Wedding Season in Energy OFS: Schlumberger's Proposed Acquisition of Cameron International Following Halliburton's Pending Deal with Baker Hughes
(Continued from Prior Part)
Size
In this final part of the series, we’ll discuss Cameron International Corporation’s (CAM) and Schlumberger’s (SLB) current financial situation. How profitable would it be to invest in Cameron International?
Schlumberger is Cameron International’s much larger counterpart. As of August 31, 2015, Schlumberger had a ~$98 billion market capitalization and a ~$102 billion EV (enterprise value), compared to Cameron International’s ~$13 billion market capitalization and $16 billion EV. (EV is calculated by adding a company’s net debt to its market capitalization.)
Cameron International’s EV-to-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple is 8.4x—higher than Schlumberger’s EV-to-EBITDA multiple, which is 7.9x. (EV-to-EBITDA is a measure of a company’s relative value in the market.)
Earnings quality
Cameron International’s gross margin, or gross profit as a percentage of revenue, is 26%, compared to Schlumberger’s 22.5%. The smaller company’s operating profit margin and net profit margins are, however, much weaker than Schlumberger’s.
Debt levels
Schlumberger has a lean debt structure, with a net debt-to-EBITDA multiple of 0.59x—lower than Cameron International’s, which is 1.05x. A higher multiple indicates a company’s larger debt load compared to its ability to service or repay debts.
Schlumberger’s total debt as of June 30 was at ~13.4 billion. Cameron International’s total debt as of June 30 was ~$2.8 billion. By June 2015, Schlumberger had cash and cash equivalents of ~7.2 billion, while the smaller company’s cash and cash equivalents totaled ~$1.7 billion.
So, apart from the premium that Schlumberger has agreed to pay, Cameron International shareholders may end up with a slightly better company than they have now.
The risks
Schlumberger’s risk will no doubt increase after the company merges with Cameron International due to the increased debt it will have during this period of weak energy prices. This increased risk could reduce the larger company’s ability to make technology upgrade investments, which are crucial in today’s highly competitive energy sector.
But more than anything, if the deal were to fall through, Cameron International would immediately slump to its pre-announcement levels. Schlumberger and Cameron International together make up 8.3% of the Vanguard Energy ETF (VDE).
Another mega energy deal announced on November 2014, 2015, was Halliburton Company’s (HAL) agreement to acquire Baker Hughes (BHI). For more on this merger, check out our analysis in “Baker Hughes-Halliburton: A Critical Deal for the Oil Industry.”
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