The largest oilfield service company, Schlumberger Ltd. (SLB), is said to be doing a deal for smaller rival Smith International Inc. (SII) worth about $9 billion. At that price, Smith is being valued at about 20% above its Thursday closing price.
The deal, if it happens, would be the second major consolidation among oilfield service companies in six months. Last August Baker Hughes Inc. (BHI) announced that it would acquire rival BJ Services (BJS) in a deal that was valued at $5.5 billion.
Oilfield service companies have begun to recover from the doldrums they suffered in the first half of 2009. E&P companies are exploring again, especially for natural gas in U.S. shale deposits.
Drilling and fluid cracking in the shales are booming, and both Schlumberger and Smith are heavily involved in the U.S. shale fields. As a bonus, the two companies already have a joint venture, M-I SWACO, that supplies drilling fluids to the industry.
On its face, there doesn’t seem to be as much reason for Schlumberger to buy Smith as there was for Baker Hughes to acquire BJ Services. In the latter case, BJ’s strength in pressure pumping complemented Baker Hughes’ international presence. Internationally, bigger is always better, and this merger makes a lot of sense.
But Schlumberger is already the biggest of the oilfield service companies, with more than double the market cap of nearest rival Halliburton (HAL). The rumored merger with Smith boosts Schlumberger’s market cap by only about 10%, and there’s a decent chance that the joint venture fluids operations will have to be scaled back or spun-off to meet regulatory demands.
Oilfield service companies are poised to see some significant growth mostly due to the opening of the huge Iraqi oil fields to development. Iraqi production could boom in the next five years, to 6 million barrels per day by 2013, more than double current production.
Positioning for the coming boom in Iraqi production is what we’ll be seeing among the oilfield service companies in the coming year. There are enormous profits at stake, and no player wants to be left behind.
But that still doesn’t explain why Schlumberger would buy Smith.
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