Big Oil could have made a lot of money last year. But their parsimonious nature means the rewards don’t flow freely to those companies involved in drilling and maintaining oil and gas wells.

To increase their pricing power, oilfield service companies must merge. On Thursday, Patterson-UTI Energy and NexTier Oilfield Solutions reached an agreement merge in an full stock offer that would create a larger provider with an enterprise value of $5.4 billion.

Patterson will run this rodeo. NexTier holders will receive 0.752 Patterson shares for each share they own. NexTier shareholders will ultimately own 45 percent of the new company, although it will contribute about 48 percent of the group’s EBITDA, according to S&P Global Market Intelligence.

In addition, Patterson’s boss will run the combined company as president and chief executive officer. In a twist, NexTier’s CEO becomes vice chairman of the new board.

The strategic logic is clear because the two complement each other. Patterson is primarily an offshore driller, rig and service provider. NexTier offers completion and production services such as hydraulic fracturing. Both companies are struggling to cope with labor shortages and rising material costs for everything from steel to sand.

Meanwhile, oil and gas explorers themselves merged, leaving the service with fewer companies. The joining of forces should create a better capitalized and more cost effective service company.

According to Rystad Energy, the combined NexTier and Patterson assets would represent roughly 2.6 to 2.7 million active hydraulic capacity (HPP). It would gallop past current leader Halliburton to become the largest frac provider.

The combination also means that 70 to 75 percent of the industry’s HHP will be in the hands of five service firms. This should translate into better pricing power and margins.

The $200 million in annual cost savings the companies are predicting 18 months after closing is eye-catching. Taxed and capitalized, they are worth $1.2 billion. That’s an impressive number as a share of combined overhead, and some skepticism is warranted. Both companies have already cut costs aggressively during the Covid-19 downturn.

However, these savings are not necessary for the trade to pay off given the benefits of consolidation. Not surprisingly, the share prices of both companies rose on the day.

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