Oilfield service provider Smith International, in a total transaction valued at approximately $3.2 billion, is acquiring W-H Energy Services, a supplier of petroleum drilling tools with leading-edge technology in directional drilling. Although a win-win for both companies, concerns are being expressed that the deal would put at risk an existing joint venture between Smith International and Schlumberger.
Directional drilling, the oilfield service industry's second fastest growing market in the world -- right behind rig equipment -- is used to reach oil and gas in unconventional areas, such as underneath a difficult to drill rock formation like shale, and can reduce the environmental impact in ecologically-sensitive locations by allowing multiple wellheads to be grouped together on one surface platform.
At the moment, 90 percent of W-H Energy's drilling service activities (including logging-while-drilling well-formation data, measurement-while-drilling tools, and directional well-bore drilling services) are in North America, focused offshore in the Gulf of Mexico and onshore along the Gulf Coast. Nearly two-thirds of Smith's existing oilfield segment revenues are generated outside of North America. Leveraging Smith's worldwide platform, including customer relations and working footprint, will accelerate W-H's globalization.
Although combining Smith's turbine motors and drill bits with W-H's expertise in directional will create better drilling systems, it also puts the world's fourth-largest oilfield services contractor into closer competition with Schlumberger, the number one player in oilfield-services.
Smith and Schlumberger own a respective 60 percent and 40 percent interest in a joint venture called M-I Swaco, which is the leading supplier of drilling fluid systems to the hydrocarbon exploration and production industry, with locations in more than 75 countries around the world.
M-I is important to Smith, constituting 50 percent, or $4.42 billion, of the revenue base in fiscal 2007.
In a conference call with Wall Street analysts on Tuesday, Doug Rock, Chairman and Chief Executive of Smith, however, said he did not think the W-H deal would have a major effect on the company's current relationship with Schlumberger and M-I.
"Yes, clearly, we don't move and do these kinds of things without the understanding of what we're doing by our partner," he said. "A lot of our drilling tools, in technologies and in the services group are really in the directional area. So this really fills that area out. We don't see ourselves as a major competitor of Schlumberger. In fact, some of these tools being supplied by W-H may actually be complimentary to that relationship."