Schlumberger Asset Sale Could be the Start of Oilfield Services Rationalization

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The long-expected consolidation of the oilfield services business took a big step forward September 1, when Schlumberger (NYSE:SLB) (Houston, Texas) sold its North American pressure-pumping business to Liberty Oilfield Services Incorporated (NYSE:LBRT) (Denver, Colorado), in return for a 37% share of the newly enlarged Liberty. Liberty's stock soared 35% Tuesday on the news, and it added to those gains on Wednesday before giving some back.

Earlier this year, Schlumberger announced it was cutting its worldwide staff by about 20%, or approximately 21,000 people. It reported a net loss of $3.4 billion on sharply declining revenue for the second quarter. The company's leaders have embraced an "asset light" strategy, where revenue is generated through licensing its technology, rather than deploying its equipment and field crews.

For more on the shakeout within the oilfield service industry, see August 26, 2020, article - Barclays Analyst: Oilfield Services Industry Will Be Reinvented by Digital Technology and Data Science; and August 3, 2020, article - The New Gusher in the Oil Patch? Red Ink.

"Weak demand, an uncertain outlook and an awful pricing environment have combined to crush the oilfield services sector as much as, or more than, the exploration and production (E&P) sector," said Jesus Davis, IIR's research specialist for North American Oil & Gas Production, Pipelines and Terminals industries. "The North American rig count is down about 71% from what it was a year ago. There reportedly are about 76 frac crews working today, about 81% less than the comparable year-earlier period. The industry's efficiency gains means that U.S. companies are producing nearly as much oil today as they did a year ago, with far fewer rigs."

Major oil producers such as BP plc (NYSE:BP) (London, England), Royal Dutch Shell plc (NYSE:RDS.A) (The Hague, The Netherlands), ExxonMobil Corporation (NYSE:XOM) (Irving, Texas) and Chevron Corporation (NYSE:CVX) (San Ramon, California) have announced multibillion cutbacks in their capital spending while reporting large losses.

Despite the sharp cutbacks by producers and oilfield services companies, U.S. crude oil production is down only about 13% on a year-over-year basis, according to the U.S. Energy Information Administration (Washington, D.C.). For the four-week period ended August 21, production averaged about 10.8 million barrels per day (BBL/d), compared with about 12.3 million BBL/d in the comparable year-earlier period.

Between January and July, 25 oilfield services companies have declared bankruptcy, according to law firm Haynes & Boone, LLP (Dallas, Texas). The filers include Calfrac Well Services Limited (Calgary, Alberta), McDermott International Incorporated (Houston, Texas) and BJ Services Incorporate (Tomball, Texas). Last summer BJ Services pulled a planned stock offering.

With the Schlumberger-Liberty deal, Halliburton Incorporated (NYSE:HAL) (Houston) remains the only full-service oilfield services firm serving the hydraulic fracturing industry. The oilfield services industry is highly fragmented, with numerous niche players.

Longtime frac players such as Baker Hughes Company (Houston) and Weatherford International plc (Houston) have sold frac assets and sharply curtailed the scope of their frac business in recent years.

Three years ago, Schlumberger paid about $430 million to acquire Weatherford's pressure-pumping business. That deal included about one million horsepower of pressure-pumping capacity. As part of the deal announced September 1, Liberty will permanently retire about 1 million horsepower of pressure-pumping capacity.

"When there are too many frac crews chasing too little business, revenues and margins fall," said Davis. "But now that revenues and margins can't go much lower, surplus equipment needs to be retired and employees need to be let go."

On a pro forma basis, the transaction will more than double Liberty's annual revenue to about $5.2 billion, the company said, making it the nation's third-largest frac company. The deal, expected to close later this year, includes Schlumberger's frac equipment, a pumpdown perforating wireline business and Permian sand mining business units, as well as an extensive technology portfolio and significant owned acreage, Liberty said Roughly $125 million in duplicative overhead will be eliminated, and the deal will be accretive to pro forma financial metrics.

In announcing the deal, Liberty Chief Executive Officer Chris Wright predicted frac crews will more than double to more than 200 active fleets by 2021.

""The COVID-19 pandemic has thrown the world for a loop, bringing serious threats to our industry," Wright told analysts and investors September 1. "But these dark hours are most fertile for opportunity. The last several months have been extremely challenging for the world, the industry and the Liberty family. These times also bring opportunity. This transaction will be a transformative step forward in our journey as a company." Liberty has grown through acquisitions in recent years.

Commenting on the transaction with Liberty, Schlumberger Chief Executive Officer said, "This partnership provides an ideal home for our OneStim business and its employees and is in line with our capital stewardship strategy, while benefiting from future market upside through our equity stake."

"Sometimes people forget that the Oil & Gas business is the quintessential boom-and-bust business," Davis said. "Things are never as good as they seem on the upswing, and that causes people to make investment decisions they have to unwind during the inevitable downturn."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com/.