Why This Deal Is a Win for C&J Energy Services

This new deal allows C&J Energy Services to navigate both domestic and international markets.

Jul 21, 2014 at 8:41AM

C&J Energy Services (NYSE:CJES) recently announced that it would be acquiring Nabors Industries' (NYSE:NBR) completion and production businesses for $2.9 billion. Under the deal, C&J Energy will pay $937 million in cash and 62.5 million shares of the newly merged company, which will be headquarter in Bermuda and trade under the existing ticker, CJES. Existing C&J shareholders will convert their shares to those of the new entity on a 1 to 1 basis, tax free.

Besides the attractive incentives thrown into the Nabors deal such as tax exemptions derived from setting base in Bermuda, the deal presents a great opportunity for existing C&J Energy investors. This is not only because it allows C&J Energy Services to combine operations with Nabors while maintaining minimal overlap, but it also puts the new entity in a position to capitalize more effectively on favorable market developments, both locally and internationally.

Increased local demand for fracking equipment
The U.S. surpassed Saudi Arabia and Russia to become the world's largest producer of oil after output for the first six months of the year went above 11 million barrels per day, according to the International Energy Agency (IEA). The IEA further added that the US's new-found lead could stretch out through 2030 due to increased output in shale plays such as the Bakken and Eagle Ford.

In light of this new development, the next goal on the agenda for the US will be to maintain its top position. To achieve this, producers in shale plays will need to invest more in fracking equipment and services.

Another driver for increased investments in fracking equipment is the possible exportation of surplus US natural gas to Europe. Ever since the situation in Ukraine imploded, Europe's energy reliance on Russia has seen Russia arm-twist it into unfavorable political positions through threats of cutting gas supply.

Fracking opposition
Although Europe has revisited the previously unsuccessful fracking debate as a means of countering Russia's energy dominance and the resultant influence it gives the former communist nation, the reality is that fracking may take a while due to several impediments, including resistance from the citizenry and possible failure to get commercially viable deposits.

Even in the U.S., where fracking has succeeded tremendously, opposition has been stiff, as signaled by a recent move by the city of Denton, Texas to put a ban of fracking in the area up for public vote in November. It is thereby likely that Europe will attempt to placate the US into exporting its surplus natural gas, at least before its (Europe) fracking ambitions materialize. Consequently, the accelerated push by several European nations and a contingent of U.S lawmakers to expedite the approval of export terminals in the U.S still persists. 

The U.S.'s need to maintain top producer position, as well as its ability to use its energy dominance to strengthen ties with allied European states through possible gas exports, will stir increased crude and gas production. Naturally, suppliers of fracking equipment will swamp the market (as they already have) to capture increased fracking demand, leading to a general decline in prices of fracking equipment and services.

C&J Energy's new deal has however allowed it to more than double in size, giving it sufficient scale to enjoy higher-cost benefits and thereby price more competitively. This scale should be instrumental in countering the low prices induced by increased competition, effectively allowing it to record higher sales in the face of competition.

Tapping international networks
C&J Energy's merger with Nabors also gives it access to the latter's pervasive international networks, which span across The Middle East, the Americas, Africa, and the Far East.

Escalating turmoil in the Middle East has slowed output in recent months. Considering the feverish pace at which violence instigated by the jihadist group ISIS is picking up in Iraq, it is likely that output from the region will slow down considerably this year, and probably the next. This might considerably disrupt global oil supply, considering Iraq is the second biggest OPEC producer. Similarly, instability and oil theft have also reduced output from Libya and Nigeria, respectively.

The overall effect is that international output may decline, prompting the few producers in the Middle East who are experiencing relative calm at the moment to take on more exploration and production in order to offset the overall supply deficit. Accordingly, E&P spending in the Middle East is expected to increase 14% during the year, as represented in industry commentary by James West, managing director at Barclays Capital. The increase in E&P spending in the Middle East will be higher than the U.S's expected 8.5% uptick and the projected global average of a 7% increase in spending for this year.

Bottom line
As international producers look to spend more in order to add capacity and offset the deficit induced by insurgency in the Middle East, international prices of exploration and production equipment and services will increase, allowing C&J Energy, through Nabors, to capitalize on the opportunity. This new exposure to the international market essentially allows C&J Energy to complement the valleys and peaks in the US business, and vice versa. In consideration of this, investors should expect sustainable growth from C&J Energy going forward.

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Lennox Yieke has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers