Smith Int'l Plans Acquisitions

Smith International Inc. (SII), a major oilfield services company, expects to spend approximately $350 million on acquisitions in this quarter, following the company’s last year’s $700 million-plus stock issue. In addition to acquisition initiatives, the company also intends to deploy this fund to pay down its debt level.

Smith has been quite active in recent days with an increasing trend in the North American drilling scenario, coupled with stable prices for the company’s products and services. There were 2 analysts covering the stock who had increased their 2010 estimates in the last 7 days. Over the last 30 days, 10 analysts have raised estimates for 2010 while only 5 analysts moved in the opposite direction.

We have long admired Smith for its well-run operations and cyclical leverage. Smith is currently pursuing a growth strategy by focusing on unconventional reservoirs, strengthening its global deepwater as well as environmental solutions offerings and acquisitions. In the last quarter, Smith had completed acquisitions with total transactional costs of approximately $60 million.

Given the recent increase in North American drilling activity, we think this year will be positive for Smith. However, we remain cautious on the outlook for natural gas drilling activity until there’s a real and material return in industrial demand. Fundamentals of the natural gas market have a direct bearing on drilling activities in North America, as the predominant majority of E&P activities in this region are natural gas focused.

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