Liberty Oilfield Services: A Brilliant Play For Schlumberger's Assets

Summary

• The management team at Liberty Oilfield Services announced the acquisition of significant assets from Schlumberger.
• This move looks brilliant at first glance and should be attractive in the long run.
• Investors should applaud this decision, while Schlumberger looks to be getting the weak end of the deal.
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The management team at Liberty Oilfield Services (NYSE:LBRT) just struck a big deal with Schlumberger (NYSE:SLB) that should permit it to add significant value to its shareholders moving forward. This maneuver involves a merger of sorts that results in Schlumberger owning a sizable minority of what should be considered the new Liberty Oilfield Services. Due to the pressure facing the fracking industry, investors should consider that the future may not look as bright as the past has been, but the data provided makes the deal appealing no matter how you stack it. At the end of the day, it looks like Liberty will walk away with the lion's share of value. This should prove incredibly bullish for the business, even after taking into consideration the fact that units of the firm surged 35.7% in response to the development.

A look at the transaction

The transaction between Liberty and Schlumberger is fairly straightforward. Schlumberger is creating a new entity, transferring its OneStim assets into that entity, and transferring ownership of said entity to Liberty. In exchange Liberty is issuing to Schlumberger 66.3 million of its Class A shares. This works out to a 37% interest in Liberty that Schlumberger will end up having. Immediately upon completion of the transaction, which management believes will occur in the fourth quarter this year, Liberty believes that it can achieve around $125 million worth of synergies. This is quite odd since synergies generally take months, if not years, to achieve, but management said the rapidity of these synergies will be chalked up to the absence of corporate overhead expenses that the assets currently involve that won't be coming over with them from Schlumberger. Other incremental synergies that management predicted would be "significant" can be realized in the future as well.

*Taken from Liberty Oilfield Services

The assets Liberty is absorbing are those associated with Schlumberger's onshore hydraulic fracturing operations. These include the firm's pressure pumping, pumpdown perforating, and Permian frac sand businesses. With this will come at least 20 facilities and a portfolio including more than 400 patents. In all, this addition to Liberty generated sales in 2019 of $3.2 billion. This will push the combined firm's revenue up to $5.2 billion annually. Collectively, the business will generate (using pro forma estimates) $664 million in Adjusted EBITDA. $262 million of this comes from Schlumberger's assets, with another $125 million created by the initial day's synergies. The remaining $277 million can be chalked up to what Liberty would generate on its own.

*Taken from Liberty Oilfield Services

Liberty got a bargain

In my eyes, Liberty will end up walking away with these assets on its books looking far better than it had previously. While hydraulic fracturing has slowed considerably in the US and investors should expect another year or two to pass before a real rebound in the space occurs, the picture as I see it looks bullish for Liberty and its shareholders. All we need to see to understand why this is are the cash flows produced by the assets the company is absorbing.

*Taken from Liberty Oilfield Services

Consider, for starters, the aforementioned EBITDA metrics. Let's ignore the potential synergies for a moment. Without these, the assets taken on by Liberty should produce EBITDA of around $262 million per year. The effective purchase price of Schlumberger's assets works out to $428 million. There is no net debt coming over to Liberty, so the OneStim purchase price (equivalent to its market cap) and its EV (enterprise value) are approximately the same (the exact same if net debt is precisely $0 and there's no excess cash). This works out to an EV and market cap multiple for OneStim of just 1.63.

*Taken from Liberty Oilfield Services

Another, probably better, way to look at this picture is through the lens of free cash flow. According to the management team at Liberty, the combined firm should generate free cash flow of $2.08 per share. This compares to just $0.57 per share for Liberty without OneStim. Based on my math, this works out to free cash flow of $379.2 million for the combined company. Strip away Schlumberger's 37% stake, and you get $238.9 million attributable to existing shareholders of Liberty. Take from this the $66.1 million that Liberty would have without Schlumberger, and you get $172.8 million in additional free cash flow to Liberty as a result of this transaction. This works out to a trading multiple for the company's shareholders of just under 2.5. That's remarkably cheap on a free cash flow basis for any firm.

Takeaway

Right now, the best for the industry in which Liberty and Schlumberger operate seems to have passed. More likely than not, there will be pain around the corner. However, given the price paid for Liberty in exchange for these assets, the move looks highly-accretive for the company and its shareholders. It is surprising that Schlumberger divested these assets for such little value, but what is that company's loss apparently will work out to be somebody else's gain.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.