Schlumberger Deal Shows Hope For Battered Oil Services Sector
Who says it’s all doom and gloom in the oilfield services sector?
Sure, U.S. drilling and fracking activity remain near all-time lows, and the sector is drowning in red ink after a brutal second quarter, but as Baron Rothschild once said, “The time to buy is when there’s blood in the streets.”
That was clearly the mindset of Liberty Oilfield Services when it agreed to purchase Schlumberger’s SLB +1% North American shale fracking business on Monday. The $430 million all-stock deal will also see Schlumberger, the world’s largest oilfield services company, take a 37 percent equity stake in Liberty.
Investors loved the deal, sending shares of Liberty up 35 percent on the day, thus providing hope that smart consolidation can help lift the sector from the doldrums where it’s effectively been stuck since the 2015-2016 oil price downturn.
As I previously noted, consolidation in the hydraulic fracking, or “pressure pumping,” business is necessary to reduce supply and strengthen pricing for the oilfield services companies that cater to shale producers.
The highly fragmented sector has too many players with too much fracking capacity, and it has contributed to its own struggles for too long.
Removing weaker players, either through tough love bankruptcies or consolidation, is badly needed so that oilfield services can gain some pricing leverage on producers when oil rebounds and drilling activity picks up.
This year’s shale downturn has hit fracking services hard, with firms including B.J. Services and Calfrac Well Services filing for protection from creditors. There are signs that the great U.S. drilling collapse of 2020 has reached bottom, though, which means there’s nowhere to go but up for the sector.
It’s easy to say an industry must consolidate, but it can be challenging to clinch deals when large debts are involved.
There is a need for smart, creative M&A solutions in the oilfield services sector, and based on recent events, companies are responding. With this deal, Denver-based Liberty will increase its total market share in fracking to about 22 percent, with an active fleet of 2.5 million horsepower working across 10 oil basins, including assets in Alberta, Canada.
It will become the second-largest fracking company behind Halliburton HAL -0.8% — achieving the sort of scale needed to negotiate more profitable contracts with producers. In one fell swoop, Liberty has made the company and its industry stronger. Liberty is showing rivals that it’s possible to craft value-driven deals investors will cheer — even in this challenging market.
Schlumberger was always a step behind Halliburton, Baker Huges, and others in the fracking market. The deal with Liberty gives Schlumberger a chance to cut its losses and retain some upside from the equity stake in Liberty, considered one of the better positioned and managed firms in the sector, with a blue-chip customer base.
Schlumberger and Liberty had combined fracking revenue of roughly $1.5 billion in the first quarter of 2019, but that fell to below $200 million in the second quarter of this year, according to oilfield consultancy Spears & Associates.
This transaction will help the combined entity capture market share and prepare for the recovery in shale, which should begin once oil prices safely breach the $50 a barrel mark.
West Texas Intermediate crude is at $43 now, but the OPEC-plus alliance looks committed to keeping the market balanced and drawing down huge inventories built up in the first half of the year. That effort could take all the rest of this year and 2021, but recent strong compliance rates show that OPEC-plus members, which need higher prices, are up to the task.
Global demand for oil remains a giant wild card, and it’s unclear when demand will return to pre-Covid levels. But so long as the OPEC-plus cartel continues its stellar compliance, the market’s supply side appears manageable.
Liberty certainly sees the upside and expects a shale recovery in the near term. CEO Chris Wright said he expects fracking will recover to over 200 active fleets by next year, up from around 76 last month.
The oilfield services sector must further consolidate the pressure pumping market, sidelining older, less efficient equipment and putting more advanced technology and fracking horsepower in return-focused management teams to take advantage of demand when it returns.
This week’s deal, as well as the recent tie-up of KLX and Quintana Energy Services, is a good start. It proves that there’s hope for the downtrodden sector to come out of this crisis stronger.