Oil and Gas Investor Profile: ChampionX—Until the Last Drop

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[Editor's note: A version of this story appears in the July 2021 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

About this time last year, when most businesses were scrambling to survive due to the pandemic, one company was defying the downturn and hitting the right notes with a strategic merger focused on higher exposure to longer cycle markets. One year later, ChampionX—a merger of Apergy and Ecolab’s upstream energy business—is on track to maximize potential integration benefits and achieve targeted cost synergies of $125 million within 24 months of the merger.

“As we close in on the one-year anniversary of our transformational merger of legacy Apergy and legacy ChampionX, our first-quarter results further demonstrate the geographic breadth and resiliency of our combined business portfolio and the strong free cash flow generation capacity of the company,” said ChampionX president and CEO Soma Somasundaram, during the company’s first-quarter earnings call.

Analysts have rightly pointed out that ChampionX has established a strong presence in four key areas—chemicals, artificial lift, diamond drilling technologies and digital solutions—and is highly levered to increasing global production and international growth.

Barclays Capital Inc. analysts forecast ChampionX’s businesses to “lift higher with steadily improving profitability since production chemicals are directly correlated to increasing global production while artificial lift is the most effective way for E&Ps to maintain volumes.”

Under the bold vision and leadership of Somasundaram, the company has quickly asserted itself as a premier oilfield service (OFS) company and is on track to become one of the best-positioned companies as macro tailwinds build.

Born and raised in a small town of southern India, Somasundaram attributes his leadership skills to his father—a school teacher in the local village—who believed so strongly in education that he would often visit children’s homes to convince their parents to send them to school.

“He was very passionate about educating children, particularly those who came from economically disadvantaged backgrounds,” Somasundaram told Oil and Gas Investor. “Just observing him doing that had a great impact on me growing up.”

Looking back, Somasundaram sees his father as a role model, whose service-orientated career and selflessness had a significant impact on his thought process.

Early career

In pursuit of better opportunities, Somasundaram moved to the U.S., and after completing his post-graduate degree at The University of Oklahoma, he landed his first job at Baker Hughes Co., where he was given an opportunity to work in different parts of the world. “Being able to do that early in my career really helped me a lot to get a global perspective and operate comfortably in a global environment,” he said.

In 2004, Somasundaram was appointed president of Dover Corp.’s operating company in Michigan. Nearly three years later, when Dover decided to grow its oil and gas presence, Somasundaram moved to Houston to spearhead the action plan for the company’s expansion in the upstream and downstream sectors.

“This is a very transformative merger for us and to do that in the middle of a pandemic virtually and getting it completed on time was remarkable.”

In 2017, Dover Corp. announced plans to spin off its upstream energy portion into a separate public company called Apergy where Somasundaram became president and CEO.

The fundamental strategy behind the spinoff was to create long-term shareholder value, Somasundaram explained.

“If you look at Apergy, it had world-class businesses in upstream energy markets, and the businesses were known for their differentiated technologies, leading brands and superior customer service. As a standalone public company, Apergy would be attractive to new investors in the oil field, given a strong value proposition to the investors and its ability to pursue a focused and tailored strategy relevant to upstream energy markets,” he said.

In addition to providing investment benefits to Apergy, the spinoff would give Dover the ability to focus on its core industrial businesses and invest in them with lower volatility.

“If you look at the combined market value of Dover with Apergy and ChampionX today, you will see how well that strategy has played out,” he said.

Establishing priorities

When Dover’s board of directors formally approved the separation of Apergy, it was time to set priorities, Somasundaram said.

The first one, he said, was international expansion. “When we spun out, we had almost 80% of revenues coming from North America. So we wanted to expand internationally for growth as well as to reduce the risk,” he said.

“The second priority was deleveraging the balance sheet. As part of the spinoff, we had taken on a $700 million debt to pay dividends to Dover, and I’m not in favor of holding debt in a cyclical market because of a downturn. Your leverage will go up and you won’t have many options.”

Another priority that Somasundaram outlined for Apergy was to evolve the portfolio and to stay relevant by creating new pathways for growth as the energy transition began gaining momentum.

“Once we came out as a public company, we developed a clear strategy and established what we call a value creation framework where we laid out the key financial characteristics that will generate superior value for our shareholders,” he explained.

Once the priorities were outlined, there was no looking back for Somasundaram. He immediately began studying growth options for the company, identifying artificial lift and production chemicals as possible key businesses for growth, while accelerating digital and digitally enabled revenue streams.

“When the opportunity of production chemicals came to us in June 2019, we started screening the opportunity against our priorities and framework,” Somasundaram said. “It was clear that this opportunity would enhance our portfolio.”

In the midst of a pandemic

In December 2019—right before the pandemic hit—Apergy’s merger with Ecolab’s Nalco Champion upstream business was announced when the “market reception was very good,” recalled Somasundaram.

“On the day of the announcement, both Apergy and Ecolab stocks went up, so the investors clearly saw that the deal had a strong thesis to it,” he said.

And just when the companies were working on the next steps and closing the merger, the pandemic hit and economies began closing down. But that didn’t slow them down, said Somasundaram.

“I will say this—I was so grateful to the teams around the world who quickly shifted to working things virtually and completing the merger. This is a very transformative merger for us and to do that in the middle of a pandemic virtually and getting it completed on time was remarkable.”

“I’m not in favor of holding debt in a cyclical market because, in a downturn, your leverage will go up and you won’t have many options.”

Somasundaram envisions making ChampionX the “leading production optimization company in the world.”

Not just that, he wants to be a business that creates superior value for both customers and shareholders, and he believes that the company’s portfolio is well-positioned to achieve his vision.

“I am a strong believer that a company has to have a purpose that is beyond financial gains,” Somasundaram said, adding that their core operating principles include being customer-driven, having a safe and collaborative work environment, and developing and deploying technologies that deliver positive impact.

It’s no wonder, then, that ChampionX earned the top overall ranking for total customer satisfaction in the 2021 Oilfield Products Survey conducted by EnergyPoint Research.

“This exceptional industry recognition illustrates the strong customer-centric cultural alignment across our organization, the dedication of our employees around the world in supporting our customers and how our combined offering of products and services is truly better together.”

‘Strategic rationale’

According to Evercore ISI analyst James West, the Apergy-ChampionX merger was carried out with a multitude of strategic rationale, which will lead to significant growth including the merger of two highly complementary product lines—artificial lift and production chemicals. Additionally, the company can leverage the legacy ChampionX international footprint to accelerate the expansion of the legacy Apergy artificial lift business and the increased exposure of legacy Apergy to high-quality international oil company and national oil company customers.

West also pointed out that ChampionX has a promising future using the legacy Apergy “Top Box” financial and operating priorities framework and chasing the three strategic goals of pursuing attractive return organic growth, using free cash flow to reduce debt and considering the return of excess capital to shareholders when target leverage is reached.

While investors have started appreciating the narrative that upstream capex and opex dollars will be spent on completing wells and maintaining production instead of drilling new oil and gas wells, West expects that in the medium term, investors will better appreciate ChampionX’s earnings power and free cash flow generation. With about 80% of the company’s revenue coming from oil and gas production-related products, consistently solid fundamentals will allow the company to demonstrate its ability to convert sales into cash and subsequent debt repayments.

Exceeding expectations

ChampionX’s first-quarter 2021 performance in artificial lift and drilling technology exceeded analyst expectations.

The company reported 21% margins for its artificial lift business, representing a return of margins close to historical peaks, Barclays reported. This year, the management team expects to remain in the 20% to 22% range but foresees upside beyond that as volumes grow.

For drilling technologies, after two quarters of customer restocking, EBITDA margins jumped up sharply from a negative 18% in third-quarter 2020 to a positive 21% in first-quarter 2021, showcasing the impressive incremental growth in one of the most quality businesses across the service sector. Moving forward, analysts expect a sharp pickup in customer technology adoption, which will be a key component in seeing margins return to the 30% range.

Although ChampionX’s short-term margins progression—specifically production chemicals—took a dip in first-quarter 2021 due to volume and supply chain disruptions from winter storm Uri, yet the management team remains focused on long-term targets for production chemicals, which it expects to march toward 20% margins fueled by top-line growth and synergy around the supply chain.

Additionally, during the next few years, the company expects to expand its chemical business in more chemical-intensive regions like the Middle East and Guyana.

“If you look at it, we have a very broad customer base, and today more than 50% of our revenues come from outside the U.S.,” Somasundaram said.

He strongly believes that the production chemical activity will be “driven by budget releases in the second half as customers, particularly the OPEC countries start to increase production.

“We expect sequentially all of our international activity, particularly the Middle East will continue to show strong growth as we walk into Q2 as well as in Q3 and Q4. We expect all of our product lines to grow in Q2,” he said.

Navigating energy transition

Somasundaram recognizes the energy transition is “real” and that the OFS sector needs to “get more efficient in handling the transition.”

During the first-quarter earnings call, he stressed on the “distinct growth pathways” that ChampionX is working on to align its operations with the ongoing energy transition buzz.

“We as a company have to be focused on developing and deploying technologies that help our customers achieve their aspirations like lowering the cost of production per barrel of oil and decarbonization,” he said.

From using environmentally friendly chemicals to reducing their energy consumption, Somasundaram noted that he is working hard to ensure that ChampionX’s products and technologies align with the energy transition goals of the customers so that the products remain in demand in the long term.

He said, “Over 85% of our revenue comes from the production phase of the well, which means in the world of energy transition, there will be a need for our products and services until the last drop of oil is produced … that combined with strong free cash flow generation gives us an ability to successfully navigate the energy transition.”

What’s next for the industry?

Discussing the key themes that will dominate the oil and gas industry during the next few years, Somasundaram said the OFS sector will see considerable consolidation.

“Anytime when a sector has to get more efficient, there is a natural consolidation that needs to happen in certain parts of the industry, particularly in those product lines or geographies where there is excess capacity and there is a need to improve cost structure,” he said.

He added that the next few years will be “constructive” for the energy industry.

“We all have gone through a very challenging market downturn driven by the global pandemic. As the economy reopens, and as we are already seeing, the demand for energy and associated oil demand, is going to continue to increase, and we will start seeing oil demand growing over the next few years. You can see oil prices are already inflecting,” he said.

ESG will be another key theme in the coming years, he said. “ESG will gain more traction and we as an industry have to actively embrace that and we have a role to play in the area especially around decarbonization.”