FBR & Co. analyst Thomas Curran is out with a note to clients on Monday saying that National Oilwell Varco should buy Weatherford.
Curran wrote that Weatherford ““would attractively conform to what we believe should be NOV’s three primary criteria for choosing among the ‘extraordinary acquisition opportunities’ management expects to arise over this downturn and enable NOV to become an early mover in the ‘integration 2.0’ market.”
Recall that NOV recently stated it was seeing “extraordinary acquisition opportunities” emerging this downcycle. Curran is arguing that acquiring Weatherford is one such extraordinary opportunity.
In a combination between NOV (the industry’s largest equipment provider) and Weatherford (one of the industry’s four largest oilfield service providers), Curran sees a chance for meaningful cost synergies and operational improvements.
He also argues that a combination of the two would help shift exposure from land to offshore and enhance the company’s portfolio of onshore completion and production offerings.
Curran says NOV would have to offer Weatherford a 50% premium all cash payment for the deal, close by year-end 2016, and notes that convincing Weatherford management to take the offer would be a box that must be checked.
Curran’s value estimate would mean shareholders of Weatherford would receive $13.10 for each share they own vs. the current $8.73 price of Weatherford’s shares today. This would suggest a value for Weatherford’s equity of just north of $10bn.
But investors weren’t buying it today, as Weatherford’s stock traded lower.
NOV would have to fund the transaction with debt, which would mean the company’s debt to capital ratio increased but remain within reason, Curran estimates. He thinks the deal would be accretive to earnings in the first year assuming NOV could “secure an interest rate on deal debt of 5.25 percent and to reduce WFT’s SG&A and R&D expenses by 30 percent and 20 percent, respectively.”