Oilfield services giant Schlumberger Ltd. (NYSE: SLB) took a third-quarter, pretax impairment charge of $1.6 billion on its North American pressure pumping business last year. On Tuesday, the company contributed its onshore fracking business (OneStim) in the United States and Canada to Liberty Oilfield Services Inc. (NYSE: LBRT).
In exchange, Schlumberger received a 37% stake in the expanded version of Liberty. Liberty shares closed Monday at $6.45, implying a market cap of around $550 million. The smaller company’s stock traded up by around 37% in the noon hour Tuesday, at around $8.86, implying a market cap of around $1 billion, valuing the OneStim business at right around $450 million.
That tells nearly the whole story in the shale oil plays in North America. In its annual report for last year, Schlumberger said it was continuing to “right-size” its fracking capacity by stacking (mothballing) more fleets in light of lower demands. And that was before the COVID-19 pandemic.
In the second quarter of this year, Schlumberger’s production revenue (including the OneStim business) fell by 48% to $1.6 billion and margins fell by 630 basis points sequentially to just 2%. North American production revenues fell by 58%.
According to Tuesday’s announcement, the transaction is expected to close in the fourth quarter. Based on 2019 results, the combination posted revenue of $5.2 billion and a pro-forma market cap of $1.2 billion and no debt. Liberty’s management will continue to run the company. Current Liberty shareholders must approve the deal, and other regulatory approvals customary closing conditions are also necessary.
The write-down on production assets added to a total write-down of nearly $13 billion in the third quarter of last year. CEO Olivier Le Peuch had warned in September 2019 that Schlumberger would take such a write-down as the company shifted from its former strategy of taking equity positions in oil and gas assets and adopted a “focus on the company’s strength in digitization of oil and gas exploration and development.”
Tuesday’s deal will help Schlumberger reach its goal of cutting 21,000 jobs and transitioning to a business model that is light on assets and heavy on technology that can be licensed to other oilfield services firms.
Schlumberger stock traded down about 0.8% in the noon hour Tuesday to $18.73. The stock’s 52-week range is $11.87 to $41.14, and the consensus price target was $23.58. The company’s market cap is around $26 billion.
Liberty stock recently traded at 8.70, up about 35%, in a 52-week range of $2.17 to $12.42. The company’s price target was $7.16 before this morning’s announcement.