Merger Forms Biggest Fish in Drilling Industry Pond
Schlumberger Ltd, one of the largest oil services companies in
the world, decided last week to spin off Sedco Forex Offshore, its
offshore drilling company, and allow it to enter into a merger
agreement with Transocean Offshore Inc. for $3.2 billion in the
resultant company's stock. If approved by regulators, the
combination will form Transocean Sedco Forex, the largest offshore
drilling company in the world.
The new drilling giant will have operations in all of the
world's major offshore drilling regions including the North Sea,
the Gulf of Mexico, Southeast Asia, West Africa and Brazil. It will
have one of the world's largest offshore rig fleets with 75 units.
On a market capitalization basis, the merger will form the fourth
largest oil services company worldwide behind Schlumberger,
Halliburton and Baker Hughes. The combined worldwide work force
will consist of 7,500 people and have its principal offices in
"The merger of Transocean Offshore with Sedco Forex Offshore is
advantageous due to the rising capital costs for new rig
construction, the increasing size and needs of our customers, the
expanding geographic diversity of offshore drilling and the
technical challenges posed by new deep-water drilling activities,"
said J. Michael Talbert, CEO of Transocean Offshore. Talbert will
be CEO of the new company. "Transocean Sedco Forex will be uniquely
positioned to address these challenges due to its technical
leadership, financial strength and global presence."
Under the terms of the agreement, Schlumberger shareholders
would own 52% of the new company by trading in their shares at a
ratio of five Schlumberger shares to one Transocean Sedco Forex
share. The deal has already been approved by the board of directors
for each company and is expected to close by Dec. 31, 1999.
"This had to happen," said one analyst who wished to remain
anonymous. "There has been so much convergence on the other side.
Giant exploration and production (E&P) companies are forming,
but the rig construction industry has been lagging behind. In order
to succeed, you've got to keep pace with your customers. The big
move these days is to drill in deepwater, which is an expensive
endeavor. By merging, the combined company will now have a more
impressive resource base to attract the BP Amocos and the
Exxon-Mobils of the world who favor the more expensive projects."
He noted that the rig construction industry is not devoid of
consolidation, siting the Halliburton-Dresser Industries and the
Reading & Bates-Falcon Drilling deals, but it was not happening
at the pace of E&P consolidation.
Arvind Sanger, an analyst with Donaldson Lufkin and Jenrette
Securities Corp., said the merger may help the industry recover
from the recent oil price slump. Oil prices bottomed out in 1998,
reaching record lows of under $13/barrel. Current prices fall in
the $17-$20/barrel range. "The rig construction industry is
fragmented right now. By joining forces, these two major players no
longer have to bid against each other or compete in any way. Now,
we all know the Justice Department won't let a combination occur if
it will affect prices, and I don't think this merger is big enough
to do that anyway. But it will get people evaluating their
positions, and this company could have some bargaining power."
Sanger said the long-term winner in this deal could be
Schlumberger. "In the short-term, the results are market-dependent.
It's famine time right now, but when the rig construction industry
is going well, it goes well for everybody. If the recovery
continues, who knows? In the long run, however, I think
Schlumberger did the right thing because it is better to be an oil
services company than an oil service and rig construction company.
There is less risk and more reward." Sedco Forex's net income was
$390 million in 1998, and Schlumberger said it expects the drilling
company to represent 15% of its annual net income for 1999.