While ultimately good for the industry, the US $41 billion deal has implications for service companies.

If Exxon Mobil’s (XOM) recently announced acquisition of XTO Energy (XTO) represents the beginning of a fresh trend in which large-cap multinational E&P companies begin gobbling up reserve-rich independents on a grand scale, which oilfield product and services suppliers might benefit most in the long run from such as shift?  Put another way, which industry suppliers currently enjoy higher satisfaction ratings with multinational E&P companies and, as a result, might be expected to gain disproportionate amounts of market share as a result of any buying spree on the part of these larger cap operators?  

Parker Drilling (PKD) also enjoys a relatively strong reputation with many of the industry’s larger players, although its more international focus and degree of specialization likely limits its ability to benefit from deals involving independents that own onshore assets in North America.

The answer to this question lies in the characteristics that larger E&P companies look for in their suppliers. At the top of this list are the health, safety and environmental (HSE) policies, practices and records of a supplier -- all larger customers are going to require a supplier to be a safe and law-abiding operator. The good news is that most are.  Outside of HSE, while individual E&P companies place varying degrees of importance on different attributes and factors depending on their specific priorities and objectives, there are some high-level drivers that we’ve identified over the years from EnergyPoint Research’s independent customer satisfaction survey that can provide some guidance.

First of all, we note that the nominal “price” charged by a supplier is not nearly as strong of a determinant of larger customers’ satisfaction as the all-in “cost” of working with that supplier.  In other words, a rock-bottom price on an invoice does very little to assuage the dissatisfaction larger customers feel when they pay additional dayrate and/or incur unplanned downtime because a supplier’s product malfunctioned, the equipment and/or crew showed up late, etc.  Non-productive time, or NPT, is the enemy at most larger-cap E&P companies, and suppliers that appear friendly to the enemy usually aren’t invited back.  Contrariwise, suppliers that demonstrate high levels of reliability and job quality tend to enjoy preferred status.

Related to this point is the finding that larger-cap customers tend to prefer higher levels of service and professionalism. Specifically, flexibility and responsiveness to customer needs and accountability in resolving problems and disputes have exhibited the strongest influence on the overall satisfaction levels of large-cap customers in the past.  Not surprisingly, research also shows that suppliers rating well in this attribute invest in their people at higher-than-average rates. Communication and interpersonal skills are also emphasized and rewarded within these organizations, and a drive to develop and maintain strong professional customer relationships is pervasive.

So, given these criteria, which suppliers look best positioned to benefit from such a trend?  Atop the list is Helmerich & Payne (HP), which over the years has shifted both the performance and expectations curves in the U.S. land contract drilling segment by providing customers with top-notch service and industry-leading rigs, crews and technologies.  Parker Drilling (PKD) also enjoys a relatively strong reputation with many of the industry’s larger players, although its more international focus and degree of specialization likely limits its ability to benefit from deals involving independents that own onshore assets in North America. Conversely, Unit Drilling (UNT) and Patterson-UTI (PTEN) have tended to rate lower with larger E&P customers, driven by lower ratings in the areas of equipment and technology. Thus, they could find themselves vulnerable to any ongoing shifts.

On the oilfield services and equipment side, Smith International (SII) and Dril-Quip (DRQ) are two suppliers that consistently stand out in the eyes of many larger customers. In addition, the world’s largest drilling fluids services supplier, M-I SWACO, which is owned jointly by Smith International and Schlumberger (SLB), is the ratings leader in its segment and seems well positioned to pick up market share should further consolidation materialize.  Suppliers that could potentially face challenges include privately-owned Expro International and Key Energy Services (KEG).