Derivative Instruments and Hedging Activities | 9 Months Ended |
Sep. 30, 2014 |
Derivative Instruments And Hedging Activities Disclosure [Abstract] | ' |
Derivative Instruments and Hedging Activities | ' |
11. Derivative Instruments and Hedging Activities |
Schlumberger is exposed to market risks related to fluctuations in foreign currency exchange rates and interest rates. To mitigate these risks, Schlumberger utilizes derivative instruments. Schlumberger does not enter into derivative transactions for speculative purposes. |
Foreign Currency Exchange Rate Risk |
As a multinational company, Schlumberger conducts business in more than 85 countries. Schlumberger’s functional currency is primarily the US dollar, which is consistent with the oil and gas industry. 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. In addition, Schlumberger is also exposed to risks on future cash flows relating to certain of its long-term debt which is denominated in currencies 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 September 30, 2014, Schlumberger recognized a cumulative net $50 million loss in Equity 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 12 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 as it relates to certain currencies. These contracts are accounted for as fair value hedges with the fair value of the contracts recorded on the Consolidated Balance Sheet and changes in the fair value recognized in the Consolidated Statement of Income along with the change in fair value of the hedged item. |
At September 30, 2014, contracts were outstanding for the US dollar equivalent of $6.2 billion in various foreign currencies, of which $2.5 billion related 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 occasionally 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 September 30, 2014, Schlumberger had fixed rate debt aggregating $9.1 billion and variable rate debt aggregating $4.0 billion, after taking into account the effect of the swap. |
Short-term investments and Fixed income investments, held to maturity, totaled $4.1 billion at September 30, 2014, and were comprised primarily of money market funds, eurodollar time deposits, certificates of deposit, commercial paper, euro notes and Eurobonds, and were substantially all denominated in US dollars. The carrying value of these investments approximated fair value, which was estimated using quoted market prices for those or similar investments. |
The fair values of outstanding derivative instruments were as follows: |
|
| (Stated in millions) | | | | | | | | | | | | | | |
| Fair Value of Derivatives | | | Consolidated Balance Sheet Classification | | | | | | | | | | | |
| Sept. 30, | | | Dec. 31, | | | | | | | | | | | | | | |
| 2014 | | | 2013 | | | | | | | | | | | | | | |
Derivative Assets | | | | | | | | | | | | | | | | | | | | |
Derivatives designated as hedges: | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | $ | 3 | | | $ | 98 | | | Other current assets | | | | | | | | | | | |
Foreign exchange contracts | | 2 | | | | 24 | | | Other Assets | | | | | | | | | | | |
Interest rate swap | | — | | | | 27 | | | Other Assets | | | | | | | | | | | |
| $ | 5 | | | $ | 149 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedges: | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | $ | 10 | | | $ | 10 | | | Other current assets | | | | | | | | | | | |
Foreign exchange contracts | | — | | | | 4 | | | Other Assets | | | | | | | | | | | |
| $ | 10 | | | $ | 14 | | | | | | | | | | | | | | |
| $ | 15 | | | $ | 163 | | | | | | | | | | | | | | |
Derivative Liabilities | | | | | | | | | | | | | | | | | | | | |
Derivatives designated as hedges: | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | $ | 42 | | | $ | 14 | | | Accounts payable and accrued liabilities | | | | | | | | | | | |
Foreign exchange contracts | | 83 | | | | 1 | | | Other Liabilities | | | | | | | | | | | |
Interest rate swap | | 15 | | | | — | | | Other Liabilities | | | | | | | | | | | |
| $ | 140 | | | $ | 15 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedges: | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | $ | 10 | | | $ | 2 | | | Accounts payable and accrued liabilities | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| $ | 150 | | | $ | 17 | | | | | | | | | | | | | | |
|
The fair value of all outstanding derivatives was determined using a model with inputs that are observable in the market or that can be derived from or corroborated by observable data. |
The effect of derivative instruments designated as fair value hedges and those not designated as hedges on the Consolidated Statement of Income was as follows: |
|
| (Stated in millions) | | | |
| Gain (Loss) Recognized in Income | | | |
| Third Quarter | | | Nine Months | | | |
| 2014 | | | 2013 | | | 2014 | | | 2013 | | | Consolidated Statement of Income Classification |
Derivatives designated as fair value hedges: | | | | | | | | | | | | | | | | | |
Interest rate swap | $ | (44 | ) | | $ | — | | | $ | (53 | ) | | $ | (2 | ) | | Interest expense |
| | | | | | | | | | | | | | | | | |
Derivatives not designated as hedges: | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | $ | (26 | ) | | $ | 31 | | | $ | (21 | ) | | $ | 8 | | | Cost of revenue |
|
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 | | | | | | |
| Third Quarter | | | Nine Months | | | | | | |
| 2014 | | | 2013 | | | 2014 | | | 2013 | | | Consolidated Statement of Income Classification | | | |
Foreign exchange contracts | $ | (54 | ) | | $ | 33 | | | $ | (62 | ) | | $ | (8 | ) | | Cost of revenue | | | |
Foreign exchange contracts | | 1 | | | | (3 | ) | | | 3 | | | | (7 | ) | | Research & engineering | | | |
| $ | (53 | ) | | $ | 30 | | | $ | (59 | ) | | $ | (15 | ) | | | | | |
|
| (Stated in millions) | | | | | | |
| Gain (Loss) Recognized in AOCL | | | | | | |
| Third Quarter | | | Nine Months | | | | | | |
| 2014 | | | 2013 | | | 2014 | | | 2013 | | | | | | |
Foreign exchange contracts | $ | (151 | ) | | $ | 76 | | | $ | (138 | ) | | $ | (27 | ) | | | | | |
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