A wave of mega-mergers among oil producers is compelling U.S. service companies that drill and hydraulically fracture wells to slash their prices, merge, or face bankruptcy. The consolidation is shrinking the customer base, creating fierce competition among oilfield service providers.
Impact of Mergers on Oilfield Services
Over the past 18 months, U.S. oil producers have announced deals worth over $275 billion, including major mergers such as Exxon Mobil’s acquisition of Pioneer Natural Resources. These mergers are leading to more efficient operations and increased oil output, but they also mean less work for oilfield services companies, according to executives and energy analysts.
For example, Diamondback Energy anticipates $550 million in annual cost synergies following its acquisition of Endeavor Energy. The savings are expected to come from operations, land, and financial and corporate costs. Chris Wright, CEO of Liberty Energy, noted that when companies merge, they often reduce the number of rigs in operation, leading to a decrease in demand for service companies.
Struggles and Strategies of Smaller Firms
The U.S. rig count has dropped to 586, the lowest since December 2021, highlighting the challenges faced by the oilfield service sector. Halliburton leads the market with a 14% share, but smaller firms with older technology are struggling. They are forced to lower prices to stay competitive as their customer bases shrink and clients opt for more efficient drilling.
“Everyone is scrambling and fighting for fewer scraps,” said Jasen Gast, CEO of Oilfield Service Professionals. Operators are aware of their leverage and often demand better rates, exacerbating the pressure on service providers.
The market pressures have led to bankruptcies and further consolidations. Texas-based Nitro Fluids filed for bankruptcy in May, largely due to the consolidation of its top customers. After Permian Resources acquired Earthstone Energy, Nitro Fluids’ monthly average revenue plummeted, leading to significant financial strain.
Other companies are merging to expand their services and remain competitive. This year, the U.S. oilfield sector has seen $12 billion in mergers and acquisitions, compared to $5.3 billion in 2023. For instance, SLB announced its acquisition of ChampionX to enhance its artificial lift technology capabilities.
Long-Term Contracts and Future Outlook
In response to the volatile market, larger service firms are pushing for longer-term contracts and partnerships with operators. These agreements provide stability and appeal to operators who seek more efficient drilling methods offered by technologically advanced companies. ProPetro, for example, secured a three-year contract with Exxon Mobil for electric hydraulic fracturing fleets in the Permian basin.
David Schorlemer, ProPetro’s CFO, highlighted that new technologies and consolidation are driving operators to offer longer-term contracts. This trend is expected to continue as the industry adapts to the changing landscape.
As smaller companies go bankrupt, auctions are becoming a way for surviving firms to acquire assets at low prices. “We picked up some assets for pennies on the dollar at an auction because the company went under,” said Thomas Dunavant, CFO at Oilfield Service Professionals.
Superior Energy Auctioneers has held multiple liquidation sales this year, reflecting the ongoing challenges in the sector. The fierce competition among small service companies shows no signs of easing, with experts predicting a tough road ahead.
“The outlook is a bloodbath,” said Thomas Jacob, vice president at Rystad Energy. The industry must navigate these challenges to survive and thrive in an increasingly consolidated market.
Source: Reuters
