Schlumberger Limited (SLB 0.23%) broke the relative silence in the energy M&A market today with a bang. It announced that it has agreed to acquire oilfield equipment maker Cameron International (CAM.DL) in a $14.8 billion deal.
The offer represents a hefty 56.3% premium to Cameron's closing stock price yesterday. However, it views the premium as being well worth it because of what a combination with Cameron will bring.
Synergies come first
Despite the hefty premium Schlumberger is paying for Cameron, the company expects that the deal will be accretive to earnings by the end of the first year after closing, which is expected to come early next year. The incremental earnings will be largely the result of merger synergies, as Schlumberger expects to realize roughly $300 million in pre-tax synergies in the first year due to operating cost reductions, streamlining supply chains, and improving its manufacturing process. On top of that, it sees year two pre-tax synergies ballooning to $600 million due to the aforementioned benefits, plus a growing component of revenue synergies.
Those synergies will be made possible by the complementary businesses the two companies will be combining. What Schlumberger envisions the deal enabling it to provide is "pore-to-pipeline" products and services, as it will create the first complete drilling and production systems within the industry.
Not only will this enable the company to capture value along each point of the process, but it believes that the next industry breakthrough will be achieved by the "integration of Schlumberger's reservoir and well technologies with Cameron's leadership in surface, drilling, processing and flow control technologies," according to comments made by Schlumberger CEO Paal Kibsgaard on the deal.
A new way forward
In other words, what this deal does is position Schlumberger not only to grow earnings and expand its margins during the downturn, but do the same for its customers. The idea is that, by integrating the two complementary businesses, Schlumberger can not only lower its costs, which can therefore be passed on to its customers, but can revolutionize the way companies develop oil and gas reservoirs. In a sense, it's helping the company's position to deliver value for itself and its customers in an environment where oil could remain lower for longer.
Even before oil prices imploded, it was becoming increasingly more difficult for oil companies to create value from offshore discoveries because of escalating costs. This is an area where Schlumberger and Cameron excel, as the two already had a joint venture, OneSubsea, which was focused on optimizing subsea oil and gas production. By fully combining companies, the partners are planning to take this optimization to another level by offering a complete drilling and production system to not only reduce costs, but also to improve recoveries, both of which will improve producers' returns.
Investor takeaway
Oil producers desperately need to lower the costs of finding and developing oil and gas supplies in order to economically develop future resources. This is not lost on Schlumberger, which is why it's looking to drive down those costs by streamlining the entire process. By acquiring Cameron, it has found the perfect partner that will enable it to design complete drilling and production systems that will lower costs and improve recoveries for producers, especially in offshore areas.
The deal not only positions Schlumberger to prosper in an era where oil could stay lower for longer, but it will enable it to deliver products and services that will make the current environment a bit more palpable for its customers.
