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Schlumberger sheds US shale

Major oilfield services player reshuffles portfolio to cope with dearth of work and spiralling costs

Oilfield services heavyweight Schlumberger is lowering its footprint in US shale, offloading a majority stake in its North American fracking business to smaller rival Liberty Oilfield Services for $448mn. The merger will create the second largest fracking provider in North America, with Schlumberger retaining a 37pc stake. 

Schlumberger boasts over half a century in the shale patch. The oilfield services firm has operated pressure pumping businesses in the region since 1949 when the technology was first created. But the capital-intensive nature of shale has driven an exodus in recent years. Peers Baker Hughes and Weatherford divested their stakes back in 2014 when oil prices last collapsed, and Halliburton cut its exposure by 50pc.

And the economic downturn in 2020 has only accelerated this downsizing trend. “The most negatively impacted market in the world has been the US shale industry, where exploration and production spending collapsed during the second quarter and will likely be down close to 50pc year-on-year,” says James West, senior managing director at US bank Evercore. “The rig count has fallen by over 70pc and bankruptcies have been significant in both the E&P and oilfield services sectors, with more likely to come.” By comparison, the international market has been much more moderately impacted.

Cutting their losses

Until recently, Schlumberger had been expanding its footprint in US shale. The firm snapped up rival Weatherford’s fracking business for $430mn in 2017 when it formed its OneStim pumping brand.

But the merger failed to reap significant financial benefits. “Unfortunately, more than a year had passed since Weatherford ceased fracking operations, and much of the equipment was in poor condition and had to be written off,” says Audun Martinsen, head of energy service research at consultancy Rystad Energy. “Liberty said it plans to scrap essentially all that is left of the former Weatherford fleet due to its poor condition.”

“The most negatively impacted market in the world has been the US shale industry” West, Evercore

The balance sheets of most US shale focused services companies have also suffered this year. Schlumberger posted a $10.8bn net income loss across the first six months of 2020 as the oil price plummeted. Total revenue slumped by 20pc year-on-year, with the North American share of the business particularly struggling, down by 32.5pc compared with the same period in 2019.

“Schlumberger second-quarter revenue declined 28pc sequentially, caused by the unprecedented fall in North America activity, and international activity drop due to downward revisions to customer budgets accentuated by Covid-19 disruptions,” says Schlumberger CEO Olivier Le Peuch.  

Broadening the horizons

The merger will broaden Liberty’s customer base considerably. Before the deal, the company’s largest customers were US independents Parsley Energy, WPX Energy, Devon Energy and Kraken Oil & Gas. In comparison, Schlumberger’s four main customers were US-based independents Chesapeake, Continental Resources, Occidental Petroleum and ExxonMobil. The newly formed company will hold a substantial 22pc market share, a stake in 10 US basins and combined revenue of $5.2bn.   

The pro forma business of Liberty plus the Schlumberger shale assets is worth $1.2bn, according to the two companies. And the market has broadly agreed, with Liberty’s share price lifting by 21pc in recent days since the deal was finalised on 1 September—taking its market capitalisation from just under $990mn to $1.195bn.

$1.2bn – pro forma market cap

But that would mean Schlumberger’s 37pc stake is worth just over $440mn, only slightly more than it paid solely for Weatherford’s assets back in 2017. On the other hand, Rystad calculates that if the enlarged footprint could get back to the share price peak that the pre-combination Liberty reached in 2018, Schlumberger’s stake of $1bn would then be worth the same on a horsepower basis as it paid for the Weatherford assets.

While the merger consolidates Liberty’s market share, now only behind Halliburton, the sector still needs a long-term oil price revival. Neither firm’s horsepower is currently being fully utilised and there is lingering market volatility. “The recovery of the oilfield services companies will be dependent on the capital spending of upstream oil and gas companies,” says Dean Price, partner at consultancy Opportune. “Given investor expectations for return of and on capital and upstream companies living within their cash flow, the recovery will be slow.”

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