C&J Energy Services Inc. agreed to acquire the hydraulic fracturing business of Nabors Industries Ltd. for $2.86 billion in cash and stock, becoming the latest U.S. company to seek an offshore address to lower taxes.
Nabors, based in Hamilton, Bermuda, will receive 62.5 million C&J shares and $940 million in cash, Houston-based C&J said yesterday in a statement. The new company, to be known as C&J Energy Services Ltd., will be incorporated in Bermuda and run from its current offices in Houston.
C&J is the latest U.S. oilfield services company to seek an exit from the country’s tax system, after similar moves by most of the largest drillers including Transocean Ltd., Weatherford International Plc, Ensco Plc and Noble Corp Plc. Nabors has been incorporated in tax-free Bermuda since 2002, while its executives continue to run the company from Houston.
“As we continue to grow and generate revenue, being offshore can bring our tax rate down,” C&J founder and Chief Executive Officer Josh Comstock told analysts and investors yesterday on a conference call.
C&J’s effective tax rate averaged 37 percent over the past four full years, according to data compiled by Bloomberg. Bermuda-based Nabor’s was 19 percent in 2010-2012, and it recorded a negative income tax expense in 2013.
C&J owns the 13th biggest fleet of trucks used in hydraulic fracturing, or fracking, which shoots a mixture of water, sand and chemicals into newly drilled wells to crack rock and release oil and natural gas. C&J will gain Nabors’ fracking services unit, which is the sixth-biggest in the U.S.
The deal comes after two years of falling prices for fracking services in the U.S. amid a glut of pressure pumping equipment. Prices are expected to remain flat this year in the U.S. and Canada, and increase in some U.S. regions in early 2015, according to a Feb. 14 report by PacWest Consulting Partners LLC.
In a North American market that’s now improving, Nabors has struggled to get its fracking equipment back to work, while C&J has been one of the few service companies adding capacity aggressively, said Chris Robart, a principal at PacWest, a Houston-based consultant that tracks fracking service providers.
“The Nabors side of the deal makes more sense, trying to get rid of that business,” Robart said. “On the C&J side, I view it as risky because there’s a lot of risk going in, assuming you can clean up Nabors’ business.”
The pace of U.S. companies adopting foreign addresses for tax purposes, a technique known as “inversion,” has quickened this year, prompting discussion in Congress about legislation to halt the deals.
Pfizer Inc.’s proposal earlier this year to adopt a U.K. tax domicile through a merger with AstraZeneca Plc spurred Democrats including Carl Levin, a Michigan Democrat, to propose eliminating the tax benefits of some of these transactions.
Even if it became law, Levin’s bill probably wouldn’t affect the C&J deal because Nabors plans to end up with a majority of the shares of the company.