The energy sector was hammered badly by the recent global market rout and the brutal plunge in oil prices. In fact, it is the worst-performing sector from the year-to-date look and is struggling with a global supply glut and reduced demand (read: Oil Tumbles to Six-Year Low: ETF Tale of Two Sides).

In an effort to reduce operating cost and withstand the current slump more efficiently, the world’s largest oilfield services provider – Schlumberger (SLB - Analyst Report) – agreed to acquire smaller rival Cameron International (CAM - Analyst Report) for $12.7 billion in cash and stock.

Schlumberger-Cameron Deal in Detail

Per the terms, Cameron shareholders will receive $14.44 per share in cash and 0.716 shares of Schlumberger for each share. The deal reflects a premium of about 56.3% to the closing price of Cameron’s shares on August 25 and 37% premium to Cameron’s 20-day volume weighted average price of $48.45 per share. Upon completion, Cameron's shareholders will own about 10% in the combined company.

Schlumberger is known for its "down hole" services while Cameron is a leader in surface operation technologies. The combination would lead to the next industry technical innovation through the integration of Schlumberger’s reservoir and well technologies with Cameron’s leadership in surface, drilling, processing and flow control technologies. Further, the deal would make the expensive deepwater drilling of Schlumberger more affordable amid low oil prices (read: Oil ETFs Slide Again: More Pain in Store?).

The acquisition – expected to be completed in the first quarter of next year – has already been approved by the board of directors of both companies and is seeking approvals from the shareholders and regulators.

The transaction is expected to generate annual pre-tax synergies of $300 million in the first year and $600 million in the second. Initially, the synergies will come from reducing operating costs, streamlining supply chains, and improving manufacturing processes and then from revenues in the second year and beyond. Additionally, the combination will also be accretive to earnings per share by the end of the first year after closing.

Market Impact

The upcoming takeover of Cameron by Schlumberger was well received by investors and CAM shares surged as much as 46.3% in yesterday’s trading session but closed a little lower with 41.1% gains. The stock trumped its average volume figures, as nearly 59.3 million shares moved hands compared to just 3.5 million on average daily. On the other hand, SLB shares dropped 3.3% at the close on the day on elevated volumes of 58 million compared with 8.1 million on average.

The merger news has injected fresh life to the oil service ETFs that saw impressive gains of at least 3% on the day. All of these funds have decent allocations to the in-focus two firms and are in focus over the coming days given the M&A talks. If the possible merger turns out successful, it could change the dynamics of the overall oil service industry, creating a good opportunity for these ETFs (see: all the Energy ETFs here).

Market Vectors Oil Services ETF ((OIH - ETF report))

This fund provides exposure to the 26 most liquid oil services firms by tracking the Market Vectors US Listed Oil Services 25 Index. Out of these, SLB takes the top spot at 22.4% while CAM is the fourth firm in the basket accounting for 5.8% share. With AUM of nearly $844 million and average daily volume of about 6.9 million shares, this is one of the largest and the most popular ETFs in the energy space. The ETF charges 35 bps in annual fees and gained 3.8% on the day following the Schlumberger-Cameron deal. It currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.

iShares U.S. Oil Equipment & Services ETF ((IEZ - ETF report))

This fund follows the Dow Jones U.S. Select Oil Equipment & Services Index, holding 46 stocks in its portfolio. SLB and CAM make up for the top and fifth positions in the basket at 25.1% and 4.3% share, respectively. It has amassed $254 million in its asset base and trades in good volume of more than 150,000 shares per day. The ETF charges 45 bps in annual fees from investors and added 3% on the day. The product has a Zacks ETF Rank of 3 with a High risk outlook.

PowerShares Dynamic Oil & Gas Services Fund ((PXJ - ETF report))

The fund tracks the Dynamic Oil Services Intellidex index, which evaluates companies on a host of investment criteria including growth, valuation, timeliness and risk factors. Holding 30 securities in its basket, Cameron and Schlumberger occupy the top two positions with nearly 6% share each. The ETF is less popular and illiquid with AUM of $46.5 million and average daily volume of around 26,000 shares. The product has an expense ratio of 0.61% and surged 4.5% on the day. It has a Zacks Rank of 4 or ‘Sell’ with a High risk outlook (read: Q2 Earnings Bring No Respite for Oil Service ETFs).

SPDR S&P Oil & Gas Equipment & Services ETF ((XES - ETF report))

This fund provides equal weight exposure across 46 securities by tracking the S&P Oil & Gas Equipment & Services Select Industry Index. Schlumberger and Cameron take the second and third spots, respectively, in the basket with over 3% share each. It has amassed $173 million in its asset base while sees solid volume of about 417,000 shares a day. Expense ratio came in at 0.35%. The fund is up 4% on the day and has a Zacks ETF Rank of 3 with a High risk outlook.

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