.7% -25.0% 4.0% 8.5% 7.5% 6.5% 6.0% 4.5% 35.5% 35.2% 37.3% 36.6% 36.5% 36.5% 36.6% 36.7% 36.8% 36.8% 11, , , , , , , , , , % 27.5% 25.2% 25.5% 25.9% 25.8% 25.8% 25.9% 25.8% 25.8% 12.4% 11.7% -1.9% -22.5% 6.0% 8.0% 7.0% 7.0% 5.0% 4.5% <0.3% <0.5% <0.4% <0.4% <0.5% <0.5% <0.6% <0.6% <0.5% <0.5% % 82.8% -2.7% -33.7% 47.9% -3.9% 32.6% 4.2% -12.2% 4.5% Total Revenues % change % 8.5% 7.3% -23.6% 4.3% 8.4% 7.1% 6.5% 5.5% 4.5% Geographic+Split+of+Revenue North'America Latin'America Europe/CIS/Africa Middle'East/Asia Elimination/Others Total+Revenue Cameron+International , , , , , , , % 2.7% 16.2% -35.0% 0.0% 7.0% 7.0% 6.0% 5.0% 4.5% , , , , , , , % 2.6% -0.7% -20.0% 6.0% 9.0% 7.5% 7.0% 6.0% 4.5% , , , , , , , % 7.8% 0.8% -24.0% 4.0% 8.0% 7.0% 6.0% 5.0% 4.5% , , , , , , , % 23.5% 10.3% -12.0% 8.0% 10.0% 7.0% 7.0% 6.0% 4.5% % 5.3% -22.2% 50.0% 5.0% 5.0% 5.0% 5.0% 5.0% 4.5% % 8.5% 7.3% -23.6% 4.3% 8.4% 7.1% 6.5% 5.5% 4.5% Business+Segment+Revenue Subsea Surface Drilling V&M Elimination/Others , , , , , , , % 36.5% 9.0% -18.0% 4.0% 6.0% 6.0% 5.0% 5.0% 4.5% , , , , , , , % 11.7% 16.1% -18.0% 6.0% 8.0% 7.0% 6.0% 5.0% 4.5% , , , , , , , % 28.8% 31.0% -10.0% 4.0% 7.0% 7.0% 6.0% 5.0% 4.5% , , , , , , , % -2.9% 1.0% -15.0% 8.0% 10.0% 8.0% 7.0% 6.0% 4.5% <100 <184 < % 84.0% 47.3% -20.0% 5.0% 5.0% 5.0% 5.0% 5.0% 4.5% Total+Revenue % 17.2% 13.6% -15.0% 5.2% 7.6% 7.0% 6.0% 5.2% 4.5% Page 15