Schlumberger Ltd is in advanced talks to buy Smith International Inc, The Wall Street Journal said, in a move that would expand the oilfield services leader's arsenal as the weakened sector begins to recover.

The report, citing people familiar with the talks, sent Smith shares up 13 percent on Friday, valuing it at above $9 billion. Schlumberger shares fell 3 percent.

With the deal, Schlumberger would boast revenue double that of nearest rival Halliburton Co . Regulatory scrutiny of the expanded business is likely, and their existing M-I SWACO joint venture already has a history with antitrust watchdogs.

The companies did not respond to requests for comment.

A deal would represent a homecoming for Smith Chief Executive John Yearwood, who spent 26 years at Schlumberger and between 2006 and 2008 was senior adviser to Schlumberger CEO Andrew Gould, who like Yearwood was educated in the UK.

Smith's new chief financial officer, William Restrepo, also worked at Schlumberger for two decades.

A sale by the two executives to their former employer would be only the latest consolidation in oilfield services, a sector that saw its profits plummet as oil and natural gas companies cut spending on projects when the boom collapsed in 2008.

Baker Hughes Inc , the third-largest oilfield services company, is due to close its $6 billion takeover of smaller peer BJ Services Co this quarter. Weatherford Ltd , the fourth-largest U.S.-listed player, bought the services unit of BP Plc affiliate TNK-BP last year.

Outside the top four, which are far better placed to compete in an industry where oil and gas companies increasingly seek one-stop shopping for services, Smith looked the most in need of adding to its range of offerings.

It makes a tremendous amount of sense, Kurt Hallead, RBC Capital's co-head of energy research, said of a Smith deal, as it would let Schlumberger compete in drillbits and give it full ownership of M-I SWACO. Baker was filling an empty slot, and Schlumberger is doing that here with Smith.

FMC Technologies Inc and Cameron International Corp , which help make up the industry's mid-tier along with Smith, have both seen strong demand for their subsea products as deepwater drilling booms in places like Brazil.

ANTITRUST CONCERNS

Smith and Schlumberger currently operate M-I SWACO, which sells drilling fluids to the oil and gas sector, as a 60-40 joint venture, and analysts said a bid for Smith would likely get a hard look from antitrust regulators.

A decade ago, a U.S. court found Schlumberger and Smith in criminal contempt for violating a 1994 consent decree to keep their drilling fluid arms separate. The companies split a $13.1 million civil settlement and each paid $750,000 in fines.

So analysts expect a combined company would have to sell some assets, and Joe Hill, from Tuder, Pickering Holt Energy Research in Houston, said the benefits for Schlumberger would be much smaller than those resulting from Baker's move.

There's no such imperative for Schlumberger to do this. That's why it's a bit of a head-scratcher, he said.

Still, Schlumberger is not likely to face a rival suitor for Houston-based Smith, since few other companies would see a better fit for their business, Hill added.

To get regulatory approval, RBC's Hallead said Schlumberger would likely have to sell Smith's PathFinder business, which logs real-time data while drilling, and National Oilwell Varco Inc or a private equity firm would be possible buyers.

Smith shares rose 13 percent to close at $37.70 on the New York Stock Exchange. Schlumberger, which also has NYSE-listed shares and has its corporate offices in Paris, Houston and The Hague, dropped 2.9 percent to $63.90.

(Reporting by Matt Daily in New York and Braden Reddall in San Francisco; additional reporting by Sakthi Prasad in Bangalore; Editing by Gerald E. McCormick, Dave Zimmerman and John Wallace)

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