By Alison Sider And Dana Mattioli 

Schlumberger Ltd., the world's largest oil-field service company, said Wednesday it would buy smaller rival Cameron International Corp. for $12.7 billion in cash and stock.

Consolidation is expected across the energy sector as companies struggle with low oil prices and a pullback in drilling activity. The deal comes months after Schlumberger's two biggest competitors, Halliburton Co. and Baker Hughes Inc., agreed to combine. That $35 billion deal is still undergoing regulatory review.

The price tag values Houston-based Cameron--which makes drilling equipment and supplies maintenance equipment to pipelines, refineries and oil-and-gas wells--at $66.36 a share, a 56.3% premium to Tuesday's closing price. Cameron's shares have fallen 42% in the past 12 months as the price of oil plunged. But stock in Cameron surged 41% to $59.81 midday Wednesday. Shares of Schlumberger fell 4.7% to $69.11.

The combination of Schlumberger and Cameron, two of the best known names in oil-field services, will create an energy technology powerhouse, executives from the two companies said Wednesday during a conference call.

Schlumberger's expertise is focused underground, helping companies find new oil and gas reserves and coax more fuel out of existing discoveries.

Cameron creates the equipment that sits on the surface at the top of a well, and is perhaps best known as the maker of a piece that malfunctioned and helped trigger the 2010 Deepwater Horizon oil spill disaster. It settled with BP, the well's operator, for $250 million. Cameron later benefited from new regulations on oil wells as companies upgraded their equipment in the wake of the disaster.

"The real excitement here is around what we can create by combining our technology offerings," Schlumberger Chief Executive Paal Kibsgaard said on a call to discuss the deal. "We will basically generate better performance for our customers."

Helping oil companies unlock oil and gas stores more cheaply has become especially pressing for oil-field service providers as crude-oil prices linger at their lowest levels this decade. Companies like Schlumberger and Halliburton, as well as smaller service providers, have had to lay off tens of thousands of workers around the world this year and idle hundreds of drilling rigs amid sharp spending cuts by their energy company customers.

Analysts said the deal didn't come as a complete surprise. Schlumberger and Cameron are already partners in a joint venture, OneSubsea, which focuses on drilling and managing subsea wells in extremely deep water offshore.

The companies were in talks for months, according to a person familiar with the matter. Market volatility in recent days complicated the discussions, but ultimately only delayed the announcement, people familiar with the matter said.

If crude-oil prices or stock markets decline further, the deal could look better from Cameron's perspective, because the company will be able to ride out the downturn as part of a more muscular entity, the people said, adding that if prices or markets rebound the transaction no longer looks attractive and Cameron shareholders could vote it down.

Schlumberger took advantage of sharp share price declines during the downturn. Although it is paying a high premium based on Cameron's current price, the bid represents a 10% discount to where the company's shares traded a year ago.

By acting now, Schlumberger was able to ink a deal before Cameron's retiring CEO Jack Moore passed the baton to Chief Operating Officer Scott Rowe in October. Schlumberger said Mr. Rowe will run one of the main divisions at the combined company.

The Schlumberger-Cameron deal is unlikely to be the last combination of oil-field service companies, the part of the energy industry that has borne the brunt of the pain inflicted by lower oil prices. The sharp decline in oil prices has been a catalyst for energy deals, with more oil-and-gas M&A so far this year than in the same period of any other year on record, according Dealogic. Year-to-date, acquisitions totaling $314 billion have been announced--more than double the volume of oil-and-gas deals seen at this time last year.

While the dollar volume is high, the number of transactions so far in 2015 is smaller than in prior years. Many buyers and sellers are struggling to agree on price, deal makers say. The sharp slide in oil prices is making it tough for sellers to justify deals at lower valuations, while buyers fret that the markets still have further to fall.

While many energy observers had hoped oil prices might recover in the second half of 2015, expectations for weaker demand from China and the possibility of new crude supplies flowing out of Iran have pushed back expectations for a rebound. Analysts at UBS AG say oil-field service companies could be under pressure until 2017, which could prompt more mergers and acquisitions as companies try to weather the downturn.

"We believe that more M&A opportunities are likely to evolve between the larger oil service and equipment companies," Wells Fargo analyst Judson Bailey said. "The driving force, in our view, will be the ability to provide a suite of technology and product lines to help the world's biggest operators lower costs and enhance returns in areas like deep water and U.S. shale."

Schlumberger, with dual headquarters in Paris and Houston, said it expects to complete the Cameron acquisition in the first quarter of 2016, subject to approval by Cameron shareholders as well as regulatory clearance.

Schlumberger expects pretax synergies of about $300 million in the first year and $600 million in the second year after the deal closes. The transaction will add to per-share profit by the end of 2016, Schlumberger said.

Other parts of the energy sector, including pipelines and oil-and-gas producers, have also been consolidating.

Earlier this year, Royal Dutch Shell PLC said it would pay nearly $70 billion for Britain's BG Group PLC; pipeline giant Energy Transfer Equity LP offered $48 billion to buy Williams Cos.; and a partnership controlled by refiner Marathon Petroleum Corp. announced plans to acquire MarkWest Energy Partners LP for $15.8 billion.

Lisa Beilfuss contributed to this article.

Write to Alison Sider at alison.sider@wsj.com and Dana Mattioli at dana.mattioli@wsj.com

 

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(END) Dow Jones Newswires

August 26, 2015 17:58 ET (21:58 GMT)

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