A number of companies in the energy sector have struggled with low oil prices and a pullback in drilling activity, so many analysts have expected to see consolidation, and Michael Berger, of Technical420.com, points to this recent strategic acquisition as a continuation on this theme.

Many analysts expected to see consolidation across the energy sector as companies have struggled with low oil prices and a pullback in drilling activity. On Wednesday, this theme continued to play out after Schlumberger Ltd. (SLB), the largest oil-field service company in the world, announced that it would acquire Cameron International Corp. (CAM) for $12.7 billion in cash and stock.

This deal comes less than a year after Halliburton Co. (HAL) agreed to acquire Baker Hughes, Inc. (BHI), creating the largest North American oil service name and a substantial diversified competitor abroad. That $35 billion deal is still undergoing regulatory review.

Lots of Synergies Between the Two Businesses

The two companies have a long relationship working alongside one another, particularly with the OneSubsea joint venture which was formed in January 2013. SLB can generate $300 million of synergies in year 1 and $600 million in year 2.

Most of these synergies are from cost reductions from improved engineering processes and supply chain optimization. A substantial portion of cost savings will come from operational efficiencies across both onshore and offshore product lines. A lot of the cost benefits offshore have been seen within the OneSubsea joint venture.

Increased Share Buybacks Justify the Acquisition Premium

The acquisition valued CAM at $66.36 per share, a 56.3% premium to Tuesday’s closing price. Although this premium seems high, CAM increased its multi-billion dollar share buyback program during 2015 because management believed its shares were undervalued by the market.

During 2014, CAM repurchased $1.6 billion in shares (10.6% of fully diluted shares). Management once again increased its repurchase plan after selling its Centrifugal Compression business to Ingersoll-Rand (IR) for $600 million in after-tax proceeds. Prior to the sale, CAM had $665 million remaining in its repurchase authorization. Management said that they would use the $600 million for further buybacks totaling $1.2 billion in additional repurchases.

Creating an Energy Technology Powerhouse

During a conference call, management from the two companies said the combination of SLB and CAM will create an energy technology powerhouse. People familiar with the deal said the companies were in talks for months, but recent market volatility complicated the discussions and delayed the announcement.

SLB has taken a large step forward towards reducing its own cost structure through this strategic acquisition. By passing through some of these cost savings and continuing its focus on integrated projects and integrated product offerings, SLB will be able to attract some revenue and share gains as a result of this combination. Although the deal is expected to be accretive to EPS within the first year given rapid synergy introductions, the multiple SLB paid was relatively high.

Michael Berger, Founder and President, Technical420.com