(Oil service M&A story updated to correct for GE purchase of Wood Group well support division)NEW YORK ( TheStreet) -- Energy stocks are always fodder for the mergers and acquisitions rumor mill, and it's no different in 2012 as the sector isn't lacking for trends to spur M&A. The North American market is a good place to focus, with oil service companies dealing with a slower pace of growth and increased supply from competitors. With natural gas prices hovering near historic lows, the entire North American market is moving to focus on oil. The major oil service companies are migrating away from natural gas basins as margins are declining. Oil service companies are also betting international activity increases while the North American market shifts.
|Betting on a year of sexy acquisitions by the big oil service companies in 2012 may be wishful thinking: analysts.|
Michael Marino, analyst at Stephens, said he can't see a reason why any of the large-cap oil service companies would need to go out and make a mega-acquisition. Looking back at the recent big deals made by them top three companies -- Schlumberger, Halliburton and Baker Hughes -- there has been an overarching strategic reason for each. When Schlumberger acquired Smith International it was mostly about integration of Smith's fluids business. The Baker Hughes acquisition of BJ Services was discussed for a long time and the rationale was that service intensity was growing rapidly and it filled a hole for Baker Hughes. Halliburton's acquisition of Boots & Coots expanded its platform for a focus on servicing the brownfield (mature reservoir) market. The oil service analysts don't see a "cheap" large-cap name like a Transocean or Nabors fitting any overarching strategic need. Morgan Keegan analyst Roger Read said that Nabors might be worth more if its assets were broken up. "Nabors has had a lot of acquisitions over the last 15 years and little in the way of dispositions. Does it all make sense to be together?" asked Read. The argument that the parts are worth more than the whole merits M&A chatter, but it doesn't mean that any of the oil service majors would be interested in the company. Several analysts agreed that Nabors would not be an attractive candidate for an acquisition by an oil service major because it is a "jack of all trades rather than a master of one." If an oil service major wanted to buy a land driller in the U.S., Helmrich & Payne ( HP) is a lot cleaner as a play on land drilling, Marino noted.
Morgan Keegan's Read said the large-cap oil service companies have tended to make their biggest acquisitions during global market slowdowns. What is occurring right now in North America doesn't rate as a global slowdown and suggests that the companies continue to focus on bolt-on acquisitions adding specific lines of expertise. "In cycles where commodity prices decline and then you see a drop in activity there is a focus on consolidation and market share. But today if you merge two companies you may lose a ton of people and management might end up being distracted and end up with less market share," Read said. Halliburton announced in its recent fourth quarter and full year results that it had made $880 million in acquisitions, however, these are the type of off-the-radar acquisition that don't hit the headlines and Marino said that Halliburton has been clear that its acquisition focus remains on technology. "Larger companies won't just buy a competitor's capacity because it's getting cheaper, and if it's getting cheaper, they might wait to see if there is even more pain involved," Smith added. National-Oilwell Varco ( NOV) told analysts this week that it is focusing on making acquisitions in a range of $250 million to $750 million, a range that suggests more niche expertise acquisitions, not mega deals. National-Oilwell Varco this week said it would acquire NKT Flexibles for $670 million. NKT makes flexible pipe products and systems for the offshore drilling. In announcing the deal, Pete Miller, CEO of National-Oilwell Varco, stated "The incorporation of NKT's highly technical design capability and business into our Rig Technology group is an exciting and strategic opportunity for NOV." Late last year, NOV closed on a $772 million acquisition of fiberglass company Ameron, showing that even at the top end of the valuation range it laid out again this week, it has been focused on specialty plays related to core oil services.
Halliburton has failed several times in recent years to make a major international acquisition. Halliburton was outbid in 2008 by private equity when it bid for Expro, and was widely believed to be interested in Wood Group's well support division, which General Electric ( GE) acquired last year. Yet Smith said Halliburton made the right move in not letting itself get caught up in a bidding war with a GE or the private equity industry at the peak of the market, and the company can continue to grow internationally without a major international acquisition. "Halliburton is large enough already internationally. There is no pressure to grow internationally to offset softening in North America," said Smith. Marino added that when the international acquisition campaign failed, Halliburton took the organic approach. The Stephens analyst said the pressure will be on Halliburton to prove that the organic growth is enough: "Now that offshore and international are picking up, we will see how they have done." In addition to Transocean, Weatherford International has been a staple of rumors, but the analyst community seems to think that a Weatherford still makes more sense for a GE as its builds out its energy portfolio, rather than a large-cap oil service company, which doesn't add any particular expertise that it needs to win business by adding Weatherford. While Weatherford could be attractive because of its exposure to the recovering international market and its more limited exposure to North America, that doesn't mean a large-cap oil service company is the right fit: "If you're Halliburton and you think the international market is ready to go gangbusters, you don't want to miss what could be an up market because you are trying to integrate an acquisition. Just ride the tide and go with what you've got," Marino argued.
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