Early Monday morning, Superior Energy Services (SPN) agreed to merge with Complete Production Services (CPX) by paying a 61% premium over Friday's selling price. According to the press release, the combination creates a premier diversified mid-cap oilfield services company.
In essence, SPN wanted scale in order to compete successfully with the likes of Haliburton (HAL) and Schlumberger (SLB) in the fast growing hydraulic fracturing market in the US and enhanced size to grow internationally. Not to mention that the huge sell-off in CPX stock over the last few months provided an attractive entry point. CPX peaked over $42 in July and hasn't even cracked above $30 with this huge premium offered.
The deal is mostly stock in SPN so the board of directors clearly envision the combined company being able to increase the stock price or they would've requested more cash. The deal is accretive in 2012, so SPN shareholders might be able to recapture the 2011 highs around $42. Whether the combined company generates extra benefits to shareholders is another story. Any merger always adds extra integration risks.
CPX describes itself as a leading oilfield service provider focused on the completion and production phases of oil and gas wells. Not very descriptive, but it is active in the hydraulic fracturing and coil tubing services reminding us somewhat of C&J Energy Services (CJES).
CJES is a recent IPO that specializes in hydraulic fracturing services mainly around Texas. For more details on CJES see our recent article: 2 Eagle Ford Shale Plays Not Closely Followed. Its stock has been crushed since the July IPO at $29 though the company recently reported 336% growth in Q2 earnings. It provides a faster growth option than the combined SPN/CPX and now trades at a much lower earnings multiple. Though expecting over $4 in 2012 earnings, CJES only trades around $17.
This deal confirms the value in the sector. At these prices, CJES offers greater upside potential absent the merger integration risk.
Reasons for the merger:
- creates premier diversified mid-cap oilfield services company
- brings together critical product and service offerings required by customers in North American unconventional resource plays and International markets
- accretive to earnings per share and cash flow per share in 2012
- enhanced financial position enables acceleration of International expansion efforts
Details on the merger:
- Complete stockholders will receive 0.945 common shares of Superior and cash of $7.00 in exchange for each share of Complete common stock held at closing. This represents a premium of 29% to Complete's average price over the last two months. Upon closing, and reflecting the issuance of new Superior shares, Superior and Complete stockholders are expected to own approximately 52% and 48%, respectively, of Superior's outstanding shares.
- at June 30, 2011, Complete had approximately 315,000 horsepower of pressure pumping capacity to provide hydraulic fracturing services in North America. As a result of combined broad diversification, pressure pumping would have comprised just under 25% of proforma North American land revenue for the twelve months ended June 30, 2011, and approximately 10% of proforma total revenue for the twelve months ended June 30, 2011. Furthermore, combined North American coiled tubing operations would have resulted in the combined coiled tubing product line representing about 15% of proforma North American land revenue for the twelve months ended June 30, 2011.