The oilfield services sector, which has largely sat on the sidelines during the current round of consolidation among US producers, may finally be catching up.
SLB, the world's largest oilfield contractor, this week announced the $7.8bn all-stock takeover of smaller rival ChampionX, seeking to meet growing demand for services to maximise output from existing oil wells. The transaction marks the industry's first major response to the more than $190bn of US upstream acquisitions and mergers announced last year, which threaten to undercut pricing and revenue for oil services firms. That has heaped pressure on services providers to follow suit with deals of their own, especially with drilling budgets remaining squeezed as producers ramp up shareholder returns instead.
As the US shale sector matures and the best acreage gets used up, services companies are looking to shore up their technology offerings to boost recovery rates and keep wells running for longer. ChampionX's expertise in production chemicals and artificial lift, used to improve the flow and productivity of wells, was a key draw, SLB chief executive Olivier Le Peuch says.
The priority of customers is to "focus more and more on the recovery factor, more and more on the production performance of their existing assets as they are disciplined on capital", Le Peuch says. The production phase of oil and gas operations — after a well is drilled — makes up the majority of an asset's life span and is less capital-intensive. It is also less prone to the ups and downs of the oil cycle, which is in line with the company's "returns-focused, capital-light" strategy, Le Peuch says.
Deal making in the services sector had been widely tipped to take off after the wave of upstream deals resulted in fewer but larger players. Patterson-UTI Energy agreed to buy NexTier Oilfield Solutions for about $1.9bn in stock last year to create a leading North American drilling and completions provider.
Quizzed by the Federal Reserve Bank of Dallas in its first-quarter energy survey last month, oilfield services executives expressed concern over the recent oil and gas deals. "As the operator pool shrinks, the oilfield services will inevitably follow suit," one executive said. "This leads to concerns on additional oilfield services mergers or worse, aggressive pricing from competitors striving to stay alive."
SLB, previously known as Schlumberger, sold off its US and Canadian fracking unit to services provider Liberty Energy in 2020 at the height of the industry slump caused by the pandemic. The takeover of ChampionX was the company's second deal in a week following the merger of its carbon capture business with Norwegian firm Aker Carbon Capture, designed to speed up decarbonisation efforts.
Champion of the world
SLB predicts savings of around $400mn/yr within about three years of the ChampionX deal closing, coming mostly from lower costs and revenue growth. Following the deal, SLB's geographical mix will be 75pc international and 25pc in North America. The overseas revenue mix is forecast to climb upon completion, which is expected by the end of this year. But some analysts express concern over potential regulatory hurdles. SLB is ranked fifth globally in terms of production chemicals, while ChampionX holds fourth place, according to bank Citigroup, citing data from consultancy Spears & Associates.
SLB is also doubling down on investor returns with the deal. It plans to return $3bn to shareholders this year, up from a previous target of $2.5bn, with additional share buy-backs accounting for the increase. Distributions are to rise further next year, to $4bn. "This commitment to our shareholders for 2024 and 2025 highlights our confidence in the value this transaction will create," Le Peuch says.
