Moody's Upgrades Schlumberger (SLB) to 'Aa3'

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Price: $58.13 +2.23%

Overall Analyst Rating:
SELL (= Flat)

Dividend Yield: 2.5%
EPS Growth %: -10.1%

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Moody's Investors Service upgraded Schlumberger Ltd's (NYSE: SLB) issuer rating and the senior unsecured ratings of its guaranteed subsidiaries to Aa3 from A1. Moody's affirmed the A1 issuer rating of Schlumberger Holdings Corporation (SHC), a wholly owned unguaranteed subsidiary of Schlumberger. Moody's also affirmed the Prime-1 short term commercial paper ratings for Schlumberger's guaranteed subsidiaries and SHC. The rating outlooks for Schlumberger and SHC are stable.

"Schlumberger's industry leading technologies and dominant market position coupled with its conservative financial policies support the higher Aa3 rating through oilfield services cycles," commented Pete Speer, Moody's Senior Vice-President. "The company's growing asset base and free cash flow generation also compares well to Aa3-rated peers in other industries."

RATINGS RATIONALE

The upgrade to Aa3 for Schlumberger reflects the diversification and global breadth of its operations, as well as the substantial financial flexibility provided by consistent free cash flow generation and its large cash balances. The company is the world's largest publicly traded oilfield services company and the highest rated within its industry sector. Schlumberger's market position is first or second in most of its products and services, including seismic data acquisition, directional drilling, hydraulic fracturing, wireline logging, drilling and completion fluids, and production testing. With the 2013 formation of the OneSubsea joint-venture with Cameron International Corporation (Baa1 stable), the company owns 40% of this joint venture in the growing subsea market.

Schlumberger has historically maintained large cash and short-term investment balances as a financial management strategy and offset to its debt balances, enhancing its ability to withstand cyclical downturns in oilfield services demand while continuing to fund capital and R&D investments that increase its competitiveness. The company continually improves its operating efficiency, service delivery and working capital management to boost its already strong free cash flow generation. This allows Schlumberger to meet its shareholder reward objectives by supporting a meaningful dividend and a $10 billion share repurchase program through free cash flow and cash balances without diminishing its financial strength.

Moody's expects the company to generate over $15 billion of adjusted EBITDA in 2014 and end the year with Debt/EBITDA of around 1.5x. Schlumberger's net debt/EBITDA will be about 1x. The company's earnings power is comparable to Aa3 rated companies in the consumer products, heavy manufacturing, business services and transportation industries. Its financial leverage is generally lower than these peers, mitigating the higher cyclicality of demand for its products and services which are tied to volatile oil and natural gas prices.

SHC is an intermediate holding company that owns Schlumberger's assets and operations in the United States. The company is one of Schlumberger's largest operating units, accounting for about 30%-35% of the Group's total revenues and assets. SHC benefits from strong market positions and service line diversification across the oil & gas drilling and production life cycle, but it is concentrated in the US. SHC's scale, geographic concentration and modest leverage supports a stand-alone rating of A2, which we have continued to add one notch of ratings uplift to A1 because of its financial and strategic importance to Schlumberger. SHC's debts are not guaranteed by Schlumberger, and therefore the upgrade of Schlumberger did not result in a corresponding upgrade of SHC.

Schlumberger's Prime-1 commercial paper rating is supported by its large cash and short-term investment balances and an aggregate of $4 billion of committed bank credit facilities. The company's strong intrinsic liquidity is underpinned by free cash flow and flexible capital spending. At March 31, 2014, the company had $7.1 billion of cash and short-term investments and $2.7 billion of available borrowing capacity on its revolving credit facilities, factoring in the $1.1 billion of outstanding commercial paper borrowings.

A future upgrade of Schlumberger's ratings will depend on the company's success in consistently maintaining low financial leverage throughout cycles and in generating superior returns compared to other Aa-rated companies across industries. Schlumberger's ratings could come under pressure if its earnings and capital returns were to weaken substantially and fall below levels achieved by similarly rated peers in other industries, or if the company changed its financial policies towards a more aggressive posture. Debt/EBITDA sustained above 2x in a mid-cycle or better earnings environment for oilfield services could result in a ratings downgrade.

Rating Actions: Upgrades: ..Issuer: Schlumberger Ltd

.... Issuer Rating, Upgraded to Aa3 from A1

..Issuer: Schlumberger Finance B.V.

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)Aa3 from (P)A1

....Senior Unsecured Regular Bond/Debentures, Upgraded to Aa3 from A1

..Issuer: Schlumberger Investment SA

....Senior Unsecured Regular Bond/Debentures, Upgraded to Aa3 from A1

..Issuer: Schlumberger Norge AS

....Senior Unsecured Regular Bond/Debentures, Upgraded to Aa3 from A1

..Issuer: Schlumberger Oilfield UK, plc

....Senior Unsecured Regular Bond/Debentures, Upgraded to Aa3 from A1

..Issuer: Schlumberger S.A.

....Senior Unsecured Regular Bond/Debentures, Upgraded to Aa3 from A1

Affirmations:

..Issuer: Schlumberger Finance B.V.