On the Grey Wolf-Basic Energy Merger: Bigger Isn't Always Better

To some extent, we view it as our role to worry about all things oilfield. So, when Grey Wolf (GW) and Basic Energy Services (BAS) announced earlier this week that the two would combine in a friendly deal billed as a merger of equals, but seen by many as an acquisition of BAS by GW, our "worrier instincts" kicked into high gear. This is not to say we believe the merger can't end up being a positive watershed event for both companies and their stakeholders, including their customers; it very well may. It's just that after having analyzed for several years what operators want from their oilfield suppliers, we can't help but view the transaction as a potential distraction from what matters most in today's market place.

Our concern is a simple one: these kinds of transformational transactions tend to soak up too much in the way of time and organizational resources. Moreover, they tend to result, at least during (and often after) the integration period, in a less productive and more inwardly focused supplier. Typically, customers are asked to be patient as managers and employees toil on teams to create, and then implement, a new organizational structure. When new debt is part of the deal, in this case to help fund a $600 MM return of capital to shareholders, short-term cost cutting rather than longer-term investment often becomes the internal mantra. The mission of satisfying customers and making sure quality products and services are reliably provided is often given token lip service, but in reality, relegated to the back burner. From what we can see, neither GW nor BAS have been particularly notable standouts with customers as of late.

In our most recent customer survey covering drillers and service providers, both ranked in the bottom third in terms of overall satisfaction (although GW's low rating contrasted with a much stronger rating two years earlier). BAS ranked modestly higher than GW in most attributes, with completion services enjoying higher marks than its well servicing and fishing segments. GW rated modestly lower than BAS overall, as did other U.S. land drillers Nabors Industries (NBR), Unit Drilling (UNT) and Patterson-UTI (PTEN). We should note that initiatives designed to result in more consistent service experiences for customers are underway at GW, and we hope these positive efforts survive the merger.

The transaction seems to us to be mostly about gaining mass. The combination will create a larger and more integrated provider, with approximately half of its revenues coming from land drilling and half from well servicing, fluids services, completion-related and other services. Unfortunately, while our research does suggest size and scope are growing in importance with customers, service and job quality along with reliability are still the primary drivers of satisfaction. In other words, while bulk might gain the attention of customers, the more important metric will still be how well the company performs for customers. Maybe the merger is just the catalyst to propel GW and BAS into the big leagues. Then again, maybe it will simply result in a larger, less focused version of GW and BAS as they exist today.

Disclosure: None

Comments

[worthy:]

Nice job of stating the obvious that generally exicts between any two merger partners...

2008 Apr 26 01:36 PM

[NOWHEREMAN:]

An effect of global warming is More Land.

Huge tracts are opening up that were Iced over...
That means that land based rigs will be in demand more than ever. It also means that vertical integration will be a key to the exploration/drilling of them. The majors have backlogs that they can't fill. A lot of business will go to companies which are vertically integrated...but do not have commitments far into the future...

Please keep talking this stock merger down. I like averaging down.

2008 Apr 26 02:44 PM

[GoldDude:]

So let me get this straight, you're generalizing M&As as a whole, and further using that generalization to analyaze a specific situation?

2008 Apr 27 12:05 PM

[Doug Sheridan:]

User 184091, thanks for your question. Since 2003, EnergyPoint has collected literally thousands of evaluations of oil and gas industry suppliers by their customers. In reviewing this information, it is clear to us that customers' satisfaction levels often fall (sometimes significantly) when the transaction is transformational in nature and / or the purchaser's customer satisfaction levels are lower than that of the company being purchased. Again, I've based my comments on specific, considerable and closely watched customer satisfaction research in the industry, not on generalizations. Go to energypointresearch.co... if you want to view summary reports related to our surveys.

2008 Apr 27 01:13 PM