By Selina Williams in London and Alexander Kolyandr in Moscow
Schlumberger Ltd., the world's biggest oil-services company by
market value, agreed to acquire a minority stake in Eurasia
Drilling Co. Ltd., 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 Russia's oil industry, at a time of high
tension between Moscow and the West. The investment also comes as
oil prices have more than halved since last summer, dragging down
shares in the global oil-services sector and spurring consolidation
elsewhere.
The deal presents risks for Schlumberger. While much of the
Russian energy industry isn't subject to overall sanctions, Western
governments have targeted parts of 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.
Representatives for Schlumberger couldn't be reached immediately
for comment on Tuesday.
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 Chief Executive Paal Kibsgaard said in a conference
call Friday that the company saw opportunities for mergers and
acquisitions following the drop in oil prices.
EDC's shares fell by 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 on Monday reported a 19% year-over-year decline in drilling
volume 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 a statement Tuesday.
EDC, which was formed in 2004 from the drilling arm of Lukoil,
is the largest provider of onshore drilling services in Russia,
where it has a market share of about 30%. 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 (Schlumberger) is taking an
opportunity to strengthen its presence in the regional market,"
Moscow-based Otkritie brokerage said.
EDC's main shareholders are Russian oil-industry veterans
Alexander Djaparidze, who has a 30.2% stake and is the founder and
chief executive, and Alexander Putilov, who has a 22.4% interest in
the company. Neither of the two are thought to be close to the
Kremlin's inner circle and haven't been targeted by western
sanctions.
Both Messrs. Djaparidze and Putilov will remain shareholders
after the deal is completed, a spokeswoman for EDC said. Mr.
Djaparidze will stay on as CEO, EDC said.
This isn't Mr. Djaparidze's first deal with Schlumberger. In
2003, Schlumberger agreed to buy PetroAlliance Services, a Russian
oil services company that the Russian billionaire founded in
1995.
Russia has long been a lucrative market for Schlumberger. While
western sanctions have sharply reduced western investment in Russia
in the last year, many major multinationals say they plan to remain
in the country in the hope of a recovery once the geopolitical
tensions ease.
"The deal is a good entry point for Schlumberger, which
obviously wants to stay and grow in the region long-term," said
Ekaterina Rodina, a VTB Capital analyst. EDC isn't subject to any
sanctions, and the deal looks fairly priced for both companies, she
said.
EDC is listed on the London Stock Exchange through global
depository receipts. Upon completion of the deal, the company will
be delisted, and Schlumberger will acquire a 45.65% stake for $22 a
share. That represents 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. EDC
will hold an extraordinary shareholders meeting on Feb. 16 to vote
on the proposed deal.
Write to Selina Williams at selina.williams@wsj.com and
Alexander Kolyandr at Alexander.Kolyandr@wsj.com
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