Although oil and gas companies might be operating according to the whims of fluctuating prices, the value of oilfield service companies aren’t necessarily bound by oil prices.
The recent and dramatic drop in the price of oil, which fell from $100 per barrel in August to around $80 in October, has many oil and gas service companies wondering if they missed an opportunity to sell at a decent price. However, according to John Sloan, vice chairman of Allegiance Capital, an investment bank specializing in mergers and acquisitions, “The value of a proven, well-managed, successful oilfield services company is not totally immune from the latest drop in oil prices, but we haven’t seen any negative impact on what buyers are willing to pay for companies.”
The price of oil is an important factor when determining the value of a company, but the past success of a particular company is paramount. Sloan notes that in the near future, investments into mergers and acquisitions could potentially reach $1.1 trillion, but company value is mostly dependent on how it is marketed. The most ideal route is to solicit to the largest number of qualified buyers that are highly active within the industry.
A company’s value is determined by the potential buyers, not oil prices. While the price of oil may fluctuate from region to region, its true value is dictated by world oil markets and is easily affected by events in areas such as China, Russia, and the Middle East. The value of a particular company is often directly tied to the global market, and the companies which are able to market both domestically and abroad have better chances of receiving the best offer. Successful companies are high in demand, but supply is low, says Sloan. “The ultimate value of the company is based upon what potential buyers are willing to pay – not what is happening with the price of oil,” he says.
The international market place has also created new and unique opportunities for companies looking to sell off its assets. Sloan explains, “Today, many countries have proven oil and gas reserves, but they do not have the technology or experience necessary to tap into those reserves. International investors know American companies can provide the technology they need and the experience required to get the job done quickly, and they are willing to pay for it.”
As an example of how strategic investors are willing to pay more for a viable company, Sloan offered an example of one particular oilfield service company he had dealt with. The company owned a patent and was marketed in the U.S. The best domestic offer the company received was about eight times the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). The firm was ultimately sold to a British investor, which was looking to add the patented technology to their repertoire, for about 12 times the company’s current EBITDA.
Despite the promising global market of acquisitions, middle-market oil and gas services will often try to time their moves in a continually shifting market. But this is often impossible, according to Sloan. He says that right now the market for successful oil and gas services companies is impressive. “Investors have cash on hand … and investors still see the industry as offering a good return on investment,” he says. But the completion of an acquisition deal generally takes between nine to 12 months, making it extremely difficult to predict what oil prices will be by the time of the sale’s closure. Rather, timing of a sale should be based on a company’s financial situation.
For owners of domestic oilfield service companies with rare technologies and processes, this means that potential foreign investors might be willing to offer a better deal than a U.S. investor would. As oilfields in foreign nations are being set for exploration, the technology developed in the U.S. is extremely beneficial to foreign operators that don’t have the technology or experience to be able to tap into reserves such as unconventional shale formations.
“If oil prices remain lower, the only change we may see would be in the way deals are structured,” Sloan explains. “Investors may begin asking owners to stay more financially engaged in the company for a longer period of time after a sale closes. However, we still believe a company is worth whatever the buyer is willing to pay. It’s extremely important to ensure your company is marketed well to maximize value and secure the best terms possible.”