The Schlumberger (NYSE:SLB) buyout of Cameron International (NYSE:CAM) promises the creation of the industry's first complete drilling and production systems. While the company promises the combination will create the industry's next technical breakthrough, it doesn't guarantee stock success. The biggest concern is that the high-margin, high-multiple business of Schlumberger is pulled down by the low-margin business of Cameron.
Can the venture pull enough synergies out of the merger to not impact the stock?
Low Margin Equipment
Cameron focuses on flow equipment products and systems so by its very nature the margins are lower than the services aspect of Schlumberger.
In the last quarter, Cameron had operating margins below 10%. The company only had minimal impact from the energy collapse, with earnings dropping to $0.83, compared to $0.93 in the prior Q2. Revenues were down over 10% from last year so again even during the boom times of mid-2015, the operating margins were sub-10%.
During Q2, Schlumberger was generating total operating margins of 19%. The oilfield services giant had international margins in excess of 24% with expectations that the domestic business would eventually rebound to the 18% level achieved in the last Q2.
Cameron generated $2.2 billion in quarterly revenue compared to the $9.0 billion for Schlumberger. The company will account for roughly 20% of the total business and the total pretax operating margin drops to 17%.
Will Synergies Help?
Of course, all of these numbers are before any synergy impacts. The company guides towards synergies of $300 million in the first year and $600 million in the second year.
With the deal closing in Q1 next year, Schlumberger is planning to strip roughly $75 million per quarter out of the Cameron costs. Those levels would still leave the Cameron business with margins below those of Schlumberger. It does get the total company margins closer to 18%, and of course by the second year, total pretax margins will approach the 19% achieved by Schlumberger now.
The question is, how willing the market is to reward the stock for what will appear as lower margins once the companies are merged.