Sources Say Schlumberger-Smith Deal on the Table

(THE WALL STREET JOURNAL via Dow Jones), Feb. 19, 2010

Oil-services company Schlumberger Ltd. (SLB) is in advanced discussions to acquire Smith International Inc. (SII), according to people familiar with the negotiations, a deal that would create an industry giant with revenues double that of its nearest rival.

The deal, which the companies could announce in coming days, would bring together two of biggest players in the business of oilfield services, which help oil companies locate and drill for oil deposits.

Smith's current market capitalization is around $7.5 billion. Assuming a typical deal premium of around 20% would take the transaction in the $9 billion range, though an exact price could not be determined late Thursday evening.

Schlumberger, which maintains headquarters in Houston, Paris and The Hague in the Netherlands, is already the industry's biggest company with 2009 revenue more than 50% higher than Halliburton Co., its largest competitor. Houston-based Smith is one of the biggest producers of oilfield drill bits, among other equipment.

A Smith spokesman declined to comment. A Schlumberger spokesman did not return requests for comment.

Oilfield service companies have struggled recently as the global economic slowdown cut into demand for oil and gas. Schlumberger's profits fell 42% in 2009 from 2008, although business has picked up in recent months as oil prices rebounded.

But Schlumberger's size and geographic diversity have helped the company weather the economic storm better than many competitors. That, combined with the company's $4.6 billion in cash and short-term investments as of Dec. 31, have prompted speculation that Schlumberger could snap up weaker rivals. Smith's profits fell 80.7% in 2009 from 2008.

Sources cautioned the deal has not yet been finalized and could still fall apart. It will also likely face antitrust scrutiny in the U.S. and overseas. The two sides came close to finalizing a deal at different times last year, only to have it fall apart over price considerations, said people familiar with the matter.

Smith shares have rallied about 11% over the last month. Schlumberger, meanwhile, carries a market capitalization of around $79 billion. Its shares have declined about 7% since mid-January.

A Schlumberger-Smith pairing has long been the subject of rumors in the oilfield services industry. Smith does most of its business outside North America, making it attractive to internationally-focused Schlumberger. The two companies already work together closely through a jointly-owned drilling fluids business, M-I Swaco.

Speculation about a deal picked up after last year another rival company, Baker Hughes Inc. announced plans to acquire BJ Services Co. for $5.5 billion. That deal, announced Aug. 31, has yet to close.

Such mergers put pressure on competitors such as Halliburton Co. and Weatherford International Ltd. to pursue their own transactions. Already, many industry experts argued Schlumberger enjoyed an advantage due to its size and wide range of offerings, which allowed it to offer customers package deals on the hugely expensive process of finding and extracting oil.

Asked about his plans on a conference call last month, Schlumberger Chairman and CEO Andrew Gould said acquisitions were not necessarily a reason to build cash. But, he said, the company is still actively pursuing opportunities in acquisitions.

Although Schlumberger and Smith are both part of the diverse oilfield services sector, they compete directly in relatively few businesses. Smith is best known as a manufacturer of drill bits and related equipment, while Schlumberger makes most of its money providing finding and evaluating oil reservoirs, drilling wells, and pumping out the oil.

Those differences could help ease pressure from antitrust regulators. But U.S. authorities have yet to sign off on Baker Hughes acquisition of BJ Services, even though the companies are in almost entirely different segments of the oil business. Sources close to Schlumberger but not involved in the deal said company executives had previously expressed concern that a big acquisition could make the company a target of regulators.

The two companies have faced such scrutiny before. In 1999, the companies paid a combined $14.6 million for violating a 1994 anti-trust consent order in which Smith agreed not to sell its drilling fluids business to certain companies, including Schlumberger. When Smith and Schlumberger merged their drilling fluids businesses in 1998, a judge ruled they had violated the 1994 agreement.

Both companies have long histories in the industry. Schlumberger traces its roots back to French brothers Conrad and Marcel Schlumberger, who in the 1920s began using electrical measurements to map underground rock formations, now a widely used oilfield technique.

Smiths history dates back even further. The company was founded in California in 1902 by 20-year-old blacksmith Herman C. Smith, who began sharpening drill bits for local oilmen.

Copyright (c) 2010 Dow Jones & Company, Inc.