Together, these factors leave the OFS sector in a challenging place. While the threat of insolvency has receded for most, the challenge of delivering an acceptable return to investors remains. The sector struggles to articulate how it will deliver the kind of earnings growth that could support a higher valuation, despite improved financial performance. OFS companies’ responses at the moment comprise of a combination of the following:
- Focus on technologies or activities in which they have the kind of competitive advantage that supports activity and acceptable margins
- Extend the scope of integrated service offerings that can attract premium pricing, if scale permits
- Where a definitive technological or operative advantage cannot be sustained, build scale to enable a lower cost base that can allow sustainable margins; where possible, use digital technologies to control costs, too
- Engage with the operator’s technology agendas
The implications for the M&A agenda continue to be:
- Consolidation by activity or area to drive competitive advantage and costs
- Bolting on entities with adjacent viable technologies
- Exit of markets or areas where activities are sub-scale or undifferentiated
2018 was largely similar to 2017 in terms of transaction activity.
In 2018, we saw 218 deals announced in the oilfield services sector globally, down by 7% from 234 in 2017 and approximately half the number of deals pre-crisis.
Deal value (US$21b) was down by 11% from US$24b in 2017. This decrease was due to the limited number of large transactions above US$1b (only 3 in 2018) and the continued absence of transformational transactions (above US$10b).
Given that cost efficiencies are still high on the agenda, a large volume of M&A activity has been driven by the need to achieve economies of scale through the creation of more dominant companies with greater scale and a broader portfolio of assets.
2018 therefore saw the combination of complementary asset-heavy companies in various sectors. We expect this trend to continue in 2019, with well-capitalized companies and investors engaging in more consolidation activity and/or acquiring assets out of administration.
The oil and gas industry is one of the world’s most advanced users of technologies. However, to date, these technologies have been primarily focused on improving time to first oil and the effectiveness of hydrocarbon extraction, rather than operational performance and end-to-end integration.
The industry also collects massive volumes of highly specialized, siloed data. Significant opportunities exist to enhance data transparency and enterprise understanding to drive better decision-making and operating performance.
The past few years have seen a number of transactions driven by the acquisition of technology and the integration of digital data, and we expect these acquisitions to continue to be on the wish list of oilfield services companies looking to differentiate in 2019. While mostly small-sized transactions, these acquisitions could form a strong basis for operational outperformance and contribute to an increase in market share for the players involved.
The majority of oilfield services companies are working to streamline their offerings with data-enhanced processes, increasing flows, shortening process times and ultimately increasing efficiencies. This trend will continue in the years to come.
As in 2017, several special-purpose acquisition companies (SPACs) and financial sponsors deployed funds to the energy sector in 2018. With oil prices stabilizing and the market starting to recover, we should expect growing activity from SPACs and financial investors.
Financial stress was a key driver of M&A activity in 2017, specifically on the highly fragmented end of the market focused on serving non-complex oil and gas development projects or providing relatively commoditized products and services.
This trend was less prevalent in 2018, especially at the top end of the market, but still existed and is expected to continue in 2019.