Schlumberger will be shedding its fracturing services operations in a deal with Liberty Oilfield Services in exchange for 37% of that company’s stock.
For the giant oilfield services company, the OneStim deal eliminates a line of business in a deep slump which has been a major reason for losses in its North American business. Those losses have offset profits from its international operations.
For Liberty, the all-stock deal doubles its working pressure-pumping capacity without adding any debt to the balance sheet of a company that avoids borrowing, making this the rare shale-industry merger that is welcomed by investors. Liberty shares were up more than 35% in 1 September afternoon trading, while Schlumberger was off by 1.4%.
A wild card in the deal is the union of two technology-driven fracturing operations working on innovations such as low-emissions hybrid and electric power systems, which could significantly change the power and control systems used for fracturing.
While this is a relatively small part of Schlumberger’s operation, it is a major leap for Liberty. The 9-year-old company’s rapid ascent has been fueled by a couple deals during deep downturns. In addition to the OneStim deal, Liberty’s acquisition of Sanjel in 2016 tripled its size.
Liberty’s executives said their focus is on organic growth unless they can buy a company that immediately adds to its earnings and cash flow without adding any debt. Chris Wright, chief executive officer for Liberty, said, “This is one of those opportunities. We are excited by the value this deal will create.”
Based on 2019 revenues, the combination would have $5.2 billion in revenues—making it the second-largest company in the field—with $3.2 billion of that coming from OneStim.
The 2020 total is going to be a fraction of that. Liberty’s second-quarter revenues totaled $88 million, down 81% from the same quarter the year before.
The combined company ranking may not be as high because both companies have been willing to idle equipment rather than doing jobs at money-losing rates. Wright said, “If you were in the business of fracturing, not the activity of fracturing,” business slowed considerably in early summer.
Schlumberger does not break out OneStim revenues separately, but its executives also made it clear they were going to idle equipment if the rate was too low.
As a result, the expanded operation will add 1.25 million hydraulic horsepower (HHP) of equipment working in the field, plus an equal amount that has worked in the past year which has been pulled out of service. This maintenance fleet will be used to fill in as Liberty modifies it to its standards or to provide parts, according to a Liberty presentation. They also pick up another 1 million HHP worth of old equipment that will be junked.
After the deal closes late this year, Liberty expects to be able to eliminate $125 million in corporate overhead by operating the combined company with the same business organization that ran a fracturing operation at that scale in January before the crash, said Michael Stock, chief financial officer for Liberty.
There was no mention of cutting any of the 1,000 OneStim workers still with the company. When asked about whether they would retain Schlumberger crews, Wright said they are looking forward to adding working Schlumberger crews because “they are on active (fracturing) fleets they are running, which means they are doing a good job” satisfying customers.
The effort to rapidly combine the two operations will begin in the next few weeks. Liberty management will visit each of the Schlumberger field camps to tell them about working at Liberty, including the program to increase the efficiency of its equipment and operations by “Libertizing” them, said Ron Gusek, president of Liberty.
Liberty valued the Schlumberger stake at $448 million in its announcement. That is a bit higher than the $430 million Schlumberger paid to Weatherford International in January 2018 to buy its pressure-pumping operation, which doubled its fleet.
In addition to expanding its share of the pressure-pumping business to 22%, Liberty will be picking up 60 wireline perforating units and crews, a sand mine in the Permian basin, and adding markets.
The deal will add operations in northeastern US gas-only shale plays, Alberta in western Canada, Oklahoma, and the Haynesville shale in Louisiana.
Schlumberger will also get two seats on Liberty’s board of directors and rid itself of an up-and-down business, which has been down more than up since the 2014 bust.
“This partnership provides an ideal home for our OneStim business and its employees,” said Olivier Le Peuch, chief executive officer for Schlumberger, who also pointed out the potential upside of holding Liberty shares.
To some extent, those shares will be a technology play. Their value will depend on whether Liberty can generate value in the hundreds of patents it is getting in the deal, a technology partnership with Schlumberger, and some innovations in progress.
For example, Liberty will pick up Schlumberger’s electric-powered, digitally controlled blender and hydration unit which it can marry to the electric-powered pumps it is developing for its digiFrac system, which uses gas-powered generators to power fracturing.
The new system, which Wright said will offer greater operational efficiency, is expected to be launched in 2021.
They will also be looking to apply their obsession with eliminating downtime to the plug-and-perf operations. “Wireline is the leading cause of downtime on fracturing operations,” Gusek said.
