Shares of relatively small energy services provider Liberty Oilfield Services (NYSE:LBRT) took off like a lightning bolt at the start of trading on Sept. 1, rising 42% out of the gate. Although the stock started to cool off by 11:30 a.m. EDT, the shares were still up by a massive 33% or so. The big news was a deal with energy industry giant Schlumberger (NYSE:SLB).
The economic shutdowns used to slow the spread of COVID-19 resulted in a steep drop in demand for energy, with oil prices actually falling below zero at one point earlier in the year. Faced with painfully low commodity prices and a lingering supply overhang, oil and natural gas drillers have pulled back sharply on the capital investment front. That's been a particularly notable theme in the U.S. onshore space, which is the market that Liberty Oilfield serves. It has not been an easy slog, with revenue down nearly 50% year over year through the first six months of 2020. Earnings fell from a profit of $0.59 in the first half of 2019 to a loss of $0.53 in 2020.
Much larger Schlumberger has operations around the world, but it also has a notable business providing services to U.S. frackers. In an attempt to get out from under what is basically a lagging niche operation, Schlumberger is merging its OneStim U.S. fracking business with Liberty Oilfield's operations. In exchange, Schlumberger will get a 37% stake in Liberty Oilfield Services. This looks like a win-win, with Schlumberger exiting a business dealing with material headwinds but retaining an interest that will allow it to benefit from future improvement in the U.S. fracking space.
Liberty Oilfield, meanwhile, gets to expand its business at virtually no cost, preserving the sanctity of what is a very strong balance sheet (the company's debt-to-equity ratio is just 0.2 times). The pair has also agreed to collaborate in the future, which is likely a bigger benefit to Liberty Oilfield than Schlumberger. Assuming that Liberty can muddle through this downturn, which appears pretty likely, this deal should allow it to exit as a much more prominent industry participant.
Investors are correct to be upbeat about Liberty Oilfield Services on this news. The deal with Schlumberger materially expands the company's business and effectively partners it with one of the most dominant names in the energy services sector. However, the deal isn't set to close until the end of 2020, and investors have already priced in a lot of good news here. Most should probably wait for the deal to close before jumping aboard at this point.