Shares in oil services firms Cape (LSE: CIU), Hunting (LSE: HTG) and Petrofac (LSE: PFC) rose by 6-8% on Wednesday morning.
The majority of the gains came after it emerged that US oil services giant Schlumberger Limited has agreed a $14.8bn deal to acquire Cameron International Corporation, a US firm that manufacturers oil rig equipment.
Cameron shareholders will receive $14.44 per share in cash, plus 0.716 Schlumberger shares, valuing each Cameron share at $66.36. That’s a sizeable 56% premium to Cameron’s closing price on Tuesday of $42.47 per share.
What does this deal mean for UK investors? Why have shares in Hunting, Cape and Petrofac risen so sharply today?
This could be the bottom
The price of US WTI crude oil has fallen by 57% to $39.80 over the last twelve months, prompting massive spending cuts by all the big oil companies, on which Schlumberger depends for its business.
Schlumberger shares are down by 32% on one year ago. Similarly, shares in Petrofac and Cape are down by around 25% over the same period, while Hunting has fallen by 50%.
However, it’s worth remembering that Schlumberger’s size gives it a more comprehensive view of global oil market activity than almost any other company in the world. In my view, today’s deal suggests that Schlumberger believes we are close to the bottom of the oil market.
Oil prices are now at a level where many companies are unable to fund exploration or develop new fields to replace produced reserves. Some companies are starting to lose money on each barrel of oil they produce.
I reckon that a short spike lower for oil is still possible, but would be unlikely to last long. I think we are close to the bottom.
If so, spending in the oil sector might start to stabilise again over the next 12-18 months. With a more stable outlook and much lower costs, firms will be better able to make investment decisions.
Takeover tips?
Of course, the other implication of today’s news is that smaller oil services firms like Hunting, Cape and Petrofac could become takeover targets.
Both Petrofac and Cape have issued interim results this week, confirming strong order books and profits in-line with full-year forecasts. This has left both firms quite attractively valued and offering generous yields:
|
Petrofac |
Cape |
Hunting |
|
|
2015 forecast P/E |
17.1 |
8.5 |
28.9 |
|
2015 forecast yield |
4.8% |
6.1% |
3.5% |
While Hunting does look a little expensive, earnings per share are expected to rise by 58% in 2016, pushing down the firm’s 2016 forecast P/E ratios to a more 18. Similarly, Petrofac’s 2016 P/E is just 8.6, even after today’s gains.
Is this a buy signal?
The Schlumberger-Cameron deal isn’t the first mega-money takeover since the oil crash started. Earlier this year we saw Royal Dutch Shell stick its corporate neck out with a £47bn offer for BG Group. That definitely wasn’t the bottom for the oil market.
However, large companies have to plan much further ahead than most investors. For Schlumberger, Cameron’s depressed share price presents an opportunity which the firm believes will generate significant opportunities in the medium term.
I’d suggest investors take the same view. Petrofac, Cape and Hunting all carry risks, but all look quite attractive buys for patient investors.
