DEBORAH JIAN LEE

The Associated Press

HOUSTON (AP) - Oilfield services company Baker Hughes Inc. said Monday that it will buy BJ Services Co. in a cash-and-stock deal valued at $5.5 billion to diversify the services it offers and compete better with industry leaders.

Baker Hughes customers will get a one-stop shop for a variety of services. Notably BJ Services' pressure pumping business will go to Baker Hughes, which will help clients with unconventional gas and deepwater fields, said Chad Deaton, Baker Hughes Chairman, President and CEO.

"It will better position us to drive international growth and to compete for the growing large integrated projects by incorporating pressure pumping into our product offering," he said. Integrated oil companies are active in all phases of the business including production, refining, transportation and marketing.

Pressure pumping made up less than 1 percent of Baker Hughes 2008 revenue, but is expected to comprise about 20 percent of the company's revenue after the deal is complete. Pressure pumping injects liquid or gas into wells to increase the amount of recoverable oil ornatural gas. This added business will boost Baker Hughes total revenue near levels of its two largest competitors, the company noted. Schlumberger Ltd. is the world's largest oilfield services company, with Halliburton Co. just behind it in size.

Pritchard Capital Partners analyst Stephen Berman said the combined company will have BJ Services' pressure pumping franchise and Baker Hughes' international market share.

But Wachovia analyst Tom Curran remained skeptical. While he expects the deal to help the company compete in bidding for foreign integrated projects in the long term, he believes excess capacity in North American pressure pumping and the timing of the deal will hurt the company in the near term.

"Baker Hughes will likely come under fire for not closing on this deal when BJ Services was much cheaper," Curran said. BJ Services shares have risen more than 32 percent this year.

In a conference call this morning, Deaton explained that the timing of the deal made sense. He believes that the energy market has reached a bottom, international markets will grow and oil prices have reached a "decent" level.

Since the beginning of the year the price of crude oil has gained 64 percent as of Friday's close. The price of natural gas has shed more than 46 percent of its value. On Monday the price of crude fell $3.17, or 4.4 percent, to $69.55. Natural gas prices fell just under 2 cents to $3.016 per thousand cubic feet.

The acquisition is expected to produce $75 million in cost savings for Baker Hughes in 2010 and $150 million in 2011, and add to earnings per share in 2011.

BJ stockholders will receive 0.40035 shares of Baker Hughes and $2.69 in cash for each share they own. The deal represents a 16.3 percent premium to BJ's $15.43 Friday closing stock price, the companies said.

BJ's shareholders will have an approximately 27.5 percent stake inBaker Hughes once the acquisition closes, and two BJ services board members will join Baker's board.

The is the first major oil services takeover of the year. After larger oil companies reaped hefty profits from last year's crude and gas price rally, some analysts predicted that crumbling stock and crude prices would make smaller oil and gas companies potential takeover targets.

Exxon Mobil Corp., BP PLC and other oil giants find it increasingly difficult to secure new sources of fossil fuels the old-fashioned way - by simply exploring and drilling for them.

Smaller producers that don't have the same massive capital reserves have been stung by a credit crisis that's severely limited or even paralyzed their ability to finance new exploration and production.

In July BJ Services posted a net loss for its fiscal third quarter, citing declining demand for oil and natural gas amid global economic weakness.

The company reported a fiscal third-quarter loss of $32.3 million compared with earnings of $141.8 million during the same period last year.

Revenue slid 41 percent to $786.9 million.

The acquisition, which has approval from both companies' boards, may close by year's end. It still needs the approval of both companies' shareholders.

Shares of Baker Hughes fell $3.16, or 8.3 percent, to $34.93 in midday trading. BJ Services shares jumped 92 cents, or 5.9 percent, to $16.35.