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Is C&J Energy Services/Keane merger the start of oilfield services sector consolidation?

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Oilfield Technology,

On 17 June 2019, C&J Energy Services and Keane Group announced a US$1.8-billion all-stock merger agreement, with the assumption of US$225 million in debt. The deal, expected to close in 4Q18, would create a combined company with about 2.3 million hydraulic fracturing horsepower and make it the third-largest US pressure pumping firm behind Schlumberger NV and Halliburton Co. The deal comes after ProPetro’s closing of its acquisition of Pioneer Natural Resources’ pressure pumping assets earlier this year, and Patterson-UTI Energy Inc. reportedly exploring a potential US$1 billion divestment of its pressure pumping business. With C&J/Keane set to merge, does this signal the start of a wave of consolidation in the oilfield services sector?

Oilfield services companies, which provide drilling, fracking and a variety of other services for oil and gas producers in major shale plays, were greatly impacted by the 2014 downturn and have since tried to recover. The North American rig count fell to 1076 in the week ended 14 June, 122 lower than a year earlier, according to data from General Electric Co.’s Baker Hughes energy services firm.

Today, as oil prices have declined from 2018 highs, oilfield services companies are now left with seeking M&A opportunities to boost the value of their stock, all the while serving an E&P sector that is either paring back drilling new wells or are looking for cheaper rates as investors demand that cash be used for dividends and buybacks rather than pursuing growth.

Additionally, since the beginning of the downturn in 2014, oilfield service firms have diligently worked to reduce their general and administrative (G&A) costs. This has been an underreported drag on earnings and operational growth. As the energy industry continues to adjust to the lower commodity price environment, focusing on the business operations to become more efficient is necessary to generate positive cash flow.

The proposed C&J/Keane merger should allow the combined company to better compete on price and service offering against larger oilfield service players, potentially leading to enhanced market share.

More oilfield services M&A on the horizon?

The much-anticipated consolidation of public oilfield service companies appears to be moving forward with the C&J/Keane merger. Offshore rig companies began the trend last year with the expectation of further consolidation in 2019.

More oilfield service deals are forthcoming as investors are pushing management of oilfield service companies to act. Given limited access to capital in the current environment, smaller oilfield service companies will need to partner in order to grow. We could potentially also see more reverse mergers in the oilfield services sector and throughout the energy industry as a whole. Therefore, smaller private oilfield service companies will need to look for ways to access the public markets, and smaller publicly-traded companies will need to improve their scale and scope of offerings.

For shareholders, consolidation can be a reward for their investment in the companies and supporting their management teams during volatile times. In general, smaller oilfield service companies are having a difficult time gaining access to capital, limiting their ability to grow. For those in capital-intensive segments of the industry, lack of capital can be detrimental to their business as equipment ages and needs to either be refurbished or replaced. Management teams have to rationalise their businesses and the prospects for future growth otherwise there will be limited upside for investors.

Authors: Dean Price and Kevin Cannon, Opportune, USA

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