Early Monday morning, Weatherford International (NYSE:WFT), a leading energy services firm, announced that it had reached an agreement to acquire the energy services and international contract drilling operations of Canada's Precision Drilling (NYSE:PDS). This $2.3 billion deal will be paid for with $900 million in cash and 26 million shares of Weatherford.
The good news for Weatherford shareholders is that this deal makes a heckuva lot of sense. No, really!
Weatherford is already a strong player in drilling services, but the inclusion of the Precision Drilling business will significantly improve Weatherford's directional drilling and wireline capabilities, as well as adding more underbalanced drilling capabilities. I know it will seem weird to some people to think of R&D and innovation in oil and gas drilling, but Precision was an innovator, and Weatherford will now have the advantage of that innovation.
In addition, Weatherford is a global operator, while Precision was more or less focused on North America. Assuming that Weatherford can take these acquired assets and technologies and apply them overseas (and I see no reason why it can't), the company will see some relatively easy accretion on that basis alone.
The odder part of the deal is the acquisition of Precision's overseas contract drilling operations. This 48-rig operation is largely made up of assets that Precision acquired from GlobalSantaFe (NYSE:GSF) about one year ago. Though Weatherford management believes that this operation will bolster its presence in the Middle East (particularly among customers who want a "one-stop shop"), it represents a type of business that the company hasn't really engaged in before now.
For Precision Drilling, this is obviously a transformative deal. Once the deal closes, the company will shrink (in revenue terms) by about half and the remaining company will be pretty much a pure-play onshore driller focused on Canada. In fact, Precision has the largest fleet in Canada and controls about one-third of the market.
While Precision management has already stated that it intends to pass along "a portion" of the proceeds of this sale, the amount, timing, and method of distribution are still unknown. Most likely, some portion of the acquired stock will be distributed to shareholders, but it's unrestricted and could also be sold on the open market.
Weatherford shareholders should see this as a positive step toward enhancing the company's competitive position vis-a-vis the likes of Baker Hughes (NYSE:BHI), Halliburton (NYSE:HAL), and/or Schlumberger (NYSE:SLB). Precision Drilling shareholders should see this as a slightly more risky maneuver that gives them some return on their shares (either in cash or stock) and leaves the company as a pure-play land driller with an excellent footprint in the Canadian drilling market.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
