Oilfield services companies grapple with major mergers in oil sector

SLB and Halliburton reported second-quarter results last week, and both reported strong international business and weaker domestic results. Baker Hughes, which released its report Thursday, also reported strength in its international business — and didn’t boast about its domestic business. It’s a trend that’s continuing.

The series of megadeals in the U.S. oil and gas sector that began last year and continued into this year has had an impact on the entire industry. But the impact has perhaps been felt most strongly in oilfield services—and not in a positive way.

“When customers merge, you can have a guy who was operating seven rigs and a guy who was operating five rigs, that’s 12. But when they come back, they’re operating 10,” Liberty Energy Chief Executive Chris Wright told Reuters. Liberty, by the way, had a better quarter and beat expectations in terms of earnings. But the outlook for both the company and the oil services sector remains bleak, according to Zacks.

The latest Dallas Fed Energy Survey, released in June, revealed a worsening picture for the industry, with equipment utilization rates falling below zero and the same for the OSP operating margin. The oilfield services firm price index remains positive but has fallen sharply from 25 to 3.9.

Things aren’t looking good for oilfield services providers. That’s because the pool of customers they have now is much smaller than it was two years ago—and they’re really chasing the synergies that companies that combine so much love. Reuters noted that Diamondback Energy, for example, expected to save about $550 million a year in synergies after acquiring Endeavor Energy. Most of that would come from its operating business, which is oilfield services.

The wave of consolidation means less work for oilfield service providers. But that’s only part of the challenge. “Industry consolidation is the primary driver of change in the industry right now,” said one Dallas Fed Energy Survey respondent in the June issue of the survey.

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“Many competitors are extremely consolidated in terms of their work profile and customer base,” he added. “As consolidation occurs, often the acquiring company does not acquire the existing service companies. Once they are separated, these companies look for a lifeline and in many cases are willing to work at negative margin rates, doing everything they can to allocate money to fixed recurring costs.”

This trend has mostly hurt smaller players in the space, with some of them being forced into bankruptcy while the rest are scrambling to secure long-term commitments from their shrinking customer base. For example, fracking services provider Nitro Fluids filed for Chapter 11 bankruptcy protection earlier this year, citing a massive drop in revenue due to consolidation in the E&P industry. A Reuters report noted that the company’s revenue has fallen from about $1.2 million per month last year to less than $100,000 this year.

“Everybody’s in a hurry and fighting for less scrap,” the CEO of one industry player, Oifield Service Professionals, told the publication. “Operators know they can get better rates. They can just go out and say, ‘Well, who wants my business?’”

It’s a buyer’s market in oil services and will likely remain a buyer’s market for the foreseeable future as consolidation among producers continues. This in turn will cause consolidation in the oil services sector as companies try to survive.

“Too many equipment suppliers are chasing too few E&P customers. Without consolidation among service providers or equipment, there will be a race to the bottom on pricing,” said one respondent to the Dallas Fed Energy Survey earlier this year.

The race has already begun, and some are being left behind. The rest are starting to consolidate. Year-to-date, oil services M&A activity has reached $12 billion, according to Enverus data cited by Reuters. That compares with $5.3 billion for the whole of last year, indicating a clear trend toward consolidation.

“As the industry consolidates across the board, you’ll see these larger (producers) partner with larger service companies, so the service companies that have scale will have an advantage over time,” Rystad Energy Vice President Thomas Jacobs told Reuters. They’ll also partner with them on long-term contracts, which TSOs are increasingly looking for to protect themselves against sudden business losses.

In other words, what started happening in the E&P sector last year is happening in the oil services sector now, because there is no other option for oil service companies. The process seems set to continue in a survival of the fittest manner until competition among oil service providers catches up with competition among E&P players. But it won’t be painless: “The outlook is a bloodbath,” says Rystad’s Jacobs.

By Irina Slav for Oilprice.com

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