6 important insights about Trican’s acquisition of Canyon from GMP FirstEnergy

Image: Trican

Analysts with GMP FirstEnergy are taking positively this week’s announcement that Trican will acquire Canyon Energy Services, creating Canada’s largest fracking service provider.

“We believe consolidation is needed in the Canadian oilfield services industry and we believe this transaction helps accomplish this,” GMP FirstEnergy’s Ian Gillies and Cory Kross wrote in a research note issued Thursday.

“Anecdotal evidence would suggest that there is minimal customer overlap between these two entities which reduces our concerns about ‘revenue synergies.’ Given our view of an improving oilfield services activity environment, we view the transaction positively given the accretion characteristics.”

Here are six key insights about the transaction and “new Trican” from Gillies and Kross.

1. Diversification will be important

“We do believe this combined entity is stronger than these two entities were separately. However, the fact remains that the combined EBITDAS of this new entity in 2016 was negative $61 million.

“The combined entity’s revenue and cash flow remain tied to the same factors as before. We believe a key strategic step for Trican over the medium term will be diversifying its cash flow stream from Canadian well completions.”

2. Trican will be the dominant force in Canadian pressure pumping

Operationally, the combined fracturing fleet will be 675,000 horsepower (and solely focused on Western Canada), which equates to 1/3 of the Western Canadian pressure pumping fleet (with roughly 66 percent active today).

“On an active horsepower basis, the combined entity would have about 37 percent market share today…[it] will be the largest fracturing fleet in Western Canada by a wide margin, with Calfrac being the second largest at 410,000 horsepower.”

3. The company’s backbone will straddle northern Alberta and B.C.

“We believe 75 to 85 percent of the company’s revenue will be generated in the Montney, Duvernay and Deep Basin regions.”

4. Fracking prices aren’t likely to change

“Frankly, we believe this transaction will have little impact on the broader Canadian well servicing market with respect to pricing and activity. We continue to believe that pricing dynamics are driven by the least disciplined competitor (and we do not believe Trican or Canyon were this competitor) and that activity levels are determined by producers (and therefore commodity prices).”

5. Reducing costs is the big win

“The benefit to Trican is going to come by the way of cost savings and consolidation, which should theoretically improve margins. As such, the combined entity’s revenue is not likely to be much different than if they were standalone entities, but the true benefit will come from their ability to reduce costs.”

6. The loser?

“Ultimately, the net loser in this transaction may become suppliers as they have fewer entities to sell their products too.”

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