The oil and gas industry has had much to celebrate lately; we have seen major projects coming on stream and there is a robust pipeline of new work.
Engineering and manufacturing have been boosted by increased capital and operational spending.
The positive mid-term picture has certainly increased confidence and optimism at a time of continued global economic turmoil and also masked the negative impact of the chancellor’s tax grab earlier this year.
This is tempered with uncertainties over commodity price volatility, however, and – notwithstanding BP’s recent Clair announcements – the long-term sustainability of the UK continental shelf.
The underlying supply and demand fundamentals for the oil and gas industry remain robust as the twin pressures of the ever-present depletion challenge and strong energy demand from developing economies provides the momentum for commodity prices to hold up in the face of troubles in the wider economy.
With these attractive underlying fundamentals, oil and gas operators’ capex is rising and is expected to continue to do so until 2014, with annual growth of about 15% forecast across the period.
New projects are increasingly challenging and will require greater innovation and more advanced technology. Equally, extending the life of fields and assets – using more complex technical solutions – is high on the agenda. This is good news for Aberdeen companies leading the way in technological advances.
Those that can apply their technology and know-how to North Sea technical and operational complexities will be able to exploit other opportunities in complex environments such as ultra-deep water, the Arctic and in liquefied natural gas and unconventional oil and gas, such as shale reservoirs.
The industry is at the forefront of a spate of activity to exploit these new and more challenging domains.
The oil service and equipment sector will be a major beneficiary, particularly as capacity bottlenecks arise.
Opportunities will be most significant for high-end providers in these markets with differentiated offerings, market-leading capabilities and high barriers to entry.
This in turn feeds research, development and merger and acquisition (M&A) activity as service providers move to elevate their offerings in response.
M&A activity has continued unabated in 2011 following on from the strong levels seen last year, when the likes of Schlumberger/Smith and Baker/BJ deals led the way. This run of deal activity has been led predominantly by larger corporates, with their strong balance sheets and ability to fund cash transactions or use their stock.
Some deals were concluded at double-digit ebitda (earnings before interest, tax, depreciation and amortisation) multiples, primarily involving businesses with valuations north of the $500million (£313million) mark.
Most of the flagship deals exhibited clearly defined strategic drivers around access to high-growth markets, differentiated technology or skilled manpower.
The high purchase prices also reflected strong buyer conviction about rapid profit growth over the next few years.
GE has continued to add to its growing stable with acquisitions such as Dresser, Wellstream and Wood Group’s well-support arm. Hunting, National Oilwell Varco and Archer have also been active in the M&A market recently, while in offshore construction there have been tie-ups between Subsea 7 and Acergy plus Technip and Global.
Mid-market M&A activity has also been dominated by trade buyers rather than private equity and though multiples were typically not as heady as in the larger deal bracket, they were trending upwards and buyers were bidding aggressively for quality businesses.
Local examples of this were the sales of qedi to Amec and of NCS to Acteon, both of which had highly differentiated offerings that were viewed attractively in the market.
Nevertheless, private-equity involvement in oil service M&As appears to be on the increase as new companies of a suitable scale emerge and trading performances and the general industry climate improves.
Gresham’s recent acquisition of Walker Technical Resources is a good example of the resurgent attraction of oil services to private equity.
Service firms that have taken on private-equity investment to accelerate growth over the past couple of years, Xodus and Flexlife, for example, are now particularly well positioned to benefit from buoyant activity at home and abroad.
For those contemplating a sale or an acquisition, though the underlying fundamentals are positive, there is still a need to exercise caution.
Even in the most positive of environments, to get the best result out of any M&A process, whether you are a buyer or a seller, you need to be properly prepared, proficiently advised and disciplined in the execution of your plan.
Eddie Leigh is managing director at Simmons and Co International, specialist corporate-finance adviser to the energy industry, in Aberdeen