Service Sector Consolidation | Russell T. Rudy Energy LLC
Since crude prices collapsed last fall the energy industry has fallen on hard times, and no segment of the industry has been harder hit than the service companies. According to a recent article in “World Oil”, operators have cancelled over $100 billion in capital spending which has resulted in almost a 60% drop in active drilling rigs. Concurrently, the prices for frack jobs have dropped by 35%. In January of this year there were 61 companies providing fracking services. Currently there are 41, and some analysts predict only half of these will survive until year end.
Many industry observers fear the worst is yet to come. Second quarter earnings at industry giant Schlumberger are projected to be down 25% from the first quarter of this year, and it is expected to outperform its smaller competitors. Consequently, we can expect a flurry of merger and acquisition (M&A) activity in the service sector, especially among the smaller companies. Jim Rebello with financial advisors Duff & Phelps, predicts that “The service-side M&A activity will accelerate as we go through the remainder of the year. There’s too much capacity. We don’t think every company will make it through this down cycle.”
M&A will become a matter of survival for some companies and most of these combinations will be confined to the smaller players. As Stephen Trauber with Citigroup observed, “The big guys don’t need anything from the smaller guys.”
While cash strapped service companies might not have, or be able to borrow, the money to acquire competitors, stock-for-stock combinations might be mutually beneficial. The remaining impediment to a wave of M&A activity in the second half of this year seems to be sellers coming to grips with what their companies are worth now versus what they were worth a year ago.
To read the article in its entirety, please go to http://www.worldoil.com/news/2015/5/14/oil-services-ugly-second-quarter-seen-as-prompting-mergers .
