Another merger, another Deal Spotlight! On today’s episode, we talk all things OFS and the merger of SLB + ChampionX that happened earlier this year. To break all this down, we needed to find an expert, and Jeff Krimmel is that expert!
He joins the show to discuss all things OFS, market dynamics, pricing, and future segment forecasts before diving into this merger from all angles. SLB is making a clear statement: the future of US Shale is in production longevity, not drilling. Jeff points out some really interesting tidbits surrounding the nature of the press releases and in the end, gives it his blessing.
Thanks again to Jeff Krimmel for joining the show.
Until the next deal!
Links:
Jeff Krimmel Newsletter: https://jeffkrimmel.carrd.co/
Jeff’s LinkedIn: https://www.linkedin.com/in/jeffkrimmel/
Jeff’s Website: https://krimmelsg.com/
Highlights of the Podcast
00:00 – Introduction and overview of the Schlumberger Champion X oilfield service merger discussion
01:37 – Discussion about Jeff Krimmel’s recent keynote address
03:22- Overview of Jeff Krimmel’s background in oilfield services and strategy
05:06 – Discussion about market pricing strategies in oilfield services
08:28 – Analysis of the Schlumberger Champion X merger
17:32 – Current sentiment in the oilfield services market
25:03 – Detailed breakdown of the Schlumberger Champion X merger highlights
27:43 – Discussion on the future of operational expenditure in oilfield services
29:47 – Examination of Champion X’s business focus and how it complements Schlumberger
36:00 – Discussion of synergies and financial aspects of the merger
44:50 – Final thoughts on the Schlumberger Champion X merger and its impact on the oilfield services industry
50:10 – Conclusion and wrap-up of the episode
Michael Tanner [00:00:00] What’s going on, everybody? Welcome in to episode six of The Duel spotlight. Well, we are going to be covering the Schlumberger Champion X oilfield service merger. We have not dipped our toes in the office waters yet, but I am excited to do that with none other than Jeff Cremo. He is an energy expert. He has an excellent newsletter I would recommend checking out. He’s the owner of Criminal Strategy Group, formerly of Pinnacle Key Energy Services and GE, where he really was at the forefront of a lot of oilfield service market strategy stuff. He joins the show today. Helps us really get an overview from a 30,000 foot view of what, the oilfield service market is dealing with from, from kind of a financial and M&A standpoint. And then we dive into and cover everything about this deal, which is really novel for me. Again, being an upstream guy and generally what we cover on the show. This was an awesome overview. I really thank, Jeff for coming on here. You should go hit the description below to check out all the ways you can find Jeff. You can visit him on his website. You can also subscribe to his newsletter, The Business of Energy. Highly recommend. It’s something I read every Monday and again, hit that description below. You’ll be able to see all of that. Thanks for checking us out, as always on the Deal spotlight. That description below. We’ll also have ways to visit us at Energy News Beat.com And links to all of our previous episodes, but I’m going to go and kick it off and turn it over. And, let’s learn about this deal.
Michael Tanner [00:01:33] Jeff welcome into the deal Spotlight. Appreciate you joining us today.
Jeff Krimmel [00:01:37] So much for having me.
Michael Tanner [00:01:39] Yeah. No, this this will be fun. You are you just recently got back from your first keynote address. Hope all that went well.
Jeff Krimmel [00:01:45] It went great. Yeah. It was a lot of fun to put together and deliver. So all’s well there?
Michael Tanner [00:01:50] Yeah. No. Appreciate it. Well, I’m I’m excited to have you. You know, I you’ve been starting to put out a lot more content. First off you’ve been putting out some great videos on LinkedIn. You also have a great newsletter which everybody can check out. The description below will definitely have a link to that. I’m definitely a subscriber and some really interesting nuggets in there. And and you kind of being the the oilfield service expert, I was really excited when you were like, yeah, let’s come on and talk about this Schlumberger champion. Because, you know, we were talking about this a little bit before we started recording here is, you know, I come from and what we do on this podcast is really focus on the upstream, merger side. We we’ve done Exxon Pioneer. We’ve done yeah. Oxy Crown Quest. We’ve done the gamut going back to to January now. And I was telling you, I feel like I should be more knowledgeable of what goes into a lot of these oilfield service deals. And coming from the upstream sector, I know that you know, me. And and definitely a lot of our listeners are keen to learn a little bit more about kind of what goes on behind the scenes. From, from, from this type of site, specifically on the oilfield service side. So I, I’m really excited to dive into this. You know, we’ll get to the actual SLB champion merger here in a second. But I want to, you know, start off by just giving, you know, letting you talk for a bit a little bit about your background, what you’ve done. You’re you’re an oilfield services, you know, energy expert. I mean I don’t want to, limit you just to oilfield services, but that’s a lot about what your background is. And I, I think you’ve, you’ve got are going to have a really unique perspective on this. So if you just don’t mind kind of just just kick it off and tell us a little bit about kind of your background and where you ended up, where you are today.
Jeff Krimmel [00:03:22] Certainly. Thanks, Michael. So my my education is all in mechanical engineering. I have a bachelors, a masters, a PhD, all in mechanical engineering. And so I figured, you know, as I was finishing up the PhD, that I was going to have this, you know, long and winding journey through research and development as a career. And that lasted for all. About 15 months. I joined Baker Hughes immediately, upon defending my PhD thesis and, joined in a traditional research development capacity, working on, on new product design for wireline tools and tools and but then very quickly got kicked off into a leadership development program. And, and through that program, I found my way into some data driven pricing and profitability work. And that then led into some market intelligence. One thing I did, so that was, you know, the back say six years, five, six years of my time at Baker Hughes was all data driven price and profitability, market intelligence, that kind of thing. I left Baker Hughes in the summer of 2018 after the combination which you oil and gas and went to Key Energy Services and basically there did a combination of what I had done at the tail end of my time at Baker Hughes. I had done some, pricing work and some market intelligence work, and, I was at key until the pandemic and then went to pinnacle, where I became the chief strategy officer. And pinnacle is an industrial Reliability services, company. And so their customer base is much more on the downstream side, but also in mining a bit midstream. And so I did a lot of market intelligence work over there, but again, focused sort of outside that there was some upstream work there, but, but focused in a lot of adjacent spaces beyond just upstream. So over the past 15 years or so, I’ve been kind of eyeballs deep into market intelligence, specifically in oil and gas, but in some adjacent spaces as well.
Michael Tanner [00:05:06] Yeah. Again, you can you know, guys, you can see exactly why we brought them on, because this is going to be able to help break this down at all. So I’m really interested. So when you talk about you were you were doing some like market pricing. Is that literally helping, you know, helping service companies actually price their products relative to what an operator would say? I mean, I assume trust me, that’s a that’s a not an easy job. Oh, fraction. Just 100 grand. Now is a little bit more of that goes into it.
Jeff Krimmel [00:05:30] Exactly right. And, you know, that’s why I mean, all of the stuff that I’ve done, I’ve found interesting in different ways. The pricing bit has probably been genuinely the most challenging, part because the collaboration that’s required to come up with with an optimal pricing strategy is, is immense because you have, you know, the sales folks that are on the ground have these relationships that that are aware of, you know, the customer needs specifically, you have the operations side of understanding what we can deliver and what those realities look like. And then you have the finance folks that are trying to to make sure that we’re delivering the financial performance that you would expect. And you have all the competitive pressures, awareness of, you know, competitive intelligence and all the rest. So all of that has to kind of blend into, what you hope is an optimized, pricing approach. Like you said, there’s just a lot of moving parts. It’s a lot of fun. It’s very rewarding when you get it right. And it’s incredibly difficult.
Michael Tanner [00:06:21] So is is does that have a lot to do with kind of forecasting where the market is going to be from an upstream side? Because I think we’re going to get into the M&A stuff a little bit in the in the classic, you know, oh recounts going up. So service companies are going to do better. I think we kind of all a little bit know that. What are some of those key variables when you’re, you know, kind of put yourself back in your old job. What are some of those key variables that you see that were kind of driving prices one way or the other that, you know, maybe outside of rig count, which I think everybody kind of knows.
Jeff Krimmel [00:06:52] Right? So you nailed that one. You start sort of in the macro level and get a sense, okay, where is activity on the whole going. And that’s that’s a nice sort of baseline to start with. Where you been go is you have to really start to understand, how differentiated is your product and service offering and what does, substitution look like around that? Right. If you’re highly differentiated and, you know, you can, generate, generate differential performance for your customers, and they have seen this and lived it and you’re confident in it. Well, that that leads to one approach around pricing. If, on the other hand, you’re in a much more commoditized space where you’re playing a utilization game, you’re playing an operational efficiency game, that leads to a very different reality around how you want to, structure your pricing, deploy your operations. And, but both of those are in form, like you said, sort of high level, you know what? What is activity doing across the oil field? And, and you also do some customer segmentation work. So, so you can be differentiated within one segment of customers but then not differentiated amongst different segments of customers. So like you said, when you start say all in at the rig count level or the activity level, you can look at what it is across the US oil field. You then want to segment that and see if there’s a particular class of operators that you know you’re best positioned to serve. What are the activity looking like within that class of operators? What are their realities looking like? And again, that’s where you have to collaborate and pull in a lot of, field level intelligence. I can do a lot of research from publicly available, you know, market facing information, but then you collaborate with folks that are out there living it, breathing it, sleeping it, eating it every single day and pull everything together. And that’s how you build your strategy.
Michael Tanner [00:08:28] Well, I mean, there’s a reason Baker Hughes is the one that’s been running the rig count numbers for over 20 years now. Because you guys have or, you know, they have the best data available. So no, that’s super, super interesting. But yeah.
Jeff Krimmel [00:08:42] That’s right. It’s, it’s, you know, and it is part of the culture. I would say Baker Hughes when I was there that, that, you know, you do feel this sense of ownership that, that you’re, you know, supplying the industry with a data set that needs to be in which folks have a lot of confidence, and they’re making a lot of business decisions that are informed by that data set. So it does lead to, you know, a real appreciation for the stakes of the games being played and the value of using data in the right ways.
Michael Tanner [00:09:08] And as we talk about the, the, the broader kind of oilfield service M&A market, you know, it’s there there’s not as many deals. I mean, there’s very few deals to actually look at data points. I think one of the articles I read, there’s only been like nine deals since 2015 or something like that, like it’s a small ish dataset, at least from kind of what makes out in the public. I’m sure in your realm you’ve seen a lot more at the small, small level. But the, the, the data set maybe necessarily. Isn’t it big when you’re looking at just kind of when you when when a deal kind of crosses your plate or somebody says, hey, I think, you know, you hear a rumor and you’re and you’re thinking about it, valuing it, what are some of the key metrics that people should look at kind of off the bat to say, oh, interesting. This this company, is it a lot to do with forecasting? Is it looking backwards and seeing how efficient they are with kind of the verticals they’re in, what kind of goes into kind of a broader oil field service valuation?
Jeff Krimmel [00:10:00] Great question. I will hate to disappoint you with my top level answer, which is all of the above. There isn’t all the above element to it, so. So you can start with how you would analyze, say, any deal, which, I’ll in fact, you know, pull back to my keynote that I gave, at the fluid 2024 conference, where I talked about what I’d done was read through press releases for a lot of the ENP, consolidation, activity and for oilfield services. So for the oilfield services ones, I went through SLB champion hacks, I went through, Patterson Utley next year, and I went through, index and droplet and, and pulled out themes for MPs and for office on the other side, the three themes that showed up in all those press releases and really have showed up historically. But but it’s a little bit different now. More scale innovation and returns. The returns bit is newish. I mean, obviously shareholders have always cared about returns, but particularly right now in today’s oil and gas sector, they have a visibility that it’s even greater than what they’d had historically. So when you’re thinking about, the oilfield services combinations, rumors, these sorts of things, I typically go through those three types of things. I there’s a scale argument if, like you said, there’s a bunch of small scale deals that would happen day to day. But what gets really interesting is are you combining two entities, the each of which have already achieved scale to some degree, and where the combined entity, is meaningfully different than than the two entities that existed before. And that’s where I’ll be champion starts to get interesting, because when you start to carve out the production side within the U.S oil field specifically, that space does look different after this deal than it does before that deal. We can go through those, details later. So there’s absolutely there’s an element of scale, right, that you care about when you’re thinking about these deals where, if you’re adding meaningful scale that starts to make a difference, it starts to make combination, more justifiable, because with that increased scale comes increased leverage. You have increasing, you know, commercial optionality. And, that’s the lifeblood of, of oilfield services is keep equipment, working and, and, try to do it at a pricing level where you can justify, you know, maintaining that work over time. So it’s a scale element. There’s an innovation element, all the technology. We’ve always heard about that on oilfield services. And it’s it’s thought of as being the technology epicenter for oil and gas in a lot of ways. And that gets really interesting when you think about combinations of who’s bringing what technology and what sort of cultures exist around technology innovation in these oilfield services shops. All oilfield services companies talk about innovation, but they live it out and invest in it in very different ways. So so you can start to think through, okay. Is there a real, alignment in how these different cultures are, are pursuing innovation that would make a combined entity, more potent than either of the entities are, by themselves. And then there’s a returns element, you know, if there’s if both are generating healthy cash flow levels and you can find a way to unlock even more going forward. Great. If one or both are struggling, does the combination allow them to, you know, the word of the day with all this synergies to identify some of these synergies and harvest them, so that shareholders can get more out of the combined entity than they would out of, the two, when they were separate beforehand. So these are all elements you start to work through when you ask yourself, can a deal be justified?
Michael Tanner [00:13:14] But is there a reason that we’re we see less overall kind of deals make it this far in the in the office space relative to the ENP? Is there are there challenges? As you know, oilfield service providers look to merge? I mean, you would think maybe, you know, if the were if scale, like you said, is something that’s key. You know, it may behoove somebody should be buying everybody right now.
Jeff Krimmel [00:13:37] Yes. It’s it’s a great question. There’s. There’s a challenge on the oilfield services. Like I said, the notion of integrating oilfield services companies and this is me painting with a very broad brush. So so the disclaimers apply. But integrating, oilfield services companies, it’s a very different proposition than, say, integrating on the ENP side, not integrating any two entities of scale is ever easy. It’s not. There are always real challenges to be done there. But like I mentioned about, the technology side, on the offside, you also have differences in, operational paradigms, safety programs, cultures, you know, legacy customer relationships. And I think that the oilfield services segment has found over time and like we found in, the economy broadly, when you look at some of these studies about, the returns to business combinations in general, they don’t work right over half the time. You you generate less value than you would have if you cut the two apart. And so there’s some hubris that goes into thinking, of course, we can just combine these two entities and get something more valuable on the back end. Right. You have to think very, deeply around what are the nuances of actually integrating these things. I think that’s the challenge. Mostly on the oilfield services side is it’s easy for any one company to think like we’re we’re almost there. Like we just got it’s just a little bit more and we’re going to unlock, you know, that next level of performance and that next, incremental value. That why go through all the disruption of trying to combine with someone and making that happen? When you’ve seen in oilfield services, there’s a bunch of of those acquisitions that don’t really change the game. And so I think there’s a culture, I think there’s a sentiment. I think there’s just sort of a general friction around believing that those sorts of combinations, well, will be as effective as we have seen on the ENP side of things.
Michael Tanner [00:15:23] You know, kind of the last two deals that have happened in the office space we’re about to write, we’re about to talk about, you know, Schlumberger Champion X here. But you mentioned UTI, Patterson and next year oil. You know the difference between those two deals. There’s a lot. But one of them being one of them’s a merger. And the other one is we’re buying you and controlling it is there is is there a is I assume the challenges are with the merger tend to a lot more with what you’re talking about synergies. Who’s going to do what overlapping business units. Where is the the the issues that could arise, say in an acquisition have maybe more to do with the expected returns aren’t exactly what the acquirer was expecting. Is that kind of how you see it?
Jeff Krimmel [00:16:06] I think that’s a great way to to say it. Yes, there’s just more uncertainty. But when you’re when you’re talking a merger of equals and you just necessarily when you’re talking to a merger of equals, they typically are entities that are much smaller in scale, say than than SLB is. And SLB has, you know, an acquisition playbook, right? They’ve done this routinely countless times. And so they know exactly what they’re doing and how to do it. Why do it? It doesn’t mean it’s going to work flawlessly, but it does mean they they have an approach. Like there’s not an uncertainty around how are we going to integrate this acquired company into our operations. I know exactly how that works. When you take two equals, they’re trying to merge in that way. There’s a lot more uncertainty in the integration process. And in general, when you’re talking about mergers of equals, you’re talking about about two companies that, you know, desperation is too strong of word. But but that see that, hey, that the returns to getting bigger, the returns to combining joining forces here are so much greater than what we’d be staring at if we continue to march on this thing alone. And so I, like I said, desperation is too strong of war. But there’s a lot of motivation to to realize, like, hey, there’s there’s immense struggle in front of us, our potential struggle if we stay alone. But let’s combine find someone of a similar size combined. And so what that means is just the starting point of that integration is slightly more turbulent than what you would see if you’re a massive, you know, SLB whose financial performance is going very smoothly at the moment. And this is one additional way to unlock incremental value going forward. So I think there’s a there are important differences between those two types of combinations.
Michael Tanner [00:17:32] No, I completely agree. And final question, kind of before we dive into to this deal specifically here, kind of for me in the audience, can you kind of set the stage of the current kind of sentiment of the oilfield services right now? We’ve have oil prices have pretty much rose over the past six months, but we haven’t seen that reflected at least in the overall rig count. I know some of that activity is continuing to go on, but gas prices are also low. So you’ve got companies like Chesapeake, you know, drilling but not completing any of these wells. We’re building up that duck count again. Give us a quick kind of 30,000 foot overview of kind of where the the offshore field sits right now. So we can kind of use that as a backdrop to what we were about to talk about in this deal.
Jeff Krimmel [00:18:13] That question aligns very well with the theme of the keynote that I gave at the fluids 2024 conference, and what that was is that on the e p side, MPs are generating much more cash from operations than they had even going into the pandemic. There was a big climb coming out of the pandemic. It has fallen off since then as all prices have come back down, but still, they’re generating more cash over $20 per boe, across the cohort of the, MP side. And so with that extra cash that they’re generating. Like you said, that cash is not going to standing up more rigs like the rig count in the US is flat at the moment. It’s down from where it was a year ago. I showed a chart on the international side. Rig count. It continues to grow, but the pace at which it is growing is slowing down. So you are reaching toward a plateau, even on the international rig count. So where’s all this extra capital going? The theme of the keynote was a ton of it’s going to shareholders. It’s going to shareholders in the form of increased dividends, increased share repurchases. I showed a couple of charts. It shows us oil prices go up, cash from operations for MPC goes up, and then cash transfers to shareholders goes up. So we’re not seeing it on the, recount side. So like you said, that is a headwind against oilfield services that we’re not seeing. Just, a huge wave of new activity, that’s made available to, oilfield services. What we have seen, again, coming out of pandemic past couple of years, oil prices have gone up. We’ve seen margins expand. On the other side, we’ve seen returns on capital expand on the other side. Oilfield Services is healthier today than it’s been in years, frankly. You know, certainly since coming out of the price crash, 2014, 2016. So, I made a couple post on LinkedIn where, and I know it sounds, weird for me to say. It’s part of the reason I try to say it out loud is, you know, the past year, two years ish. In that time frame, this has been the golden age for oilfield services. I know whenever you live through a golden age, there’s always reasons that it’s. It’s not that great. It’s still frustrating. And I get it. I’m not trying to argue. It’s perfect. That’s not what a golden age means. But having been, you know, around, the oilfield services space, as long as I have, you can see it in a lot of different, market phases. And, this phase has been phenomenal. So, like, if you think of it, services are struggling or disadvantaged right now, right? You haven’t seen anything compared to what they’ve lived historically. And, you know, some other cycle is probably coming in the not too distant future. So now, what I’ve also done, for the orphan services side is gone back and looked at price to earnings ratios. Very simple logic, right. But it is something I do pay attention to because I am curious to see how, how much are investors really willing to pay for for these dollars of oilfield services earnings? And what we saw is, as earnings have have grown coming out of the pandemic, your p e ratio is it started sky high because earnings were so thin. Right. And investors expected hey this segment is going to generate earnings in the future. So you know we’re not really buying the earnings been at this point. But we expected v to generate healthy earnings going forward. So as these earnings levels have started to equilibrate you have a say in the range of 13 to 17 for the big oilfield services companies. And it actually reached a low in January February. And it’s now starting to climb a little bit again. Now some of that is, you know, the earnings side. It’s starting to walk back just a little. But some of it is I think we’re starting to see that the oilfield services landscape, a lot of these companies have responded very well to the recovery, to the pandemic. While there are pockets of, of, Overbuild where there’s excess supply out there, it’s not widespread across the whole office space. So these margins that we recovered to coming out of the pandemic are largely holding these returns. Levels are largely holding. You know, we’re not seeing this big crash. We didn’t see a race on UFC to try to capture every last increment of activity. And this wager that, hey, there’s even more activity coming on the back end. The NPS have been disciplined about it. The other side has been disciplined. And so they’re in a reasonably good spot at the moment.
Michael Tanner [00:22:08] No, that’s I think it’s a great overview, of where kind of the market stand. So let’s pivot here and let’s actually kind of talk specifically about Schlumberger Champion X. So for everybody listening there. We’re going to I’m going to probably pop up a few slides during this. So I’ll do my best to make sure I’m covering it. But this deal happened April second, 2024. Probably been in the works for for a little bit, which is an interesting question I’ve got for you. Come in there, but we’ll go ahead. And if you’re following along at home, we’re going to pull up slide four here in the announcement deck. It just basically got kind of their five key bullet points. And I think what’s what’s you know what serves a lot of light Jeff to what you said is the three things you mentioned of what drive M&A activity in the oil filters was mentioned in these accounts in highlights. First, it’s you know, the first thing was they’re saying they’re strengthening their their production space, which basically gets them into a new market segment that they’re not necessarily in and ended up being about a $7.7 billion total price deal, which basically was done in all stock, which is another question I’ve got for you, because now it’s never been a better time. The energy industry to use your stock to go acquire. You used to have to be all cash for a lot of this stuff. Super interesting. But that $7.7 billion price tag, including the debt, which I think brought it up to a little bit above eight, $8 billion, represents about a 91, 9 or 91%, 9% split between SLB. Now in champion X, it’s about a, 0.735 share conversion. Based on that, those shares of champion X were valued about $40.59, which represents about a a 14.7% premium. Again, kind of their their highlights as you see in the bottom here. You know it is really touting the fact that it’s kind of bringing them into a new market, specifically this production chemical space, which championed, champion X pun intended, has championed number two, again, the kind of they got they’re talking about their combined portfolio. They, they go there right there and highlight the, the shares, which I obviously mentioned. And then kind of the last two points, Jeff, that you mentioned specifically is, is they’re touting the synergies of about $400 million, which they will be able to annualize on a on a three year basis or be able to achieve that within three years. This is what that kind of PR is, what that means from a I wrote a lot of these, sell side by side paper. So I love breaking down and figuring out which side of the fence wrote this, because sometimes it can be obvious. And then specifically that number five, increasing their total returns to shareholders, to a target of 3 billion this year, where they’re really feel like they’re going to see the returns, increase based on this deal is in 2025 at, 4 billion, you know, off the top. I just kind of want to let you go, you know? What did you think initially about this deal and then what kind of breakdown? Some of the stuff that they were. You know, I always love to read the transcripts of these mergers and figure out what were what’s driving it. Then go back and look at their last quarterly earnings report to see if their mood is switched a little bit.
Jeff Krimmel [00:25:05] So fantastic question, Michael. And I would say, when I first heard the idea to say thank you, to read through the press releases, I made a big point in the keynote that, you know, like I said, some of the stuff that I talked about was reading the press releases of a bunch of NPD and then some of these awful services deals and these press releases. Right. It’s easy to kind of have your eyes glaze and just skim through it and be, okay, I got it. These press releases are incredibly, deliberately constructed. I made a point to say, you know, the word choice matters. The structure of the press release matters. And, I made the point that omissions from the press release matter. If you pay attention to what’s not in some of these releases, you can start to get some information. So, when I read through the press release, I do the same thing you do. I then go back to say previous, earnings calls and read through some of those transcripts and just get a sense of, you know, what? What did the landscape look like leading into this kind of deal? This is clearly Schlumberger, positioning itself to participate much more meaningfully on the production side of the US oil field. And that makes a lot of sense for a bunch of different reasons. They talked about in the press release how, you know, how much of a well’s lifecycle, lives in this production phase of things. And so there is, a long runway of potential cash flows available to service companies that can support NPS on the production side, and particularly in the US oil field, where, like I said, we’ve seen activity levels in terms of rig count. Be flat now for some period of time. We’re still down where we were relative to a year ago. If you’re not going to have, you know, so much, incremental well, construction activity, to participate in, you really want access to the ongoing, production streams. That’s also representative of what we’ve heard through these ENP consolidation announcements is that, you know, you probably remember, say, circa ten years ago, where these sexy initial production records would get celebrated widely and, and investors would respond to them. And that’s not nearly the case so much anymore. And, in my notes, I highlighted in Selby’s, press release, they said that, you know, like, we acknowledge our customers, are trying to maximize their assets, I believe was their phrase. And we’re now in a phase where, investors, employee management teams, office management teams are increasingly realizing we will trade away these short term, sexy initial production records of, say, in order to get a long runway of sustainable cash flows on the back end. And, so it made a lot of sense to me knowing that how massive the US oilfield is. And, how SLB, how weakly SLB was positioned to bid for this kind of deal and participating on the production side of it. This combination makes a lot of sense from that perspective.
Michael Tanner [00:27:43] I think that’s because the next kind of slide they talk about, I want to pull this graph up here. It’s they they specifically talk about what you were you mentioned that upstream MP market spend where right now, you know, in 2010 about $6 out of every $10 spent was going into CapEx versus opex. Today, as it stands, it’s about $5.40 relative to that $10 spend. And the projection going to 2040. Is that only 45% or $4.50 of every $10 is going into CapEx, and 55% or that $5 range is going into opex. First off, do is is that what you see happening? Because that’s a lot of what this deal hinges on going to what champion is, is, you know, what we’ll talk about in a bit. Their their segment is opex. They are mainly focused. Not necessarily. You know, they’re not they don’t initially have a hydraulic hydraulic fracturing, business line. They’re mainly focused, on that other stuff. So is is that a correct assumption? Right. That seemed to me kind of one of the big things underpinning this, this the thesis of this merger was the fact that the the shift of spend is really going to go towards opex versus CapEx. Do you buy that directionally?
Jeff Krimmel [00:28:53] I do, yes. It you know, on the on the cabinet side, the well construction side, you have a lot of technology efficiencies that that are continuing to work against that, that, on a spend intensity basis will try to drive, you know, aggregate spend levels down in that phase. Whereas on the production side, those barrels are going to come to surface and they will come to surface over, you know, a period of years, decades. And so that’s going to require ongoing activity to make sure that those production flows, are efficient and safe and captured and steered, directed the way you want them to. So it does make a lot of sense going forward as the U.S. oil field continues to mature, that you would see that spend pendulum swing. And I like the way they do it. It’s not, you know, a super dramatic it’s not an 8020 kind of deal, but but it does start to drift more toward the production side of, of the life cycle. And so if you’re not there today, or if you’re not there at the scale that you want to be today, it would make sense to pull the kind of lever that pull people.
Michael Tanner [00:29:47] Yeah. No, I think I think, yeah. Because as you said, a lot of this, a lot of this deal is, is, is focused around that. I think the next, you know, the next slide, slide six here. I really just want to show kind of the revenue by segment for fiscal 2023 for champion X over 64. Percent of their revenue came from production chemicals, technology. Only six of it came from drilling technologies. The rest of you know, the rest of it. Between their chemicals and then their automation business, you’re talking over 90% of their revenue is really in a business unit that Schlumberger hasn’t necessarily attacked. I would say as maybe they hard as maybe they should have considering their international yet, you know, kind of their, their, their big stance on kind of the frac and wireline side.
Jeff Krimmel [00:30:33] It’s right. It’s you know, and I think this is also slowly acknowledging that, in today’s oil field, time is of the essence, right? There’s some of this stuff has always been true. So, time is of the essence is a phrase that any management team in history would respond positively to. Right. So so it’s not that that that idea is unique today. What is unique today, though, is the, the extent to which investors are demanding a premium to participate in oil and gas specifically, say, whether it’s on the up side or the oilfield services side. And this premium is coming largely through, increased dividends and increased activity around share repurchases. And so when you know, time is of the essence that investors don’t just expect these synergies to materialize and increased cash transfers at some point in the future, but it needs to happen almost immediately, which is a word that I highlighted in a lot of the ENP, press releases. They talk about, you know, the word of choice there is accretion and how these deals are accretive to all financial metrics. And many of them say are immediately accretive to all financial metrics. And for those that didn’t use the word immediately talked about would be a accretive within one year of the deal finishing. I go on that little bit of a tangent to highlight. SLB has effectively all the resources any oilfield services company could hope to have. Right. If it got serious about it, could have said, hey, I want to stand up a production chemicals business inside this thing. We can go hire whoever we need to hire. We can invest in how are we need to invest and so on and so forth and build out this business. I believe it is. Kudos to them realizing that. Or we could do that path, or we could find a business that plays at scale in that way today and acquire it, integrate it, stand it up. And those gains we can capture immediately? Yes, we will pay a premium for buying a business that already exists, that already has those customer relationships, that’s already achieve what’s going to achieve it. Could a quote unquote have been cheaper to try to do this internally? I think it’s it’s easy to overestimate how easy it would be to stand up new businesses inside of these office behemoths. And that’s why I’m not surprised. That’s why I continue to believe that we’re going to see more consolidation on the office side as they realize that, hey, if if we’re not playing where we want to play today, yes, we could follow a long R&D game around that, or we could acquire someone like champion X and make this happen almost immediately.
Michael Tanner [00:32:50] So that 14.5% premium that that that Schlumberger pay, do you use you know, is that large small. Where’s that relative to where maybe you would have pegged this where other people are pegged this or what you might have seen in previous kind of deals?
Jeff Krimmel [00:33:08] My initial reaction, I should be clear that, you know, I’ve not done a thorough survey across the landscape. My initial reaction was that that premium was relatively light. Given. And I say that because, champion X is and it performs very strongly, its financial metrics are strong. It has, the right kinds of customer relationships in the right kinds of places. And, it just showed me, how, you know, how weak the sentiment is around of us generally that that you could, you know, for 14% gobble up, an entity of the quality of champion X, and that SLB would be the one to be able to to do that so quickly. So if anything wildly surprising that it’s sort of on the lighter end because, again, compared to trying to stay in something like that up organically, internally, this this is such a more direct path to try to get to that kind of outcome.
Michael Tanner [00:33:58] Yeah. And I love going back to what you originally said. I love the word of creative two. You can just throw it anywhere. And it sounds great. We are you’re looking at this the the the press release, slide nine. They’ve got a creative in two of their three bullet points. You’ve got a creative to cash free cash flow and margin accretive, which I absolutely love. And it kind of flows into my next question, which is, you know, in that’s one of the things that they’re touting is the, the business lines that that champion X is in. If you go back and look at the their fourth quarter earnings report, you know, one of their big their key performance metrics is EBITDA margin amount of and margin specifically in their individual business units. Is is the chemical side or kind of the OPEC side of the spend a little bit more, you know, to use the word of of the the investor relations folks margin accretive, or is it very much so that it just it is a little bit more dependent on some of the macro environment does that. And I guess what that means is, is can you can Schlumberger expect these quote unquote good margins to continue, you know, even to 2040?
Jeff Krimmel [00:35:01] Right. So yes, there’s always uncertainty around a lot of this. But but again, directionally, yes, I would believe that the production chemical side, you could expect to be if you start to line up products and services lines against each other, this production chemicals line, you could expect to be, to have stronger margins than then the others on balance going forward. It’s just it’s the nature of the technology. It’s the nature of, the delivery systems, the, you know, the kind of scale that’s necessary to meet the commitments, for the largest customers in those segments. Yes, there are mom and pop chemicals companies, just like there’s mom and pop, flavors of every, you know, foodservice variation that you can find. So it’s not that those don’t exist, but, particularly on the chemical side, there’s real returns to having, the technology and the scale and the delivery apparatus that that champion X or now SLB has around that. So, so I would feel confident that the, you know, this won’t become, a margin anchor anytime soon if you invest in it the right way and continue to evolve it in the right way, it should be a strong contributor to Selby’s portfolio.
Michael Tanner [00:36:00] One of the things they also mention is the combined synergies. I know everybody hears that and immediately thinks layoffs, because that’s what we’ve been come to know. Is that really where they feel the synergies come in, or I guess talk a little bit about where where some of this that just I mean, they mentioned G&A, obviously there is a little bit of G&A overlap. But you know, when I hear synergies, I mean, if they think, well, we got we’re gonna see a lot of resumes flying around now.
Jeff Krimmel [00:36:25] So you’re right. There’s always an element of that. There’s always going to be, overlap, duplication that that gets pulled out of this. I think though, there’s also, you know, just efficiencies that you can capture by champion now having access to all the infrastructure that that SLB already has, whether, again, it’s operational infrastructure or, you know, delivery, logistics, all the rest, whether it’s, research, development, resources that are made available where champion X, you know, just it would have cost them more to pursue some of the gains to make some of the investments that SLB can is either already making or can make more cheaply than the champion X can. So that’s another, mechanism where you can find synergies. And depending on how the synergies are defined. Yeah, there’s the cost side specifically, but there’s also revenue synergies. And you know between us and being champion, you’ll have, stronger, you know, more involved, customer relationships than either one would find individually. And those customer relationships might allow you to, achieve some, some commercial flexibility that you otherwise wouldn’t. So. So maybe they can, you know, do some work performance pricing that gives them access to more upside going forward when they’re more efficient or when, you know, the macro winds are blowing favorably. They’re able to, to capture a little bit more of that rather than ceding all of it over to the MPs. So there’s a lot of ways to capture, synergies. So, yes, the duplication element is one that will always be there, but there are plenty of other ways to to go after that as well.
Michael Tanner [00:37:45] No. I think it’s super interesting in terms of the amount of debt that specifically a champion is holding. I mean, it was only about a month and a half. You know, leverage that seems that seemed, at least on the MP side, a little, you know, not low, but it definitely seems to be a little bit, more conservative than I think I would have expected. Two MPs I do see is oilfield service a little bit, you know, lighter on the debt side and a lot of things are more funded that way. Or how does that play into this? Because I was a little shocked. Wow. There’s almost no debt on this company.
Jeff Krimmel [00:38:16] Excellent question. And I think it ties back to. You had mentioned the all stock nature of the transaction. And those are tied. And that’s another theme. I apologize for keep referring back to the keynote, but my I was eyeballs deep in prep for that. And this was one theme that that showed up over and over again is that across the oil field, both MP and offsite, but also midstream, downstream and so on, so forth. There’s there’s been enormous pressure to, at least maintain, if not strengthen balance sheets. We saw the catastrophe that was the 2014 to 2016 price crash and what, overleveraged balance sheets looked like when you’re trying to survive in oil price crash like that, right? It was just beyond nasty. And so, there’s there’s been a lot of effort put into strengthening balance sheets. And in these deals, both on the amp side and the side, you’re seeing increasingly, high stock weightings on these transactions. Many of them are all stock transactions. Those that do, have some cash involved. The cash is relatively light. And the big reason for that is you don’t want to have to dip into more debt to, execute these kinds of deals. And the reason you don’t want to do that, there’s the sort of the general that, you know, just the more levered you are, the more exposed you are in a highly volatile, industrial segment like oil and gas. That’s always dangerous to take on leverage. The other is it’s back to the shareholders being so laser focused on immediate returns that the higher quality balance sheet you have, which all is equal, means less debt, but the higher quality, the more the stronger the balance sheet that you have, the lower your cost of capital, right? The less you have to pay to take on the debt, the less you have to pay to maintain the debt you have, or to pay off the debt you have. And shareholders equity holders really want to make sure that any excess capital, any excess cash is coming back to them. So as an orphan services management team, they don’t want you paying a penny more than you have to to service or retire the debt that you have. So when you’re executing these deals, if you can do it on an all stock basis, you’re not having to dip into more debt to come up with the cash that you need to to close these kinds of deals. You’re keeping your balance sheet strong, and you’re making sure that when cash from operations flex upward, more of that cash is available to hand over to shareholders. So I think it’s a it’s a deliberate, act. Hear from all of these management teams to know that that leverage is always risky. It’s even more risky in today’s oil field than it has been in recent past. And so a lot of management teams are staying away from it.
Michael Tanner [00:40:40] Yeah, I mean, we’ve seen even in, as you mentioned, the upstream Side, everything, everyone’s now throwing their stock around in these deals, which I think is a sign that people are at least a little bit more bullish on where things are going. You know, as we as we think about this more broadly, I guess is is in the upstream space, the theme has been consolidate, consolidate, consolidate. Because, you know, we’re running out of tier one acreage, and the only way to get advantage of the tier two acreage is to is, is to scale up and do all the stuff. We don’t need to focus on that too much, but is from an offside. Does consolidation hurt the overall outlook of the business? You know, I look at it from, you know, if I had had an oil and gas technology company, who am I. Companies merge. Well I know they’re going to come to me in six months and ask for a discount. I’m not getting 200% revenue. I’m only get 100%, 150%. So do does is the oilfield service seeing a little bit of that as consolidation happens? They’re getting, you know, their customers reaching out to them and say great, you were you were a you were a vendor to both of us. Now we’re one company. We’re we’re not raising prices another 100%. It’s only 75%. Or is it a little bit detached from that? Because it’s a that’s not necessarily how things are priced.
Jeff Krimmel [00:41:51] I think you’re right, Michael, that there’s there’s real commercial leverage implications, on both sides of consolidations. Right. When the MPC consolidating, it’s not so much thinking about, okay, you know, this greater scale allows us to get better. You know, oilfield services rates going forward. I mean, there’s a little bit of that, but but that’s not what you said, not the thesis of the combination or the oh, left side. It very much can become existential when two customers or one customer combines with an entity that’s not a customer. What does that mean for us on the office side? And so, like I mentioned earlier, when we had the conversation about, thematically, what I’m seeing across these office deals and we’re seeing, comments around scale innovation and returns on the MP side. Like I said, we don’t have to go super deep into that. But there is one bit of the consolidation, verbiage that I paid a lot of attention to, and that was around the notion of breakeven. So they talked about, in many combinations. They will mentioned, hey, we got, you know, this many proforma, locations say less than $40 WTI breakeven. And they know that in order to ramp up, cash flow from operations, two things, right? You can wait for oil prices to go up, or you can drive a break even, price estimates down. And. Oh, of course, companies, of course, are paying attention all this and are aware that, okay, MPs are focused, you know, insensitively around this idea of how do we drive breakeven down as low as possible on the other side. That’s largely why you get to all this commentary around innovation, that it’s just incredibly important for you to find new, more efficient, more. Effective ways to, you know, construct wells to, you know, surface the hydrocarbons that that are below the ground today and, that largely comes through technology. Yes. There’s some operational efficiencies that you can, continue to harvest just through being more, effective in your logistics. But but technology plays, an incredibly important role there. And it has historically for office. But it’s, again, even more urgent today than it has been. So I think when as companies are thinking about, combinations, they’re also thinking about and SLB wrote about it in its press release with champion talks about, in fact, I have my notes here. They said, the quote was growing demand to scale emerging technologies such as AI and autonomous operations across global operations. And again, it’s easy to read that and be like, okay, I get it. It’s, you know, it’s the kind of thing that I would expect, you know, any technology company to say the real importance of them saying it that way is, you know, we’re in an increasingly capital constrained sector. That’s where there’s not just, you know, waves of capital being made available to these companies that they can turn around and just invest willy nilly in all sorts of exotic research development programs. Shareholders really want access to as much cash as possible. So you need entities of massive scale like SLB to be able to place these technology bets, knowing not all these bets, pay off. That’s the nature of R&D. Some of it is not going to work the way that you want to work, but you need entities at scale that can simultaneously place high consequence R&D bets and return a lot of capital to shareholders. And that’s why I think we’re going to see even more of these kinds of combinations, is finding ways to get both access to both pathways, which largely comes through scale.
Michael Tanner [00:44:50] I love a good just throw AI into the press release. You got to do what you got to do. I’m, I, I love it. What? What else about this deal? Do you, like, dislike that that we missed on because I, you know, we consider looking at. Course you’d be, but I’m interested in as you ran this. What is something that you felt that was interesting? What? What’s maybe a little nugget that you saw that that that, you know, maybe other people who don’t cover this space like me as much as you do, noticed it and think it’s worthy getting out there.
Jeff Krimmel [00:45:19] Would say that the two bits that I’ve covered are the ones that hit me the hard, as the first was the access to the production phase of the US oil field that we know that that phase is it’s going to be long, it’s going to be consequential. It’s it’s meaningfully different than, you know, the first 10 to 15 years of the US unconventional oil field where, well, construction was the name of the game. It was all about, you know, how to drill, where to drill. How far can we push these laterals? You know, what’s your optimal well, spacing look like? What should, these frack designs look like? And and it makes sense. And all that stuff will continue to be incredibly important going forward. But that was getting, more attention than the production side of the equation. And, and now it’s starting to tip where, where the production side is, is becoming even more higher consequence than we’d seen before. And the production side is where we’re going to get access again to this long, sustainable, road of cash flows that investors demand, to make these companies investable. So this I think when you say fast forward 5 to 10 years in the future, we’ll be able to look back. And it’s possible you can point to the SLB champion press release and be like, that’s when, you know, that was the most consequential, indication that this pendulum was really swinging back toward, the production side, the other bit. And again, it’s easy to think of it as a throwaway line, the press release, but it is something that I paid a lot of attention to. Is it SLB that their quote was, our customers are seeking to maximize their assets, and I bolded maximize their assets when I read it, because that’s, again, it’s a pivot from what we had seen through the first 10 or 15 years of the US unconventional oil field, when it was much more about, you know, how big can these wells get? How aggressive can we ramp up our production profiles? How prolific are some of these players going to be? And this is SRP acknowledging that that that phase of the game is over. Right. We’re now at a point where, these API management teams are entrusted with assets, and investors are trying to make sure and those management teams are harvesting absolutely as much value out of those assets as possible. And that’s a highly complex, highly multi-dimensional, long term challenge to resolve. And, SLB acknowledges it. They’re very clear about this part of the justification for, this combination here with the champion. And so, at the end of the speech that I gave, earlier this week, I highlighted that, hey, there’s a lot of uncertainty, obviously, around oil and gas for for all the reasons that we’re aware of. And while uncertainty can bring fear naturally to human beings to respond to it, it’s also possible for us to lean into the excitement around a lot. And so when I read the press release for SLB champion X, I found myself getting very excited about, there is a new generation of oilfield services company that’s going to emerge from all this turbulence and and from the broader energy transition conversation that’s happening right now. And I’m incredibly excited about it. I get the impression from reading the SLB, press release that that management there is incredibly excited about it. I think as time goes on, we’re going to see that excitement build. We’re going to see momentum build around, all kinds of technologies that, companies can bring to bear on these problems that MPs absolutely have to resolve. And so I’m just deeply excited and optimistic about what’s in front of us.
Michael Tanner [00:48:27] Yeah. Another thing I found interesting to kind of wrap up this, this, this Schlumberger champion deal is, you know, champion X recently is is in three months ago I did summon their own M&A activity themselves gobbling up a few smaller providers. I assume this deal, you know, having been not having worked on large deals like this, been working on a lot of small mergers, you know, these things take months and months to to go through. Do you think that there was, some foresight by the champion team to say, hey, we may need to strengthen some business units, in order to make this deal, you know, look better. Is that something that maybe was hint, hint at coming from from Schlumberger? Because I found that very interesting that, you know, you’re in the process of acquiring two companies that all of a sudden you go to sell yourself.
Jeff Krimmel [00:49:09] It’s a great question. I don’t know about any direct connection, say with that activity to the ultimate SLB deal, but what I will say is for a lot of these oilfield services companies today, I would imagine they’re thinking very deeply about what what do we need to do to position ourselves to either, combine and find a partner where we can achieve even more scale that we have now, or organically build up the scale that we need to to thrive in this newly emerging oil field. So it doesn’t surprise me that they were already thinking through, okay, our portfolio as it exists right now, where are some key weaknesses that we can go fill so that either we can play the game even stronger going forward, or if there is someone that sees what we’re doing and decides this is a fit for them, we’re able to address some of the, caveats or objections or potential frustrations that they might feel as they try to gobble up, you know, an at the scale of champions. So it’s not surprising to see. And in fact, I would expect a lot of management teams are thinking similarly right now.
Michael Tanner [00:50:10] Interesting. So, you know, I always like to wrap this up and, you know, we I like to say we’re value in the deal here. So what’s your pitch? You like the deal? You don’t like to deal with a thumbs up or a thumbs down or a thumbs up.
Jeff Krimmel [00:50:21] A thumbs up, thumbs up, thumbs up.
Michael Tanner [00:50:24] Awesome. Well, well, Jeff, I really appreciate it. It’s just been really enlightening to me. I hope everybody, who listen to this goes in and check you out. We’ll have the link to your, you know, your newsletter, your LinkedIn, ways to get Ahold of you in the description. So please go check that out. Really appreciate your time coming here and educate us. And, you know, hopefully we can have you back for for another deal here.
Jeff Krimmel [00:50:44] Michael, it was an absolute blast. I really appreciate you invite me on and yeah, I can’t wait for the next time.
Michael Tanner [00:50:48] Absolutely. So all right, guys. Thanks for checking us out here at the Deal Spotlight in the Introduce Me podcast. Until the next one.
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