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

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%).

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

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

Sector Outperform Recommendation: BUY Key Statistics: Price $90.03 52 Week Low $69.08

Projected Return

30% 52 Week High $94.91

Shares O/S (bn) 1.31 Yield 1.8% Market Cap (bn) $118.75 Enterprise Value $1,230mm

Earnings History: Earnings Date EPS Revenue YoY Price

1Q13 $1.01 1% -1.48% 2Q13 $1.15 7% 5.43% 3Q13 $1.29 9% 2.80%

4Q13 $1.35 7% 1.81%

Earnings Projections: Year Q1 Q2 Q3 Q4 Total

2011 $0.71 $0.857 $0.967 $1.098 $3.613

2012 $0.960 $1.006 $1.040 $1.078 $4.164

2013 $1.053 $1.149 $1.290 $1.350 $4.750

2014 $1.235 $1.371 $1.508 $1.615 $5.706

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.

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.

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,

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

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

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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, measurement-

while-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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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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Free Cash Flow

Schlumberger has a Price / FCF of 28.85, the highest of its

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.

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

Target Price

($ in millions except per share)

Growth Leverage

Stock Equity Enterprise Total Gross EBITDA Debt/

Price Market Market ROE ROA ROC Revenue Margin Margin Equity

Company 2/11/2014 Value Value LTM NFY LTM NFY NTM NTM NTM NTM LTM LTM MRQ

Halliburton 53.84$ 46,084$ 51,305$ 16.12 13.58 10.18 7.03 14.5% 7.5% 11.4% 8.1% 14.9% 20.5% 57.4%

Baker Hughes 60.49$ 26,740$ 29,793$ 22.96 15.02 8.17 6.30 6.3% 4.0% 5.6% 8.4% 17.0% 16.3% 24.5%

Weatherford 13.90$ 10,740$ 19,715$ 25.74 21.25 8.03 7.26 -8.6% -3.6% N/A 7.2% 22.1% 16.1% 108.3%

Mean 21.61 16.62 8.79 6.86 4.1% 2.7% 8.5% 7.9% 18.0% 17.6% 63.4%

Median 22.96 15.02 8.17 7.03 6.3% 4.0% 8.5% 8.1% 17.0% 16.3% 57.4%

Schlumberger 90.37$ 118,750$ 122,949$ 18.66 15.84 10.24 8.79 18.1% 10.5% 14.3% 9.3% 22.1% 26.6% 33.2%

*Data as of 2/11/2014

P/E Multiple EV/EBITDA

SCHLUMBERGER (SLB) Comparables Analysis

Capitalization Valuation Multiples Ratios Margins

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%

EV/EBITDA Target Price

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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 threefold:

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.