Why the Move?
The oilfield services and drilling industry being one of the worst sufferers of oil slump had lowered mergers and acquisitions post 2014. Through the downturn period, energy companies remained focused on stabilizing their balance sheets and undertook various cost-cut initiatives.
However, with the crude pricing witnessing a partial recovery from the lows associated with downturn, energy companies started inking various strategic deals to enhance their capabilities. With the markets starting to stabilize with the changing dynamics within the oil and gas sector, merger and acquisition deals have also been picking up in the oilfield services industry.
Limited organic growth along with low volumes and weak margin expectations left the companies in the drilling and oilfield services industry primed for consolidation. The companies thus are focusing on accelerating M&A activities which not only complement their existing portfolios but also help to enhance their capabilities and competencies. Various M&A deals have been entered upon or completed in the last few months. These include Baker Hughes BHGE - General Electric merger, Halliburton Company HAL - Summit ESP LLC merger and Trican Well Service Ltd - Canyon Services Group, Inc. merger among others.
The recent news of amalgamation of Nabors - owner of the world's largest land-based drilling rig fleet - and Tesco which is noted for its technology-based solutions is likely to further reinforce Nabors position as the equipment and drilling services provider.
The acquisition will be an all stock transaction worth $215 million, wherein Nabors will purchase all the issued and outstanding shares of Tesco in exchange for 0.68 common shares of the former. The deal values Tesco's stock at $4.62 reflecting a premium of about 19% on the Tesco's closing price of $3.90 on Aug 11. The transaction value also represents a 30% premium of the total enterprise value of Tesco based on its cash balance as of Jun 30. After the closure of the deal, which is expected to take place in the fourth quarter of 2017, upon necessary approvals and satisfactory conditions, shareholders of Tesco will own 10% of the shares of Nabors. However, if the deal fails to close by Feb 14, 2018, Tesco will be liable to pay Nabors a cash termination fee of $8 million.
The deal is a win-win transaction for the both the companies which is likely to result into various financial, commercial, and operating synergies.
Nabors, which has a stretched balance sheet with a debt-to-capital ratio of over 55%, will be able to deleverage itself to certain extent by the issuance of shares for the acquisition of Tesco, which is free of debt as of Jun 30.
Nabors Drilling Solutions unit will be benefited by Tesco's tubular running services which are expected to provide Nabors with comprehensive solutions and integrated offerings. This in turn is likely to drive the revenues of the company and position it for increased benefits amid the rising oil production of late. Further, Nabors intends to synthesize its rig equipment subsidiary Canrig Drilling Technology Ltd. with Tesco's equipment unit which is well noted for its product offerings and aftermarket service. This bodes well for the directional and horizontal drilling process of the company.
The deal is expected to result into operating synergies of around $20 million in the first year followed by full run-rate synergies of $30-$35 million along with further capital savings. The acquisition will also provide Tesco an enhanced platform and scale thereby boost its potential for market share gains in the light of stronger and wider offering of complementary products and services.
Barbados-based Nabors conducts oil, gas, and geothermal land drilling operations along with offering a number of ancillary well site services, including oilfield management, engineering, transportation, construction, maintenance, well logging, and other support services in select domestic and international markets. The company currently carries a Zacks Rank #4 (Sell).
Nabors Industries Ltd. Price
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