The prolonged turbulence in oil prices has brought cost reduction programmes, the shelving of projects, and insolvencies in the oil field services (OFS) and exploration and production (E&P) sectors — and has presented a once in- a-generation buying opportunity. Although many companies are focused on pure survival, there are buyers willing to bet on an eventual recovery. Indeed, the situation presents a significant opportunity for private equity, either alone or in partnership with corporates.
Paradoxically, the consensus that no significant price recovery is imminent could simplify parties’ agreement on valuations in 2016. Q1’s Eon/Premier deal showed a pronounced softening of asset valuations with an implied price per barrel of under US$2. At these levels sellers need a strategic reason to sell or else a strong financial imperative. With financing alternatives limited, asset sales will be unavoidable for a number of companies in 2016.
Oil price stability will be key to consummating deals, especially in the upstream segment. Sharp changes in price scuppers deals, as experience in Q3/4 2015 has demonstrated. The only way to mitigate the risk is to transact quickly.
Though upstream is challenged, the market for downstream and midstream assets, especially infrastructure, remains relatively buoyant, and there remains a significant pool of potential buyers, PE included. With many E&P players needing to keep producing to generate revenue and service debt, tariff-based infrastructure, such as gas transport pipelines, can be attractive. Robust refining margins in 2015 have generated downstream interest, especially for emerging market assets. Consolidation within the oil field services subsector is widely anticipated and appears to be gaining momentum. As well as straight buy-outs, involvement in the OFS sector may also include taking positions in the increasing number of OFS work-outs, perhaps to leverage existing debt positions or provide new equity to unlock a restructuring.
Many PE buyers will look to team up with oil and gas corporates to benefit from these opportunities. Creating a successful, sustainable joint venture between PE and strategics can be challenging, with the parties often having varying outlooks on matters such as governance and exit, as well as different investment horizons and ideas on valuation. To overcome these challenges, the parties must clarify each party’s role based on their strengths, and concentrate on the issues important to them as an organization, rather than the numerous differences between them.
2016 promises to be challenging for all those involved in the oil and gas industry, but opportunities definitely exist.