Despite Tight Market, There Are Still Opportunities For Energy Services Mergers And Acquisitions
So far 2017 hasn't been a busy year for mergers and acquisitions in Western Canada’s energy services sector, Rhys Renouf, KPMG's National Energy Services leader, and a managing director of KPMG Corporate Finance Inc., said at KPMG’s 17th annual Energy Services Executive Roundtable in Calgary on Thursday.
There were only 12 deals worth around $1.4 billion done in the 12 months leading up to the end of August, Renouf noted, adding that two deals—Trican Well Service Ltd.’s acquisition of Canyon Services Group Inc. and the Total Energy Services Inc. takeover of Savanna Energy Services Corp.—accounted for around $1.27 billion of the total dollar value.
“Backing those deals out, not a lot of dollar value has been announced,” said Renouf, adding that those deals were largely share-based, with only around $25 million in cash changing hands.
Yet despite the tight M&A market, panelists at the roundtable said there are opportunities within the sector for the right companies to make deals.
One reason for the optimism is that there is general consensus in the industry that oil and gas prices and activity are likely to remain around current levels in the short and medium term, said Douglas Freel, a managing director at ARC Financial Corporation focused on the oilfield services sector.
“There is a complete convergence of views of where we are in the cycle,” he explained. “The view is that now is as good as it gets, that next year will be like this year, maybe up 10 per cent. Buyers and sellers are starting from the same basis and that brings better alignment between them making it easier to make deals.”
Freel said that many older owners of service companies have no motivation to hold on for another year as they have survived the downturn, their business is kind of healthy, and they don’t want to go through another downturn.
“This tends to motivate not the 50-year-old owner but the 60-year-old owner is going to have a discussion with potential buyers.”
The fly in the ointment that could slow M&A activity, however, is a lack of new investment coming into the service sector, said Matt Colucci, co-founder and managing partner of PillarFour Capital Partners.
“Equity markets are closed and private equity outside of energy specialists has fled from investing in oilfield services, ” said Colucci, pointing out this lack of capital means more share-based deals in the market.
“It’s more difficult to get share deals done with private companies,” he added, as most are looking to cash out of the business.
But there could be advantages to making share-based deals in the current market.
“No one wants to sell at the bottom,” he said, adding it may be advantageous for sellers to take the paper deal and ride the potential upside. “But you are putting your life in the hands of another management team.”
So what type of service companies do investors find attractive?
Colucci said PillarFour is looking for companies that have developed technologies that can be applied to international plays, with a focus on the U.S. market especially important.
“We target investment where companies have a clearly defined competitive advantage and 90 per cent of that is new technology,” he said.
“Our bias is towards companies with leverage to production and completions as opposed to the drill bit,” he explained. “Companies that can reduce unit costs to operators not two years out but tomorrow because then the operators are ready to listen. They’re not interested in savings over the life of the well.”
“Our preference is to have geographical diversification,” he added. “Having exposure to the U.S. is important. In the U.S. there is more willingness to try new technologies and to look at start-up ideas compared to Canada.”
Andy Pernal, president and CEO of Strad Energy Services Ltd., said his company is also looking for diversification, although in a different arena.
Pernal said for the last five years Strad has been, “diversifying from the drill bit,” and focusing on providing rig mats and surface rentals to the energy infrastructure market. That business has grown from nothing five years ago to represent 35 per cent of Strad’s revenues.
Pernal said a second thing he looks for in acquisitions is a cultural fit.
“Fit and execution are really important,” he explained. “As an operator the deal isn’t what’s important, what you do day one after the deal, integrating the companies, is what’s important. Bringing two companies together can be a challenge.”
Freel said ARC has traditionally focused on financing start-ups with great ideas, excellent management and capital in the game.
“There has to be some investment thesis that drives us to look at a business,” he explained. “Five years out it has to be attractive to other acquirers. But we have to build a thesis that we want to be in this sector and this is a good company to be involved with.”
Freel said ARC is generally looking for companies with ideas that work in the current over-supplied market for oilfield services, or new ideas that can take market share from existing companies.
“Most oilfield services are not in balance and we’re looking for ideas that work with these constraints,” he said.
Both Freel and Pernal said the management of any company they invest in must be willing to share risk.
“If we’re going to acquire a company their management has to have skin in the game,” said Pernal. “Stock mergers work out well because buyers don’t have money and sellers shouldn’t expect it in this market.”
“They have to write a substantial cheque. We want alignment,” said Freel.