Analysis: US oilfield firms slash prices as mega-mergers shrink customer base

ProPetro Holding

24/07/2024 10:00

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      Mega-mergers lead to reduced work for oilfield services
companies
    

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      Smaller firms with older tech forced to lower prices to
stay
competitive
    

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      Mergers rise as service companies struggle to maintain
customer
base
    

  
    By Georgina McCartney
       HOUSTON, July 24 - A wave of mega-mergers among oil
producers is forcing the U.S. service companies that drill and
hydraulically fracture wells to slash their prices, merge, or
risk bankruptcy as they compete for a dwindling number of
customers. 
    U.S. oil producers, also known as operators, announced more
than $275 billion in deals over the past year and a half,
including multi-billion-dollar combinations such as Exxon Mobil
 XOM.N  and Pioneer Natural Resources.
    As big producers integrate and become more efficient while
raising oil output, there is less work for the oilfield services
companies that depend on them, according to service company
executives and energy analysts. 
    Diamondback Energy  FANG.O , for example, anticipates $550
million in annual cost synergies following its acquisition of
Endeavor Energy. Of that, $325 million in savings are tied to
operations, $150 million to land and $75 million to financial
and corporate costs.  
    “When customers combine, you might have a guy who was
running seven rigs, and a guy who was running five rigs, that
adds together to 12. But when they come back, they run 10," said
Chris Wright, CEO of Liberty Energy  LBRT.N , which holds 6% of
the U.S. services market, according to consultancy Rystad
Energy. 
    The U.S. rig count fell to 586 last week, off 83 from this
time last year, its lowest since December 2021, according to
services company Baker Hughes. 
    The fragmented U.S. oilfield service sector is led by
Halliburton  HAL.N  with 14% of market share, according to
Rystad.
Some smaller firms with older technology have been forced to
lower prices to stay competitive as their customer bases shrink
and clients opt for more efficient drilling, executives and
analysts said.
    "Everyone is scrambling and fighting for less scraps," said
Jasen Gast, CEO of well construction and completions firm
Oilfield Service Professionals. 
    "The operators know that they can get better rates. They can
just go out into the market and say, 'well, who wants my
business?'" he added.
     
    BANKRUPTCIES AND MERGERS
    Nitro Fluids, a Texas-based oilfield services company that
filed for bankruptcy in May, largely blamed consolidation by
operators, according to court filings.
After Permian Resources  PR.N  acquired one of Fluids' top
customers, Earthstone Energy, in November, Fluids' monthly
average revenue plummeted from $1.2 million in 2023 to less than
$100,000 in March, the company said. 
    It now faces $38.23 million in secured debt obligations and
$14.4 million in unsecured debt, while holding $234,000 in cash
as of May.
    Fluids declined to comment. Permian did not respond to a
request for comment. 
Other companies are consolidating to broaden their services. The
U.S. oilfield sector has seen $12 billion worth of mergers and
acquisitions this year, versus $5.3 billion in all of 2023,
according to energy tech firm Enverus. 
SLB  SLB.N  said in April it would buy ChampionX  CHX.O ,
allowing SLB to expand further into artificial lift technology
that pumps more oil out of wells. 
"As the industry consolidates across the board you will see
these bigger (producers) working with bigger service companies,
so the service companies that have scale will have the advantage
over time," said Rystad vice president Thomas Jacob.  
     
    LONGER-TERM DEALS
    Large service firms are pushing for longer-term contracts
and partnerships with operators for stability after years of
painful boom-and-bust drilling cycles, executives said. 
Longer-term partnerships also appeal to operators as they pursue
more efficient drilling methods that are usually offered by
technologically-advanced, large service companies.  
   Midland, Texas-based ProPetro secured a three-year contract
in April with Exxon Mobil to provide electric hydraulic
fracturing fleets in the Permian basin.
    "The consolidation and new emerging technologies available
today, including electric hydraulic fracturing equipment, have
led operators to begin offering longer-term contracts," said
David Schorlemer, ProPetro's CFO. 
     
    'PENNIES ON THE DOLLAR'
As oilfield companies go bankrupt, auctions are booming,
providing a chance for surviving companies to buy inexpensive
equipment. 
    "We picked up some assets for pennies on the dollar (at an
auction), because the company just went under,” said Thomas
Dunavant, CFO at Oilfield Service Professionals.   
    Superior Energy Auctioneers, based in Oklahoma, has held
three total liquidation sales for oilfield companies this year,
compared with three for all of 2023, according to the company's
website.
The brutal battle for customers, especially among small service
companies, shows no sign of abating, Jacob said. 
    "The outlook is a bloodbath," he said.

 (Reporting by Georgina McCartney in Houston; Editing by Liz
Hampton and Rod Nickel)
 ((mailto:Georgina.McCartney@thomsonreuters.com;))