Give credit where credit is due - Nabors Industries (NYSE:NBR) is not messing around. Not content to just be the largest land-based driller in the world, the company is now moving more aggressively into services as well. With the acquisition of Superior Well Services (Nasdaq:SWSI), Nabors is definitely taking a significant step towards enhancing the breadth of services the company can offer.

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The Deal
Before the open on Monday, Nabors announced that it was offering to pay $22.12 per share in cash in a tender offer for Superior Well Services. This deal has the support of Superior and roughly one-third of Superior's existing shareholders. All told, this will represent a roughly $900M cash outlay for Nabors, but the company will also be assuming over $160 million in debt on Superior's books.

What Is Nabors Getting?
In buying Superior, Nabors is taking a big step into the energy services sector - specifically, the market for stimulation services (fracturing, or "fracing/fracking/fraccing"). Superior is the fifth-largest player in well stimulation - holding roughly 7% share in the market. That is a far cry from the 18% share of Halliburton (NYSE:HAL), the 15% share of Schlumberger (NYSE:SLB) or the 13% share of Baker Hughes (NYSE:BHI), but it did position Superior as the largest public company of "digestible size".

Although Superior's core business is pretty concentrated (75% of revenue in the second quarter was from stimulation services), it is geographically diverse within the United States. Superior has positions in all of the major plays, including the Marcellus, Haynesville, Barnett, Woodford and Bakken shales, as well as the Permian Basin and Pinedale Anticline. In fact, due to the company's close working relationship with Chesapeake Energy (NYSE:CHK), Superior is a major force in the Marcellus region.

How Will Nabors Leverage This Deal?
Nabors seems to be making a clear bet that one-stop shopping will give the company an edge in its long-term business prospects. After all, rivals like Patterson-UTI (Nasdaq:PTEN) offer relatively few services beyond drilling. Moreover, if there are additional profitable dollars to be gained from a customer, why not see to it that those dollars go into your pocket? In other words, customers like Chesapeake are paying for drilling and stimulation anyway, so why not double-dip?

The nature of Superior's business gives Nabors both an interesting challenge and opportunity. I am referring specifically to the fact that Superior is essentially an all-American company in terms of its operations. Now, that would seem to fly in the face of Nabors previously-discussed intentions to broaden its business internationally, but investors should not overlook the probability that Nabors will look to leverage this acquisition and bring those services overseas in the coming years. After all, the U.S. is far and away the leader in active rigs and stimulation activity, which suggests unexploited opportunities overseas.

Who's Next?
Given how fractured the stimulation market is (4 companies represent about 57% of total capacity), I do not think it is unreasonable to expect a "land grab" here and a drive towards industry consolidation. Weatherford (NYSE:WFT), for instance, has something of a token presence in the market (roughly 6% share) and may need to get bigger to say competitive in the services market. Likewise, Canadian companies like Trican and Calfrac may face interesting choices about whether to be among the predators or the prey in this market.

Nabors paid more than what I saw as fair value (I thought Superior shares were worth about $20/share), but not so much more as to be worrisome. Moreover, Superior's business is going strong these days (revenue was about 20% higher than expected in the second quarter, and EBITDA tripled on a sequential basis) and I probably would have been moving my price target up after this quarter due to strong activity and good pricing in the company's stimulation business.

Bottom Line
All in all, this was a decent deal for both parties and I think both shareholder groups can be reasonably content today. (For more, see The Wacky World Of Mergers And Acquisitions)

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Tickers in this Article: SWSI, NBR, HAL, SLB, BHI, CHK, WFT

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