Schlumberger (SLB.N) said it is selling its North America fracking business to rival Liberty Oilfield Services Inc LBTR.N for a 37% stake in a new combined company, as U.S. oil producers cut spending to cope with a plunge in energy demand.
The rig count in the United States has plummeted more than two thirds since the start of the year with completions also set to be much lower than expected as the coronavirus-related curbs has led to sharp decline in energy consumption and prices.
Liberty shares, which have fallen 42% so far this year, rose 15% to $7.40, while Schlumberger shares fell 1.7% to $18.56.
Fracking, involves injecting sand, water and chemicals underground to crack open rock formations holding natural gas and oil, a technique that led to a boom in U.S. production and a slump in energy prices in 2014.
Schlumberger formed the fracking unit less than three years ago by acquiring the U.S. and Canadian operations of rival Weatherford International for $430 million and combining them with its own business.
However, the unit failed to live up to its potential and Schlumberger Chief Executive Olivier Le Peuch said earlier this year he planned to reduce the operation.
“Some may quibble that SLB is getting out of the NAM onshore frac business just as expansionary cycle is beginning to unfold – perhaps,” said Bill Herbert, analyst at Piper Sandler’s Simmons Energy.
“But SLB is bequeathing its frac business to LBRT, in exchange for a prominent minority stake in the company, and will be riding a recovery in the event one unfolds, which we believe will happen, albeit with prominent uncertainties.”
Both Schlumberger and Liberty racked up losses in the second quarter.
Schlumberger’s North American revenue more than halved in the second quarter, with only slightly better conditions expected in the current quarter. Liberty’s revenue slumped about 84%.
Le Peuch said in July conditions were set “for a modest frac completion activity increase in North America,” but added it was from a “very low base.”
The combined company will have a market capitalization of $1.2 billion, and 2019 revenue would have been $5.2 billion.
The deal is expected to close in the fourth quarter and Liberty will continue to be led by its current management team.