Dealmakers will have to be more imaginative and produce clever combinations of companies to deliver real value in the current energy market, according to a leading expert in company finance.
Colin Welsh, international partner of SCF, set out the challenges and opportunites for dealmaking in energy at Insider’s Deals and Dealmakers Business Breakfast yesterday.
He said: “This is a time for clever combinations of companies, deals that don’t require much cash and really bigger and more cash generative businesses with better debt capacity and the opportunity to squeeze out cost.
“If you can’t sell a company for a good price, at least get it into a position where you can get it within the shareholding, that way people will stick with you.”
He told the audience of nearly 200 in Aberdeen: “To the dealmakers and aspiring dealmakers in the room I say this: this is a time for real dealmaking, and I mean not just doing a sell-side mandate or a bank refinancing, but coming up with an original idea that creates real value.”
He said it was a difficult climate for dealmaking. “M&A isn’t high on the radar for the big traders unless it involves technology that is truly game changing. So the good old days of Schlumberger paying $100 million for a small technology company are gone, at least for now.
“Turning to private equity: in the specialist world of oil and gas private equity a major change is taking place because PE managers are finding it virtually impossible to raise new capital because of poor performance, a lack of exits and ESG pressures.
“Investors in private equity funds often roll over the gains that they achieve from one fund and they put the money into the next fund but if a fund can’t monetise their existing investments, there’s a reluctance to allocate more capital into more illiquid assets.”
He pointed to investment houses that closed offices in Aberdeen and London and that were no longer investing in oilfield services.
“The bottom line is that the pool of buyers is greatly diminished and obviously that’s not good news for anyone that’s wanting to sell.
“Currently there is a backlog of oilfield services that were bought in the run-up to the downturn in 2013 and 2014 that are good solid profitable companies, but because they were bought at high valuations and funded by high levels of debt then the market deteriorated, they now have little or no equity value and way too much debt.
“Unless the private equity owners are prepared to walk away and the banks take a haircut it’s difficult to see a way forward for these companies.”
But he said there were still opportunities and pointed to SCF portfolio company Centurion, which he chairs, which had done deals that were only part cash and where they had reduced debt from 4.6 times EBITDA to two time EBITDA.
He continued: “You might ask if things are so bad why have SCF spent a lot of money buying Score in Peterhead and Contract Resources in Australia?
“The answer is because these are two terrific companies who’ve got excellent management teams and the business have proven they can perform well in today’s markets. They both provide critical maintenance services to growth markets.”
He added: “There will be a day when oil and gas is back in favour, particularly with a better offshore market, much better financial performance and it will need the industry to show that it is taking action to address environmental concerns.”
