The wave of mega-mergers in the U.S. oil and gas sector that began last year and persists into this year has significantly impacted oilfield services.
The client base for oilfield services has shrunk considerably compared to two years ago. It’s a buyers’ market for oilfield services, and this scenario is expected to continue as producer consolidation persists.
Halliburton’s Performance
SLB and Halliburton disclosed their second-quarter results recently, showing robust international business but weaker domestic performance. Baker Hughes, which also released its report on Thursday, highlighted strong international results without much to boast about domestically. This pattern is becoming more pronounced.
The series of mega-mergers in the U.S. oil and gas sector that started last year and continued into this year has had widespread effects, most notably on oilfield services, and not in a positive way.
Liberty Energy’s Insight
“When customers merge, you might have someone running seven rigs and another five rigs, which totals 12. But when they combine, they operate just 10,” said Chris Wright, CEO of Liberty Energy, to Reuters. Liberty exceeded expectations last quarter, yet the outlook for both the company and the sector remains bleak, according to Zacks.
The June Dallas Fed Energy Survey painted a grim picture of the industry, with the equipment utilization index falling below zero and the operating margin index for oilfield services doing the same. The price index for these firms remains positive but dropped sharply from 25 to 3.9.
Market Conditions
Oilfield service providers are struggling due to a much smaller client pool compared to two years ago, aggressively seeking synergies favored by merging companies. Reuters noted that Diamondback Energy, for instance, anticipated $550 million in annual synergy savings post its Endeavor Energy acquisition, primarily from operations, impacting oilfield services.
The consolidation trend results in less work for oilfield service providers. However, this is only part of the problem. “Industry consolidation is the main driver of change currently,” a Dallas Fed Energy Survey respondent stated in June.
“Many competitors have highly consolidated work profiles and customer bases,” the respondent added. “As consolidation occurs, the acquiring company often does not retain existing service companies. These companies, once cut loose, search for a lifeline and often work for negative margin rates, doing whatever they can to cover fixed costs.”
Impact on Smaller Players
This trend has mostly hurt smaller players, driving some to bankruptcy while others seek long-term commitments from their dwindling client base.
Fracking services provider Nitro Fluids, for example, filed for Chapter 11 bankruptcy protection earlier this year, citing a significant revenue drop due to industry consolidation. Reuters reported the company’s revenues fell from about $1.2 million monthly last year to less than $100,000 this year.
“Everyone is scrambling and fighting for fewer scraps,” the CEO of Oilfield Service Professionals told the publication. “Operators know they can get better rates. They can just say, ‘Who wants my business?'”
Buyers’ Market
It’s a buyers’ market for oilfield services and likely to remain so as producer consolidation continues. This will also drive consolidation within the oilfield services sector as companies strive to survive.
“Too many equipment providers are chasing too few E&P customers. Without consolidation among service or equipment providers, it will be a race to the bottom for pricing,” a respondent to the Dallas Fed Energy Survey commented earlier this year.
The race has already started, with some falling behind while others begin to consolidate. Since the beginning of the year, mergers and acquisitions in the oilfield services sector have totaled $12 billion, compared to $5.3 billion for all of last year, indicating a clear trend towards consolidation.
Future Outlook
“As the industry consolidates, you’ll see larger producers working with larger service companies, giving scaled service companies an advantage over time,” Rystad Energy Vice President Thomas Jacobs told Reuters.
These larger service companies will also secure longer-term contracts, which oilfield service providers increasingly seek to protect against sudden business losses.
In essence, the consolidation trend seen last year in the exploration and production sector is now occurring in the oilfield services sector as there is no other option for survival. The process will likely continue in a survival-of-the-fittest manner until competition levels match those in the exploration and production sector. However, this won’t be without pain: “The outlook is a bloodbath,” said Rystad’s Jacobs.