Group of interns at Schlumberger Wireline field training next to two wireline trucks.
Valentin Martynov/Dreamstime.comThe U.S. oil boom was the most exciting growth story in the energy industry for nearly a decade. But the exit of a major player from a big part of the business shows that the growth story may be over and that the industry’s future has more to do with consolidation and efficiency in the years ahead.
Schlumberger (ticker: SLB) announced on Tuesday that it would sell its hydraulic fracturing unit in North America, combining it with public company Liberty Oilfield Services in exchange for a 37% stake in Liberty.
Schlumberger’s technology helped transform U.S. oil exploration over the past decade, making fracking more efficient and profitable. It led to the U.S. becoming the No. 1 oil producer in the world, which would have been unthinkable 10 years ago. But Covid-19 and years of weak financial results by producers have turned investors off and threatened the future of U.S. oil production.
There are now fewer than 100 fracking spreads operating in the U.S., down from more than 400 in 2018. New Schlumberger CEO Olivier le Peuch has committed to reducing assets and focusing the company more on overseas business. It is also cutting 21,000 jobs and reduced its dividend earlier this year.
On Wednesday, shares of Schlumberger were down 0.3%, to $18.57.
The fact that North American land drilling is no longer considered one of the most promising areas in energy is telling.
Liberty (LBRT), a Denver company, will become the third-largest oil service company in North America, according to Evercore.
“The Covid pandemic has thrown the world for a loop, bringing serious stress to our industry, but these dark hours are most fertile for opportunity,” Liberty CEO Christopher Wright said in a conference call about the deal. But even he doesn’t think that the glory days of fracking are coming back soon.
“Most operators are signaling a maintenance cap ex or flat production profile in 2021 versus year-end 2020 exit production rate,” he said. “This implies significant growth in frack activity from today’s depressed levels to reaching around 200 active frack fleets sometime in 2021. Even modest production growth in 2022 or 2023, would require more than 200 active frack fleets. We expect to have strong free cash flow and investment returns in the years ahead, even though active fleets likely remain far below the peak of over 400 fleets running in 2018.”
What the deal points to is a future where a few specialized players may end up dominating the fracking service industry.
Producers will be increasingly choosy about who they partner with, Evercore analyst James West predicts. “Operators will want to collaborate with service companies that are financially strong, drive improving efficiencies and differentiation, and have scale,” he wrote.
For the industry, that may mean overall employment could stay subdued, but a few players could do well. “This transaction should help the combined entity capture market share as operators continue their flight to quality service providers,” West wrote. He rates Liberty shares at In Line with an $8 price target. It was trading at $9.07 on Wednesday.
He sees more promise in Schlumberger stock, which he rates at Buy.
“Pressure pumping is a capital intensive commoditized business and they are transitioning back to a capital light, technology driving company and focusing on their strengths in the international arena,” West wrote in an email to Barron’s. “While they are not abandoning North America entirely—they will rent and sell technology into the market but do not desire to compete in the commoditized product lines. Liberty is a solid partner and one with lots of momentum in the space.”
Write to Avi Salzman at avi.salzman@barrons.com
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