What The Cameron Subsea Deal Could Mean For Schlumberger

Schlumberger (NYSE:SLB), the world’s largest oil field services firm, recently signed an agreement with Cameron International Corp, a provider of subsea equipment, to jointly develop products, systems and services for the subsea oil and gas market. According to Schlumberger CEO Paal Kibsgaard, the venture is intended to help customers improve production and recovery from their offshore wells. ^[1]

Under the agreement, Schlumberger will pay Cameron $600 million to acquire a 40% stake in the joint venture company called OneSubsea. The deal will combine Schlumberger’s Framo subsidiary as well as its surveillance, flow assurance and power and controls divisions with Cameron’s subsea business. Cameron will manage the joint venture and consolidate it in its financial statements.

Why The Subsea Market Is Important

Oil  fields that lie under the ocean floor are broadly referred to as subsea reserves. High oil prices and the gradual decline in easily accessible land-based reserves are prompting oil and gas companies to look to offshore fields. In the last 10 years, more than half of the oil and gas discoveries came from offshore locations. Offshore services have also proved to be a redeeming factor for oil field services firms over the last few quarters, thanks to growth in activity in Africa, US Gulf of Mexico and Brazil.

Subsea production activities are especially challenging since they involve working with equipment on the ocean floor that are subject to high pressures, temperatures and strong ocean currents. Due to challenging conditions and the high level of service intensity, offshore services typically command attractive rates, helping oilfield services firms to increase their revenue per rig. The growth prospects for the subsea market are expected to be strong. According to Kibsgaard, about 200 new subsea fields are expected to become active in the next four years and around 11,000 subsea wells are expected to become operational worldwide by 2020. ^[2]

What The Deal Means For Schlumberger

While the subsea market has traditionally been serviced by small and specialized firms, Schlumberger has been making steady inroads into this space. Last year the firm acquired Framo Engineering, a Norwegian company with technologies focused on the subsea market. (See Also: Framo’s Deepwater Prowess Fuels Schlumberger to $105) Now, the new deal is likely to solidify Schlumberger’s position in this rapidly growing market by combining its knowledge of reservoirs, well completion and production with Cameron’s expertise in subsea flow control technologies. This will allow the firms to provide a suite of integrated services to customers to enhance the production from wells. Production improvement has been the focus in the oil industry as firms investing heavily on locating, drilling and completing oil wells seek to maximize their returns by improving recovery rates.

While competitors like Baker Hughes (NYSE: BHI) and Halliburton (NYSE: HAL) have specific products and services targeted at the subsea market, this partnership will allow Schlumberger to distinguish itself by providing a complete suite of solutions to customers. Integrated services are attractive to customers since they reduce costs by eliminating the need to manage multiple vendors and also allow for better coordination and performance.

We have a price estimate of about $86 for Schlumberger, representing a premium of about 21% over the market price.

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1. Schlumberger Press Release [↩]
2. Schlumberger, Cameron In Subsea JV to tap Deepsea boom, Reuters [↩]