INITIATING COVERAGE REPORT

William C. Dunkelberg Owl Fund February 13, 2014 Michael Kollar: Lead Analyst mkollar@theowlfund.com Maxime Berin: Associate Analyst mberin@theowlfund.com Shady Botros: Associate Analyst sbotros@theowlfund.com

Schlumberger, Limited
Exchange: NYSE Ticker: SLB Target Price: $115.16

Oil & Gas Equipment & Services

COMPANY OVERVIEW
Schlumberger Limited (SLB) is the largest company in the midstream, oil & gas equipment & services industry of the energy sector. The company has 120,000 employees, with operations in 85 different countries, and delivers technology, integrated project management, and information solutions to oil and gas explorers and producers. Schlumberger continues to thrive by delivering efficiency to customers in the form of advanced processes and technology that reduces the cost of extracting oil a need that will persist as oil reserves deplete and new reserves become most costly to drill. Schlumbergers revenue can be broken down into three business segments; reservoir production (27% of revenue), drilling (38% of revenue), and production (35% of revenue). Schlumberger operates globally with operations in North America (32%), Latin America (18%), Europe, Russia and Africa (27%), as well as the Middle East and Asia (22%).

Sector Outperform Recommendation: BUY

Key Statistics:
Price Projected Return Shares O/S (bn) Market Cap (bn) Earnings Date 1Q13 2Q13 3Q13 4Q13 $90.03 30% 1.31 $118.75 EPS $1.01 $1.15 $1.29 $1.35 52 Week Low 52 Week High Yield Enterprise Value Revenue YoY 1% 7% 9% 7% $69.08 $94.91 1.8% $1,230mm Price -1.48% 5.43% 2.80% 1.81%

Earnings History:

Earnings Projections: INDUSTRY OVERVIEW

The United States recently became the largest producer of hydrocarbons in the world (surpassing Russia), and the energy industry continues to transform along with constant developments in oil, gas, and renewable energy. The oil & gas equipment & services industry remains sensitive to the supply and demand of oil. Demand is impacted by macroeconomic headwinds and tailwinds, most notably: a plodding US economy, the European debt crisis, and emerging market growth. Supply is influenced by global production levels and political unrest in the Middle East, such as Libya and Egypt. Although rebounding, Iran, the third largest oil exporter in the world, saw its exports cut after the US House of Representatives passed a bill levying sanctions on it in July of 2013. This resulted in a $40 billion loss of total industry revenue in 2012. Despite short-term turmoil, oilfield service companies remain bullish on growth in the Middle East and emerging markets such as Asia, given the increased demand for oil & gas from their developing economies. Innovation and new technology for fracking and deepwater rigs continues to catalyze growth across the industry. National oil and gas E&Ps
Year 2011 2012 2013 2014 Q1 $0.71 $0.960 $1.053 $1.235 Q2 $0.857 $1.006 $1.149 $1.371 Q3 $0.967 $1.040 $1.290 $1.508 Q4 $1.098 $1.078 $1.350 $1.615 Total $3.613 $4.164 $4.750 $5.706

Energy

All prices current at end of previous trading sessions from date of report. Data is sourced from local exchanges via CapIQ, Bloomberg and other vendors. The William C. Dunkelberg Owl fund does and seeks to do business with companies covered in its research reports.

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have continued to increase capital expenditures in unconventional, ultra-deepwater drilling as onshore reserves mature. Its estimated that offshore production will equal onshore production in the next 15 years. Because offshore drilling is more expensive, companies place a premium on efficiency. Offshore drillers continue to replace older rigs with newer, more technologically advanced rigs, particularly in challenging drilling environments such as the North Sea. As a global leader in the equipment and services industry, Schlumberger is well-positioned to capitalize on this trend.

Economic Moats Economy of scale: SLB is the largest company in a capital intensive business with high barriers to entry. SLB is able to leverage its size, 70 years of expertise, and global network of resources to continually expand margins and deliver value to customers. Proprietary technology: SLB maintains a massive portfolio of patents which guarantees a diverse and unique product offering not available elsewhere. Research & Engineering Centers: SLB operates 125 R&E centers which drive innovation and shortens product development cycles

INVESTMENT THESIS
The energy sector has seen a sell-off recently, leaving many companies at attractive prices. In an environment where commodity prices are forecasted as being flat through 2014, a company deriving its revenue through services, rather than the sale of commodities themselves, will perform well. Schlumberger is the worlds largest oil services company and a staple of the energy sector. Schlumberger is an excellent addition to the Funds portfolio because will give it exposure to a less volatile segment of the sector. Schlumberger is the premium company in its peer group and is currently trading at a 8.5% discount to its implied average EV/EBITDA multiple. Going forward, Schlumberger will continue to see revenues and earnings rise as more international oil E&Ps make capital expenditures in onshore, ultra-deep and deep water oil well services and drilling equipment in 2014 and 2015. Also, the company is poised to capture new growth as the natural gas boom sweeps Asia. Schlumbergers HiWay fracturing equipment and StethoScope technology, which increase natural gas production efficiency, will drive top line growth. The company also has a broad geographic footprint allowing it to continue to service the increasing oil demand around the world, especially in emerging markets.

Positives $10 billion share buyback program launched in 2013, the largest buyback program of its peer group.

Risks Commodity Prices: Short-term volatility in pricing of oil and natural gas can adversely impact customer margins and consequent capital expenditures, and SLBs modest production business of 150,000 barrels/day. Geopolitical: SLB has operations in the Middle East, including Iraq, which although stable in the near term, may become politically unstable from terrorist attacks and insurgencies. Weather: SLB operates in many challenging environments across the globe and adverse weather conditions, such as hurricanes, can affect operations at these locations

CATALYSTS
While domestic oil companies may trim back capital expenditures in the near term, these are primarily on larger, infrastructure investments. Schlumberger provides well services and E&P spending will not be curtailed as much because of the foremost goal of efficiency and recovery. National oil companies from the Middle East and Latin America are expected to raise their exploration and production spending by 14% in 2014. These investments will benefit Schlumberger moving forward and will also help the company to find even more reservoirs such as Pre-salt region off the coast of Brazil, Norway, US Gulf of Mexico. These new sources of energy will help counter the effect of oversupply in North America due to seasonal effects and overcapitalization. There is serious potential demand for oil-services China. The shale gas output in China for 2013 was ~200 million cubic meters. By 2015, they are expected to increase to 6.5 billion cubic meters,

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resulting from capital investments in excess of $65 billion. These incredible statistics have already attracted major intergated oil companies such as Exxon Mobile and Chevron. The demand for shale gas YOY has increased by 15%. Schlumbergers StethoScope technology has already been implemented by Energy Development Corporation China and provided a 50% increase in production yield of its natural gas wells. Schlumbergers new HiWay fracturing technology will also have a strong, positive impact on the market share of SLB and on natural gas E&Ps. This pumping technology creates stable channels within fractures and has already delivered increased natural gas well production levels while minimizing proppant and water use. According to Schlumberger, HiWay can increase production by +20% while using 40% less proppant per project, and 60% less water. With natural gas prices forecasted as remaining flat through 2014, gas E&Ps will look to Schlumbergers HiWay system to deliver value.

Revenue
Schlumbergers revenue is driven by capital expenditures of large national oil companies in the US and abroad. FY2013 revenue grew 8.5% YOY reaching $45.3 billion. The most recently reported 4Q2013 revenue came in at $11.91 billion, slightly missing estimates by 0.57%.

Revenue Generation: Reservoir Characterization: Imaging, monitoring, and development services; wireline technology; E&P pressure and flow-rate measurement services; information solutions including software, consulting, data management, and IT infrastructure specific to the oil & gas industry. Production: Well services comprising pressure pumping (HiWay), well cementing, stimulation, and intervention; well completion services and equipment, such as packers, safety valves, and sand control technology; artificial lift; coiled tubing equipment and services; slickline services for downhole mechanical well intervention, reservoir monitoring, and downhole data acquisition; subsea solutions; and geological storage solutions, including storage site characterization for carbon dioxide, as well as engages in the development, management, and environmental protection of water resources. Drilling: Designing, manufacturing, and marketing of drill bits and drill fluid systems; geo services; supplies engineering support; directional-drilling, measurementwhile-drilling, and logging-while-drilling services; provides bottom hole assembly drilling tools, borehole enlargement technologies, impact tools, and tubulars and tubular services; and dynamic pressure management solutions.

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Spring 2014 EBITDA Margins

Schlumberger has kept its EBITDA margin fairly consistent and is expected to expand margins going forward into 2014. In a recent investor presentation (12/3/2013), President of Operations mentioned a reorganization of global distribution, warehousing, and maintenance.

Return on Assets
Schlumberger remains efficient at generating stable returns on its assets. While its peer group has seen deterioration since 2012Q1, Schlumberger has been increasing its returns through prudent execution and deploying over 150,000 mobile assets to better serve its broad geographic base.

Debt
Total Debt: $13.2 Billion Debt/Equity: 33.2% Interest Coverage Ratio: 22.36

Schlumberger enjoys an A+ credit rating from S&P. The nature of Schlumbergers capital intensive business is usually indicative of very high levels of debt, however, its operational goals of efficiency extends to its balance sheet. The company is very solvent, as evidenced by total outstanding debt of a mere $13.2 billion affording it a total debt to equity ratio of 33.2%. As a result, Schlumberger has negligible default risk and ample room to raise debt to finance additional expenditures. When asking IR about increasing leverage, they stated they have considered it, but have determined that maintaining a clean balance sheet is the best way to deliver ROIC to shareholders. However, they did state they may lever up for strategic reasons, such as M&A.

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Spring 2014 Free Cash Flow

Schlumberger has a Price / FCF of 28.85, the highest of peer group. Unlevered free cash flow continues to rise as Schlumberger balances expenditures and grows revenue. Free cash flow is one of the major strengths of Schlumberger. In 2012, their free cash flow is twice that of their main competitor, Halliburton. its

Dividend
Schlumberger provides a 1.77% dividend yield and is expected to increase this by 13.64% over the next year. This is the leading dividend yield of its peers and demonstrates effective management execution and its commitment of passing returns onto shareholders.

Comparable Analysis
SCHLUMBERGER (SLB) Comparables Analysis
($ in millions except per share) Capitalization Stock Equity Enterprise Price Market Market 2/11/2014 Value Value $ 53.84 $ 46,084 $ 51,305 $ 60.49 $ 26,740 $ 29,793 $ 13.90 $ 10,740 $ 19,715 Valuation Multiples P/E Multiple LTM NFY 16.12 13.58 22.96 15.02 25.74 21.25 21.61 16.62 22.96 15.02 18.66 15.84 EV/EBITDA LTM NFY 10.18 7.03 8.17 6.30 8.03 7.26 8.79 6.86 8.17 7.03 10.24 8.79 ROE NTM 14.5% 6.3% -8.6% 4.1% 6.3% 18.1% Ratios ROA NTM 7.5% 4.0% -3.6% 2.7% 4.0% 10.5% ROC NTM 11.4% 5.6% N/A 8.5% 8.5% 14.3% Growth Margins Leverage Total Gross EBITDA Debt/ Revenue Margin Margin Equity NTM LTM LTM MRQ 8.1% 14.9% 20.5% 57.4% 8.4% 17.0% 16.3% 24.5% 7.2% 22.1% 16.1% 108.3% 7.9% 18.0% 17.6% 63.4% 8.1% 17.0% 16.3% 57.4% 9.3% 22.1% 26.6% 33.2%

Company Halliburton Baker Hughes Weatherford Mean Median Schlumberger

*Data as of 2/11/2014

$ 90.37 $ 118,750 $

122,949

Target Price
EV/EBITDA Target Price Consensus NFY EBITDA $ 13,930.21 Target EV/EBITDA 11.15X Enterprise value estimate $ 155,355 - Debt outstanding (MRQ) $ 13,176 + Cash $ 8,370 Equity value $ 150,549 No. Shares (Millions) 1,307 Target price $ 115.16 E(r) 28% Dividend Yield (1.3%) 1.77% Total Return 30%

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Schlumberger historically trades at a premium to its peer group of Halliburton, Baker Hughes, and Weatherford. To arrive at a target EV/EBITDA multiple we did a relative valuation based on the historical ten year spread of Schlumberger to each peer. By choosing a ten-year time period, idiosyncrasies of the cyclical nature of business due to commodity prices are effectively taken into account. After applying a mean factor to each peers current EV/EBITDA multiple, we averaged the sum of the Implied multiples of its peers. We determined a target multiple of 11.15x. Using this multiple we reached a target price of $115.16/share. After accounting for a 1.77% dividend yield, we expect a 28% return. Appendix: Ten Year Historical Spreads on Each Peer Baker Hughes (BHI)

Halliburton (HAL)

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Weatherford (WFT)

Correlation to Crude

Correlation to Natural Gas

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Onshore vs. Offshore rig count over the last five years

Analyst Consensus

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DISCLAIMER This report is prepared strictly for educational purposes and should not be used as an actual investment guide. The forward looking statements contained within are simply the authors opinions. The writer does not own any Schlumberger Limited stock. TUIA STATEMENT Established in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business, for his tireless dedication to educating students in real-world principles of economics and business, the William C. Dunkelberg (WCD) Owl Fund will ensure that future generations of students have exposure to a challenging, practical learning experience. Managed by Fox School of Business graduate and undergraduate students with oversight from its Board of Directors, the WCD Owl Funds goals are thr eefold: Provide students with hands-on investment management experience Enable students to work in a team-based setting in consultation with investment professionals. Connect student participants with nationally recognized money managers and financial institutions

Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and auditing costs and partial scholarships for student participants.

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