HOUSTON - A wave of mega-mergers among oil producers is forcing the U.S. service companies that drill and hydraulically fracture wells to slash their prices, merge, or risk bankruptcy as they compete for a dwindling number of customers. 

U.S. oil producers, also known as operators, announced more than $275 billion in deals over the past year and a half, including multi-billion-dollar combinations such as Exxon Mobil ( XOM ) and Pioneer Natural Resources.

As big producers integrate and become more efficient while raising oil output, there is less work for the oilfield services companies that depend on them, according to service company executives and energy analysts. 

Diamondback Energy ( FANG ), for example, anticipates $550 million in annual cost synergies following its acquisition of Endeavor Energy. Of that, $325 million in savings are tied to operations, $150 million to land and $75 million to financial and corporate costs.  

"When customers combine, you might have a guy who was running seven rigs, and a guy who was running five rigs, that adds together to 12. But when they come back, they run 10," said Chris Wright, CEO of Liberty Energy, which holds 6% of the U.S. services market, according to consultancy Rystad Energy.

The U.S. rig count fell to 586 last week, off 83 from this time last year, its lowest since December 2021, according to services company Baker Hughes. 

The fragmented U.S. oilfield service sector is led by Halliburton with 14% of market share, according to Rystad.

Some smaller firms with older technology have been forced to lower prices to stay competitive as their customer bases shrink and clients opt for more efficient drilling, executives and analysts said.

"Everyone is scrambling and fighting for less scraps," said Jasen Gast, CEO of well construction and completions firm Oilfield Service Professionals. 

"The operators know that they can get better rates. They can just go out into the market and say, 'well, who wants my business?'" he added.

BANKRUPTCIES AND MERGERS

Nitro Fluids, a Texas-based oilfield services company that filed for bankruptcy in May, largely blamed consolidation by operators, according to court filings.

After Permian Resources ( PR ) acquired one of Fluids' top customers, Earthstone Energy, in November, Fluids' monthly average revenue plummeted from $1.2 million in 2023 to less than $100,000 in March, the company said.

It now faces $38.23 million in secured debt obligations and $14.4 million in unsecured debt, while holding $234,000 in cash as of May.

Fluids declined to comment. Permian did not respond to a request for comment. 

Other companies are consolidating to broaden their services. The U.S. oilfield sector has seen $12 billion worth of mergers and acquisitions this year, versus $5.3 billion in all of 2023, according to energy tech firm Enverus. 

SLB said in April it would buy ChampionX ( CHX ), allowing SLB to expand further into artificial lift technology that pumps more oil out of wells.

"As the industry consolidates across the board you will see these bigger (producers) working with bigger service companies, so the service companies that have scale will have the advantage over time," said Rystad vice president Thomas Jacob.  

LONGER-TERM DEALS

Large service firms are pushing for longer-term contracts and partnerships with operators for stability after years of painful boom-and-bust drilling cycles, executives said. 

Longer-term partnerships also appeal to operators as they pursue more efficient drilling methods that are usually offered by technologically-advanced, large service companies.  

   Midland, Texas-based ProPetro ( PUMP ) secured a three-year contract in April with Exxon Mobil ( XOM ) to provide electric hydraulic fracturing fleets in the Permian basin.

"The consolidation and new emerging technologies available today, including electric hydraulic fracturing equipment, have led operators to begin offering longer-term contracts," said David Schorlemer, ProPetro's ( PUMP ) CFO. 

'PENNIES ON THE DOLLAR'

As oilfield companies go bankrupt, auctions are booming, providing a chance for surviving companies to buy inexpensive equipment. 

"We picked up some assets for pennies on the dollar (at an auction), because the company just went under," said Thomas Dunavant, CFO at Oilfield Service Professionals.   

Superior Energy Auctioneers, based in Oklahoma, has held three total liquidation sales for oilfield companies this year, compared with three for all of 2023, according to the company's website.

The brutal battle for customers, especially among small service companies, shows no sign of abating, Jacob said. 

"The outlook is a bloodbath," he said.