The oil patch has been a very fickle sector of late. With the price of oil tanking to under $40 per barrel, profitability is going to be a tough road ahead for drillers, exploration outfits, service providers, oilfield equipment makers and other businesses which live around the growth of the oil patch.
While it was impressive to see that Schlumberger Ltd. (NYSE: SLB) was paying almost $15 billion in cash and stock to acquire Cameron International (NYSE: CAM), what is even more impressive is what this might mean for the companies and the players in the oil patch.
After reviewing several analyst calls from Merrill Lynch, Wells Fargo, Credit Suisse and elsewhere, it looks like the discount in post-announcement Schlumberger is just that much more of an opportunity for long-term investors. It is impossible to say that this will mark a bottom, and even more impossible to guess whether an oil stock recovery is any closer.
Bank of America Merrill Lynch said that this deal builds on top of the OneSubsea joint venture. With Cameron shareholders receiving 0.716 shares of Schlumberger and a sum of $14.44 in cash per share, this was better than a 50% premium.
What stands out here is “virtually no product overlap” and strong relationships with the OneSubsea joint venture. Merrill Lynch sees few regulatory issues with the deal being approved, and it sees a quick integration that will allow for a rapid capitalization of synergies and increased value for customers.
Merrill Lynch’s Douglas Becker and Christopher Voie have a $105 price objective for Schlumberger, some 52% higher than the $69.10 share price after a 5% drop on the news. The research report said:
Schlumberger expects the transaction to be accretive in the first year after closing, with year 1 and 2 synergies of $300 million and $600 million, respectively. Revenue synergies are a key aspect of the deal and the successful integration of the Smith acquisition provides confidence in execution. Schlumberger expects the deal to close in the first quarter of 2016. In this oil price environment, Schlumberger remains a top pick given its internal transformation and the acquisition.
Another boost is that the merger puts other deepwater/manufacturers into focus. Brent crude is down more than 60% from its 2014 peak and this merger highlights a likely trend of consolidation in oil services.
The analysts here said that they would not rule out further M&A in the near term as industry pain intensifies, although the report does note that future deals would likely be smaller in scale.
The Merrill Lynch team said that the Cameron deal puts competitors like FMC Technologies, Inc. (NYSE: FTI), Aker Solutions, Forum Energy Technologies, Inc. (NYSE: FET) and Dril-Quip, Inc. (NYSE: DRQ) into focus. It also raises questions about what National Oilwell Varco (NYSE: NOV) and Weatherford International plc (NYSE: WFT) will do. A separate report from Robert W. Baird also put FMC Technologies, Inc. (NYSE: FTI) and Dril-Quip, Inc. (NYSE: DRQ) into the merger candidate ring as two potential takeover candidates.