While providing small benefit to the oilfield services sector, the merger of Schlumberger Ltd.'s integrated completions services business with Liberty Oilfield Services Inc.'s fracturing and engineering operations benefits both companies as they strive to meet long-term goals, analysts said.
In addition to acquiring a 37% stake in the combined entity, Schlumberger also moved one step closer to its stated goal of reassessing its North American portfolio, including each of its business segments in every basin.
At the same time, Denver-based Liberty Oilfield Services grows its North American fracturing fleet, adds 60 pumpdown perforating wireline units, two Permian Basin sand mines, and ancillary real estate. Schlumberger also agreed to give Liberty access to its technology portfolio.
Operating for only nine years, Liberty Oilfield Services is now the third-largest oilfield services company by North American revenue, having nudged Baker Hughes Co. out of the spot.
Liberty CFO Michael Stock said on a Sept. 1 call discussing the merger that on a pro forma basis in 2019, the combined revenues would have been $5.2 billion and adjusted EBITDA would have been $664 million, including day-one synergies of approximately $125 million. Liberty's balance sheet will improve "with no net debt and a substantially larger asset base," Stock said.
The deal comes as the COVID-19 pandemic continues to challenge the oil and gas industry. Already struggling with low equipment utilization rates and limited pricing leverage due to overcapacity, oilfield services companies have seen work opportunities further diminish amid spending cuts by exploration and production companies in response to a lack of demand in a market awash with supply.
The consolidation of Schlumberger's OneStim business with Liberty Oilfield Services marginally improves market utilization, Credit Suisse analyst Jacob Lundberg said in a Sept. 1 note.
Schlumberger's OneStim fleet consists of 3.5 million horsepower. Liberty plans to retire 1 million horsepower, maintain 1.25 million horsepower as "ready to run" — including four fleets of tier 4 equipment — and hold the remaining 1.25 million horsepower for redundancy or capitalized maintenance savings, company President Ron Gusek said during the call.
The planned attrition in horsepower prompted Credit Suisse to increase its 2021 utilization forecast by about 200 basis points, which represents an incremental profitably increase of $1.5 million to $2.0 million per fleet on a normalized basis, Lundberg said. Still, "We see pumping market utilization remaining well below the historical threshold required to drive cost of capital profitability," Lundberg said.
But Liberty executives believe that the transaction will result in substantial returns as its competitive advantage in the fracking market grows. Over the past three years, the combined pro forma company held about 20% market share. With 200 to 250 frack fleets needed to boost production marginally from 2020 depressed levels, Liberty stands to gain considerable earnings power, and shareholders could see strong returns, Stock said.
Investors were encouraged by the transaction as Liberty Oilfield Services stock on the NYSE was up $2.30, or more than 35%, to settle Sept. 1 at $8.75 per share.
The transaction also moved Schlumberger one step closer to meeting the strategic goals CEO Olivier Le Peuch outlined nearly one year ago.
In October 2019, Le Peuch said Schlumberger would undertake a strategic review of its North America land businesses and look at scale for every business in every basin. Since then, the already feeble North American land market, severely impacted by the coronavirus pandemic, has weakened further.
"We see this transaction as a logical step toward de-emphasizing North America (in particular its most commoditized markets) and reducing capacity intensity," Lundberg said.