Schlumberger To Acquire $1.7 Billion Stake In Eurasia Drilling Company

Schlumberger Limited SLB announced Tuesday an agreement to acquire a minority equity interest in Eurasia Drilling Company Limited EDCL.

According to Schlumberger’s press release, the total cost of acquiring the minority interest is approximately $1.7 billion and EDC shareholders will take the company private.

EDC is the largest provider of onshore drilling services in Russia, as measured by the number of meters drilled, providing onshore integrated well construction services and workover services. The company also provides offshore drilling services in the Caspian Sea and is the largest provider of such services in the sectors where it operates based on the number of jack-up drilling rigs.

Morgan Stanley analyst Pavel Y. Sorokin rated EDC Overweght and viewed “this deal as potentially a positive sign, as a major Western company is investing a material sum...and providing financing to a Russian company, thus committing itself to the market longer term for the first time in this size since sanctions were introduced against Russia last year.”

“We note that c.62 percent of EDC's order portfolio is from Lukoil, with 20 percent coming from Gazprom Neft, with both of these companies also significantly exposed to EDC. We see little risk for the oil companies as we do not expect any deterioration of quality/ transparency of EDC business when co-managed by SLB, though it may give SLB more negotiating power,” according to Sorokin.

The firm’s base case price target for EDC was “$26 per GDR, 19 percent above the take-out price” and saw “the transaction boding well for the OFS sector in general at current valuations, although it is another signal that times are getting tougher for independent mid-sized businesses in the Russian O&G space.”

The price target for EDC derived from a “base-case 9-year DCF model (WACC of 13.2 percent, risk-free rate of 5.5 percent and Russian/FSU equity risk premium of 8 percent, terminal growth rate of 3 percent.”

Schlumberger Limited traded at $81.23 in the pre-market, down 0.12 percent.