Wednesday morning, Schlumberger, the world’s leading oilfield service provider, announced that it will acquire Cameron, one of the Big 3 oilfield equipment manufacturers, in a deal worth $14.8bn. When the transaction closes early next year, Cameron will become a new product group within Schlumberger.
Once again, Schlumberger is finishing consolidation that started with a JV. Schlumberger and Cameron formed a joint venture, OneSubsea, in November 2012 to work together to optimize subsea technology. Schlumberger has a tendency to wade in with JVs, alliances, or smaller ownership stakes before executing on big M&A. This same behavioral pattern played out in Schlumberger’s deals with M-I Swaco / Smith International, Saxon, and Eurasia Drilling. Today’s news may refocus attention on Precision Drilling, with whom Schlumberger signed a strategic alliance last year.
What This Deal Means: 5 Key Points
Innovation Incubation & Blurry Lines Between Oil Service & Equipment. This deal blurs the lines between the historically more distinct “oilfield service” and “equipment manufacturing” sectors more than any other transaction to-date. Low oil prices put innovation in the industry at risk. Novel segment combinations like this one can keep innovation alive. There is virtually no overlap between Cameron and Schlumberger product lines. More innovation is enabled by layering complementary oilfield service expertise upon a broader technology / equipment portfolio that serves the entire oilfield value chain. And inefficiencies will be shaved out to the tune of hundreds of millions of dollars per year leaving more resources available to fund progress. This deal will not only make the combined company more profitable, but it should also help operators lower the cost per barrel by changing the way reservoirs are developed.
A Milestone In The Re-Ordering Of Oilfield Services. We see this deal as a key milestone in an ongoing re-ordering of the oil service industry to integrate product lines. Driven by accelerating resource complexity over the past decade and spurred on by low oil prices today, we believe operators are changing the way they think about the oilfield service model. We believe they increasingly value integrated solutions, life-of-field innovation, and improved efficiency. These virtues are becoming more important than supplier diversity and the pricing power that comes with it. We saw a general lack of operator resistance to the Halliburton / Baker combination, and we expect operators will welcome this deal between Schlumberger and Cameron. Obviously, OneSubsea has worked or Schlumberger wouldn’t be consummating the relationship. That’s not to say all oilfield transactions will be welcome – efficiencies for operators must be inherent in the combinations, and this deal checks the right boxes.
Strategic Value From Pore To Pipeline. This strategic transaction is being couched by Schlumberger as combining two complementary technology portfolios into a “pore-to-pipeline” products and services offering. We think this is a very good way of putting it, and see a great deal of strategic value in the combination. By combining their technology portfolios, the two companies will be able to provide an unprecedented level of service to operators, further separating themselves from peers. The biggest losers in this strategic combination are smaller oil service / equipment competitors with just a few product lines and little or no integration. Competitive advantage in oilfield service is increasingly linked to product line integration and full life-of-field development innovation.
More M&A Coming? This SLB/CAM deal signals the resumption of big oilfield service M&A. The stocks of other oil service and equipment companies are getting a big lift this morning, as takeover speculation surges. FMC Technologies and Weatherford are now in focus as the next big potential takeout targets (and their shares were up 7-11% in early trading). GE and National Oilwell Varco make sense as the next big buyers in line for sector consolidation. Oilfield service M&A has been on hold during the downturn since the Halliburton / Baker Hughes merger was announced in November. This deal could ignite further consolidation as peers are forced to respond to the industry shift this transaction represents.
Less Regulatory Risk Than Halliburton / Baker Hughes. Questions have recently been raised as to whether Halliburton will be able to get its proposed merger with Baker Hughes past anti-trust scrutiny. We see less risk with this SLB / CAM combination as there is far less product service line overlap between the businesses than with Halli-Baker. Schlumberger does not plan on any divestitures associated with the combination.
The cash and stock deal values Cameron at $66.36. This is a 56% premium to Cameron’s closing stock price yesterday of $42.47. The total transaction value is $14.8 billion as of August 25, 2015. The deal is expected to close in the first quarter of 2016.
Schlumberger plans to pay the cash portion of the transaction (approximately $2.8bn) with cash on hand. Schlumberger currently has $7.3 billion of cash.
On a pro forma basis, the combined company had 2014 revenues of $59 billion. The combined company expects to realize $300 million and $600 million in synergies in the first and second years following the deal, respectively. Initially, the synergies are primarily related to reducing operating costs, streamlining supply chains, and improving manufacturing processes, with a growing component of revenue synergies in the second year and beyond. Schlumberger expects the combination to be accretive to earnings per share by the end of the first year after closing.
Upon closing, Cameron shareholders will own approximately 10% of Schlumberger’s outstanding shares of common stock.