Slump means time to buy

Prolonged pain in the oil patch could pry loose bargains in the oil field services sector at a time only a few companies still have the financial strength to take advantage of the deals.

On Wednesday, National Oilwell Varco said it is positioning itself for a significant buy as the lingering crude slump opens the door on more opportunities for mergers and acquisitions, a rare announcement in an industry marred by falling oil prices and a collapse in the U.S. rig count.

“This is becoming a buyer’s market, and we’re pretty excited about that,”

CEO Clay Williams said during an earnings call with investors.

With domestic crude prices stuck below $50 a barrel for weeks, oil field services companies already reeling from the downturn earlier this year are bracing for further slides in the rig count and more pressure from their customers to come down on prices.

The fourth quarter is expected to bring fresh trouble to companies that already cut back significantly. For larger firms with healthy balance sheets like Houston-based oil field equipment supplier NOV, it’s a prime time to bid on distressed assets and companies.

“This is a great market to do something and capitalize on this downturn, but many companies are not able to do that because they’ve suffered grievously,” said Bill Herbert, an analyst at Simmons & Company International in Houston.

The number of services companies with enough financial flexibility to make big buys can be counted on one hand, Herbert said.

After finalizing four small purchases during the third quarter and completing a share buyback program, NOV said it will start prowling for deals in anticipation of “extraordinary acquisition opportunities” in the oil field services and manufacturing industries, Williams said.

Wide disparities between the prices potential buyers are offering and what potential takeover targets think they’re worth have kept acquisitions to a minimum, Williams said. But NOV has remained “patient and disciplined in these discussions,” he said, and sees the lingering slump as the catalyst to narrow that bid-ask spread.

“As the downturn has lengthened, we believe the value of potential target companies will become more and more compelling,” he said.

NOV hasn’t escaped the downturn. Its thirdquarter profit slipped 78 percent to $155 million and its revenue tumbled 41 percent to $3.3 billion, the company announced Wednesday.

But it has enough cash to make an acquisition and still ride out the downturn, even if the tough times continue for a while, Herbert said.

Oil behemoth Schlumberger is another company capable of more dealmaking, Herbert said. After announcing plans to spend $12.8 billion buying up Houston oil tool maker Cameron International earlier this year, CEO Paal Kibsgaard hinted that it may seek out additional assets.

In a conference call with investors two weeks ago, Kibsgaard said the company will “continue to be opportunistic” in the downturn but didn’t elaborate.

National Oilwell Varco’s CEO similarly demurred when asked by analysts to provide more information about potential takeover targets or specific product lines under consideration

“I’m going to stay away from getting too specific, but we take a pretty broad view,” Williams said.

The revelation that NOV may be gearing up for a large purchase comes as oil field services giants Halliburton and Baker Hughes continue to sell off pieces of their businesses in an effort to gain regulatory approval for their nearly $35 billion merger. Earlier this year, Halliburton announced plans to sell off its fixed cutter bits and roller cone drill bits, directional drilling, and logging-while-drilling and measurement-while-drilling businesses. Analysts at the time identified NOV as a potential buyer for oil field assets.

Halliburton said last week that it has entered the negotiation phase on the first round of divestitures, and continues to search for buyers for other assets on the auction block, including its expandable liner hangers business and Baker Hughes’ core completions business.

The list of potential bidders, however, has shortened as services companies continue to get battered by slowdowns in oil field activity.

Anthony Petrello, the CEO of drilling rig contractor Nabors Industries, agreed that the downturn could offer opportunities for companies interested in acquiring assets or other companies but said the firm hasn’t found a deal worth making.

“Although we have evaluated several packages recently, we have not seen the fit or evaluations recently that make sense to us,” he told investors during a conference call Wednesday.

Another major oil field services company, Weatherford, is also shying away from deals, announcing last week that it has pulled itself out of the running for acquiring the divested Baker Hughes-Halliburton businesses.

“This is now a closed issue,” CEO Bernard Duroc-Danner said. “There will be no other bidding attempts on any other divested assets.”