Oil-field services company Baker Hughes Inc said on Monday it would buy BJ Services Co in a cash-and-stock deal valued at US$5.5 billion, a move that could trigger further consolidation in the industry.
The combined company will provide customers with a one-stop shop for a variety of oil-field services, and allows Baker Hughes to diversify its product offering and to compete better with rivals Schlumberger Ltd and Halliburton Co.
This deal could be the first of many acquisitions in the industry, said Chris Sheehan, director of mergers and acquisitions research at IHS Herold Inc.
Sheehan said small to mid-size companies that specialize in international deepwater drilling and production oil services are particularly well positioned to be acquired.
“For companies to gain a competitive or technical edge ... players in this sector would find it advantageous to seek strategic acquisitions,” Sheehan said in a phone interview. Following the move by Baker Hughes, Sheehan expects further consolidation in the oil-field services sector, especially among companies focused in unconventional shale gas.
These players specialize in accessing hard-to-reach shale gas fields through such methods as pressure pumping.
Notably, Baker Hughes will gain BJ Services’ pressure pumping business, which will help clients with such unconventional gas and deepwater fields, said Chad Deaton, Baker Hughes chairman, president and CEO.
“It will better position us to drive international growth and to compete for the growing large integrated projects by incorporating pressure pumping into our product offering,” he said.
Integrated oil companies are active in all phases of the business, including production, refining, transportation and marketing.
Pressure pumping made up less than 1 percent of Baker Hughes’ revenue last year, but is expected to comprise about 20 percent of the company’s revenue after the deal is complete. Pressure pumping injects liquid or gas into wells to increase the amount of recoverable oil or natural gas. This added business will boost Baker Hughes’ total revenue near levels of its two largest competitors, the company said.
Schlumberger Ltd is the world’s largest oil-field services company, with Halliburton Co just behind it in size.
Pritchard Capital Partners analyst Stephen Berman said the combined company will have BJ Services’ pressure pumping franchise and Baker Hughes’ international market share.
But Wachovia analyst Tom Curran remained skeptical. While he expects the deal to help the company compete in bidding for foreign integrated projects in the long term, he believes excess capacity in North American pressure pumping and the timing of the deal will hurt the company in the near term.
“Baker Hughes will likely come under fire for not closing on this deal when BJ Services was much cheaper,” Curran said.
BJ Services shares have risen more than 32 percent this year.
In a conference call this morning, Deaton explained that the timing of the deal made sense. He believes that the energy market has reached a bottom, international markets will grow and oil prices have reached a “decent” level.
Since the beginning of the year the price of crude oil has gained 57 percent. The price of natural gas has shed more than 47 percent of its value. On Monday, benchmark crude for October delivery lost US$2.78 to settle at US$69.96 on the New York Mercantile Exchange.
The acquisition is expected to produce US$75 million in cost savings for Baker Hughes next year and US$150 million in 2011, and add to earnings per share in 2011.
The deal is valued at US$5.5 billion based on Friday’s closing prices. BJ stockholders will receive 0.40035 shares of Baker Hughes and US$2.69 in cash for each share they own.
The deal represents a 16.3 percent premium to BJ’s US$15.43 closing price on Friday.
BJ’s shareholders will have an approximately 27.5 percent stake in Baker Hughes and two BJ services board members will join Baker’s board.
This the first major oil services takeover of the year. After larger oil companies reaped hefty profits from last year’s crude and gas price rally, some analysts predicted that crumbling stock and crude prices would make smaller oil and gas companies potential takeover targets.
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