Oil & Gas

The recent surge in megadeals within the U.S. oil and gas sector, which began last year and has extended into this year, has significantly impacted oilfield services. The pool of clients available to oilfield service companies is now much smaller than it was two years ago. This shift has created a buyers' market in the sector, which is expected to persist as consolidation among producers continues. Halliburton and SLB, which reported their second-quarter results recently, both highlighted strong international business but weaker domestic performance. Similarly, Baker Hughes reported robust international results without emphasizing its domestic performance, reinforcing this trend.

The consolidation wave in the industry has had a particularly adverse effect on oilfield services. As companies merge, the resulting entities often require fewer services than their combined predecessors. Liberty Energy, for instance, experienced better-than-expected results last quarter but acknowledges a bleak outlook for the sector. The Dallas Fed Energy Survey from June revealed a deteriorating industry landscape, with declines in equipment utilization and operating margins for oilfield service firms, despite a still positive but sharply reduced price index.

The consolidation trend is reducing opportunities for oilfield service providers, particularly affecting smaller players. Companies that are cut loose in the consolidation process often struggle to survive, with some driven to bankruptcy. For example, fracking services provider Nitro Fluids filed for Chapter 11 bankruptcy earlier this year due to a sharp drop in revenues caused by industry consolidation. Many firms are now fighting over fewer clients and accepting lower rates to cover fixed costs.

As the consolidation continues, oilfield service providers are also facing their own wave of mergers and acquisitions, with the sector seeing $12 billion in deals so far this year, compared to $5.3 billion last year. This consolidation trend will likely result in larger service companies with greater scale gaining a competitive edge. According to Rystad Energy's Thomas Jacobs, larger service firms will be better positioned to secure long-term contracts and withstand the current market pressures, indicating that the industry is moving towards a survival-of-the-fittest scenario with significant upheaval ahead.