Schlumberger, Camco sign merger agreement

Bill Brocato
Staff Writer

John S. Herold Inc. oil field services analyst Ryan Zorn said the deal, valued at $3.14 billion, "fills voids in Schlumberger's nearly bullet-proof line of products with very little service overlap and adds virtually no debt to its powerful balance sheet."

Camco's management is also obviously pleased-Camco stockholders will get 1.18 Schlumberger shares for each Camco share.

The combination is expected to be accretive to earnings per share in 1999, the first full year of combined operations. The transaction will be tax-free to Camco shareholders and will be accounted for as a pooling of interests.

The combined market capitalization of the two companies totals $37 billion. Consolidated operating revenue and net income would have been $11.6 billion and $1.38 billion, respectively, in 1997.

Zorn pointed out that Camco brings to the table dominant positions in electric submersible pumps, gas lift, gas compression, and to a lesser extent drill bits. He said, under Schlumberger's "technology umbrella," Camco's line of commodity-like mechanical and hydraulic completion tools should evolve into electronically driven, intelligent completion systems.

Schlumberger will also terminate its service alliance with Baker Hughes Inc. "My understanding is that whatever arrangement the two companies had with regards to their alliance will fade away," Zorn said.

Further consolidation

"The bottom line," added David L. Bole, vice-president of corporate research at Randall & Dewey Inc., "is operators are trying to cut costs. Cost-cutting is feeding consolidations on the service side.

"What we're seeing now are the megamergers-not necessarily to gain economic leverage over operators; it's more growth oriented. The market is telling company management that we want to see growth. The early 1990s cost-cutting strategies have all but reached their potential, so all that's left is buying product lines. This is fueling mega-acquisitions."

Herold's Zorn agrees that sector consolidation will continue. He believes small to midsize companies are undervalued by Wall Street.

"The sector is still fragmented," he said. "There are plenty of other (smaller, less capitalized) companies with value that can increase through consolidation."

Analysts also pointed out that operators are quietly voicing some concern as service companies merge operations and appear more willing to take interests in client exploration and production properties in lieu of payments.

"The line between who has the leverage is becoming harder to recognize," Zorn added. "E&P companies are wondering if service companies won't become their competitors as they take larger stakes in projects."

Bole wonders whether the next wave of megamergers will come from large E&P companies.

"The bigger question is, as the hunt for lower costs has caused consolidation in the service sector and operators have faced the recent steep declines in crude prices, which of the larger E&P companies will be looking at consolidation?"

The industry witnessed a number of E&P company mergers in 1997 and 1998, he added (OGJ, May 18, 1998, p. 29). What's missing is the megamergers on the same scale as Schlumberger-Camco, Baker Hughes-Western Atlas Inc., or Halliburton Co.-Dresser Industries Inc.

Bole was reluctant to speculate about just when the E&P megamergers are coming but did say that operators in the U.S. have recognized that their chance for asset growth has matured.

"The Gulf Coast is more a manufacturing base than anything else," he said. "Growth in the upstream sector has to come from the (Gulf of Mexico's) deeper waters. Growth for these companies means higher margins. The cost to go deeper could point to megamergers in the E&P sector."

That move to deeper waters is helping insulate the large service companies, Zorn believes. Smaller, niche players in the service sector relegated to the Gulf's shallow waters and onshore drilling activities face a rougher ride as crude price swings affect where E&P dollars will go.

Michael Wang, vice-president of research at John S. Herold, also believes industry-wide consolidation will continue. He doesn't agree there is a causal connection between service sector megamergers and E&P megamergers: "I don't see the connection between the two sides. But we have seen large transactions, where U.S. companies are buying into Canadian companies and acquiring other companies with overseas assets."

Wang is betting E&P mergers will continue. "The market is placing a higher premium on larger capitalized E&P companies," he said. "The small to mid-cap independents are getting lower multiples."

Wang believes consolidation will continue, across the board, for several reasons: "First, the market will place more value on a larger capitalized company. Second, many of these companies can capture significant financial synergies. And third, mergers mean lower administrative and overhead costs."

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