IN A MOVE viewed by analysts as a win-win for both parties, Schlumberger and Weatherford have agreed to a joint venture to deliver completions products and services for the development of unconventional resource plays in the United States and Canada land markets. The JV, OneStim, will compete heavily with Halliburton, and is poised to take a top spot among US land pressure pumpers.
Both companies will contribute their respective North America (NAM) land hydraulic fracturing pressure pumping assets, multistage completions, and pump-down perforating businesses. Weatherford will receive a one-time $535 million cash payment from Schlumberger and a 30% interest in the JV, a separate legal entity to be managed by Schlumberger.
Following news of the deal, a snapshot of trading caught Weatherford shares up 10% to $6.45, Schlumberger shares down 0.9% to $76.28, and Halliburton shares down 2.9% to $47.96.
Again, analysts like the deal. Evercore ISI analysts, in particular, called the JV "a game-changing development in the world's most vibrant OFS geomarket," saying there's "no doubt" that the two "are attempting to partially displace their most dominant NAM competitor." Adding to that equation is the recent addition of Mark McCollum as the new CEO of Weatherford, the analysts said, calling his arrival a "critical component to the OneStim directive," as McCollum spent a large part of his career at Halliburton, and he "possesses the insights that OneStim needs to successfully grow market share in the NAM unconventional completions market."
Evercore ISI analysts said the biggest positive for Schlumberger is "Increased HHP (hydraulic horsepower) scale, leading downhole multistage completions products", and-again-Mark McCollum. On the other side of the coin, the "biggest positive for WFT - monetizing their HHP and deleveraging." Other analysts agree.
Capital One Securities analyst Luke M. Lemoine called the deal a "great partial monetization" for Weatherford. "While the initial cash payment of $535 million is less than expected, the future realization could be more as OneStim will have ~2.5 million nameplate HHP in North America and will be the #1 - #2 player in overall North American HHP. If using ~$1,500 - $2,000/HHP like other public companies, the OneStim JV could be worth ~$4.4 billion with Weatherford's portion valued at ~$1.3 billion."
Prior to winding down HHP operations in 4Q, Lemoine noted, Weatherford's HHP segment "generated $70 million of NA revenues with an EBIT loss of $29 million. 2016 revenues were ~$300 million from the business and likely would have grown 50% - 75% in '17." The assets include 20 fleets with exposure in the Permian, Anadarko, and Appalachia, and the Eagle Ford-its largest. "Of the 20 fleets," Lemoine continued, "nine are ready to go back to work with zero CAPEX, one fleet is hot stacked, and the other 10 fleets would cost $5 million - $7 million to reactivate."
Building on the boost to Weatherford, Evercore ISI analysts said the company's 30% stake "will allow it to participate in the land-levered upcycle, which (as signaled by Halliburton in their recent operations call) is likely to catalyze a widespread capacity shortage and steeper pricing traction as the rig count continues to grind higher. In addition, by relinquishing operational duties to SLB, the company will incur minimal startup and labor-related expenses, which will likely be front-loaded as the service companies push their market share footprint outward. Finally, WFT will benefit from SLB's unmatched subsurface characterization expertise, which will be a significant differentiator in the completions space as well complexity increases and operators step out of predictable acreage."
For Schlumberger, the analysts said, the deal "represents a 'rounding out' of what is otherwise a fully integrated completion offering. Despite having grown its own multistage completions share by 2-3x over the last several years, there were two primary gaps in the Production Group offering that Schlumberger now fills through the OneStim JV: 1) a lack of true frac horsepower scale and 2) a quality downhole multistage completion product portfolio. As an underappreciated #2 in the multistage completions space, WFT has mastered their suite of downhole completions equipment and accessories, including composite plugs, sliding sleeves, and open hole completion kits."
Agreeing that the deal as a win-win for both, Wolfe Research analysts admitted the deal took them a bit by surprise. "We knew WFT was exploring a potential partnership; it's that Schlumberger has not historically been too keen on pressure pumping given such low barriers to entry," adding "we think SLB is really after WFT's NAM multistage completion business, in particular their lower completions." Overall, the analysts said, the deal is a win-win for both, "better positioning Schlumberger to exploit its integrated completions model while WFT sells a non-core business for cash and also receives a sizable equity stake in a much better positioned NAM completions company than what Weatherford could replicate. Big Red (Halliburton) has some competition at the top now."
