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Through the first half of 2014, deal volume in the domestic oil and gas services industryexperienced a strong rebound following a tepid 2013. Detailed accounts of the oilfieldservices sector M&A landscape, its emerging trends, and their implications for oilfieldservice providers are presented below:
OFS M&A Landscape. Overall, M&A volume and size increased in the 1H of 2014.The statistics:
• 79 transactions (Services & Equipment) took place with an averagetransaction size of $146mm (See page 4 for a list of select OFS transactions)
• This represents a 93% year-over-year increase in transaction volume and a 71%increase in average transaction value compared to 1H 2013
M&A Trends. Driving factors in the aforementioned transactions are the availability ofcheap capital and a stable outlook on commodity pricing. See trends below:
• Capital with an Agenda Drives Multiples – Growth in domestic privateequity coinciding with a greater portion of the funding allocated to oilfieldservices has created plentiful capital with a timed agenda (Private Equity activitydetailed further in page 2)
• A Stable Environment Entices Strategic Buyers – Both independent andprivate equity-backed OFS companies continue to grow via acquisitions.Doug Meier, the US energy sector deals leader at PwC, notes that companiesin the oilfield services sector are “selectively looking to fill in the white spaceby adding assets that can increase productivity and reduce costs”
• Divestitures Creating Opportunity – Certain OFS companies, plagued byover-levered balance sheets have been forced to divest, creating opportunitiesfor acquisitive companies in a healthy financial position (details on page 2)
July Edition: 1H 2014 M&A Activity in Review
Prepared by:
Duane [email protected]
Patrick [email protected]
John [email protected]
Brandon [email protected]
[OFS COMPANIES ARE] SELECTIVELY LOOKING TO
FILL IN THE WHITE SPACE
BY ADDING ASSETS THAT
CAN INCREASE
PRODUCTIVITY AND
REDUCE COSTS
“
”Source: S&P Capital IQ
DOMESTIC OFS TRANSACTION COUNT AND SIZE
0% 50% 100%
1H 2014 Y-o-Y Growth
Transaction Volume Increase %
Average Transaction Size Increase %
Private Equity Activity. Total domestic private equity fundraising has reached itshighest level in four years, with an increasing number of funds targeting the oilfieldservices sector. The increasing amount of institutional capital targeting a limitednumber of oilfield service companies is beginning to drive up market valuations foracquisition targets. Expect continued high levels of activity into the second half of2014, especially from firms listed below:
2
THE INCREASING AMOUNT
OF INSTITUTIONAL CAPITAL
TARGETING A LIMITED
NUMBER OF OILFIELD
SERVICE COMPANIES IS
BEGINNING TO DRIVE UP
MARKET VALUATIONS FOR
ACQUISITION TARGETS
“
”
WFT ANNOUNCED A
MAJOR DIVESTITURE PLAN
DESIGNED TO RETURN THE
COMPANY’S FOCUS TO ITS
CORE COMPETENCIES AND
REDUCE DEBT
”
“
$62.5 $123.0
$127.8
$193.7
146
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RECENT U.S. PRIVATE EQUITY FUNDRAISING
Capital Raised # of Funds Closed
PE Firm Fund Name Fund Size Closed Data
Dos Rios Partners Dos Rios Partners $225mm 5/30/14
Intervale Capital Fund III $495mm 2/25/14
Hastings Equity Partners Equity Fund III $200mm 12/16/13
OFS Energy Fund OFS Energy Fund III $175mm 4/25/14
Corinthian Capital Group Corinthian Equity Fund II $104mm 1/10/14
Cotton Creek Capital CCCP II $160mm 6/6/14
Prophet Equity Fund II $345mm 5/30/14
A SAMPLE OF RECENTLY CLOSED OFS-FOCUSED PE FUNDS:
A Stable Environment Promotes Strategic Investment. An improved outlook in theoverall domestic economy, expected stability of oil prices, and continued growth in theE&P drilling schedules have led OFS investors to continue placing capital in thedomestic markets. An example is B/E Aerospace’s recent acquisition of Vision Oil Tools:
• The acquisition continues B/E’s initiative to expand into the oilfield equipment rental, logistics, and service businesses. This transaction comes on the heels of B/E’s purchase of Blue Dot Energy Services, LT Energy Services, and Wildcat Wireline
• Further, B/E’s acquisitions highlight a trend of non-oilfield related companies looking to gain exposure to the energy space. In 2013, Waste Management (WM) acquired two Bakken-focused service companies, Summit Energy Services and Liquid Logistics
Shrinking to Grow. Divestitures have played an interesting role in the first half’s dealflow as over-levered companies look to streamline core operations, seeking efficiencythrough the sale of non-core assets. Notable oil and gas divestiture activity:
• In 4Q 2013, Weatherford (WFT) announced a major divestiture plan designedto return the company’s focus to its core competencies and reduce debt by$3bn-$5bn by year-end 2015
• Nabors Industries (NBR) combined their pressure pumping division with C&JEnergy Services (CJES) in an effort to manage risk amid a glut of pressurepumping equipment in the U.S. ($2.86 billion transaction)
• Additionally, Chesapeake Energy (CHK) divested its oilfield services business,now an independent company operating as Seventy Seven Energy
Source: S&P Capital IQ
Source: Pitchbook
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STABILITY IN WTI OIL PRICING
3
Valuations Rise Across the Sector. Public and private company valuations have historically been highly correlated, withprivate valuations trading at a discount to similar public company valuations due to liquidity and size. Public OFSvaluations have increased significantly over the last twelve months (as seen in chart below), which is one of many factorsdriving valuations for lower middle market privately owned OFS companies. Details:
• Since July 2013, the select publicly traded service companies (listed below) EBITDA multiples increased 47%
• Additionally, Founders is seeing private companies trade at 20-40% premiums above historical mean valuations
Characteristics that Create
Value in OFS Companies:
• Revenue/EBITDA
• Growth Rate
• Strong Management Team
• Multi-Service Offerings
• Multi-Basin Footprint
• Predictability of Revenue
• Quality Financial Controls/Process
• Proprietary/Defensible Elements
• Running a Market Process
OFS – Select Publicly Traded Statistics
Market Cap
Enterprise
Value LTM Revenue
LTM
EBITDA
EBITDA
Margin
EBITDA
Mult. (x)
Diversified
Baker Hughes Incorporated 32,406.2 35,800.2 23,313.0 4,053.0 17% 8.8x
Halliburton Company 59,960.9 65,441.9 30,510.0 7,428.0 24% 8.8x
Schlumberger Limited 147,013.6 153,559.6 46,808.0 12,671.0 27% 12.1x
Weatherford International 17,693.3 26,702.3 15,022.0 1,986.0 13% 13.4x
Average 64,268.5 70,376.0 28,913.3 6,534.5 21% 10.8x
Service Focused
Archer Limited 1,032.1 1,752.3 1,959.3 161.4 8% 11.3x
Basic Energy Services 1,348.2 2,112.4 1,295.3 245.2 19% 8.6x
C&J Energy Services 1,820.3 2,008.0 1,110.8 175.2 16% 11.5x
Key Energy Services 1,062.1 1,785.0 1,519.4 247.5 16% 7.2x
Oil States International 3,335.1 3,855.5 2,652.6 761.4 29% 5.1x
Superior Energy Services 5,576.5 7,103.3 4,586.4 1,038.9 23% 6.8x
Average 2,362.4 3,102.8 2,187.3 438.3 18% 8.4x
Equipment Focused
Cameron International 14,068.6 17,328.6 10,209.0 1,490.7 15% 11.6x
FMC Technologies, Inc. 14,322.8 15,414.6 7,304.6 1,065.9 15% 14.5x
Forum Energy Technologies, Inc. 3,345.0 3,756.2 1,555.8 276.0 18% 13.0x
National Oilwell Varco 36,717.9 36,273.9 23,339.0 4,309.0 18% 8.3x
Average 17,113.6 18,193.3 10,602.1 1,785.4 16% 11.9x
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OFS - Service Focused OFS - Equipment Focused OFS Diversified
Source: S&P Capital IQ
Source: S&P Capital IQ
4
Announced
DateTarget/Issuer Buyers/Investors
Total Transaction
Value ($USDmm)
07/01/2014 DEVIN International, Inc. National Oilwell Varco, Inc. (NYSE:NOV) -
07/01/2014 Crest Pumping Technologies, LLC Nine Energy Service, Inc. -
06/25/2014Nabors Industries Ltd., Completion & Production
Services BusinessesC&J Energy Services, Inc. (NYSE:CJES) 2,918.77
06/20/2014 Vamp Oilfield Services Inc. LoneStar West Inc (TSXV:LSI) 9.17
06/18/2014 Fraction Energy Services Ltd. Canyon Services Group, Inc. (TSX:FRC) 95.70
06/10/2014 NSC and Tripoint and CDK and IPS Nine Energy Service, Inc. -
06/10/2014Erick Flowback Services, LLC and Rod's
Production Services, LLCNew Source Energy Partners L.P. (NYSE:NSLP) 81.23
06/10/2014 Peak Pressure Control and Dak-Tana Wireline Nine Energy Service, Inc. -
06/06/2014 Torqued-Up Energy Services, Fracturing Division Patterson-UTI Energy Inc. (NasdaqGS:PTEN) -
05/27/2014 Knox Oil Field Supply, Inc Applied Industrial Technologies, Inc. (NYSE:AIT) 132.82
05/23/2014 KUDU Industries Inc. Schlumberger Limited (NYSE:SLB) 239.12
05/01/2014 RedZone Coil Tubing SCF Partners -
04/08/2014 ArkLa Tex Wireline Services Harren Equity Partners -
04//04/2014 Vision Oil Tools, LLC B/E Aerospace, Inc. 180.00
03/24/2014Weatherford International Ltd., Pipeline and
Specialty Services BusinessBaker Hughes Incorporated (NYSE:BHI) 241.00
03/18/2014 Anchor Drilling Fluids USA, Inc. Calumet Lubricants Co., Limited Partnership 342.07
03/13/2014 Saxon Energy Services Inc. Schlumberger Limited (NYSE:SLB) -
03/03/2014Lone Star Tank Rental LP and KHM Rentals,
LLCGeneral Finance Corporation (NasdaqGM:GFN) 95.00
02/28/2014 Horizontal Wireline Services, LLC Allied Wireline Services, LLC -
02/25/2014 Multi-Shot, LLCNGP Energy Capital; NGP Energy Technology
Partners100.00
02/19/2014 Park Energy Services, LLC Rock Hill Capital Group, LLC -
02/18/2014 U.S. Well Services, LLCUBS O'Connor LLC; Fiengold O'Keeffe Capital
LLC; Southpaw Asset Management, LP; Others.38.00
02/18/2014 Energes Oilfield Solutions, LLC Intervale Capital -
02/10/2014 Platinum Energy Services Corp. Trinity Industries Inc. -
02/07/2014 Kayden Industries Inc. TriWest Capital Partners -
01/07/2014 Atchafalaya Measurement, Inc. KLH Capital -
01/06/2014 LT Energy Services B/E Aerospace Inc. 113.00
01/06/2014 Wildcat Wireline LLC B/E Aerospace Inc. 152.00
Select Transactions. Private equity backed strategic buyers continue to display an appetite for OFS companies. In June of2014, Nine Energy Service (backed by SCF Partners) was created from the combination of four oilfield services companies– Northern States Completions, Tripoint LLC, CDK Perforating, and Integrated Production Services Canada. The newlyformed Nine Energy immediately expanded its portfolio through the acquisition of:
• Peak Pressure Control – TX-based provider of pressure pumping services; June 2014• Dak-Tana Wireline – MT-based provider of wireline services; June 2014• Crest Pumping Tech – TX-based provider of cementing, acidizing and pumping services; July 2014
SELECT OFS TRANSACTIONS FROM 2014
A Look Forward. M&A activity has started the year strong and we expect this trend to continue through the remainderof the year. Joe Brady, SVP of Founders, recently spoke to these trends at a Founders Forum, “The first half of 2014 [theOFS market] saw prosperous and steady [oil] pricing, rig count increases that surpassed expectations, and improvementsin utilization. The market is rewarding these macro-elements and a strong outlook is priced in as well. Concerning M&A,the fundamentals for commodity pricing and the access to capital remain robust, and buyer appetite is healthy – expectPEGs (private equity groups) and PEG-backed strategics to lead this charge.”
Source: S&P Capital IQ
Natural Gas Futures (Henry Hub)
5
The natural gas spot price was $3.86 per MMBtu at Henry Hub on July 22, a decrease of $0.84 from the averageprice in the previous month, and a $0.21 increase from the average price in July 2013.
For 2014 the projected average price is $4.28 per MMBtu. Natural gas prices are expected to remain depressed incomparison to previous months, due to greater than expected replenishment of inventory stockpiles, but to trendupward slightly as the winter heating season begins.
Sources: S&P Capital IQ
Natural Gas Futures Overview:
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6
The West Texas Intermediate crude spot price on July 22 was $102.86 per barrel, representing an increase of $0.25 per barrel from the average price in the previous month. Oil prices continued to rise in conjunction with the possibility of output disruptions in the international energy market due to instability in Iraq, OPEC’s second largest oil producer.
As the likelihood of output disruptions subsides, oil prices are expected to decrease into 2015 as domestic production continues near record levels. The EIA forecasts average crude oil production of 8.5 million bbl/d in 2014 and 9.3 million bbl/d in 2015.
Sources: S&P Capital IQ & EIA
Oil Futures Overview:
Oil Futures Pricing (WTI)
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U.S. Onshore Rig Count
7
As of July 18, the U.S. onshore rig count reached 1,796, marking an increase of 1 rig over June 2014 levels and an increase of 98 rigs over July 2013 levels. Rig count increases since 2013 have been driven primarily by additions in West Texas, where operators continue to develop the multi-layered pay zones of the Permian Basin.
Source: Baker Hughes
Onshore Rig Count Overview:
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July - 20141,796
U.S. Rig Count by Basin
8
As of July 18, total rig counts observed an increase of 13 rigs from a month prior, bringing the total to 1871. Since June 20, rig counts increased in the Williston (+9), Permian (+3), Granite Wash (+5), Utica (+4), and the Woodford (+7). Rig count decreased in the Eagle Ford (-3), Marcellus (-1), Haynesville (-1), and Barnett (-3). The Mississippian, Fayetteville, and DJ-Niobrara regions remained constant (+0). Other Regions, “Others,” witnessed a decrease of 7 rigs (-7).
Rig counts as of July 18, 2014:Barnett – 23, DJ-Niobrara – 60, Eagle Ford – 212, Fayetteville – 9, Granite Wash – 75, Haynesville – 44, Marcellus – 79, Mississippian – 79, Permian – 556, Woodford – 44, Utica – 46, Bakken (Williston) – 184, and Others 1 – 461.
1 “Others” includes remaining basins and offshore and inland water rigs in count.
Source: Baker Hughes
Rig Count by Basin Overview:
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The total Gulf of Mexico (GOM) rig count remained constant at 57 since the previous month; however, gas rigs observed a 3 rig increase while oil rigs decreased by 3. An increasing proportion of deepwater rigs performing completion work is resulting in a slight drop in active rig count, according to Peter A. Ragauss, CFO & SVP of Baker Hughes. Ragauss expects an incremental increase of 2 or 3 additional deepwater rigs in the Gulf of Mexico this year, but overall flat growth in rig count in 2014 compared to last year.
Source: Baker Hughes
Gulf of Mexico Rig Count Overview:
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U.S. NG vs. Oil Rig Count
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U.S. oil directed rigs and U.S. gas directed rigs saw a 9 rig increase and a 4 rig increase respectively since June 20. Miscellaneous rigs remained constant over the same time interval. While the number of gas directed rigs is particularly low right now, gas production continues to rise, and is currently up 5% year-over-year.
Sources: Baker Hughes & EIA
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U.S. NG vs. Oil Production
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Total U.S. domestic oil production for July is projected to increase slightly to 8.46 mm bbl/day, as compared to 8.40 mm bbl/day in June 2014. The EIA forecasts domestic oil production to reach 8.93 mm bbl/day by year-end 2014.
Domestic natural gas production for July is projected to decrease slightly, dropping to 69.20 bn cubic ft/day as compared to 69.36 bn cubic ft/day in June 2014.
Source: EIA
NG vs. Oil Production Overview:
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Securities-related services, including M&A advisory for transactions involving stock or debt are offered through M&A Securities Group, Inc.., Member FINRA &SiPC. Founders Investment Banking & M&A Securities Group are not affiliated entities. Principals of Founders are registered investment banking agents withM&A Securities Group & shall perform such services on behalf of M&A Securities Group.
FOUNDERS INVESTMENT BANKING IS A MERGER AND ACQUISITION
FIRM WITH AN OIL AND GAS SERVICES PRACTICE THAT BRINGS A WALL
STREET-LEVEL OF SOPHISTICATION TO THE WELL SITE. ITS TEAM'SPROVEN EXPERTISE AND PROCESS-BASED SOLUTIONS HELP COMPANIES
AND BUSINESS OWNERS ACCESS CAPITAL AND PREPARE FOR AND EXECUTE
LIQUIDITY EVENTS TO ACHIEVE SPECIFIC FINANCIAL GOALS.
O&G SERVICES LEAD ADVISORS:
DUANE DONNER
MANAGING DIRECTOR
JOE BRADY
VICE PRESIDENT
PATRICK BRADLEY
ASSOCIATE
JOHN ORTSTADT
BUSINESS DEVELOPMENT
205-503-4030 [email protected]
BRANDON PILOT
ANALYST
BEN NEW
ANALYST
FOUNDERS INVESTMENT BANKING, LLC2204 LAKESHORE DRIVE
BIRMINGHAM, AL 35209WWW.FOUNDERSIB.COM – 866.594.4358
Recent Founders Blast & Cast Fall Forumduck hunt at the lodge in Cameron Meadows.
RECENT O&G TRANSACTIONS:
