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Schlumberger, Smith Said Close to Merger

Oilfield services giant Schlumberger Ltd. apparently is close to completing a transaction to buy Houston-based Smith International Inc., which is one of the largest drillbit producers in the world.

According to published reports on Friday, the two companies have been in talks since last year and could reach an agreement within days. The Wall Street Journal first reported the possible transaction, which was later confirmed in various media reports.

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

The two companies are joint business partners in M-I SWACO, a drilling fluids business. However, they have little opportunity to compete directly for oilfield services work, the Journal noted.

Two-thirds of Houston-based Smith's oilfield segment revenues are concentrated in markets outside of the United States. The company employs more than 20,000 full-time personnel and operates through three operating segments: Smith Oilfield, M-I SWACO and Wilson.

Last month Schlumberger CEO Andrew Gould said 2010 would be "one of two halves," similar to activity levels in 2009 (see NGI, Feb. 1). "Beyond this year we see an increase in exploration and production." Toward the end of 2009 the company saw "encouraging signs emerging," which pointed to oil demand increasing this year for the first time since 2007. But for gas, he said, "worldwide we are generally oversupplied..."

If the merger were to occur, it would be the second big tie-up in the services industry in less than a year. Last August Baker Hughes Inc. announced that it would buy BJ Services Co. for $5.5 billion in the largest oilfield services acquisition in more than a decade (see NGI, Sept. 7, 2009). Federal regulators have yet to sign off on the transaction, which is expected to close this year.

Baker Hughes CEO Chad Deaton said at the time of the announcement that he didn't think the merger would be the industry's last. There is "a lot of talk" about more acquisitions in the oil and gas business, he said at the time. "We haven't seen any deals yet, but there's lots of chat."

Spokesmen for Smith and Schlumberger declined comment.

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