Oil explorers and producers are becoming increasingly conservative in spending capital as oil has entered the bearish territory. With lower investments in drilling wells by upstream firms, oilfield service players are compelled to agree to cheaper rates. Reflective of this, the composite stock price of companies belonging to the Zacks Oil & Gas Field Services industry has declined 7.3% quarter to date.
Hence, to improve pricing power in the oilfield service space, C&J Energy Services (NYSE:CJ) and Keane Group Inc. (NYSE:FRAC) have announced a merger agreement. Energy investors are overwhelmed with the announcement as reflected by the C&J Energy and Keane stock jump of roughly 20% and 7%, respectively, on Jun 17. Now, the million dollar question is, “Will other key oilfield service players follow suit?”
Conservative Spending by Crude Explorers
Through the fourth quarter of 2018, the energy market witnessed a plunge in West Texas Intermediate (WTI) crude price from more than $70 a barrel to below $45. This convinced oil explorers and producers in the United States to cut down on investments through 2019.
With the price of WTI crude slipping more than 20% from the recent high reached in late April 2019, U.S. upstream energy players have decided to stick to their decision of conservative capital spending this year. Instead of putting more effort to pump black gold, investors are urging explorers to focus on returning capital to shareholders through dividend payments and stock repurchases.
Cheaper Rates for Oilfield Services
With lower capital spending, the number of rigs employed in the domestic plays is reducing week after week. In fact, rigs engaged in the exploration and production of oil and natural gas in the United States totaled 969 in the week ended Jun 14, down from the prior-week tally of 975, per data provided by Baker Hughes, a GE company (NYSE:BHGE) . With this, the tally has dropped in nine of the past 10 weeks. Notably, the current national rig count is also lower than the prior year’s 1059.
The fall in rig count implies that the demand for drilling new wells by explorers is declining. Oil producers are now bidding for lower rates with oilfield service players.
Merger in Oilfield Service Space
Following cheaper rates and intense competition in the oilfield service space, companies belong are looking for mergers and consolidations to expand market share and improve pricing power. Synergies from mergers will enable oilfield service companies improve operational efficiency and lower capital spending requirements, per an analyst quote.
The quest for consolidation is reflected in the recent decision of C&J Energy Services and Keane Group to merge and create a diversified and leading oilfield services company. The combined firm, where each of C&J Energy and Keane will have 50% ownership, will have a pro-forma enterprise value of $1.8 billion, added C&J Energy and Keane. The all-stock agreement is likely to consummate by the December quarter of 2019 and companies expect the deal to prove immediately accretive to cashflow.
Per Reuters, the combined firm, with 81 pumpdown units and 50 frac fleets, will manage to become America’s third-biggest pressure pumping player. The top two pressure pumping companies in the domestic market are Schlumberger Limited (NYSE:SLB) and Halliburton Company (NYSE:HAL) , added Reuters. Both Halliburton and Schlumberger currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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