US oil services: consolidation means more pricing power

Big Oil may have gained gushers of cash last year. But their parsimonious natures mean the bounty does not flow freely to those companies handling the grunt work to drill and service oil and gas wells.

To boost their pricing power, oilfield service firms need to team up. On Thursday, Patterson-UTI Energy and NexTier Oilfield Solutions agreed to merge in an all-stock deal that would create a bigger provider with an enterprise value of $5.4bn.

Patterson will run this rodeo. NexTier’s owners will receive 0.752 shares of Patterson stock for each share they own. NexTier shareholders will end up owning 45 per cent of the new company even though it will contribute about 48 per cent of group ebitda, according to S&P Global Market Intelligence data.

Moreover, Patterson’s boss will run the combined company as president and chief executive. As a tossed bone, NexTier’s CEO becomes vice chair of the new board.

The strategic logic is clear as the two complement each other. Patterson is mainly an onshore driller, a provider of rigs and services. NexTier offers well-completion and production services such as hydraulic fracturing. Both companies are trying to cope with labour shortages and increasing material costs for everything from steel to sand.

Meanwhile oil and gas explorers have themselves merged, leaving fewer companies to service. Joining forces should create a better capitalised and more cost-efficient service company.

According to Rystad Energy, NexTier and Patterson’s combined assets would account for roughly between 2.6mn and 2.7mn active hydraulic horsepower capacity (HPP). It would gallop past current leader Halliburton making it the largest frac provider.

The combination also means between 70 and 75 per cent of the industry’s HHP will be in the hands of five service firms. This should translate into better pricing power and margins.

The $200mn in annual cost savings that the companies are forecasting 18 months post closing are eye-catching. Taxed and capitalised, these are worth $1.2bn. That is a punchy number as a proportion of combined overheads and some scepticism is warranted. Both companies have already cut costs aggressively during the Covid-19 downturn.

But those savings are not necessary for the deal to pay off given the consolidation benefits. No wonder both companies’ share prices rallied on the day.