Schlumberger Ltd.’s move to buy nearly half of Eurasia Drilling Co. (EDC), Russia’s largest oil drilling concern, will cost it about $1.7 billion and perhaps a few sleepless nights over the prospect that Western sanctions may eventually apply to the new acquisition. But the American oil services giant also just may have found a genuine bargain.
Houston-based Schlumberger’s decision to buy 45.65 percent of EDC comes at a time when the European Union and the United States have imposed stiff economic sanctions on Russia for its support of separatist fighters in neighboring Ukraine.
Under the sanctions, Western energy companies may not help specific Russian companies explore for oil in the Arctic, in deep water or in underground shale. But neither EDC nor its largest shareholders, CEO Alexander Djaparidze and Alexander Putilov, are targets of the sanctions so far.
Still, if the East-West tensions don’t ease, the sanctions could expand, as they already have in the past year. Then there’s the 50 percent-plus plunge in oil prices over the past seven months, contributing to the risk Schlumberger faces in buying such a large stake in EDC.
Despite this low price, Russian companies are still producing oil prodigiously, even though they face the risk that many wells, especially older ones, may cease to be profitable if prices keep falling and/or stay low for a long period before stabilizing.
And that’s where Schlumberger may emerge victorious: Low prices for oil make ancillary energy companies such as EDC more affordable. For example, on Nov. 17, 2014, US-based Halliburton Co. announced that it would buy its rival oilfield serves company Baker Hughes Inc. for $35 billion, potentially allowing it to surpass Schlumberger as the world’s largest oil services concern.
Now Schlumberger could leap-frog over Halliburton by buying EDC and reclaim its primacy, and do so at a bargain price. The value of EDC’s shares fell by around 60 percent in 2014 because of the Western sanctions imposed on its two biggest oil customers in Russia, Gaspromneft and Lukoil. The company is also hurting because of lower oil prices and the plunging value of the ruble.
And on Jan. 19, the Russian driller reported a 19 percent year-on-year decline in the volume of its drilling operations in 2014. Further, it said, its drilling for the fourth quarter of 2014 had dropped 16 percent below the same period of 2013.
Because of these multiple facets of EDC’s devaluation, Schlumberger will pay only $22 per share of EDC and take the company private, according to the deal announced Jan. 20. But even that low price is 81 percent higher than the current value of EDC stock. The US company will also have the option to buy out the rest of EDC shares within a two-year window that opens when the current deal closes.
If Schlumberger ends up buying all of EDC’s stock, it will have turned a long strategic alliance into outright ownership of the largest onshore drilling company in Russia.
By Andy Tully of Oilprice.com
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