Houston-based Nine Energy Service Inc. has a definitive agreement on the table to acquire Magnum Oil Tools International Ltd. for $493 million in cash and stock, a merger designed to expand its completions offerings in North America’s onshore and beyond.
Nine operates in the Permian Basin, Midcontinent, Rockies and Appalachia, across the Eagle Ford, Barnett and Bakken shales and throughout Canada. Its operating companies include Northern States Completions, CDK Perforating, Integrated Production Services Canada, Peak Pressure Control, Dak-Tana Wireline, Crest Pumping Technologies, G8 Oiltool and Beckman Production Services.
Magnum, headquartered in Corpus Christi, TX, is the No. 2 global manufacturer of dissolvable fracture plug technology used in downhole completions, with 100% of its revenue levered to completion tools.
The deal would give Nine a “first-mover advantage” in the growing dissolvable plug market, said Nine CEO Ann G. Fox. The merger would allow Nine to service the “entire addressable” North American plug market, which has grown significantly because of longer lateral lengths, more fracture stage counts and multi-well pads.
“We could not be more thrilled to partner with Magnum,” Fox told investors. “At Nine, we constantly focus on adding differentiated technology to our portfolio of completion tools to enable operators to more reliably and effectively complete the horizontal wellbores of tomorrow.
“The evolution of technology in the oilfield demands a team with a demonstrated track record and ability to transform their offerings and think forward. This particular team is exceptional.”
Magnum “will propel Nine to a more balanced profile of completion tools, creating excellent barriers to entry while simultaneously building a business that is less labor and less capital intensive and more free cash flow generative.”
The merger also would allow Nine to “navigate a very difficult labor market,” and support its approach to “blending capital intensity, helping us provide more sustainable through-cycle returns for our shareholders.”
Magnum CEO Lynn Frazier, who founded the company in 1985, said the combination “made sense as we looked for the right partner with alignment in our culture and priorities.”
Under terms of the transaction, Nine agreed to pay $493 million using a combination of $334 million in cash and five million shares of common stock valued at around $159 million. Terms also include the “potential for additional future contingent payments.” Magnum has no debt.
Pro forma, Magnum would own 17% of Nine. Once merged, 65% of the revenue mix would be for completions services, with 26% for completion tools and 9% for production services.
“Nine’s completion tools business is the most attractive, highest returning portion of the company's business mix recently driving outsized earnings growth (versus U.S. onshore activity), but it's been a relatively small portion of the company's revenue stream (10-15%),” noted Tudor, Pickering, Holt & Co. The deal with Magnum would change that, analysts said.
Nine's “hunger” to take part in the merger and acquisition market “has been well telegraphed, so we're not surprised to see them announce a deal.”
Following the merger announcement, Moody's Investors Service assigned to Nine a “B2” Corporate Family Rating (CFR) and “B2-PD” Probability of Default Rating. It also assigned a Speculative Grade Liquidity (SGL) rating of SGL-2. The rating outlook is “stable.”
“Nine's B2 CFR reflects a competitive market position in a highly cyclical industry,” Moody’s credit ratings analysts said. “The company benefits from scale for its core services, but the oilfield services industry is highly competitive and includes some significantly larger companies that have greater financial resources and product diversity,” including No. 1 North American completions specialist Halliburton Co. and global leader Schlumberger Ltd.
Moody's expects Nine will continue to benefit from increased demand by exploration and production companies over the next 12 months, “albeit at a more modest pace of growth. Higher oil prices have driven increased activity levels and enabled Nine to increase prices.”
However, there is risk that labor shortages “could constrain the pace of profit margin improvement and/or revenue growth,” according to Moody’s.
J.P. Morgan Securities LLC acted as Nine’s financial adviser while Kirkland & Ellis LLP acted as legal counsel. Magnum’s financial adviser was FMI, while Porter Hedges LLP acted as legal counsel.