Big Oil may have raked in significant profits last year, but their frugal tendencies prevent them from sharing the wealth with the companies responsible for the hard work of drilling and servicing oil and gas wells.
In order to enhance their pricing power, oilfield service firms must collaborate. In a merger of equals, Patterson-UTI Energy and NexTier Oilfield Solutions have agreed to combine their forces, creating a larger provider with an enterprise value of $5.4bn.
Patterson will take the reins in this partnership, with NexTier’s owners receiving 0.752 shares of Patterson stock for each share they currently hold. Despite contributing around 48% of group EBITDA, NexTier shareholders will own 45% of the new company, according to S&P Global Market Intelligence data. Additionally, Patterson’s CEO will assume the role of president and chief executive in the combined company, while NexTier’s CEO will become vice chair of the new board.
The strategic fit between the two companies is evident. Patterson primarily focuses on onshore drilling and rig provision, while NexTier specializes in well-completion and production services, such as hydraulic fracturing. Both companies are contending with labor shortages and rising material costs.
Consolidation in the oil and gas exploration industry has left fewer companies requiring servicing. By joining forces, Patterson and NexTier aim to create a financially stronger and more efficient service company.
According to Rystad Energy, the combined assets of NexTier and Patterson would account for approximately 2.6-2.7 million active hydraulic horsepower capacity (HPP). This would make them the largest frac provider, surpassing the current leader, Halliburton.
Furthermore, the combination results in five service firms controlling between 70 and 75% of the industry’s HHP, granting them increased pricing power and improved margins.
The projected $200 million in annual cost savings 18 months after the deal’s completion is impressive. When taxed and capitalized, these savings amount to $1.2 billion. While some skepticism is warranted, given that both companies have already implemented aggressive cost-cutting measures during the Covid-19 downturn, these savings are not crucial for the deal’s success. The consolidation benefits alone make it worthwhile. It comes as no surprise, then, that both companies’ share prices experienced a boost on the day of the announcement.
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