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Analysts Remain Bullish on Schlumberger After Bid for Smith International

Although shares of oilfield services giant Schlumberger (SLB) took a hit after the company announced an $11 billion takeover bid for rival Smith International (SII) on Sunday, many analysts remain bullish on the stock.

Schlumberger, as is typical in an acquiring company, fell from the $64 level prior to the announcement to about $60 in trading this week. This compares to its 52-week high of $72 in January, up from the 52-week low of $35.50 last March.

But Morgan Stanley analyst Ole Slorer maintained a price target of $130 and an overweight rating on the stock. In a note the day after the announcement, Slorer said the Smith acquisition will make Schlumberger dominant in the “two pillars of the next energy cycle” – deepwater oil and gas production and shale gas development.

The analyst expects the acquisition to be “highly accretive” over the long run, meaning it will boost Schlumberger’s profit performance.

Jefferies analyst Stephen Gengaro told Bloomberg that the deal makes “strategic sense” for Schlumberger, which acquires complete control of the critical joint venture, M-I Swaco, a drilling fluids specialist currently owned 60% by Smith and 40% by Schlumberger.

Motley Fool analyst David Lee Smith notes that energy giants are spending more on exploration as energy prices remain at double last year’s level. The primary beneficiaries will be the oilfield services companies like Schlumberger and Halliburton (HAL), Smith says.

Analysts at Reuters Breakingviews find the market’s initial punishment of Schlumberger shares “excessive.” There may be some legitimate worry that antitrust investigation of the proposed deal will tie up valuable management time, the analysts acknowledge. But the strategic value of the acquisition, especially the chance for Schlumberger to remedy its existing gap for a drill-maker, is high, they contend.

While Morgan Stanley’s price target of $130 remains the highest among 24 brokers surveyed by Thomson/First Call, the median target is $83, a substantial advance from the current level. The financial data firm recorded nine “strong buy” recommendations for Schlumberger this month compared with five last month.

Smith International shares, predictably, shot up on the news, registering a new 52-week high of $41.31 the day following the announcement. The Schlumberger offer valued Smith at $45.84 a share. Most analysts thought it unlikely anyone else would enter into the bidding for the company.

By Darrell Delamaide


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