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Key Energy in Play With Lufkin as Baker Hughes Chases Shale Oil: Real M&A

17 Nov 2011

Baker Hughes Inc. (BHI) is looking at deals as it tries to extract bigger profits from the boom in U.S. shale-oil exploration. That may put Key Energy Services Inc. (KEG) andLufkin Industries Inc. (LUFK) on its wish list.

Baker Hughes, which provides drilling services to oil and gas companies, is seeking opportunities to make acquisitions, Andy O’Donnell, its president for the western hemisphere, said this week. After spending $7.1 billion on BJ Services Co. last year to gain a pressure-pumping business that helps drillers unlock oil trapped in shale, Key Energy, which hauls the fluids used in hydraulic fracturing, and Lufkin, a maker of pumps used to extend well production, may now make sense for Baker Hughes, Cambiar Investors LLC and Tudor Pickering Holt & Co. said.

With oil prices eclipsing $100 a barrel, oilfield-services suppliers are vying to help energy companies tap unconventional assets as the average cost for finding and developing the fuel for the largest U.S. producers surged more than sixfold in the past decade, according to data compiled by Bloomberg. Among U.S. oilfield-services companies between $1 billion and $5 billion in market value, analysts project Key Energy and Lufkin will boost earnings by the most next year to records, the data show.

“Strategically it definitely would make a lot of sense”to buy Key Energy, Tim Beranek, a Denver-based money manager who specializes in energy companies at Cambiar, which oversees $8 billion, said in a telephone interview. “Oil services stocks are very inexpensive on their earnings power assuming that the oil price stays in the $90 to $100 range.”

Cambiar owns shares of Baker Hughes, Key Energy and Lufkin.

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Gary Russell, a spokesman at Houston-based Key Energy, didn’t respond to a telephone call or e-mail requesting comment. Christopher Boone, chief financial officer at Lufkin, Texas-based Lufkin, declined to comment.

Teresa Wong, spokeswoman at Baker Hughes in Houston, said it doesn’t comment on rumors or speculation.

“We’re always going to look at opportunities and have things we buy,” O’Donnell said at a conference in Miami on Nov. 15, adding it wasn’t clear what Baker Hughes would need to acquire right now. “There’ll be dynamics that change in the market as we go forward that there’ll be things that you have to bring into the portfolio.”

Baker Hughes is the world’s third-largest provider of services, tools and technology to oil and natural gas producers, competing with Halliburton Co. (HAL) and Schlumberger Ltd. (SLB) Its equipment and services are used to drill wells and open them so their owners can begin producing oil and gas. Baker Hughes is also hired to boost production from older fields.

Hydraulic Fracturing

Baker Hughes acquired BJ Services, which was the third-largest provider of pressure-pumping services at the time, in a cash-and-stock deal to compete for the larger integrated projects by adding a hydraulic-fracturing business to its product line, Chad Deaton, the company’s chief executive officer, said in a statement when the deal was announced in August 2009.

Known as “fracking” in the oil industry, the technique is used by producers primarily when drilling horizontally through oil-bearing rock to fracture the formation by injecting a mixture of water, sand and other chemicals to release oil.

Demand for fracking has increased as rising oil prices makes it more affordable to explore on land than under water and deposits were discovered in parts of the U.S., including the Eagle Ford in southern Texas, the Bakken shale in North Dakotaand the Permian Basin in western Texas.

The number of horizontal rigs active in the U.S. has more than tripled to 1,152 since the end of 2006, as the number of vertical rigs fell 36 percent in the same period to 633, data compiled by Baker Hughes and Bloomberg show.