Is NexTier-Patterson UTI Deal A Sign Of More Consolidation Ahead?

Key Points

• Shares of Patterson UTI Energy Inc. and NexTier Oilfield Solutions surged following a merger announcement.
• The combined entity will be valued at approximately $5.4 billion.
• The merger is expected to be accretive to earnings per share and free cash flow per share in 2024.
• Merger-and-acquisition activity is rising in the oilfield services industry.
• Oilfield services companies face a shrinking customer base, driving the need for consolidation and synergies.

Shares of Patterson UTI Energy Inc. NASDAQ: PTEN and NexTier Oilfield Solutions NYSE: NEX were both trading higher on June 15 following news that the companies agreed to combine in a merger of equals. 

According to the companies, the combined entity, with an enterprise value of approximately $5.4 billion, will be a drilling and completions services provider.

The term completion services refer to the process of preparing a well for production after drilling is completed. These services involve the installation, assembly, and optimization of equipment and systems necessary to enable the flow of hydrocarbons from the reservoir to the surface.

The combined company will have operations in the most active major U.S. basins, with the aim of generating strong free cash flow to accelerate the return of capital to shareholders. Patterson-UTI dividend data show a yield of 2.56%. NexTier has no dividend, but both companies have share buyback programs. 

Will Use The PTEN Ticker

The new entity will operate under the name Patterson-UTI Energy, Inc. and trade under the ticker symbol PTEN. The well completions business will operate under the NexTier Completions brand. The combined company's corporate headquarters will remain in Houston, Texas, where both companies are currently located.

NexTier shareholders will receive 0.7520 shares of Patterson-UTI common stock for each share of NexTier common stock owned. Upon closing of the transaction, which is expected to happen before the end of the year, Patterson-UTI shareholders will own approximately 55% of the combined company, and NexTier shareholders will own approximately 45%.

The transaction is expected to be accretive to earnings per share and free cash flow per share in 2024.

Oilfield services is a distinct industry in its own right. For example, Patterson-UTI specializes in onshore contract drilling and pressure pumping services for domestic oil-and-gas producers. NexTier specializes in well-completion and production services and is active in the fracking space. 

Rising M&A Activity

Merger-and-acquisition activity has been rising in recent years. For example, Schlumberger Ltd. NYSE: SLB, the largest oilfield services company by market capitalization and revenue, has engaged in multiple M&A transactions. Notable examples include the merger with Cameron International Corporation in 2016 for $14.80 billion. It’s also acquired several privately held companies in the past five years. 

Likewise, Halliburton Co. NYSE: HAL, Baker Hughes Co. NYSE: BHI, Weatherford International plc NYSE: WFT, and NOV Inc. NYSE: NOV have all grown through acquisition. While organic growth is certainly a revenue driver, the oilfield services business has a problem: The customer base is shrinking. 

That problem began brewing a few years ago. In a 2019 report, “Too many mouths to feed: Oilfield services sector looks to consolidate,” S&P Global noted that “consolidation of U.S. producers suggests a much-needed move toward mergers and acquisitions within the oilfield services space, which is saturated due to the low barrier of entry to the market.”

Reduced Costs And Streamlined Operations

Consolidation offers several potential benefits, such as reducing costs, streamlining operations, and gaining a larger market share. By merging or acquiring other companies in the same industry, businesses can consolidate their resources, eliminate redundancies, and target a wider customer base. 

For example, Patterson-UTI and NexTier expect their merger to create significant efficiencies for the combined company's well completions operations. The combined company expects to realize annual cost savings and operational synergies of approximately $200 million within 18 months following the close of the deal. They say those savings and synergies will be achieved through operations integration, supply chain management, and reductions in sales, general and administrative expenses. One-time costs expected to be incurred to achieve the synergies are approximately $80 million.

Strategic Advantages Of Merger

The term "business synergies" sounds like a buzzword but has an actual meaning. Synergies are the strategic advantages and benefits that result from combining or collaborating with other companies, leading to improved cost efficiency, revenue growth, market expansion, and operational optimization. That’s something oilfield services firms will undoubtedly continue seeking as their customer base consolidates. 

The exploration and production industry itself is consolidating. Interest in energy acquisitions picked up after Russia’s invasion of Ukraine in 2022. 

For example, Chevron Co. NYSE: CVX recently acquired shale producer PDC Energy Inc. in a stock-and-debt deal valued at $7.6 billion. The transaction boosts Chevron’s U.S. footprint, following poor performance for Chevron assets in the Permian Basin in West Texas and New Mexico.