A surprising result of last year’s oil price crash was that dealmaking in the sector slowed down sharply.
There is a widespread feeling that this could change this year, but what are the dynamics behind this ebb and flow?
At the macro level, the value of energy sector mergers and acquisitions was down nearly 7 per cent at US$548 billion last year, according to Mergermarket, a deal-tracking outfit owned by the Financial Times Group.
A closer look shows the slowdown was even more marked considering that five large transactions accounted for nearly 40 per cent of the value, with Royal Dutch Shell Group’s $82bn takeover of BG a large chunk of the total.
The number of energy deals was down by a third, at fewer than 1,000 globally.
When oil prices started to fall in 2014, it was expected that would lead to stress for many companies and an uptick in deals as firms looking for a financial saviour, according to the consultancy firm Deloitte.
“Yet this was not the case,” Deloitte notes. Deal flow last year was even lower than the 2007-09 financial crash, according to Deloitte’s count.
“Potential sellers may have been able to stave off divestitures, and buyers did not appear willing to take on the risk of potentially overpaying,” Deloitte concludes.
The second-biggest deal of last year – Energy Transfer Partners’ $55bn takeover of William Companies – supports that caution, as the shares in the two companies fell by 60 per cent from the time the deal was announced in September to January of this year.
So why might deal activity pick up this year?
It has to do with the survival-of-the-fittest nature of the business, especially those companies at the sharp edge such as the service contractors who operate rigs.
“In the boom times, all prices creep up from the man, up to drilling contractors and to the operator,” says George Gourlay, the chief executive of OCB Oilfield Services. “In the downturns it is the reverse of that.”
There are few industries that can quickly push through 25 per cent cost cuts, with wages for front-line employees cut by maybe 50 per cent to adjust to new price conditions.
“Our guys are pretty much used to it,” Mr Gourlay says. “There have been a lot of good years of late [but] everyone takes a pay cut when that reverses, like the 2008 mini-crash and ‘97 before that.”
Dubai-based OCB, which is part of the private equity investor Gulf Capital’s (GC) portfolio, has just closed on a deal to buy Kuiper International of Singapore in a deal that doubles the size of the combined company to about $80 million.
OCB’s strength is in drillers and roustabouts, and Kuiper adds “back deck” crew, from foreman to welder.
It also brings OCB into Australia, where the company is looking at another acquisition to add to its capabilities.
“In Australia, they are so far down the line that it’s beyond the point of no return,” says Mr Gourlay. “So the biggest spending has been done already and they still need crews to man the FPSOs [the huge floating operating units] and platforms.”
It helps explain why there have been far fewer distressed companies up for sale than expected.
“We’ve actually picked up work this year because the Middle East is still quite aggressive in its drilling activity,” he says.
That will drop off next year as there are far fewer regional tenders, but there are more expected in South East Asia, so Mr Gourlay says OCB is also looking at a Malaysian company that is well-positioned with licences from Petronas, the state oil company.
There is no denying that the oil price crash has led to financial pain and the loss of hundreds of thousands of jobs globally, but downturns also allow some companies to get a firmer footing.
“I think that is why activity was lower in 2015 – people were waiting to see,” says Huda Al Lawati, the chief investment officer for the Middle East and North Africa at The Abraaj Group.
“You will find some companies that are doing fine,” says Ms Al Lawati. “The loss in oil price means there is a push for more volume, a lot of stimulation and enhanced oil recovery work that goes on.”
She concludes: This is certainly a good time to look at assets. You have to look at companies poised for growth, still operationally strong even if they are suffering in the short term.” But, she adds, “not the lemons being offered from the basket”.
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