Schlumberger, the world's largest oil field services provider, announced Wednesday morning that the company is buying Houston's Cameron International Corp, an oil field equipment company that puts together blowout preventers and other rig equipment for surface operations. (If the name rings a bell, it's likely because Cameron sold Transocean the blowout preventer that failed in the Deepwater Horizon spill.)
Now, this may seem like a surprising move with oil hanging around at $40 a barrel and all the layoffs and general gloom and doom we've seen from the Texas oil industry over the past year, but it actually makes sense, according to Ed Hirs, an energy economist with the University of Houston.
For one thing, the global oil industry isn't suffering the way that the U.S. oil industry is with the current low prices. “It's important to just keep everything in perspective. It's a market of about 94 million barrels of oil per day, so there's a lot of oil being produced and a lot of oil being consumed. That's not a bad thing, even selling at $40 per barrel,” Hirs says. “There are a lot of producers that can make money at $40 a barrel but a lot of them aren't in the United States.”
Lower prices have made things tough for oil field services companies like Baker Hughes and Halliburton because both companies were heavily involved in the expensive-to-produce U.S. shale plays. That was fine when oil was going for $100 per barrel but it left shale-focused companies in a lurch when the price of oil started falling in June 2014. Baker Hughes and Halliburton are now working on a merger of the two companies.
But while Schlumberger was also heavily involved in the U.S. shale plays in the Barnett, the Eagle Ford and the Bakken, the French-based company has always had more of an international scope to its business. That's working out well for Schlumberger these days. Most of the U.S. oil industry has been focused on the pricey unorthodox shale plays, but oil industries in other countries were more into traditional oil wells. “Schlumberger is still servicing a lot of the international market so it's clients are people who are still able to turn a profit with oil at $40 barrel,” Hirs says.
And if you need evidence that Schlumberger is doing just fine, look no further than its latest announced purchase. “Maybe we shouldn't be surprised as [Schlumberger] has historically ultimately taken out its [junior] partners,” an industry newsletter from the energy investment bank, Tudor, Pickering and Holt stated in reaction to the news on Wednesday. Cameron has a solid reputation as a good company, and the purchase will give Schlumberger more to offer in oil field services, according to Paal Kibsgaard, Chairman and Chief Executive Officer of Schlumberger.
“With oil prices now at lower levels, oilfield services companies that deliver innovative technology and greater integration while improving efficiency, which our customers increasingly demand, will outperform the market,” Kibsgaard stated in a release.
In short, everybody wins with this deal, right? Not quite. While this move will likely be good for Cameron shareholders and for Schlumberger overall, not all of the more than 23,000 employees at Cameron and about 100,000 employees at Schlumberger will be needed once the companies combine, Hirs says. Since Schlumberger is the buyer and Cameron is the company being bought, Cameron employees are the ones who are more likely to be cut, he says. That's just how these mergers work.