This year is shaping up to be an exciting period for mergers and acquisitions (M&As) in the oil and gas industry, according to Aberdeen-based energy finance expert Mike Beveridge.
Middle-East buyers and investors with deep pockets will play a key role in M&As in the sector, while banks will also be an important driver of activity, he said.
Mr Beveridge, UK co-head of corporate finance specialist Simmons Energy, a division of Piper Sandler, added: “With 2020 now, thankfully, behind us, we can look ahead with some optimism and identify the themes that will drive M&A activity in 2021.
“We can see the emergence of Middle East buyers and investors, with capital and aggressive growth strategies, pursuing local content obligations by acquiring technology and expertise internationally, with a view to exploiting this capability in their large and recovering regional markets.
“Relative to other sectors, oil and gas has continued to perform during the coronavirus crisis. Revenues have not fallen off a cliff in the way we have seen in hospitality, travel and retail.
“With the industry deemed essential during lockdown, many oilfield services companies have performed surprisingly well and will attract buyers and investors based on the fundamentals of their financial performance.”
A significant private-equity portfolio built up during the last “super cycle” will also be a key driver of M&A activity in 2021 and 2022, he said, adding: “Many of these companies will look to exit so they can generate liquidity for their investors within their planned investment timeframe.
“Another source of M&A activity will be the banks, who essentially now have control of several heavily-leveraged oilfield services businesses.
“Credit institutions are not generally keen to own and run industrial companies for long, so will look for more permanent homes for these companies to recover that outstanding debt.
“As well as many of the big industrial multi-sector corporates exiting the oilfield services acquisitions they made during the last cycle, we will see traditional oilfield services groups continue to tidy up their portfolios, to deleverage and make acquisitions to boost their green credentials.
“New buyers will emerge to take full advantage of a somewhat unloved and potentially very undervalued oilfield services sector.”
Transformational deals
Industry headwinds make private equity exits “quite challenging”, which will prompt some larger firms to seek “transformational” deals that can open up exit routes in the future or “provide scale for an IPO (initial public offering), he said.
Simmons also anticipates more deal-making activity on the energy transition front, particularly in offshore wind.
Other more “nascent” sectors, like electrification of oil and gas production, carbon capture, utilisation and storage, hydrogen and large scale energy storage will “rapidly gain M&A momentum,” Mr Beveridge said.
He added: “The one prediction we can make confidently is that M&A in 2021 will be very active at Simmons but will be characterised by creativity.
“Deals will involve some important non-cash elements, whether these are paper deals, true mergers, earn-out structures or staged/multi-step acquisitions.
“If sellers want full value for their businesses, they need to be open to risk sharing deals.
“Fundamentally, the oilfield services sector needs a lot more consolidation to remove capacity, achieve genuine synergies and offer more compelling benefits to their E&P customers.
“Many people have written off oilfield services as a tainted “fossil fuels” industry. In reality, oil and gas will remain an enormous global industry for decades to come, whether the UK wants to participate in this or not.
“Those that have conviction in this continuing journey may well find themselves making some really interesting financial returns, when others “are looking the other way”.
The market during 2020 was subdued overall
Looking back on the past 12 months, Mr Beveridge said: “Not even the most pessimistic crystal ball gazers could have predicted the devastation in 2020 which, as a result of the global pandemic, became a year of two distinct and very unequal parts for mergers and acquisitions in oilfield services.
“We entered the year with some optimism and a very strong pipeline of M&A mandates, driven by the continued recovery from a five-year sector downturn – where 2019 saw revenue growth, profit improvement and a positive outlook for many of our clients.
“This positive start to 2020 was underpinned by several deals, including the sale of Peterhead-based Score Group to SCF Partners, the sale of Norwegian-headquartered Halfwave to the Canadian inspection technology group Eddyfi/NDT, and Blue Water Energy’s investment in Varel International Energy Services – all significant mid-market deals, with the promise of more to follow.
“But then Covid struck. As the world went into lockdown, global demand for oil and gas plummeted and, beyond the immediate shock, led to extremely low commodity prices and created huge uncertainty, always a major impediment to M&A activity.
“Whilst a remarkable number of projects were announced across the global deal-making industry, many of which were initiated, managed and negotiated via Zoom, energy services did not benefit.”
He added: “The enormous operational disruption from Covid, in an environment of collapsing oil prices, with oil and gas customers cancelling or delaying projects, is not conducive to any form of deal-making.
“Ever-changing government guidance and restrictions made it almost impossible for businesses to forecast with any degree of certainty.
“This unpredictability of earnings saw public companies suspend market updates during summer 2020 and revoke prior updates because their numbers no longer bore any resemblance to current reality, and private companies were in the same boat.
“Transaction values are generally predicated on historical, current and projected financial performance.
“Quite simply, in a year like 2020, few buyers and sellers, even if willing to engage in discussions, would come to an agreement on medium-term prospects and hence valuation.
“One of the major debating points in our sector, in a Covid-ravaged early summer, was whether the pandemic might delay or accelerate the energy transition.
“In the ‘for’ camp we can now cite lower energy prices, pandemic-driven higher priorities and the massive future cost to the consumer of financing new sources of energy.
“In the ‘against’ camp sits the climate change agenda, and ever-growing public and investor sentiment.
“In 2020, it is fair to say the ‘against’ camp won this debate hands down, hindered by the lack of any leadership from global exploration and production companies.
“In that context, many industrial and financial investors have moved away from fossil fuels.
“During the pandemic, many oilfield services firms have been internally focused on survival – cutting costs, reducing capex and conserving cash.
“This applies across the board, whether mid-sized privately-owned firms or larger publicly listed oilfield services.
“In that context, allocating precious capital to M&A has been the exception, rather than the norm.
“The few deals we saw in the second half of 2020 were generally driven by need – either distressed business facing financial challenges or larger firms selling underperforming divisions to focus on core activity.”
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