Simmons Predicts a ‘Body of Potential Sellers’ for Oil and Gas Deals in 2020
2019
was a strong year for Simmons Energy despite the market, not because of it. We
were able to close a number of deals in what has been, across Europe and
internationally, a suppressed market.
Several
deals which kicked off last year have slipped but should complete in 2020. With
a strong backlog of projects and mandates just signed, we anticipate a busy 12
months.
As
the oilfield services market continues to recover, there will be an increasing
number of firms looking to exit. Many private equity owned businesses, nursed
through the downturn, have recalibrated and are seeing a return to historic
profitability.
Most
private equity funds have to deliver successful exits to generate cash returns for
their investors. Some private owners and entrepreneurs, who are now five years
older than when the downturn hit, will be ready to monetise the value in their
businesses.
At
the same time, the big corporates are tidying up their portfolios to focus on core
activity and the large generalist industrial groups, who have acquired oil and
gas capability but not seen the desired returns, are seeking to divest.
These
factors mean there will be a body of potential sellers this year. The challenge
is finding the right buyers.
Five
to 10 years ago, we had multiple potential buyers: the major and emerging
listed oilfield services companies, both specialist and generalist private
equity and large industrial groups, all looking for opportunities in the
then-high-growth oilfield services sector.
Interest
has waned among the generalist groups, many of whom had their fingers burnt in
the downturn, and others who have been influenced by the anti-fossil fuel
agenda.
Increasingly
transaction buyer lists have been stripped back to a much tighter group who
have conviction in the sector and access to needed capital.
The
dichotomy of this narrowing pool of buyers against an industry with a very
positive mid-term outlook will set the tone for M&A activity this year.
For
most, 2020 has started encouragingly with oilfield services firms experiencing
more volume and, as a result, improved profits – albeit for most, margins are
still lagging behind the recovery. Many companies are busy, equipment is in
demand and recruitment is on the up.
But
there’s a big difference between that activity and what’s happening in the
financial markets.
While
there will most certainly be an increase in deal activity in the next 12-18
months, people need to be realistic about outcomes. Fewer buyers, less bank
debt and limited equity capital to put deals together means that valuation
multiples for many companies will be lower than in the past. Deals are not
going to be simple, particularly in the face of climate change headwinds.
This
new world calls for specialists: dealmakers who know what they’re doing,
genuinely understand these market fundamentals as well as the sector, know the
relevant and capable buyers and will invest time in the right conversations.
A
sensible, pragmatic but creative approach will get deals over the line.
Our
confidence also stems from some fundamental prevailing forces. Many hundreds of
billions of dollars are invested in oilfield services and this value needs to
be protected.
Thousands
of companies are dedicated to the sector and whether they want to grow, sell,
merge, refocus, address gaps, transform or recapitalise, there is always an
appetite to do deals.
M&A
activity will also be driven by trends among the large corporates in the sector
who have shifted their approach. The large integrated service companies are
redefining their businesses and repositioning themselves as diversified energy
transition industrials which are highly cash generative.
They
have less interest in buying cash consumptive early stage businesses and are
reducing their own capex budgets. Attention is shifting towards profitable cash
generative deals and new strategic steps that will enhance their sustainability
and green credentials.
The
oil companies’ focus on decarbonising production presents huge opportunities
for the supply chain.
Every
brownfield and greenfield development will have an ambition to achieve
net-zero. This race to be the cleanest and greenest will drive M&A
activity.
The
sense of panic in mid-2019 as money walked away from the industry because of
the anti-fossil fuel rhetoric is subsiding and we are, thankfully, starting to
see a return to rationality. Many recognise that oil and gas needs to be a core
part of the energy transition, not its enemy.
2020 could prove a very attractive time for investors and corporates to make strategic moves in oil services. Ultimately, market forces will rule and, as the industry starts to make money again and deliver returns, it will attract capital. There will inevitably be some casualties but the services industry has to focus on making money and generating cash and the companies who can do that will be attractive to buyers and investors.