Accelerated Oil-Related Mergers and Acquisitions and Characteristics of an Attractive Oilfield Services Business

After a historic drop in demand in the early days of the COVID-19 pandemic, the U.S. oil market has rebounded sharply on a global demand rebound that exceeded original expectations. West Texas Intermediate (WTI) and Brent crude oil prices reached more than USD 80 / bbl for the first time since 2014 at the end of the third quarter of 2021, while international demand rose to around 99.3 million 101.7 mm bbls / d. Subject to further widespread shutdowns and travel restrictions, oil demand is expected to resume its pre-COVID growth trajectory in 2022.

From the end of the fourth quarter of 2021, major international manufacturers will have to announce an increase in material production. Coupling this news with lower demand uncertainty has resulted in persistently elevated oil prices and optimistic profitability expectations for 2022 for domestic producers and oil and gas service companies. These market conditions also offer favorable opportunities for oil and gas services companies that have successfully weathered the pandemic to gain additional market share through increased mergers and acquisitions (M&A).

Drawing on historic times of market turmoil, 2020 saw a decline in new exploration and production (E&P) investment and M&A activity across the board as both large and small companies attempted to shut down their operations in response to the oil price crash and uncertain short-term demand outlook to zoom out. While the recovery of the energy market accelerates in 2021, M&A transactions from the beginning of the year to the third quarter of 2021 already amount to more than 35 billion US dollars. Additionally, total US shale spending is expected to grow 19.4 percent to $ 83.4 billion in 2022, Rystad Energy said, signaling confidence in continued production growth.

As shown in Figure 1, leading US publicly traded oil and gas services companies are trading at multi-year EV / EBITDA highs starting in the fourth quarter of 2021. Lower average multiples in 2019 and 2020 were highlighted by a lack of accessible funding levers and the relative uncertainty of energy prices, highlighted by the multi-year low of 8.4 times the corporate average multiple in 2020. Due to the improved outlook for international energy demand and the Confidence in domestic manufacturing capabilities by 2022 will give public buyers an incentive to continue pursuing arbitrage opportunities through M&A activities.

When owners seek a sale, spin-off, or raise capital, institutional investors typically use selected, more weighted attributes in addition to financial performance to determine the valuation and overall attractiveness of an oil and gas services company. Hence, optimizing and tracking these facets of your business can greatly increase both revenue and the ability to close a deal. Since risk taking is a key function of value, it is not surprising that the same traits are among the common differentiators of companies that emerged from the pandemic in a position of strength. The following are the attributes that we believe are commonly evaluated and add value by making businesses less risky, revenue more predictable, and operations more profitable:

  • Market Segment Focus – Across the oil and gas services landscape, companies with a lower correlation with the number of rigs and new drilling activities are viewed more favorably than those directly related to production and drilling activities. As a result, service companies in the midstream and downstream area have received higher average EBITDA multiples than companies in the upstream segment in the past due to their lower dependence on short-term market conditions.
  • Project / Sales Backlog – A month-long backlog of incoming orders provides predictability of revenue streams for the next few months and short-term protection against market declines while the backlog is processed through. Arrears create predictable, tangible profit paths that give investors confidence.
  • Customer concentration – everything is the same, the more diversified a company’s customer base, the better. Investors prefer companies that ideally have no more than 20 percent concentration of sales with a single customer and no more than 50 percent concentration among the top ten customers.
  • Contractual terms – companies with long customer relationships, guaranteed contracts and recurring or exclusive service relationships are generally valued more favorably than project-based companies. In addition, seller agreements can have a significant impact on value and attractiveness to investors, especially for lower-middle-class companies with exclusive relationships in an attractive geographic region.
  • Capital Spending – Investors rate capital spending in two categories – maintenance and growth investments. Especially for private equity groups focused on ROI, companies with less maintenance are preferred as this is the most efficient use of capital. On the other hand, successful growth investment strategies that drive sales growth give investors confidence in the company’s future strategy.
  • Management team – While the management needs and integration strategies of strategic buyers vary depending on the situation, financial investors try to support management teams with proven industry experience and many years of experience in the company, but also with limited key person risk. Investors also evaluate any current or future gaps in the management team to understand how much additional C-suite salary may be needed in the future.

In addition to dealing with the ongoing headwinds in the supply chain caused by the pandemic, perhaps the single biggest factor influencing a service company’s short-term prospects is its ability to recruit and retain its employees. In our conversations with entrepreneurs, industry groups, strategic actors and private equity investors, supply chain bottlenecks and manpower are the most discussed topics. As some supply chain problems have begun to subside, oil and gas companies, in line with general labor market trends, are being forced to cope with constant wage increases, expectations for broader service packages and an increasingly changing workforce. As a result, companies with strong HR departments and training programs, whether outsourced or outsourced, are a key differentiator for potential investors.

Supported by strong energy prices, a return to pre-pandemic demand levels, and an overall healthy consumer economy, there is tailwind for oil and gas companies to achieve strong profitability and growth in 2022, coupled with sizeable arrears and strong financial performance Increased new drilling activity has fueled renewed optimism and confidence among banks and other lenders. These factors will continue to move business owners and investors to benefit from M&A strategies in 2022, which will lead to increased transactions across the capital spectrum. Despite the setbacks in the energy market caused by COVID-19, in the absence of future lockdowns or drastic legislative changes, the oil and gas landscape remains a long and profitable runway for a well-positioned service business.

managing Director



Start-up consultant

John Sinders is a managing director at Founders Advisors investment bank and is based in the firm’s Houston office. As an experienced industry professional with over 30 years of experience in energy investment banking and private equity, Sinders was also a senior executive officer in a large oil service company and board member of the Shaw Group after the IPO in 1993, where he led the energy departments at Howard Weil, Jefferies and RBC. Founders Advisors serves midsize companies in six areas of activity, including energy. It is headquartered in Birmingham, AL with a third office in Dallas. Certain Founders Advisors principals are licensed to Founders M&A Advisory, LLC, a member of FINRA & SiPC, to provide the securities-related services described herein. Founders M&A Advisory is a wholly owned subsidiary of Founders Advisors. Neither Founders M&A Advisory nor Founders Advisors offer investment advice.

Three ways technology will shape the oil and gas industry

3 ways technology will shape the oil and gas industry Download it for free today

Oil and gas operations are often located in remote locations, far from company headquarters. It is now possible to monitor pump operation, collect and analyze seismic data, and track employees from almost anywhere around the world. Whether it’s employees in the office or in the field, the Internet and its associated applications enable a greater multidirectional flow of information – and control – than ever before.

Comments are closed.