Schlumberger Ltd. , the world’s biggest oil-services company by market value, on Tuesday said it has agreed to acquire a minority stake in Eurasia Drilling Co. , Russia’s largest onshore drilling firm, for about $1.7 billion.
The move represents an unusually large investment by a U.S.-listed company in a firm involved in the development of Russia’s oil industry at a time of high tensions between Moscow and the West. The investment also comes as oil prices have more than halved since last summer, dragging down shares in the oil-services sector and spurring consolidation elsewhere.
The deal presents risks for Schlumberger. While much of the Russian energy industry isn’t subject to specific sanctions, Western governments have targeted the industry and, if tensions with Moscow don’t cool, restrictions could expand. Schlumberger’s move also comes when both lower oil prices and sanctions have put a big cloud over the oil-drilling ambitions of Russian producers.
Moscow continues to pump oil furiously, amid a global glut that has helped sink world prices. But many of Russia’s older wells may become uneconomic if prices continue to fall, or stay low for a long period.
Still, some industry players have used the lower prices to their advantage, especially at the deal table. In November, U.S.-based Halliburton Co. agreed to buy rival oil-field services company Baker Hughes Inc. for $35 billion.
Schlumberger’s Chief Executive Paal Kibsgaard said in a conference call Friday that the company saw lots of opportunities for mergers and acquisitions following the drop in oil prices.
EDC’s shares had fallen around 60% last year, as its two biggest customers—Russian independent oil company Lukoil and Gazpromneft —came under sanctions. The driller has also come under pressure from lower oil prices and the steep drop in the value of the ruble. While EDC gets paid in the Russian currency, it often buys equipment on global markets in dollars.
EDC reported Monday a 19% year-on-year decline of drilling volumes in December, while its overall drilling for the fourth quarter declined 16% from the same period of 2013.
Schlumberger’s move extends a strategic alliance between the two companies that has been in place since 2011. That deal enabled the two to work together to deploy a range of drilling and well-engineering services to customers in the Russian conventional drilling market, Schlumberger said in its statement Tuesday.
EDC is the largest provider of drilling services in Russia. It also provides offshore drilling services in the Caspian Sea where it operates a number of jack-up rigs.
“The deal thus signals to us that the Western firm is taking an opportunity to strengthen its presence in the regional market,” Moscow- based Otkritie brokerage said.
Under the terms of the deal, the main shareholders in EDC, which was listed on the London Stock Exchange via global depository receipts, will take the company private.
Following the delisting, Schlumberger will acquire a 45.65% stake in EDC for $22 per share, an 81% premium to EDC’s closing price on Monday. Schlumberger has an option to purchase the remaining shares in EDC during a two-year period, starting three years from the deal’s close, which is expected in the first quarter of this year.
By Selina Williams and Alexander Kolyandr