Schlumberger's Acquisition of Smith the Latest Evidence of a Takeover Trend

With global energy demand expected to surge over the next decade, straining production, it's no surprise that many of the sector's biggest players are racing to acquire competitors whose expertise will help them thrive in a more competitive environment.

And Schlumberger Ltd. (NYSE: SLB) on Sunday became the latest energy giant to bring a competitor into the fold, when the world's largest oilfield services provider said it would acquire Smith International Inc. (NYSE: SII) in an $11 billion all-stock transaction.

By acquiring Smith Schlumberger is hoping to transform itself into a larger, more diverse service provider capable of accommodating exploration and development companies that are faced with the task of accessing more challenging and complex reserves.

The deal is valued at $45.84 a share, with Smith stockholders receiving 0.6966 Schlumberger share for each Smith share they own. The purchase is the biggest U.S. merger so far this year.

After weak performance in 2009 due to a drop in oil demand, the deal is expected to bring Schlumberger pretax savings of $160 million in 2010 and $320 million in 2012.

"Schlumberger is already the leader in the measurement and steering technologies that are necessary to drill these profiles," Schlumberger Chief Executive Officer Andrew Gould said in a statement. "We firmly believe, however, that the next breakthrough will be through engineered drilling systems that optimize all the components of the drillstring, allowing our customers to drill more economically in demanding conditions."

To that end, the acquisition of Smith will bring Schlumberger:

• Sole ownership of M-I Swaco, the leading supplier of drilling fluid systems, which provides support in every stage of the oil-drilling game, from well construction to tool development to waste management. M-I Swaco is currently set up as a joint venture between Schlumberger and Smith, with Smith owning a 60% stake. M-I Swaco accounted for about half of Smith's $8.2 billion revenue in 2009.
• Access to the world's second-biggest provider of drill bits - an arena to which Schlumberger currently has no exposure. Smith's hardware expertise makes it a "critical link" to Schlumberger's end-goal of offering a full range of services to oil producers, RBC Capital Markets Corp said in a Feb. 19 note to clients.
• Access to Smith's I-Drill, a computer modeling system that analyzes drilling operations and predicts drilling performance. The I-Drill can drastically reduce risks and cut costs for companies attempting ambitious drilling projects.

This new array of tools "rounds out" Schlumberger's product offerings and will make the world's largest oil field services provider "even stronger over time," said analysts at Tudor Pickering Holt & Co.

Schlumberger's takeover of Smith was rumored for months, following the similar acquisitions by Baker Hughes Inc. (NYSE: BHI) and Exxon Mobil Corp. (NYSE: XOM).

Schlumberger rival Baker Hughes last August bought BJ Services Co. (NYSE: BJS) for $5.5 billion. The deal gave Baker Hughes access to BJ Services' pressure-pumping services, used to break up rock and reach hard-to-access natural gas supplies. BJ Services derived about 81% of its 2008 revenue from pressure pumping.

That was followed in December 2009 by Exxon's acquisition of U.S. natural gas producer XTO Energy Inc (NYSE: XTO), the largest U.S. natural gas producer.

"Exxon has been telegraphing this move for some time," Money Morning Contributing Writer Dr. Kent Moors said in December. "They're putting themselves in position to be the largest natural gas producer in the world. This won't be the last deal they do, and it's likely to set off a string of acquisitions by the big players."

Indeed, Smith's advanced drill bit technology, which is needed to burrow down into shale could be of tremendous value to Schlumberger.

"There is I don't think any doubt that long-term shale gas is going to be one of the big new energy sources both in the U.S. and overseas," said Gould. "Smith's capacity to serve that market in North America is of great interest to me."

News & Related Story Links:

• Schlumberger:
  Schlumberger and Smith International Announce Agreement
• Money Morning:
  Exxon Deal For XTO Energy May Set Off Wave of Energy Mergers and Acquisitions
• New York Times:
  Behind Schlumberger's Smith Deal: A Big Gas Bet