2017 was the third full year of the most protracted downturn in the global oil and gas industry but was generally considered to be no worse than the previous two. Despite initial optimism at the beginning of the year, the industry remained flat with operators keeping a tight rein on spending notwithstanding a steady increase in commodity prices throughout the year.
The US shale arena (and specifically the Permian Basin) was the exception where high levels of activity spawned a huge amount of M&A activity but elsewhere the operating environment and resultant M&A activity was difficult. There were of course some headline grabbing public transactions, most notably for the North Sea, and the Wood Group / Amec merger but deals continued to proceed slowly and with higher bars to completion.
At the start of the year, we had expected to see a flurry of private company consolidation with mergers between companies looking to capitalise on synergies and combined services to drive efficiencies and growth as demonstrated by the ATR Centurion Group deal the previous year. While public companies have led the way in this type of transaction – GE/Baker another significant 2017 combination – for whatever reason, this has proved difficult in private and private equity owned companies. Ashtead Technology’s merger with Forum Subsea Rentals at the end of last year was perhaps a sign of more to come.
As the market continues to recover and working capital requirements grow, we expect to see more of these types of transactions that will add value to owner and investors.
Our prediction that trade buyers and energy specialist private equity providers would dominate the market to the virtual exclusion of the more generalist investors certainly proved right in 2017. Energy specialist investors Bluewater and Buckthorn were particularly active with the former investing in Optilan and ROVOP and the latter investing in TWMA as well as follow on investments in Ashtead Technology, who acquired an Abu Dhabi business in early 2017 and merged with Forum Subsea Rentals at the end of the year. Both were also active on a number of other transactions perhaps most notably Buckthorn being the under-bidder on the sale of National Energy Services in the Middle East to US listed, special purpose energy acquisition company NESR Corp. This $1billion deal, combined a merger with Gulf Energy, a portfolio company of SCF Partners, another leading energy specialist private equity firm which remains active.
There are signs though of the generalist players returning to the sector and this may stimulate the pipeline in 2018 and provide some increased competition on deals.
Unsurprisingly, given the need to look to new markets for growth, deals involving diversified markets have played a part in this year’s pipeline. Offshore renewables have been core for companies like JDR Cables and ROVOP and the high profile formation of Well-Safe Solutions has demonstrated the appetite for decommissioning.
Locally, North Sea asset transfer deals, such as EnQuest’s acquisition of the Magnus field and Chyrsaor buying a package of Shell assets, have demonstrated that there is life in the old dog yet, reigniting activity and stimulating interest.
Equally on the service side, noteworthy deals included the landmark sale of North Star Shipping to North Sea newcomer, Basalt, the acquisition by Worley Parsons of the old Amec North Sea business and Rubicon’s acquisition of John Lawrie Group, as well as the afore-mentioned TWMA deal.
With the oil price stabilising around $60/$65, the costs of lifting a barrel of oil significantly reduced and the major IOCs reporting substantial profits once more, there are some signs of the green shoots that may offer some encouragement for everyone in the industry in 2018. M&A activity is usually a leading indicator of confidence in the market and at Simmons, we enter 2018 with a strong pipeline of transactions and some optimism for the year ahead.
Nick Dalgarno is managing director of Simmons & Co, corporate finance advisers to the energy industry