SLB Stock: CAM Deal Is a Long-Term Play Against Low Oil Prices

Schlumberger Limited (SLB) announced Wednesday that it is buying Cameron International (CAM) for $12.74 billion in cash and stock. The deal effectively values CAM’s share price at $66.36, which was more than a 50% premium to the price CAM closed at on Tuesday.

SLB Stock: CAM Deal Is a Long-Term Play Against Low Oil Prices

Only time will tell if the union of Cameron International and Schlumberger is a fruitful pairing or an expensive shot in the dark. But, with SLB stock down 5% on the heels of the same news that drove CAM stock up a whopping 40% on Wednesday,  Schlumberger shareholders don’t exactly seem thrilled with the deal.

Then again, the market’s initial reactions aren’t always appropriate. Some observers feel the Schlumberger acquisition of Cameron International is not only a necessary one, but could be plenty constructive for SLB stock over the long haul.

What’s Cameron International Got for Schlumberger?

The deal values Cameron International at $12.74 billion, and calls for current owners of CAM stock to receive $14.44 per share plus 0.716 shares of SLB stock for every share of CAM they own.

Cameron shareholders must still approve the deal, but with both companies’ Board of Directors in support of the idea and CAM stock up 41% following the offer, shareholder approval is widely expected.

Cameron International makes a variety of oil field, drilling and oil well equipment like pressure control systems, valves and actuators. It’s a nice complement to the oil equipment and services business Schlumberger is well-known for.

Schlumberger chairman and CEO, Paal Kibsgaard, said of the deal:

“We believe that the next industry technical breakthrough will be achieved through integration of Schlumberger’s reservoir and well technologies with Cameron’s leadership in surface, drilling, processing and flow control technologies.”

More important to owners of SLB stock, Cameron managed to generate just under $10 billion worth of revenue last year in the midst of an alarmingly long-lived streak of tepid oil prices. Even more impressive is the fact that CAM managed to turn $238 million of that revenue into net income over the past four quarters, while many of its peers have been forced to dip into the red ink of late, not to mention shutter oil and gas drilling operations.

Schlumberger expects the acquisition will boost the per share bottom line for SLB within a year — the deal should close by early 2016 — and is then looking for the margins attributable to the buyout to widen. All told, owners of SLB stock can expect to see $300 million worth of synergies saved in the pairing’s first year together, and $600 million in the next.

For perspective, Schlumberger Limited earned $4.35 billion over the course of the past four quarters, on $44.54 billion in revenue.

Not the Last Deal

Contrary to popular belief, the energy sector hasn’t produced an inordinate number of deals this year, the second quarter in particular. Rather, in an effort to avoid being forced into a deal to survive, most energy companies have chosen to focus on expense control, and remaining liquid enough to stave off bankruptcy before oil prices rebound.

That M&A slump is on the verge of coming to an end, forcing more acquisitions like the one between Schlumberger and Cameron International.

As Intervale Capital’s Charles Cherington explained in an interview on CNBC’s “Squawk Box” on Wednesday, at the end of the third quarter, many oil drillers are likely to see credit lines crimped by bank lenders, while the oil price hedges that have helped keep explorers and producers afloat during this period of rock-bottom prices will start to expire as early as 2016.

Or, as Epoch Investment Partners’ David Pearl told Bloomberg, the deal (and future deals like it) will be all about cash flow (and the growing lack thereof).

Preemptively, Halliburton Company (HAL) is in the midst of efforts to acquire Baker Hughes (BHI) before either company sinks too deep into the fiscal quicksand on their own. A few other oil names have seen the writing on the wall as well, and are making overtures.

With the crux of oil’s implosion yet to weigh in on cash flows, though, look for the pace of M&A within the space to heat up now that Halliburton and Schlumberger have both established themselves as suitors.

Bottom Line for SLB Stock

As for Schlumberger, despite the frothy price it paid for Cameron International, the acquisition was not simply for its clear upside, but a deal the two companies had to do if either were to weather the coming storm of depressed oil prices.

Of course, as David Pearl explained in his Bloomberg interview, owners of SLB stock need to think about the long-term to recognize the full benefit of the acquisition. Especially if oil prices remain in a slump.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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