Keane, C&J merge in quest for pricing power as oil producers cut budgets

(Reuters) - Oilfield services provider Keane Group Inc will merge with rival C&J Energy Services in a $746 million deal, giving the companies the much-needed pricing heft in an industry grappling with budget cuts by crude producers.

C&J’s shares rose 16.3% to $12.47 on Monday, compared with Keane’s all-stock offer of $11.29 per share based on Friday close. Keane’s stock reversed course to rise 3.4% in choppy trading.

U.S. oil producers are either holding back on drilling new wells or are looking for cheaper rates as investors demand that cash be used for dividends and buybacks rather than growth.

North America rig count fell to 1,076 in the week to June 14, 122 lower than a year earlier, according to data on Friday from General Electric Co’s Baker Hughes energy services firm.

The deal will create a company with about 2.3 million hydraulic fracturing horsepower, making it the third-largest pressure pumping firm in the United States behind Schlumberger NV and Halliburton Co.

“We have stressed the need for greater market power to push pricing higher and how scale will be important to reduce capex and improve internal efficiencies,” Evercore analysts wrote in a note.

The deal marks the start of what will be further consolidation in the onshore North American oilfield services market that will help improve industry structure and returns, the analysts added.

The transaction is expected to add to cash flow immediately, and result in annualized run-rate savings of $100 million within 12 months of closing, the companies said.

Shareholders of both companies will hold 50% each in the combined entity, upon closing, which is expected in the fourth quarter.

C&J shareholders will get 1.6149 Keane shares for each share held and a dividend of $1 per share before the deal closes. The companies said the transaction was valued at $1.8 billion, including $255 million of net debt.

On a pro-forma basis, the combined company generated $4.2 billion in net revenue for the year ended March 31.

Keane’s Chief Executive Officer Robert Drummond will lead the new company, while C&J Chairman Patrick Murray will be its chairman.

Reuters had reported earlier on Monday that the two companies were set to merge.

Morgan Stanley & Co LLC and JP Morgan Securities LLC were financial advisers to C&J, while Citi advised Keane. Lazard was financial adviser to the special committee of the Keane board.

Reporting by Debroop Roy in Bengaluru; Editing by Shinjini Ganguli and Sriraj Kalluvila