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.

IN PICTURES: Eight Ways To Survive A Market Downturn

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)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  7. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  8. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
  9. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
Trading Center