Nabors plans to buy Tesco

On August 14, 2017, Nabors Industries (NBR) disclosed that it had signed an agreement to acquire its OFS (oilfield equipment and services) industry peer Tesco (TESO). Nabors claims to own and operate the world’s largest land-based drilling rig fleet and provides offshore platform rigs in the US and a number of international markets.

Tesco also provides design, assembly, and service delivery of technology-based solutions to the upstream energy industry. According to the agreement, NBR’s rig equipment subsidiary, Canrig, will combine with TESO’s rig equipment manufacturing, rental, and aftermarket service business.

Why Nabors Plans to Acquire Tesco

Terms of the deal

In an all-stock deal, NBR will acquire TESO’s outstanding shares in exchange for 0.68 of its own shares. The transaction valued Tesco common stock at $4.62 per share, which represents a 19% premium to TESO’s closing price on August 11.

According to market analysts, the deal is valued at ~$215 million.

Stock price changes: Nabors versus Tesco

On August 14, after the mergers news, Tesco’s stock price jumped 13% over the previous day to close at $4.40. Nabors’s stock price exhibited less enthusiasm over the deal, falling 2% from the previous day to close at $6.64 on August 14. WTI (West Texas Intermediate) crude fell 3% the same day.

Over the past year, NBR has outperformed TESO. Nabors has returned -36%, while Tesco has returned -42%. The price of crude oil has fallen 3% in the past year.

Synergies from the merger

Synergies from the merger are expected to reach ~$20 million in the first year. Nabors’s management also expects synergies to total $30 million to $35 million, once the merger is fully operational.

Capital savings from facility rationalization and the planned ramp-up of casing running operations could also add to synergies. The merger is expected to close in 4Q17. The transaction remains subject to regulatory approval.

Notably, Nabors Industries makes up 2.2% of the iShares US Oil Equipment & Services ETF (IEZ), which has fallen 23% in the past year.

In this series, we’ll analyze Nabors Industries’ and Tesco’s fundamental drivers and industry drivers, as well as NBR’s balance sheet and free cash flow. We’ll start with NBR’s one-year stock price analysis.

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