More To Come On The Oil M&A Front, Says Morgan Stanley

Following the recent decline in oil prices, analysts at Morgan Stanley are now projecting increased M&A activity within the Oil Services, Drilling & Equipment sectors.

In a report published Monday, Morgan Stanley's Oil Services analyst Ole Slorer argued that the recent Schlumberger Limited. SLB and Cameron International Corporation CAM deal has created an "increased sense of urgency" as Schlumberger "likely called the trough in the current cycle." In addition, the deal marks the second major consolidation within the sector as of late but the analyst stated there is "no shortage of interest" for further activity.

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Slorer said the "vertical integration" between the two companies represents a new concept (unlike horizontal building) and Schlumberger will be in a better position to offer its customers more attractive terms to gain traction. The analyst also added that the deal could reduce Schlumberger's risk on incentive contracts and as such he remains "constructive" on the deal going through.

Slorer further noted that Halliburton Company HAL received 25 offers for assets it is divesting and most of the bidders "are likely to leave empty handed." Nevertheless, the analyst wrote that this could "burst the M&A floodgates open" as industry sentiment begins to improve.

Slorer concluded that companies with a market cap of less than $10 billion and low leverage along with differentiated technologies represents the ideal company to be acquired.

Bottom line, the analyst is expecting additional M&A activity with equipment names being as the "main focus," although the consolidation activity could eventually spread to offshore drillers and domestic pumpers.