Shares of oil services company C&J Energy Services (CJ) are up 15.4% as of 11 a.m. EDT Monday. The stock surge comes after the company announced it would merge with oil services peer Keane Group (FRAC). For reference, shares of Keane are also up 2.9% at the time of this writing.
The oil services business, especially those companies tied heavily to shale drilling in North America, has been a brutal one over the past several years. While overall production in the U.S. has increased significantly, drilling has become much more efficient over the years, and it takes much fewer drilling rigs and fracking crews to accomplish the same amount of work. This, in turn, has led to a glut of equipment. As a result, service providers such as C&J and Keane have had to viciously compete on contract pricing to win work and keep their crews working.
This is a roundabout way of saying the industry was well overdue for consolidation.
According to today's announcement, this will be a merger of equals and an all-stock deal with ownership of the combined entity at 50-50. Shareholders of C&J will receive 1.6149 shares of Keane Group for each share as well as a $1 per share special dividend. The special dividend is equivalent to a 13.9% yield based on today's higher stock price, so it's entirely possible some on Wall Street are jumping in for a quick special dividend payout.
For investors in C&J, Keane, and any other oil service company, it's encouraging to see some consolidation in this industry. Fewer players should allow companies to right-size their drilling and fracking fleets and, it is hoped, claw back some pricing power.
Whether this deal creates long-term value for shareholders remains to be seen, though. Even the largest oil service providers in the world -- Halliburton and Schlumberger -- have struggled with pricing power in North America. Perhaps this is a step in the right direction, but it's unlikely that this will be the silver bullet that brings both entities toward consistent profitability.