by Aaron Levitt | August 14, 2012 7:30 am
With its parts and components incorporated into nearly 90% of all drilling rigs on the planet, it’s hard to imagine National Oilwell Varco (NYSE:NOV[1]) getting any bigger. Yet, the purveyor of blow-out preventers,[2] drilling bits, pumps and other equipment necessary for extracting oil, management continues to make smart acquisitions to expand the firm’s dominance in the oil services sector.
National Oilwell has already completed six deals in the second quarter of 2012 alone.
But NOV isn’t sitting back and admiring its work. The firm’s latest buyout, of smaller rival Robbins & Myers (NYSE:RBN[3]), not only strengthens National Oilwell’s position in some key markets, but also provides new inroads into other juicy areas of petrochemicals. And for investors, the deal highlights National Oilwell’s continued positive investment potential.
The $2.54 billion cash deal[4] is NOV’s biggest in more than four years, since it agreed to buy Grant Prideco for about $7.4 billion in 2007. Overall, RBN shareholders will get $60 in cash, a roughly 28% premium to closing price the day before the acquisition was announced.
So far this year, National Oilwell has spent roughly $2 billion on nine acquisitions to strengthen its position in oil services. CEO Pete Miller[5] said of the Robbins & Myers deal: “We feel that our combined manufacturing infrastructure and portfolios of technology will further advance our presence in the oil and gas markets we serve.”
So what exactly is NOV getting for its money? Quite a bit actually.
First the deal will strengthen National Oilwell’s position as a supplier of blowout preventers (BOPs), which are essentially large, specialized valves used to monitor, control and seal oil and gas wells. If the device fails to control the fluctuating pressure, a large blade, or ram, is designed to “cut” the pipe to choke the flow and prevent explosive gases from reaching the rig and crews on the surface.
In the wake of the BP (NYSE:BP[6]) Deepwater Horizon disaster, pending legislation will require a second set of these devices on many drilling rigs, both onshore and off.
In the rig market for land drilling, Robbins & Myers is the fourth-largest maker of blowout preventers. National Oilwell is the second. The buyout will give NOV dominant market share in the sector.
National Oilwell gains some other valuable synergies in hydraulic fracturing and fluids management as well. The advanced drilling technique known as fracking has become standard issue as exploration and production firms race to tap the various shale formations across the U.S.
NOV highlighted Robbins & Myers down-hole tools, pumps and valves businesses as being particularly appealing components. Likewise, RBN’s artificial-lift pumps business, which sends oil and natural gas to the surface months after a well is drilled, was said to be particularly interesting to NOV.
Another key piece of the deal is Robbins & Myers’ process solutions business. The segment sells reactors, storage vessels, heat exchangers and various systems for markets like pharmaceuticals and specialty chemicals. While the pharmaceutical aspect most likely doesn’t have appeal for National Oilwell — I’m sure it’ll look to sell off those assets — the petrochemical side certainly does.
As the recent landmark deal[7] between Chicago Bridge & Iron (NYSE:CBI[8]) and Shaw Group (NASDAQ:SHAW[9]) shows, the petrochemical business in the U.S. is undergoing a massive new growth cycle. New sources of supplies from shale basins are sparking a rebirth in domestic chemicals, thanks to the abundant and low-cost feedstocks. The Robbins & Myers acquisition gives NOV access to this important growth industry, and could lead to it becoming a “one-stop shop” for many integrated firms looking to expand both drilling and processing capacity.
Despite the $2.5 billion price tag, National Oilwell Varco’s latest purchase makes great sense. The pending drilling legislation will require every rig — both onshore and off — to have more advanced blow-out preventers as standard equipment. The deal will allow the firm to really assert its dominance in that sector versus competitors like Cameron (NYSE:CAM[10]). Likewise, the additional synergies in the rest of RBN’s equipment line as well as access to the burgeoning chemicals industry, makes the deal top-notch.
It’s expected to add an additional 25 cents to 35 cents a share profit to National Oilwell’s already juicy earnings, and the merger should close in the fourth quarter of 2012. At a forward P/E of just 11, it’s hard to pass up NOV shares as the firm continues to make good choices for shareholders.
As of this writing, Aaron Levitt is long CBI.
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