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Rationale for Cameron’s Merger with Schlumberger

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Merger mania in the oil patch

Merger activity typically picks up in the energy space when energy prices weaken. While we didn’t see a spate of merger and acquisition activity during the 2008–2009 downturn, we did in the late ’90s, when some massive mergers took place: Conoco bought Philips Petroleum, Exxon bought Mobil, and British Petroleum bought Amoco. As oil prices fall this time around, we have already seen one merger between Baker Hughes and Halliburton. The Schlumberger-Cameron deal follows in its footsteps.

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Management kicked off its investor conference call by discussing the need for oil and gas companies to adapt to energy cost trends by changing the way they operate. Hydraulic fracturing (commonly known as fracking) has been a game changer, massively increasing energy supply. Companies can no longer count on steadily increasing energy costs.

Leveraging Schlumberger’s relationships

Schlumberger (SLB) is an oil services company that has strong relationships with major oil companies. Cameron (CAM) manufactures equipment for deepwater drilling. By merging with Cameron, Schlumberger believes it can create a company with a more attractive offering.

Schlumberger and Cameron have an existing relationship as partners in OneSubsea, a company that manufactures products for subsea oil and gas markets.

In their company presentation, Schlumberger and Cameron characterized the strategic rationale for their merger as “growth through integration of reservoir, well, and surface technology with instrumentation and control to launch a new era of drilling and production systems.”

Synergies and cost savings

This deal is about revenue and cost synergies. The cost synergies are expected to be $300 million in the first year after closing and $600 million the following year. Cameron and Schlumberger expect to realize cost synergies through supply chain management, operation cost reductions, and manufacturing processes improvements. In the first year of their merger, the companies expect all their synergies to be cost synergies. In the second year of their merger, the companies expect to begin realizing revenue synergies. The deal is expected to be accretive to earnings per share (or EPS) in the first year after closing.

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