Maybe Schlumberger's (NYSE: SLB ) announcement that it was increasing its long-term growth rates was a sign that the oilfield services sector was about to consolidate to exploit improving industrywide growth rates. In this case, C&J Energy Services (NYSE: CJES ) is purchasing the completion and production services of Nabors Industries (NYSE: NBR ) .
The Nabors division is actually roughly double the size of C&J Energy in nearly all key metrics. Making the deal even more interesting, Nabors will accept a sizable position in the new combined entity instead of completely cashing out. Typically when a business accepts a lot of stock in such a deal it views the combination as having plenty of synergies that will create value and make the company more valuable.
With a market cap approaching $150 billion, Schlumberger is the clear oilfield services giant. What the company says moves the industry, so the recent investor presentation suggesting the company will reach a compound annual growth rate of 17% to 20%, with earnings reaching $9 to $10 per share, pumped up the sector. An analyst at RBC wrote that the Street had only expected earnings growth of 15%, with earnings reaching $8, by 2016.
The C&J-Nabors deal is structured so that C&J Energy issues 62.5 million shares and pays approximately $940 million in cash to Nabors for a total value of $2.86 billion. The two shareholder bases will roughly equally own the new company, with a slight nod to Nabors. On that basis, the new entity, called C&J Energy Services, had a value of roughly $3.5 billion based on the closing price on June 25.
The valuation has some compelling potential, with combined revenue for the last 12 months at nearly $3.2 billion. Maybe more important, EBITDA sits at nearly $500 million with a margin of roughly 15.6%.
The company forecast 2015 revenue hitting $4 billion to $4.4 billion and EBITDA margin reaching the upper teens. The ultimate goal is to reach a margin of over 20% with the $100 million in synergies by 2017. Reaching this margin level would place the new company on par with Schlumberger.
Considering the growth potential, the new C&J Energy Services has plenty of upside. Schlumberger currently trades at over three times trailing revenue, in stark contrast to the value proposition presented by the new company.
The deal provides the combined company with service offerings in all of the major basins and limited customer overlap. The completion services division will now have over 1.15 million horsepower, 100 plus wireline trucks, and 38 coiled tubing units, placing it as one of the largest independent domestic oilfield services providers.
Nabors adds production services to C&J Energy, with 683 workover rigs, 11,483 fluid trucks, and 5,266 frac tanks. With the growing number of maturing wells on production, the unit provides access to a new market with the size to compete domestically against the likes of Schlumberger.
This deal between C&J Energy Services and Nabors Industries hit at the right time to capitalize on the burgeoning growth suggested by Schlumberger. The merger provides the potential to increase combined EBITDA of roughly $500 million in the last year to a goal of over $700 million in 2015. Remember that C&J Energy Services only generated $175 million in EBITDA on its own. The increased revenue and better margins based on growth and synergies makes the deal very rewarding to shareholders of both companies, especially C&J Energy Services.
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