Permian Basin serves as bellwether of oilfield M&A

Technology and pipeline companies stand to benefit from current cycle

Oilfield technology companies and businesses involved in the transportation, storage and delivery of crude oil appear poised for healthy merger-and-acquisition activity in the near term, as a record amount of private equity capital attracts buyers and sellers to the negotiating table.

These specialized areas within the energy sector show the most promise for M&A activity this year, because their services remain in high demand despite the recent setback in commodity prices.

To be sure, the downturn in prices has hurt the industry overall. Hundreds of rigs have been idled in West Texas’ Permian Basin. The count is down from a high of 565 in November to just over 300 in April. Despite this, the basin remains the most prolific oilfield in the United States — producing 1.96 million barrels of crude oil per day, according to the most recent report from the U.S. Energy Information Administration, up 27% over March 2014.

Increased production over the past few years is due mainly to horizontal drilling and hydraulic fracturing technology, which has unlocked the Permian Basin’s massive oil reserves. Companies involved in horizontal drilling or fracturing technologies continue to see opportunities for growth as the basin serves as a bellwether for oilfield M&A activity.

The increased fracking in the Permian Basin — and in other U.S. basins — has unlocked the need to reroute existing pipe and dig-in new pipe to supplement rail transport. The good news is that there are some great companies in West Texas and elsewhere benefiting from this work.

New pipe is releasing the pressure of getting U.S. crude to market and, in the process, improving the price differential between the international benchmark for oil — Brent — and the price of West Texas Intermediate — the benchmark of U.S. oil. West Texas Intermediate typically trades at a discount to Brent.

The general mood of energy leaders at April’s Midland Energy Expo — where Capital Alliance was a presenter — was one of cautious optimism as oil prices head upward to a healthier level.

Drilling for oil isn’t going to stop. Companies focused on driving efficiencies in the oilfield, providing the latest technology or servicing what is still operating will still find demand for their services.

Buyer interest remains strong for middle-market transactions although the higher risk, billion-dollar acquisitions likely will be on hold for some time.

Energy giants consolidated vendors in the wake of the drop in oil prices as they slashed capital expenses. Those who were fortunate enough to keep their contracts with the big players will see their business increase to take up the slack of their competitors who were forced out.

Companies still standing after this process could be among the beneficiaries of the current M&A cycle. In addition, companies that have properly managed their debt during the commodity price reduction, have strong balance sheets and are not in distress should be in good position to benefit from forthcoming M&A cycles.