Two of the biggest oilfield operators in North America, Nabors Industries Ltd. and Weatherford International plc, are teaming up to combine their "enhanced" oil and natural gas drilling solutions for customers in the Lower 48 states.

Weatherford is the fourth largest global oilfield services (OFS) operator after Schlumberger Ltd., Halliburton Co. and Baker Hughes Inc. Nabors owns and operates the world's largest land-based drilling rig fleet and also provides offshore rigs.

Under a nonbinding memorandum of understanding (MOU) announced Wednesday, Weatherford would provide well construction expertise, managed pressure drilling (MPD) solutions, directional drilling capabilities and drilling hardware, as well as associated software applications and engineering personnel. Nabors in turn would provide its fleet of MPD-ready "SmartRigs" and land-optimized measurement-while-drilling systems, as well as its performance drilling software applications, automated rig equipment and proprietary control systems.

"The early entry into this emerging market will create a strong, new sales channel for our company, while allowing us to secure market participation in a new service model increasingly demanded by our clients," Weatherford CEO Krishna Shivram said. "This transformative collaboration will enable Weatherford to deliver our industry-leading managed pressure drilling (MPD) systems, advanced logging while drilling (LWD) and rotary steerable system (RSS) capabilities, as part of an integrated drilling offering that will leverage onto the most capable land rig fleet in the U.S. market."

By leveraging their technical expertise and engineering capabilities, the MOU is expected to accelerate commercialization of a portfolio of drilling technology tools and solutions.

"We are fully committed to enhancing and integrating the drilling process to jointly deliver a new drilling concept for the future, a vision we share with Nabors. The future of automated drilling is here and we aim to play a significant role in this market evolution."

During a quarterly conference call Thursday, Shivram was asked about the reasoning behind the Nabors alliance. Weatherford is relinquishing its U.S. pressure pumping business to focus on the technical science of wells. U.S. customers are most interested in unconventional wells drilled using multi-fractures and super laterals, he told analysts.

"We are talking about some customers thinking of going to super-spec rigs with...30 well pads," he said. "You are talking about a completely different paradigm shift. It is going to be only some companies that can actually drill effectively in a cost-effective manner on U.S. land and make the economic cut at, let's say, a medium oil price environment.

"So, our customers are driving this. They want much more automated drilling. They want lower costs, much more efficiency, lower people on the well site, and drag the cost per barrel downwards..."

Nabors supplies "very strong spec rigs. They have a good position on U.S. land and, of course, it's a highly competitive market. But, by adding Weatherford technologies on drilling services...particularly MPD and drilling services, they cross the paradigm from being a very efficient driller to being a fully automated drilling services provider compelling drilling package. We are offering the entire package to customers in one fell swoop, which is exactly meeting the customers' needs today."

Nabors has 70-80 rigs operating in the Lower 48 today, Shivram said. "We operate on just a handful of those rigs. So, it is a great, huge, new channel to the U.S. land market. This is one of the ways we are going to supplement the loss of the U.S. pressure pumping business with, let's say, more profitable and more core product lines for Weatherford going forward. So, we will tap into the sales channel and increase our sales."

The MOU is nonbinding at this stage "because we have a strong meeting of minds and...our engineering teams and our commercial teams are working together, and as we knock out the details in the next few weeks going forward on all of those dotting the I's and crossing the T's and put rigs to work on the ground...the union will become more binding as you would imagine."

Weatherford also is in discussions with other companies along similar lines, said Shivram.

"The basic premise here is we have to move quickly as an industry to lower the cost of production. There is not one services company or one equipment provider or one drilling contractor that has all the technologies needed to automate...the entire drilling process. So, it takes years of engineering and investment to get there, if one wants to pursue that strategy.

"The much quicker way to get to market on this and address company needs is for companies to collaborate...Everyone we have spoken to about the strategy, they absolutely love it. They want to see this happen. I'm pleased with this alliance that we have struck with Nabors. We are going put the first...fully automated rig on the ground as partners very shortly."

Nabors CEO Tony Petrello said integrating the MPD, LWD and RSS offerings within Nabor's recently introduced Rigtelligent operating systems would help "accelerate market penetration, enhance both of our companies' returns and drive further growth in a key market."

The OFS sector may have hit bottom following two years of a crushing downturn -- and dealmaking is on the upswing.

General Electric in January said plans remain on track to complete an estimated $32 billion deal by mid-year to become majority shareholder in a partnership combining its oil and gas business with Baker Hughes. In December, North American contract driller Patterson-UTI Energy Inc. agreed to buy out financially troubled Seventy Seven Energy Inc. in an all-stock deal valued at $1.76 billion, which expands its fracturing business.

OFS transactions revived during the fourth quarter, with the segment generating 10 transactions worth a total of $29.6 billion -- the most active quarter since 4Q2014, according to PwC. Douglas-Westwood also predicted last fall that OFS capital expenditures would increase 10% year/year between 2016 and 2020, with the strongest growth expected in North America, up 19%.

In a report issued this week, Ernst & Young LLP (EY) said the OFS "showed signs of recovery" during 2016, with deal volume declining by only 2% and deal value increasing 106% to $53 billion. "Continued financial stress and overcapacity is expected to drive further consolidation in 2017," according to EY's recent review of global transactions for 2016.

"Even with optimism for 2017, the greatest stress in the U.S. resides in the oilfield services sector as structural supply/demand changes impact activity levels and force transformation," said EY's Vance Scott, Americas Oil & Gas leader for transaction advisory services. "The logical outcome is for stronger scale players to consolidate the sector. Announcements in late 2016 between very large players will spawn counter moves from other larger scale competitors as they seek to compete by creating comprehensive product and services portfolios.

"As oilfield services companies reevaluate their business models, the companies with unique technologies, intellectual property and services capabilities will be the next acquisition focus. Medium and smaller players will seek creative joint ventures and alliances to offset larger company scale and reduce costs."