2023-06-26 09:30:00 ET
Summary
- The article analyzes the Patterson-UTI and NexTier Oilfield deal announced recently.
- Overall, the deal seems fair to both sides; NexTier may benefit from Patterson-UTI's higher multiple.
- PTEN and NEX remain a buy; the valuations look too low even accounting for the falling oil rig count.
Patterson-UTI Energy ( PTEN ) and NexTier Oilfield Solutions ( NEX ) announced they had agreed to merge in an all-stock deal valued at $5.4 billion.
I recently covered NexTier; my thesis was that NEX, similar to other premium onshore oilfield services (or OFS) companies, is way too discounted, even considering the drop in rig counts and frac spreads:
NexTier: Another Value Proposition In Discounted Pressure Pumping Segment
I didn't anticipate the merger so I offer here my thoughts on what the deal could mean for Patterson and NexTier investors.
What Is The Patterson-UTI and NexTier Deal?
According to the joint press release , NexTier shareholders will receive 0.7520 shares of PTEN stock for each share of NEX common stock owned. It is expected that upon closing Patterson-UTI shareholders will own 55% of the combined company and NexTier shareholders the remaining 45%.
The combined company will be led by a management team drawn from both PTEN and NEX. Andy Hendricks, President and CEO of Patterson-UTI, will be the President and CEO of the combined company. Robert Drummond, President and CEO of NexTier, will become Vice Chair of the combined company’s board. The combined company’s board will have 11 directors, 6 of whom will be from Patterson and 5 from NexTier.
The combined company will operate as Patterson-UTI Energy, but the well completions (pressure pumping) business will continue under the NexTier brand. By most indications, this indeed looks like a merger of equals.
PTEN & NEX Stock Key Metrics
Forward NEX EBITDA is estimated at $900 million while the PTEN estimate is about $1 billion. This implies a 53%-47% PTEN share of the combined company's EBITDA and it is close to the 55%-45% pro forma ownership ratio.
Overall, Patterson-UTI has higher valuation multiples:
PTEN may have commanded higher multiples because it provides both drilling and pressure pumping services whereas NEX focuses in the latter area only; Patterson-UTI also has international operations in Colombia:
Perhaps the two managements are hoping that the merger will create shareholder value by allowing NexTier's EBITDA to benefit from Patterson-UTI's higher multiple.
Does This Deal Benefit One Group Of Investors More?
Overall, I see this as a fair deal to both sides. The stocks are down since the merger announcement, but so is the entire OFS sector ( OIH ):
The deal doesn't add any debt or use cash either. The ownership ratio more or less agrees with the relative EBITDA contributions to the combined company.
How Does This Impact Their Business Outlook?
The deal boasts $200 million of annual synergies (basically, savings from reducing duplicate costs) that will involve a one-time reorganization cost of $80 million. The $200 million is an approximately 10% increase from the current combined EBITDA of $1.9 billion.
For me though, what matters more is that the deal consolidates further U.S. frac fleets under fewer owners:
To put this in perspective, for the week ending June 23, Primary Vision reported 277 active frac fleets. The merger presentation identifies 282 fleets. Before the merger, the top 4 providers owned 60% of the fleet which will now increase to 65%.
Consolidation increases pricing power and may limit shale producers' hopes for a reversal in OFS inflation. I think this is bullish not just for PTEN and NEX, but also for the entire industry including competitors like Liberty Energy ( LBRT ) or ProPetro ( PUMP ).
What Is The Future Stock Outlook?
Patterson-UTI and NexTier both depend on U.S. shale activity. Right now, U.S. oil rigs are trending down:
However, gas rigs may have already stabilized:
Frac spreads (which lag drilling) have been up for the last couple of weeks:
Primary Vision & AOGR
While shale oil production may continue facing challenges, natural gas may have already found a "bottom":
Moreover, even if headline activity weakens, both PTEN and NEX are premium providers offering super-spec rigs and next gen frac fleets; it will be the smaller providers with older equipment who will get cut first.
Lastly, as shale runs out of Tier 1 inventory, the demand for drilling and completion services will likely increase. Shale companies will continue emphasizing "capital discipline" so production may not grow in a $70 oil ( CL1:COM ) environment, but on the flip side, no one wants to report shrinking production either. Overall, I am bullish on both the drilling and pressure pumping services of the combined company, as well as the supply chain and additional services they offer.
Risks
Three risks should be considered, two macro and one company specific:
- A selloff in the broader market ( SPX ) due to recession fears may result in further multiple compression of the already discounted multiples at which PTEN and NEX trade;
- A sharper downward move in the oil price to $50, for example, could result in a more significant cut in rigs and frac fleets; I personally think this scenario is less likely as long Saudi Arabia continues to provide a "floor" for the oil market;
- The business integration may not go well and the $200 million synergies may not get materialized.
These risks aren't trivial, but, on balance, the low starting valuation should provide enough cushion.
Bottom Line
Wall Street sees a 50% upside for PTEN:
I also think PTEN and NEX are a "buy", and remain so after the merger.
For further details see:
Patterson-UTI And NexTier Oilfield Merger: Which Stock's Investors Benefit More?