Schlumberger Scores One for the Oil Biz

According to Addison Wiggin at The 5 Minute Forecast, “Schlumberger just pulled off a super-sized acquisition of Smith Intl. In an all-stock, $11 billion transaction, SLB is now by far the world’s biggest oil service company. Should revenues stay the same, Schlumberger will be double the size of Halliburton, its closest competitor.”

This deal says two things to me. First, it’s tailor-made to help the oil and gas business exploit tough-to-get-at resources, such as shale gas and deep-water fields. The two companies can share technology. And the financial clout of the combination will make for one heck of an R&D budget.

It also tells me that things are looking up in the oil and gas business – and that stock prices of service stocks are still cheap. As Schlumberger’s chairman, Andrew Gould, said, “It probably would not have been possible at the top of the cycle, because valuations would have been out of alignment.”

I think the window is closing to make good acquisitions, though. As it is, Schlumberger paid a 37.5% premium to Smith’s price on Feb. 18 – before the rumor mill put a charge into the stock price.

I think Schlumberger probably overpaid. The market didn’t like it either, taking off $2.5 billion from Schlumberger’s market cap. These giant acquisitions rarely work out well for the acquiring company. When the oilmen get excited about the synergies of a combination, price considerations tend to get lost…

In any event, the oil market looks good and lively to me. In early 2009, it looked like it was near death, but the recovery in oil prices, China’s increasing imports and an active M&A market are all portents of good things for investors in oil.

The Daily Reckoning