Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2013

Derivative Instruments and Hedging Activities

11. Derivative Instruments and Hedging Activities

Schlumberger is exposed to market risks primarily related to fluctuations in foreign currency exchange rates and interest rates. To mitigate these risks, Schlumberger utilizes derivative instruments. Schlumberger does not enter into derivatives for speculative purposes.

Foreign Currency Exchange Rate Risk

As a multinational company, Schlumberger conducts its business in approximately 85 countries. Schlumberger’s functional currency is primarily the US dollar, which is consistent with the oil and gas industry. Approximately 78% of Schlumberger’s revenues in 2013 was denominated in US dollars. 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 local currency expenses exceed revenues denominated in local currency that are 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 December 31, 2013, Schlumberger recognized a cumulative net $29 million gain 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 twelve months.

Schlumberger is also exposed to changes in the fair value of assets and liabilities, including certain of its long-term debt, which are denominated in currencies other than the functional currency. Schlumberger uses foreign currency forward contracts and foreign currency options to hedge this exposure for certain currencies. The fair value of these contracts is recorded on the Consolidated Balance Sheet and the changes in the fair value are recognized in the Consolidated Statement of Income along with the change in fair value of the hedged item.

At December 31, 2013, contracts were outstanding for the US dollar equivalent of $7.6 billion in various foreign currencies, of which $3.8 billion relate to hedges of debt denominated in currencies other than the functional currency.

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, from time to time, 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 will 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 currently in income to largely offset the respective gains and losses recognized on changes in the fair value of the hedged debt.  

At December 31, 2013, Schlumberger had fixed rate debt aggregating $10.5 billion and variable rate debt aggregating $2.7 billion, after taking into account the effect of the swap.

The fair values of outstanding derivative instruments are summarized as follows:

	(Stated in millions)
	Fair Value of Derivatives				Consolidated Balance Sheet Classification
Derivative assets	2013		2012
Derivative designated as hedges:
Foreign exchange contracts	$	98	$	26	Other current assets
Foreign exchange contracts		24		22	Other Assets
Interest rate swaps		27		—	Other Assets
Interest rate swaps		—		2	Other current assets
		149		50
Derivative not designated as hedges:
Foreign exchange contracts		10		10	Other current assets
Foreign exchange contracts		4		6	Other Assets
		14		16
	$	163	$	66
Derivative Liabilities
Derivative designated as hedges:
Foreign exchange contracts	$	14	$	80	Accounts payable and accrued liabilities
Foreign exchange contracts		1		19	Other Liabilities
		15		99
Derivative not designated as hedges:
Foreign exchange contracts		2		3	Accounts payable and accrued liabilities
	$	17	$	102

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

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

	(Stated in millions)
	Gain (Loss) Recognized in Income								Consolidated Statement of
	2013			2012		2011			Income Classification
Derivatives designated as fair value hedges:
Interest rate swaps	$	15		$	1	$	9		Interest expense
Derivatives not designated as hedges:
Foreign exchange contracts	$	(2	)	$	5	$	(17	)	Cost of revenue
Commodity contracts		—			1		(5	)	Cost of revenue
	$	(2	)	$	6	$	(22	)

The effect of derivative instruments in cash flow hedging relationships on income and Accumulated other comprehensive loss (AOCL) was as follows:

	(Stated in millions)
	Gain (Loss) Reclassified from AOCL into Income									Consolidated Statement of
	2013			2012			2011			Income Classification
Foreign exchange contracts	$	58		$	49		$	(25	)	Cost of revenue
Foreign exchange contracts		(8	)		(13	)		17		Research & engineering
	$	50		$	36		$	(8	)

	(Stated in millions)
	Gain (Loss) Recognized in AOCL
	2013		2012		2011
Foreign exchange contracts	$	49	$	92	$	(79	)