A Flood Of Energy M&A: Schlumberger Buys Smith For $11 Billon

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The acquisition by Schlumberger Ltd. (SLB) of competitor Smith International Inc. (SII) for $11 billion could be another sign that mergers and acquisitions in the energy sector will pick up in 2010. This is the second big deal in the oilfield services sector, following last August’s announcement by Baker Hughes Inc. (BHI) that it would buy smaller rival BJ Services (BJS) for $5.5 billion.
 
Under the terms of the agreement, Smith shareholders will receive 0.6966 shares of Schlumberger in exchange for each Smith share. Based upon the closing stock prices for both companies on February 18, 2010, the agreement places a value of $45.84 per Smith share, representing a 37.5% premium. Upon closing, and reflecting the issuance of new Schlumberger shares, Smith stockholders collectively will own about 12.8% of Schlumberger’s outstanding shares of common stock.
 
Schlumberger expects to realize incremental pretax synergies—after integration costs—of aabout $160 million in 2011 and about $320 million in 2012. Schlumberger expects the combination to be accretive to earnings per share in 2012.
Exxon Mobil Corp.’s (XOM) proposed buyout of XTO Energy (XTO) for about $40 billion provides another example of M&A activity in the energy industry. Are there other deals lurking that will change the shape of the industry in the coming year?
 
Some rumors have surfaced that could prove out or could just be a waste of ink and pixels. What follows are some of the better possibilities.
 
Conoco Phillips (COP) might be the best bet among the big oil companies to forge a deal. Possible partners include Anadarko Petroleum (APC), Apache (APA), Devon Energy (DVN), and Marathon Oil (MRO). The three primarily exploration and production companies may be too rich for ConocoPhillips, but Marathon, with its large holdings of refineries, may be a decent fit with the fifth-largest refiner in the world.
Refining in the US is a nasty business right, with non-existent margins and low capacity utilization. US demand for refined fuels was dampened during the price run-up of 2008, and has never really come back. But if ConocoPhillips and Marathon could either spin-off or sell outright their combined refining operations, the more streamlined company could be a solid player in E&P going forward.
The most active areas for exploration and development in the US these days are the unconventional gas plays, particularly the shale deposits such as the Marcellus Shale in the Appalachians, the Bossier Shale in Texas and Louisiana, and the Eagle Ford Shale in south Texas.
Thanks to horizontal drilling techniques, shale gas flows quickly hit peak flows. Conventional gas wells ramp to peak flows much more slowly. St. Mary Land & Exploration (SM) drilled a vertical well in the Haynesville Shale play that produced an initial flow of 1.9 million cubic feet per day. Goodrich Petroleum (GDP) completed a horizontal well in the Haynesville that flowed at an initial rate of 12.2 million cubic feet per day. This kind of production is what makes shale gas plays so attractive.
One company that has made a substantial number of deals with its natural gas deposits is Chesapeake Energy (CHK). The company has raised about $11 billion in the past couple of years either through sales or partner agreements. One good possibility for another Chesapeake partnership is St. Mary, which holds leases and options on 225,000 net acres in Eagle Ford and a joint venture with Anadarko that includes another 66,000 acres.
Another possibility for Chesapeake is Pioneer Natural Resources Inc. (PXD), which recently announced that it is seeking bids for a partner to develop its holdings in the Eagle Ford play. Chesapeake has ceded first rights to a partnership in Eagle Ford to France’s Total SA (TOT) as part of an earlier partnership agreement. Pioneer holds 310,000 gross acres in the Eagle Ford play. The company holds proved reserves of 899 million barrels of oil equivalent, 98% of which is in the US.
Colorado-based Delta Petroleum (DPTR) has had its ups and downs in the past year, and has already announced that it is seeking “strategic alternatives”, including selling the company. The company’s market cap is around $400 million and it holds long-term debt as of September 30, 2009, of about $567 million. Cash flow from operations was negative in the third quarter of 2009, and the company had just $5 million in cash. Though not a shale play, Delta holds leases in Colorado’s gas-rich Piceance Basin.
Goodrich Petroleum with a market cap near $800 million and substantial acreage in the Haynesville and Eagle Ford plays also presents an opportunity for acquisition. The company’s proved reserves at the end of 2009 totaled about 421 billion cubic feet equivalent, 99% of which is natural gas.
A larger company that gets some attention in M&A chatter is Petrohawk Energy Corp. (HK). This is a larger deal, though, because Petrohawk has a market cap near $7 billion. The company is all over the Haynesville Shale and holds leases on some 225,000 acres in Eagle Ford.
Finally, Range Resources Corp. (RRC), with a market cap of about $8.5 billion, is heavily invested in the Marcellus and Barnett shale plays. But with a forward P/E ratio of over 60, the company may just be too rich for a potential buyer. But it’s not impossible to envision a joint venture or two with a company like Devon, which expects to recover 11 billion cubic feet equivalent per well in the core of the Cana Woodford shale play in Oklahoma.
The action in the energy business these days is virtually all in the natural gas shale plays. Exxon’s acquisition of XTO started the charge, and further consolidation is almost certain.
Paul Ausick
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