This year is shaping up to be exciting period for mergers and acquisitions (M&As) in the oil and gas industry, according to Aberdeen-based energy finance expert Mike Beveridge.
Middle-east buyers and investors with deep pockets will play a key role in M&A’s in the sector, while banks will also be a important driver of activity, he said.
Mr Beveridge, UK co-head of corporate finance specialist Simmons Energy, a division of Piper Sandler, added: “With 2020 now, thankfully, behind us, we can look ahead with some optimism and identify the themes that will drive M&A activity in 2021.
“We can see the emergence of Middle East buyers and investors, with capital and aggressive growth strategies, pursuing local content obligations by acquiring technology and expertise internationally, with a view to exploiting this capability in their large and recovering regional markets.
“Relative to other sectors, oil and gas has continued to perform during the coronavirus crisis. Revenues have not fallen off a cliff in the way we have seen in hospitality, travel and retail.
“With the industry deemed essential during lockdown, many oilfield services companies have performed surprisingly well and will attract buyers and investors based on the fundamentals of their financial performance.”
A significant private-equity portfolio built up during the last “super cycle” will also be a key driver of M&A activity in 2021 and 2022, he said, adding: “Many of these companies will look to exit so they can generate liquidity for their investors within their planned investment timeframe.
“Another source of M&A activity will be the banks, who essentially now have control of several heavily-leveraged oilfield services businesses.
“Credit institutions are not generally keen to own and run industrial companies for long, so will look for more permanent homes for these companies to recover that outstanding debt.
“As well as many of the big industrial multi-sector corporates exiting the oilfield services acquisitions they made during the last cycle, we will see traditional oilfield services groups continue to tidy up their portfolios, to deleverage and make acquisitions to boost their green credentials.
“New buyers will emerge to take full advantage of a somewhat unloved and potentially very undervalued oilfield services sector.”
Industry headwinds make private equity exits “quite challenging”, which will prompt some larger firms to seek “transformational” deals that can open up exit routes in the future or “provide scale for an IPO (initial public offering), he said.
Simmons also anticipates more deal-making activity on the energy transition front, particularly in offshore wind.
Other more “nascent” sectors, like electrification of oil and gas production, carbon capture, utilisation and storage, hydrogen and large scale energy storage will “rapidly gain M&A momentum”, Mr Beveridge said.
He added: “The one prediction we can make confidently is that M&A in 2021 will be very active at Simmons but will be characterised by creativity.
“Deals will involve some important non-cash elements, whether these are paper deals, true mergers, earn-out structures or staged/multi-step acquisitions.
“If sellers want full value for their businesses, they need to be open to risk sharing deals.
“Fundamentally, the oilfield services sector needs a lot more consolidation to remove capacity, achieve genuine synergies and offer more compelling benefits to their E&P customers.
“Many people have written off oilfield services as a tainted “fossil fuels” industry.
“In reality, oil and gas will remain an enormous global industry for decades to come, whether the UK wants to participate in this or not.
“Those that have conviction in this continuing journey may well find themselves making some really interesting financial returns, when others “are looking the other way”.
The market during 2020 was subdued because of Covid-19, he said, adding: “The few deals we saw in the second half were generally driven by need – either distressed businesses facing financial challenges or larger firms selling underperforming divisions to focus on core activity.”
