![north sea licence winners](https://wpcluster.dctdigital.com/energyvoice/wp-content/uploads/sites/4/2021/01/1506339740_35552026-Read-Only-752x564.jpg)
Law firm Womble Bond Dickinson and consultancy ROOTT discuss the oil and gas services sector M&A trends expected in 2021.
It is no secret that 2020 was probably the most difficult year on record for the global oil & gas services industry. The collapse in oil prices and corresponding capex reductions by E&P companies had an immediate impact on the sector.
This was coupled with a storm of logistical issues as COVID-19 disrupted the supply chain. And of course, overlaying all of this is the renewed focus on energy transition.
The sector saw very little M&A activity. Market leading outfits from the global epicentre of the industry in Houston were restructuring, reducing costs and preserving the free cash they had. Reduced day rates and spare capacity meant that, as in many industries, people became all too familiar with the previously little known concept of furlough.
In the UK, activity levels also dropped off. Several private equity players entered the mid-market following the last downturn five years ago, often seeking to acquire undervalued and underinvested assets considered to be non-core by large trade players. Much of that activity, both in terms of new acquisitions and exiting from portfolio investments, stalled. Trying to originate new deals over zoom is not easy, especially during a pandemic. And in any event, potential sellers, buyers and investors could not agree asset valuations or exit projections as commodity price expectations shifted downwards and investors got serious about ESG.
Despite the demand side impact of ever extending global lockdowns, prices appear to have stabilised at numbers between $50 and $60 a barrel for Brent and WTI. That represents a solid breakeven price for many global E&P companies. Assuming this short-run equilibrium doesn’t shift dramatically as the year progresses, what can we expect from M&A in the services sector? We foresee four broad trends:
Firstly, at a general level, larger international companies will seek to consolidate their core offering. Just as in the last price downturn five years ago, this may include further dispositions of asset lines as part of a wider deleveraging and cost-cutting strategy. And whilst the exploration sub-sector may have been hit the hardest, where production continues there are opportunities in operations and maintenance. And over the longer term decommissioning activities will require significant expenditure – especially in mature basins like the UK continental shelf
Secondly, whilst larger companies may not have substantial free cash to deploy, when they do so it is likely to by strengthening their current portfolio. Many of the largest US players had already pivoted away from “dumb iron” or more basic E&P services, focusing instead on high end technology with the efficiencies and cost savings it could offer clients. The industry is also undergoing a transformation in the use of data based analytics. Both of these areas had already become a focal point for M&A, and this trend is likely to continue
Thirdly, it seems obvious that there is an opportunity in energy transition. The question is exactly where. In the UK, as the deployment of offshore wind power gathers further momentum there are opportunities for mid-market companies to become active in the supply chain – a space currently dominated by European and other non-UK outfits. The North Sea already has an excellent supply infrastructure ecosystem for oil and gas, both onshore and offshore, which can be adapted fairly easily to serve the needs of the offshore wind sector: reducing opex for project operators and investors. This also aligns with UK government strategy, for example with enterprise zones being established at the Blyth Estuary and North Bank of the Tyne. There is also an opportunity for those mid-market supply companies to work with engineering technology providers to improve the mechanics and reliability of renewable energy assets – for example in using data modelling and artificial intelligence in wind turbine failure prediction and preventative maintenance scheduling.
Finally, for private equity specifically, the short term picture may be one of building scale and resilience through bolt-on investments and ever more stringent asset management. Investment timelines may be extended and returns reinvested. By combining this with a focus on ESG credentials, investors may be assured that projected exit valuations for current portfolios are resilient without significant delay in realisation. However, and more fundamentally, the most important decisions will remain around where to invest in the first place in a challenging environment. We do not expect private equity houses to switch entirely away from oil and gas services. There may be a refocusing of approach with portfolios containing both traditional assets and diversified investments into many of the themes already covered in this article. Risk and business analysis will be more critical than ever at the front end of the origination process. And where investments do look promising, contractual risk allocation should ensure the parties in the supply chain best placed, or most willing, to bear risks do so.
Matt Lewy is a partner at law firm Womble Bond Dickinson, specialising in energy and natural resources. WBD provides comprehensive legal services from eight cities across the UK and 19 offices in the US, including energy hotspot Houston. The firm has been immersed in the energy sector for decades, giving the team great depth of experience across the various different forms of energy and power.
David Robottom is a director of ROOTT, a consultancy serving the upstream and midstream energy chains and the emerging renewable power sector. It provides expert advice in the areas of M&A, contract negotiation and crafting plus project and portfolio analytics.
Recommended for you
![ROVOP co-founder and former chief executive Steve Gray is launching climate technology focused venture studio Ventex in Aberdeen.](https://wpcluster.dctdigital.com/wp-content/uploads/sites/4/2024/09/Steve-Gray-sh8nrri4-140x84.jpg)