More oilfield services M&A deals could be on tap in Q4 2016

By Bryan Livingston
Managing Director and CEO

Merger & acquisition activity likely will pick up in the oilfield services sector during the second half of 2016, as companies seek to acquire assets at still-reasonable prices.

Oil prices briefly topped $50 on May 26 for the first time this year — still far below the $100 a barrel seen between 2011 and 2014, but high enough to spur a renewed round of M&A interest as buyers seek to finalize acquisitions before future price hikes.

Price volatility is still very much with us, however. Prices dropped more than 4 percent on July 12 to $46.27 for Brent crude amid new concerns about a global glut as U.S. stockpiles climbed.

Although interest in oilfield M&A is fairly robust, a tight credit market for these deals could torpedo otherwise sound transactions, unless unconventional financing is obtainable. Traditional FDIC-insured banks, under pressure from the Office of the Comptroller due to rising bad debt from oil & gas industry loans, have begun to shy away from financing new M&A deals in the oil patch.

For buyers such as private equity firms, venture capitalists or private companies seeking to expand into oilfield services, the time to strike is now before valuations rise. We’ve certainly seen an increased enthusiasm from private equity firms ready to put billions in capital to work in this sector.

For sellers, they’ve seen oil prices rise off the bottom and may feel more confident that they can obtain more favorable pricing from potential suitors. Waiting for higher price multiples next year won’t be an option for oilfield services industries under substantial financial stress and at risk of bankruptcy.

From 2015 through June 30, 2016, 77 oilfield services companies in the United States, including 43 in Texas, have sought bankruptcy protection, according to law firm Haynes and Boone. Another eight are in Canada. These bankruptcies, including Chapter 7, Chapter 11, Chapter 15, and Canadian cases, involve approximately $61.2 billion in cumulative secured and unsecured debt.

There is plenty of cash on the sidelines ready to be put to work to buy oilfield services companies, whether they are distressed or not, but, again, this financing will likely come from nonconventional sources such as VCs and private equity firms as banks sit on the sidelines.

We expect to see fairly active oilfield M&A during latter half of 2016, although likely not until the fourth quarter.

Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including energy.

Industry: Energy