A Superior Offer For Complete Production

By Stephen D. Simpson, CFA | October 09, 2011 AAA

Last summer showed signs and portents that the energy services sector was going to start picking up. One of those is the pace of merger and acquisition activities. While bad managers buy at the top, good companies try to expand their businesses just before the sector recovers - when the price of deals is lower and the opportunity for incremental operating leverage is greater. With that in mind, Superior Energy Services' (NYSE:SPN) deal for Complete Production Services (NYSE:CPX) could be a little more than just a combination of two smaller energy service players.

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The Deal
Superior is acquiring CPX in a deal with a total value (at the time of the announcement) of $2.7 billion. The deal is a combination of cash ($7 per CPX share) and stock (0.945 shares of Superior) that values CPX shares at just under $33. That's a 61% premium to Friday's close and a 29% premium to the two-month average, but almost 30% below the average analyst target price.

Assuming that the deal goes through as described, Superior shareholders will own 52% of the combined company at closing.

From Superior to Better
When it comes to the energy service industry and segments like pressure pumping and well servicing, scale may not be everything, but it is important. If nothing else, then, this deal closes a bit of the gap between Superior and major service giants like Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI).

This deal will add some meaningful scale to Superior's efforts in pressure pumping. Despite recent environmental concerns about fracking, it is still a major market. Likewise, this deal adds a lot of servicing rigs, expands the coiled tubing business and adds capacity and know-how in fluid management. It also furthers Superior's efforts to diversify away from its traditional business in areas like the Gulf of Mexico.

Not the First, Not the Last
This is certainly not the first deal in the energy service space this year. Cameron (NYSE:CAM), for instance, recently acquired the LeTourneau business from Joy Global (Nasdaq:JOYG). It is also not likely to be the last. Basic Energy (NYSE:BAS) and Key Energy (NYSE:KEG) are credible targets very similar to Complete Production. Likewise, names including RPC (NYSE:RES), Core Laboratories (NYSE:CLB) and Calfrac could draw attention from companies looking to add scale, specific capabilities or particular geographic exposures.

When it comes to the buyers, it could be open season. Even for the mighty like Schlumberger or Halliburton, a deal can make sense if it offers fast, cost-effective expansion. Elsewhere, companies like Weatherford (NYSE:WFT) may look at strategic deals as a way to boost their footprint and catch more business during the cyclical uptrends.

The Bottom Line
It's hard to see much bad news in a deal that values the target at better than a 60% premium. Still, the fact that the deal was done below traditional industry multiples (presuming that analyst estimates for 2012 and 2013 are in the right zip code) might make some investors pause and reconsider their valuations. The good news is that even if Superior is buying Complete Production for less than traditional multiples would suggest, there's plenty of room between current prices and the targets that this deal would suggest are appropriate for the sector.

Investors should not buy into the energy services space indiscriminately. Quality matters, and the good news is that even quality companies are trading at attractive levels. It's unfortunate that a good investment opportunity like Complete is going away, but maybe it will remind the market that there's still some value in this sector. (For additional reading, see Trade Takeover Stocks With Merger Arbitrage.)

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