A possible merger between Schlumberger Ltd. and Smith International Inc.

A possible merger between Schlumberger Ltd. and Smith International Inc. highlights a continuing theme in the oil-field services industry: Size matters.

Schlumberger, already the world’s biggest oil-field services company by revenue and market value, is close to an agreement to acquire Smith, according to people familiar with the situation. A deal isn’t finalized and could still break down.

A deal would create an industry giant with more than double the revenue of its nearest rival,Halliburton Co. Any transaction could be valued at $9 billion or more, these people said. An exact price could not be learned.

Industry analysts said a deal could force competitors including Halliburton, Weatherford International Ltd. and National Oilwell Varco Inc., to pursue deals of their own in order to compete. None of the companies returned calls for comment.
Smith shares jumped 13%, or $4.35, to $37.70 while Schlumberger’s fell 2.9%, or $1.91, to $63.90, both in 4 p.m. trading Friday on the New York Stock Exchange.

A wide breadth of services offerings and financial size have become increasingly important for services companies, which help oil companies locate and drill for oil deposits. As more and more of the world’s oil is produced overseas, the industry’s customers are increasingly state-run oil companies, which often prefer to work with companies that can offer a full range of products and services.In August, Baker Hughes Inc., the fourth-largest services firm by revenue, announced plans to acquire smaller BJ Services Inc. for $5.5 billion. The deal, which is expected to close this spring, would help Baker fill key holes in its product line, which many analysts said had been making it hard for the company to win big contracts overseas. “When you go to international markets in particular, not only scale but breadth of products and services is important,” said Gary Flaharty, head of investor relations for Baker Hughes. “It gives you more tools for the tool kit.”

Mr. Flaharty said Baker is unlikely to make another big acquisition until it has finished integrating BJ Services, although he said the company still had the flexibility to make smaller deals.
Oil-field service companies have struggled recently as the global economic slowdown cut into demand for oil and gas. But larger companies such as Schlumberger and Halliburton have weathered the economic storm better than many competitors, and in some cases have taken business away from smaller companies. That has led to speculation that stronger companies could snap up weaker rivals.

But few industry analysts predicted a huge wave of acquisitions similar to the surge in mergers among big oil producers a decade ago. In part, that is because there aren’t many big companies left to buy—and the ones that would be attractive targets, such as equipment maker Cameron International Corp. or FMC Technologies Inc. are too expensive for most buyers.

“Do I necessarily see this unlocking a spate of consolidation? Not really,” said Bill Herbert, an analyst with Simmons & Co. in Houston. “The industry’s pretty consolidated as it is.”
What is more likely, experts said, is a series of smaller deals, as companies look to fill voids in their product lines. National Oilwell Varco, for example, has said publicly that it would like to increase the size of its drilling fluids business.

One possible source of acquisitions: Smith International itself. Despite its size, Schlumberger competes directly with Smith in relatively few areas. But experts said antitrust concerns will probably force the company to sell Smith’s PathFinder Energy Services business, which helps evaluate oil reservoirs. Schlumberger may also choose to sell some non-core areas of Smith’s business, such as its equipment distribution segment.

Brad Handler, an analyst with Credit Suisse in New York, said the deal not only fills a gap for Schlumberger, but also helps prevent Smith from developing into a serious competitor down the road—or being acquired by one.

“There had been rumors around others trying to step in and buy it,” Mr. Handler said.

(Ben Casselman)


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