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Weatherford pumps up Oilfield services company to buy two divisions from Canada’s Precision Drilling Ray Tyson Petroleum News Houston Correspondent
Weatherford International, in what analysts called a bold move for the big U.S.-based oilfield services company, has agreed to buy two of Precision Drilling’s major divisions for $2.28 billion in stock and cash, signifying further consolidation of a once floundering industry now revived by the unprecedented strength in worldwide oil and gas prices.
Wall Street immediately warmed up to the deal as investors stepped in with their wallets to push Weatherford shares higher on announcement of the transaction June 6.
Investment bank Jefferies & Co. raised Weatherford’s target price to $70 per share from $65 per share. The stock closed June 6 at $56.27 per share, up 4.2 percent from the previous close.
“Weatherford’s new product introductions, acquired assets from (Precision Drilling) and its cost-cutting measures combined with our bullish outlook for the oil service sector should drive strong earnings growth over the next several years,” Jefferies analyst Stephen Gengaro said in a note to clients. Money-making deal Weatherford’s acquisition of the Canadian-based company’s Energy Services Division and International Contract Drilling Division was done for no other reason than to make money, said Bernard Duroc-Danner, Weatherford’s chief executive officer.
“It’s really all we’re after,” Duroc-Danner told analysts in a conference call explaining the deal. “This is not an exercise in industry aesthetics. It’s not an exercise in some sort of crusade. This is just money.”
Investors were not as kind to Precision Drilling, Canada’s largest contract drilling company, as Precision’s share price fell three percent on news of the transaction. Moreover, Standard & Poor’s Ratings Services put the company on its Credit Watch with negative implications. S&P noted that while the pending sale likely would not affect Precision’s dominant position in Canada, it would remove about half of the company’s assets.
Under terms of the agreement, Weatherford agreed to pay Precision Drilling $900 million in cash plus 26 million Weatherford shares for Precision’s two divisions. The acquired net book value is about $1.63 billion, according to Weatherford.
Weatherford is already a strong player in drilling services. But the inclusion of the Precision Drilling business would significantly improve Weatherford’s directional drilling and wireline capabilities, as well as add more “underbalanced” drilling capabilities, according to Weatherford. Underbalanced maintains wellbore pressure below formation pressure while drilling. Precision’s international division a carrot The odd part of the deal is Precision Drilling’s international contract drilling division, consisting of 48 land rigs with a strong presence in the Middle East-North Africa region. While Weatherford already has a strong position in the region, actually operating rigs in the area would be a first for Weatherford. However, the company plans to target national oil companies that desire “one-stop shop” services, Weatherford’s Duroc-Danner said.
“They are showing a keen interest in having engineering planning, logistic coordination, drilling efficiencies … managed with as few contractors or vendors as possible,” he added. Duroc-Danner said Precision also has developed innovative technologies which Weatherford is anxious to harvest. He said Weatherford intends to accelerate the growth of the technologies with the full support of its worldwide infrastructure.
“And that’s why I am very grateful that we were able to pick up Precision, which has done a wonderful job at developing those technologies,” Duroc-Danner said. “Frankly, we could not duplicate what they did, and we need it.”
He said that Weatherford brings its vast worldwide infrastructure to the deal, while Precision brings technology and the product and service lines that Weatherford lacks.
“So for us it’s very much a harvesting of their product and service lines and the technology work they’ve done,” Duroc-Danner added. “For them it’s harvesting our infrastructure. It consolidates what we have. It broadens what we have and gives us what we want.” 5,300 employees in 25 countries In the 12 months ending December 2004, Precision Energy Services and International Drilling had combined revenues of C$1.1 billion. The combined divisions have about 5,300 employees operating in 25 countries.
“After careful consideration of various strategic alternatives, the board determined this opportunity to be the best for our shareholders and for employees of the respective divisions,” said Hank Swartout, Precision Drilling’s chief executive officer.
The transaction is expected to be completed during the third quarter of 2005 and is subject to regulatory approvals, including U.S. and Canadian competition filings.
Weatherford’s Duroc-Danner said that in large part industry’s increasing move toward directional and horizontal drilling prompted the deal with Precision Drilling.
“One thing we found out is how very successful the underbalanced business is (and) that pretty much all the wells that we are getting involved in are either directional or horizontal,” he said.
“We also found out that in much of our market the client wants us to coordinate closely with the directional people. We also found out that we did not have a substantive directional competency. Directional was the missing link. And that (acquisition) to us is sort of being able to get all the right arrows in our quiver.”
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