Fuelling Oilfield Services' Financing

Ross Campbell, Chief Executive Officer, The Oil Council, describes the current investment and finance landscape in the oilfield services sector.

The recent performances of companies in the oilfield services sector have, on the whole, been good for investors. Many so-called small- and mid-cap services companies have enjoyed stellar performances across global stock exchanges and doubled or tripled their investment values over the past 24–36 months.

During 2009–2011, the market also enjoyed a wave of consolidations in Europe’s services sector. This was driven by the aggressive growth strategies of the larger service companies and energy conglomerates, including Schlumberger and General Electric. These acquisitions helped to boost the flow of deals for banks and advisers, and raise the visibility of the oilfield services sector, which prompted wider investor interest in the energy sector.

However, as a consequence of those deals, there are fewer oilfield services companies in Europe offering attractive growth stories for fund managers to invest in. Normally, this would not cause too many ripples in the sector, but, in 2012, merger and acquisition deal flow decreased significantly and only a handful of oilfield service companies made initial public offerings on exchanges outside North America. Deals are becoming harder to find

Currently, the financial community is reviewing and recalibrating the companies that emerged from this wave of consolidation. As banks’ profits have an obvious positive correlation to the flow of deals and the number and size of transactions they can make, a perceived lack of opportunities in the oilfield services sector over the past 12 months has made the sector less appealing in terms of bank resourcing and servicing.

The limited awareness about oilfield services, as defined by the few visible players, is both a hindrance and an opportunity; it holds back wider market understanding, yet creates an opportunity for clearer definition of the sector and its key constituents, which includes subsea services.

The hesitancy surrounding investment in oilfield services is partly because some investors do not understand how to accurately determine the risks involved in the sector and, consequently, how to place them in a portfolio.

Outside North America, oilfield service companies sometimes find it difficult to attract the right levels of investor awareness, largely because there are very few financial institutions in Europe, the Middle East and Africa (EMEA) that completely understand the oilfield services sector in comparison with the exploration and production sector.

There are simply not enough specialist buy or sell-side services analysts in the EMEA region. There is only a relatively small group of highly skilled experts, enough to cover all the recognised services companies but not enough to promote the sector effectively across EMEA and reaffirm the value of its stocks. The sector does not have enough champions in the financial sector.

Understanding the market
The most important part of making any investment decision is having a clear understanding of the market. The Oil Council assists by bringing investors and companies together, and helping to broker oil and gas sector relationships on a global basis.

Businesses thrive on capital investment. Injecting finance at the right time powers commercial growth and enables diversification. Organisations sometimes need guidance in their search for business partners and financiers. The Oil Council offers a global platform for companies to gain access to sound commercial advice, vital capital and crucial business connections. We do not offer insights into the merits of a particular technology, operational management or geopolitical advice. Our focus is on helping companies to find strategic investment and business solutions, and to choose effective partners.

The processes surrounding a major investment programme or a change of ownership, such as Acteon has recently experienced, lead to closer interactions with banks and other financial institutions. Part of this has to be about promoting better understanding of subsea services, as distinct from subsea construction or subsea equipment provision, because it helps investors to understand and evaluate the companies operating in the sector.

By engaging effectively with the financial and investment communities, companies like Acteon can explain their role and better define subsea services. This gives investors a clearer understanding of the business models that subsea services companies adopt. It helps them to invest with confidence in the sector, as they understand the risks, the timeline of a return on their investment and, most importantly, that they are buying into a long-term value proposition that paves the way for significant upside in the company and, ultimately, the performance of their investment portfolio.

Some banks and brokers still struggle to differentiate the investment stories for oilfield services from those in the exploration and production sector because they lack knowledge and understanding about this industry sector. Of course all banks and brokers cannot be all things to all men.

There were a few exceptions in 2012 to the generally strong and reliable stock performance of oilfield service companies. Last year, a handful of companies issued unexpected profit warnings and their share prices plunged as much as 60% from their year highs. Consequently, some investors shied away from the sector.

Without enough specialist analysts to make sense of what are unique company-specific events, one or two pieces of bad news can overshadow the underlying strength of the sector. Bad news stories seem to linger in the memory, which can prompt investors to treat oilfield service companies that offer good dividends and a relatively stable revenue stream as they would much higher risk/return investments in exploration and production.

Private equity companies, however, have been very active over the past 24–36 months and their influence is still being felt in the oilfield services sector. European private equity has grown substantially in recent years, but little has been invested in international exploration and production. The pattern of investment we are seeing suggests that private equity has a good understanding of the oilfield services sector and can find opportunities not always apparent to public institutions. We only see their interest and allocation of dry powder* in the sector increasing.

To attract more investors to the sector, especially those with larger cheque books, services companies will have to boost cost control and cost-effectiveness, and deliver business performance without scaring the market. Existing and potential investors need to see commercial stability to increase confidence in their investment. Investors are looking for companies and individuals that push boundaries, inspire others and achieve growth in challenging markets.

New revenue streams will bolster confidence and, with the continuing rise of national oil companies, we see this as a key avenue to new growth for many services companies. As national oil companies have about 70% of global resource holdings, the international oil companies are facing a squeeze to gain access. There are vast opportunities for the oilfield services sector here because of the significant variability in the extent to which national oil companies adopt new technology and in the depth of relationships with their suppliers.

Other performance factors key to growth and renewed investor interest in 2013 include good management, consistent performance, good revenue streams and accurate forecasting for operations in established and emerging markets.

Acteon was a great example of a company performing well in 2012. Consequently, it was nominated for a 2012 Annual Award of Excellence in our category for Oilfield Services Company of the Year, but was unfortunately beaten by Petrofac. In making these nominations, our judging panel of 55 industry experts assessed financial and operational performance, the strength of industry partnerships and market reputation, corporate governance and investor relations. All these aspects are crucial to success in the modern oilfield services market and for attracting investment.

Service companies that can achieve these targets and goals and ensure that they have a diverse customer base should be able to attract the investment they require.

In our view, 2013 will be relatively low key in terms of new investment and growth in oilfield services. Capital expenditure in exploration and production has been rising year on year for the past 10 years and the oilfield service sector has grown with it. This year, we anticipate another small rise, which is good news for the services sector, but, with rising costs, we see this margin and investment as having neither negative nor positive effects on growth for most. However, we still see strong dividends and order books being highlighted by many companies; the greatest upside is being seen on those that can remain innovative. Consequently, The Oil Council remains bullish on the sector and committed to helping it achieve new growth in 2013 and in the years to come.

*The amount of capital that has been committed but remains uncalled to private equity funds

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