The Price Paid for a Big Fracturing Deal Suggests Next Year Could Turn out Flat
The pressure pumping business has been looking up this year, but the price paid to buy a big player in that business, FTS International, suggests growth may not last.
A pressure pumping company sold by the Wilks Brothers for $3.5 billion in 2012 has agreed to a $408 million takeover offer from another company started by the brothers.
It was an offer some investors in FTS International (FTS) would like to refuse. The deal with ProFrac offers $26.52 per share—a 5% discount from where the shares were on 22 October when the deal was announced. And they ended the day at around $27.
Normally takeover offers are at a premium to the current market price. In this case, the announcement noted the a 14% premium was offered to the “volume-weighted average price of FTS shares over the past 60 days.”
The terms of the deal offered a slim hope of a better deal. It includes a “Go-Shop” clause that gives FTS 45 days to look for a higher offer.
If a higher offer comes along, FTS will be able to terminate the deal with ProFrac, “subject to the terms and conditions of the merger agreement.” That normally would include a fee for breaking off the deal, but the terms were not disclosed.
By 25 October, the market reaction suggested that hopes of a better offer had faded as the stock price slid down to the offer price, which represented an “immediate and certain value at an attractive price” for shareholders, according to Eugene Davis, FTS chairman of the board.
More deals could be coming according to John Daniel of Daniel Energy Partners. He sees improving conditions ahead for companies with high-end equipment. Customers are looking for such features as automated pumping, the ability to fracture two wells at once, dual fuel, or electric power.
“Industry consolidation seems poised to continue as several small players acknowledge a desire to sell while larger players acknowledge a desire to consolidate. Frankly, this has been the case for months, but sellers don’t like to sell at the bottom, nor do buyers like to issue equity at subdued prices,” he said.
Those tensions are apparent in the ProFrac-FTS deal where the cash offer fell short of market expectations. A more accurate view of shareholder opinion will come with the vote required for approval of this deal.
Skeptical investors worried about selling low could point to the past success of the investors behind privately held ProFrac—Dan Howard Wilks and Farris Cullen Wilks—who started that company in 2016. It is their second act in the pressure pumping business.
Their first was the company now called FTS International, which they sold in 2012 for $3.5 billion to a group of international investors.
Their timing at the top of the shale boom was perfect. Two years later, the price of oil plunged from $100/bbl to $50/bbl, and pressure pumpers were among the hardest hit by the sharp slowdown that lasted for years.
Finally, oil prices are again approaching that high, suggesting the future could again be bright for publicly traded pressure pumpers.
On 15 October, the number of drilling rigs working was up 89% from last year’s depressed level, and the number of frac spreads working has risen as well, standing at 268, according to a survey by Primary Vision.
Those who follow pressure pumping closely question whether that steady rise can continue. The problem is that pressure pumpers have nearly exhausted the once large inventory of drilled but uncompleted wells (DUCs). Those represented about $3 billion of the $12 billion on fracturing wells this year, according to an analysis offered by John and Richard Spears, whose Tulsa firm Spears & Associates tracks the oilfield services business.
By now most of that surplus has been worked off and the wells in the DUC category are either recently drilled wells waiting to be completed or some that are never likely to be put into service.
While the number of wells drilled next year will rise, that gain will nearly equal the drop in DUCs drilled, according to their outlook offered on their podcast, The Drilldown.
“We will see drilling activity go up on order of 25% and [frac activity] will not grow much. It might not grow at all,” said John Spears, president of the data and advisory firm.
That would limit the ability of pressure pumpers to raise prices, though on the plus side, bigger players in the business have been reluctant to add pumping capacity.
“Big publicly traded service companies with frac spread are showing real discipline; that is, they are not adding crews for frac spreads unless there is a contract for long-term work for it,” John Spears said.
A presentation from FTS said as much, with its statement: “We require a customer commitment to build new fleets—we do not build on spec.”
Another plus for FTS is its focus on innovation, from using artificial intelligence to automate pumping using a program called Machine IQ, to having dual-fuel capacity, allowing 7 of its 13 active fleets to run on either natural gas or diesel.
It is combining with ProFrac, which is building electric- powered fracturing equipment. It has licensed technology that could allow it to add at least three electric-powered units to its fleet of 15 starting early next year.
Combining these advances could deliver a significant reward.
“Customer appreciation and demand for emission-friendly equipment is growing and this segment of the frac market is essentially soldout. Consequently, healthy price improvement, particularly on incremental upgraded spreads, is emerging,” Daniels said.
That same presentation delivered in September made a case that its stock was significantly undervalued compared to its peers. A chart showed its shares were selling for 2.4 times its expected 2022 cash flow—as measured by EBITA—while others were trading at 5.2 times that amount.
While FTS share price rose with the deal combining the companies, it should improve the cash flow by allowing it to reduce corporate overhead by combining overlapping functions such as accounting. The combination creating “one of the largest completions-focused service companies in the US oil and gas industry” could also increase its leverage when negotiating deals with customers and lenders.
Add to those valuation arguments the perfect timing exhibited in the past when the Wilks Brothers bought and sold pressure pumping companies.
But none of that will increase the offer unless there is a bidder out there willing and able to offer more than $408 million in this volatile business.
Based on their 2022 pressure pumping outlook which was offered in August, Richard Spears, vice president of Spears & Associates, concluded, “this is the time to not get into the frac business because it is not growing.”