The outlook for mergers and acquisitions in the oil and gas service sector in 2015 will hinge upon the resilience of businesses and a recalibration of pricing expectations, according to energy specialist corporate advisory firm Simmons & Co. International Ltd.
Simmons expects that a lot of groundwork will be carried out in the 1H 2015 with potential to bear fruit in the latter half of the year, once both buyers and sellers have a clearer picture of what 2015 will look like for the industry.
Mike Beveridge, co-head of eastern hemisphere corporate finance at Simmons, said the active M&A market in 2014 reflected the strong oil price in the first half of the year and that 2015 will present its own challenges.
“Last year saw a return to the market of the larger private equity investors and a number of large industrial groups were also active buyers in the oilfield services sector,” says Beveridge. “The majority of deals completed in 2014, however, reflected the market prior to the oil price collapse. Even deals closed in the latter part of the year were driven by negotiations completed in 3Q.”
Rental-based businesses, integrity inspection services, subsea products and services, and well services businesses were all the focus for M&A activity in the year and continue to represent good investment prospects.
“These long term growth markets will continue to present attractive investment opportunities in 2015 but this will be a very different year compared to 2014. Whilst there are exciting opportunities for clients on the buy and sell side, the real challenge will be getting deals over the line,” says Beveridge. “This is where the energy specialist corporate advisory firms will have an advantage as you need more experience to put successful transactions together in the current climate.”
“The industry has enjoyed successive years of high oil prices and it is going to take a couple of quarters for transaction value expectations to readjust to the new climate. Once that happens, I think that we can expect strong levels of activity in 3Q and 4Q,” says Beveridge.“There is capital in the market looking for investment opportunities but 2015 should not be about bargain hunting or looking for distressed situations to exploit. The oilfield services sector in general has enjoyed several great years so should be relatively strongly positioned to cope with the current oil price slump.
Beveridge went on to say that leveraged debt markets will be quieter and each deal is going to require more equity. There will be some consolidation and there will be opportunities as companies seek to divest non-core assets as part of this process. Equally, there is scope for more MBOs as investors will need management team expertise and buy in to take businesses forward.
Beveridge also believes that the oil price is forcing the industry to reappraise how it works and address its capex and opex costs, which is creating new opportunities within the supply chain.
“Operators driving down contractor rates will not address the fundamental cost issues in the industry. They require new ways of working and new technologies, which is creating opportunities in the market,” says Beveridge. “Operators should be more open to new working methods, willing to try more imaginative contracting models and may even adopt innovative technologies at a faster pace. The outlook is far from negative and the strong, adaptable businesses in the supply chain can make this work for them in the long term.”
The firm, founded in the 1999 oil price slump, as the eastern hemisphere business of US-based Simmons & Co. International, completed 18 M&A transactions in 2014 with a total value of more than US$3.9 billion.
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