Schlumberger Ltd, one of the largest oil services companies inthe world, decided last week to spin off Sedco Forex Offshore, itsoffshore drilling company, and allow it to enter into a mergeragreement with Transocean Offshore Inc. for $3.2 billion in theresultant company’s stock. If approved by regulators, thecombination will form Transocean Sedco Forex, the largest offshoredrilling company in the world.

The new drilling giant will have operations in all of theworld’s major offshore drilling regions including the North Sea,the Gulf of Mexico, Southeast Asia, West Africa and Brazil. It willhave one of the world’s largest offshore rig fleets with 75 units.On a market capitalization basis, the merger will form the fourthlargest oil services company worldwide behind Schlumberger,Halliburton and Baker Hughes. The combined worldwide work forcewill consist of 7,500 people and have its principal offices inHouston, TX.

“The merger of Transocean Offshore with Sedco Forex Offshore isadvantageous due to the rising capital costs for new rigconstruction, the increasing size and needs of our customers, theexpanding geographic diversity of offshore drilling and thetechnical challenges posed by new deep-water drilling activities,”said J. Michael Talbert, CEO of Transocean Offshore. Talbert willbe CEO of the new company. “Transocean Sedco Forex will be uniquelypositioned to address these challenges due to its technicalleadership, financial strength and global presence.”

Under the terms of the agreement, Schlumberger shareholderswould own 52% of the new company by trading in their shares at aratio of five Schlumberger shares to one Transocean Sedco Forexshare. The deal has already been approved by the board of directorsfor each company and is expected to close by Dec. 31, 1999.

“This had to happen,” said one analyst who wished to remainanonymous. “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 orderto succeed, you’ve got to keep pace with your customers. The bigmove these days is to drill in deepwater, which is an expensiveendeavor. By merging, the combined company will now have a moreimpressive resource base to attract the BP Amocos and theExxon-Mobils of the world who favor the more expensive projects.”He noted that the rig construction industry is not devoid ofconsolidation, siting the Halliburton-Dresser Industries and theReading & Bates-Falcon Drilling deals, but it was not happeningat the pace of E&P consolidation.

Arvind Sanger, an analyst with Donaldson Lufkin and JenretteSecurities Corp., said the merger may help the industry recoverfrom the recent oil price slump. Oil prices bottomed out in 1998,reaching record lows of under $13/barrel. Current prices fall inthe $17-$20/barrel range. “The rig construction industry isfragmented right now. By joining forces, these two major players nolonger have to bid against each other or compete in any way. Now,we all know the Justice Department won’t let a combination occur ifit will affect prices, and I don’t think this merger is big enoughto do that anyway. But it will get people evaluating theirpositions, and this company could have some bargaining power.”

Sanger said the long-term winner in this deal could beSchlumberger. “In the short-term, the results are market-dependent.It’s famine time right now, but when the rig construction industryis going well, it goes well for everybody. If the recoverycontinues, who knows? In the long run, however, I thinkSchlumberger did the right thing because it is better to be an oilservices 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 drillingcompany to represent 15% of its annual net income for 1999.

John Norris

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