Deal Options in a Turning Market OFS Newsletter October 2016

Transcription

1 Deal Options in a Turning Market OFS Newsletter October 216 Introduction As reported in our August OFS Newsletter, Energy M&A sentiment is increasing. Evidencing this, we have seen a slew of transactions announced in recent weeks. These transactions, which were initiated during a period of higher uncertainty, are now being closed with guarded optimism. This recent optimism is being manifested by the sustained and steady increase in rig counts, oilfield activity, and oil prices, but the underlying driver of these results is a combination of a number of other positive factors. These factors include a change in OPEC s position and resilient demand fundamentals. With these factors at play, operating companies and investors alike are beginning to enter the market with the intent to place their bets or double down. Founders is actively advising on buy-side and sell-side processes as oil and gas industry constituents are aggressively positioning themselves to ride the cycle back up. One common thread among our most recent engagements has been oilfield creativity. Transactions ranging from mergers and recapitalizations to growth equity and private debt are being pursued by oilfield entrepreneurs, Texas-based family offices, and oilfield focused private equity firms to take advantage ofthe current market opportunity. Transaction Types A number of transaction types are now happening in the marketplace as capital returns. See chart below for recent example transactions. Oil & Gas Team Duane Donner ddonner@foundersib.com Joe Brady jbrady@foundersib.com John Sullivan jsullivan@foundersib.com John Ortstadt jortstadt@foundersib.com Vaughn McCrary vmccrary@foundersib.com Jackson Poe jpoe@foundersib.com Matt Roden mroden@foundersib.com Transaction Types in a Turning Market Merger Announced May 216 FMC Technologies and French oil-services rival Technip have agreed to merge in an all stock deal that will create one of the world s largest oilfield service companies. Recapitalization March 216 Globe Energy Services has been recapitalized by Clearlake Capital; This partnership provides Globe with a strengthened financial position that will enable us to reinvest in the business and execute.. - Troy Botts Jr., Globe s Founder & CEO Debt Restructuring October 216 Stallion Oilfield Services has completed a debt restructuring with its secured lenders, key equity holders, and financial investors eliminating virtually all of its debt and restructuring the company's balance sheet. Private Debt September 216 Wolverine Group, a Canadian-based oilfield services company, has received a $19MM loan from IAM Private Debt Group; proceeds are expected to be used to finance the acquisitions of HD Energy Rentals and Bearing Oilfield Services. We are seeing an influx of capital into the oilfield with the proceeds being put to use in a number of creative ways. - Joe Brady, Founders Investment Banking Director

2 ($ in Thousands) (Market Share) Improving Fundamentals and Changing OPEC Position With oil prices steadying and rig counts consistently increasing, the oil and gas industry is reaching a point of stability that is giving comfort to investors and operators. A catalyst for the recent optimism is OPEC s changing position in the global market. Historically, the cartel has utilized their internal production levels to control global pricing, and they were successful in driving prices down for the past two years by oversupplying the market. The long-term success of this strategy is now being called into question. With OPEC operating at near max capacity, even the Saudi s are feeling the pain of low prices in their declining revenues. OPEC appears to be coming to terms with the resilience of U.S. energy and that their strategy may in fact be furthering their problems. Michael McDonald of Oilprice.com commented, OPEC seems to have finally accepted the fact that they are not as strong as they once were, and that the market forces behind unconventional production in the U.S., Canada, and abroad are not as weak as OPEC had supposed. While a few U.S. firms have been bankrupted by the last few years, those bankruptcies have only served to strengthen top tier players in the space. Another recent data point supporting this idea is Saudi Arabia s $17.5Bn bond sale. The Wall Street Journal noted in an article on October 19, sale is biggest-ever emerging-market debt issue; comes as kingdom works to keep economy afloat as oil income dwindles. With industry fundamentals solidifying, U.S. energy proving its resilience and wherewithal to innovate, the chances of a lower for longer scenario seems less likely. The only place where we don t see any signs of recovery at this stage is in Asia. - Paal Kibsgaard, Schlumberger CEO The Opportunity Due to the nearly two-year decline in the industry, many oilfield service companies are in a challenged state. And the underlying hope is that the market recovery will begin increasing revenues and lifting margins. That hope materialized in Halliburton s recent earnings release, which surprised analysts as the Company turned a profit in Q3. OFS companies that have made it this far have accomplished an impressive feat and are likely coming out of the woods of the downturn. But, while they may be well on their way to riding the cycle back up, an even larger opportunity for growth exists in the form of taking market share. A company that can take market share in a growing market will go from riding revenue growth to driving it. These leap frog moves over hobbled competitors will fast track revenues as the market returns. Calculated bets will have to be made on actions such as new hires, upgraded equipment, aggressive pricing, and even new locations. Some moves can be difficult to consider as wounds are still fresh on the minds of most operators, but those who can capitalize should be handsomely rewarded come time for an exit. This window of opportunity, although recently opening, may close fast. Example OFS Company Market Share and Revenue through the Cycle $1,4, 14% 13% $1,2, 12% 11% $1,, 9% 1% 1% $8, $6, 6% $4, 4% $2, $- $38,942.6 $66,433.4 $12,573.1 $54,71.1 $23,638.5 $5,513. $6,188.8 $83,54.1 $15, E 217P 218P 219P 22P Domestic Revenue Domestic Market Market Share 16% 14% 12% 1% 8% 6% 4% 2% % Note: This analysis was performed using Spears & Associates recent data and projections for newly completed domestic oil wells and Founders assumptions for market share. Revenue in projected years assumes an amount of spend captured per newly completed domestic oil wells and a subsequent improvement in pricing to pre-cycle norms.

3 Conclusion Industry fundamentals and a shift in OPEC s position have brought about a strong change in sentiment on the industry outlook. This sentiment is bringing about a more subtle change in the industry that is luring investors back to the table and giving operators more transaction options and liquidity. Now is a good time to reevaluate your situation and assess opportunities in order to capitalize on a return in the oil and gas industry. Recent M&A Activity Announced Date Target Target Business Description Buyers / Investors 1/12/216 Gazelle Transportation, Inc. Gazelle Transportation, Inc. provides crude oil transportation and logistics services for the oil and gas industry. EIV Capital, LLC; EIV Capital Fund II, LP 1/11/216 Light Tower Rentals, Inc. Light Tower Rentals, Inc. provides industrial rental equipment and services to energy and construction markets. Clearlake Capital Group, L.P. 9/16/216 Groom Energy Solutions LLC Groom Energy Solutions LLC provides commercial and industrial energy solutions in the United States. DK Energy US LLC 9/15/216 Top Notch Energy Services, Inc. Top Notch Energy Services, Inc. provides thru-tubing fishing and milling services to the oil and gas industry. Team Oil Tools, Inc. 9/15/216 American Well Service LLP American Well Service LLP provides workover rig services. RockPile Energy Services, LLC 9/14/216 KEL-TECH, INC. KEL-TECH, INC. manufactures and supplies specialty chemical products for production, field stimulation, and drilling applications in the oil and gas industry. Clariant AG 9/14/216 X-Chem, LLC X-Chem, LLC provides solutions for the maintenance, production, completion, and stimulation of oil wells, gas wells, and pipelines. Clariant AG 9/13/216 Warrior Manufacturing Services Ltd Warrior Manufacturing Services Ltd, an oilfield services company, designs, manufactures, and repairs oilfield equipment. Patterson-UTI Energy Inc. 9/12/216 Applied-Cleveland Holdings, Inc. 9/6/216 Virent Energy Systems, Inc. Applied-Cleveland Holdings, Inc. provides third party inspection services for the construction and maintenance of oil and natural gas transmission, distribution, and other types of oil and gas construction. Virent Energy Systems, Inc. produces hydrocarbon chemicals and fuels from plant sugars. First Reserve Corporation Tesoro Corporation 9/8/214 American Well Service LLC American Well Service LLC provides containment and closed loop solids control Extreme Plastics Plus, to energy exploration and production companies throughout the Marcellus and Inc. Utica Shales regions. Source: CapitalIQ 3

4 Trading Statistics Stock Price % of 52-Week Market Enterprise 216P Enterprise Value / 217P Enterprise Value / Ticker Company Name 1/25/16 High Low Cap Value Revenue EBITDA 216 Revenue 216 EBITDA Revenue EBITDA 217 Revenue 217 EBITDA Integrated Equipment & Service Providers NYSE: SLB Schlumberger Limited $ % 135% $ 111,711.2 $ 122,232.2 $ 28,366.3 $ 6, x 18.7x $ 31,812.1 $ 7, x 15.5x NYSE: HAL Halliburton Company % 173% 41, , , , x 24.2x 18, , x 15.2x NYSE: BHI Baker Hughes Incorporated % 145% 22, , , x 77.3x 11, , x 16.3x NYSE: WFT Weatherford International plc % 13% 5, , , x 36.x 6, x 14.x Min $ % 13% $ 5,511.3 $ 12,356.3 $ 5,921.6 $ x 18.7x $ 6,738.4 $ x 14.x Median % 14% 31, , , , x 3.1x 14, , x 15.4x Mean % 146% 45, , ,15.8 2, x 39.x 17, , x 15.3x Max % 173% 111, , , , x 77.3x 31, , x 16.3x Equipment & Technology NYSE: NOV National Oilwell Varco, Inc. $ % 14% $ 13,881.7 $ 15,568.7 $ 7,32.8 $ x 57.9x $ 7,558.5 $ x 25.7x NYSE: FTI FMC Technologies, Inc % 145% 7, , , x 14.2x 4, x 13.8x NYSE: OII Oceaneering International, Inc % 16% 2, ,12.5 2, x 8.x 2, x 9.5x NYSE: DRQ Dril-Quip, Inc % 17% 2,11.9 1, x 1.7x x 2.3x NYSE: OIS Oil States International Inc % 144% 1, , x 34.2x x 21.5x NYSE: FET Forum Energy Technologies, Inc % 241% 1, , (22.2) 3.6x N/A x 43.8x Min $ % 16% $ 1,591.6 $ 1,52.2 $ 54.9 $ (22.2) 1.3x N/A $ 431. $ x 9.5x Median % 142% 2, , , x 12.4x 1, x 2.9x Mean % 147% 4, , , x 4.5x 2, x 22.4x Max % 241% 13, , , x 57.9x 7, x 43.8x Service Providers NYSE: SPN Superior Energy Services, Inc. $ % 182% $ 2,814. $ 3,819.5 $ 1,43. $ x 35.5x $ 1,83.7 $ x 13.8x NYSE: FI Frank's International N.V % 113% 1,98.6 1, x 111.6x x 62.9x TSX: ESI Ensign Energy Services Inc % 181% 1,24.2 1, x 11.7x x 9.6x TSX: CFW Calfrac Well Services Ltd % 297% (19.6) 1.6x N/A x 18.x TSX: TCW Trican Well Service Ltd % 94% (38.9) 2.5x N/A x 21.5x NasdaqGS: TESO Tesco Corporation % 151% (33.7) 2.1x N/A (16.2) 1.6x N/A NYSE: BAS Basic Energy Services, Inc..6 13% 2% (39.6) 1.8x N/A x 3.x NYSE: RES RPC Inc % 185% 4,7.2 3, (53.8) 5.7x N/A 1, x 34.8x NYSE: TTI TETRA Technologies, Inc % 122% , x 11.9x x 8.6x Min $.6 13% 113% $ 14.8 $ 27.5 $ 131. $ (53.8) 1.6x N/A $ $ (16.2) 1.1x N/A Median % 182% , (19.6) 2.4x N/A x 18.x Mean % 26% 1, , x.7x x 2.3x Max % 94% 4,7.2 3, , x 111.6x 1, x 62.9x Offshore Drillers NYSE: RIG Transocean Ltd. $ % 131% $ 3,694.1 $ 1,8.1 $ 3,88.3 $ 1, x 6.x $ 2,97.6 $ 1, x 9.1x NYSE: ESV Ensco plc % 129% 2,64.5 5, , , x 4.7x 1, x 7.5x NYSE: DO Diamond Offshore Drilling, Inc % 12% 2, , , x 7.3x 1, x 7.6x NYSE: NE Noble Corporation plc % 19% 1,4.9 5,43.1 2, x 5.9x 1, x 1.2x NYSE: RDC Rowan Companies plc % 129% 1, , , x 4.5x 1, x 8.x Min $ % 19% $ 1,4.9 $ 3,652.4 $ 1,578.2 $ x 4.5x $ 1,224.8 $ x 7.5x Median % 129% 2, ,43.1 2, x 5.9x 1, x 8.x Mean % 124% 2, , , , x 5.7x 1, x 8.5x Max % 131% 3, ,8.1 3,88.3 1, x 7.3x 2,97.6 1, x 1.2x Land Drillers NYSE: HP Helmerich & Payne, Inc. $ % 164% $ 7,177.8 $ 6,753.5 $ 1,6.6 $ x 15.1x $ 1,47. $ x 18.7x NYSE: NBR Nabors Industries Ltd % 259% 3, , , x 11.5x 2, x 1.x NasdaqGS: PTEN Patterson-UTI Energy Inc % 214% 3, , x 21.3x 1, x 16.7x NYSE: PES Pioneer Energy Services Corp % 447% x 42.x x 15.x Min $ % 164% $ $ $ $ x 11.5x $ $ x 1.x Median % 236% 3, ,47. 1, x 18.2x 1, x 15.8x Mean % 271% 3, , , x 22.5x 1, x 15.1x Max % 447% 7, , , x 42.x 2, x 18.7x Source: CapitalIQ 4

5 (Millions of Barrels) (Price per Barrel) Recent Trends Crude Oil (NYMEX: CL) $1 $9 $8 $7 $6 $5 $4 $3 $2 Domestic Oil and Natural Gas Rig Count Domestic Crude Oil Production Source: CapitalIQ, EIA 5

6 (Production - M b/d) (New Wells Drilled) (Price per Barrel) Domestic Oil Trends Crude Oil Price and Rig Count 1,6 1,4 1,2 1, $12 $1 $8 $6 $4 $2 $- Rig Count Oil Price Notable Trends Avg. Oil Price E 217P 218P 219P 22P $94.18 $98.2 $93.22 $48.59 $42.2 $52.25 $62. $7. $8. Avg. Rig Count 1,335 1,334 1, New Wells Drilled 31,425 32,15 33,15 19,25 8,65 11,1 13,3 17, 2, Production (M b/d) New Wells Drilled per Rig Domestic New Oil Well Count and Production , 3, 25, 2, 15, 1, 5, Production (M b/d) New Wells Drilled Source: CapitalIQ, EIA, Spears & Associates 6

7 (Gross Withdrawals - Mcf/d) (Price per M BTU) Domestic Natural Gas Trends Natural Gas Price and Rig Count 1,6 1,4 1,2 1, $1 $9 $8 $7 $6 $5 $4 $3 $2 $1 $- Rig Count Natural Gas Price Notable Trends Avg. Nat. Gas Price E 217P 218P 219P 22P $2.75 $3.73 $4.32 $2.62 $2.35 $3.13 $3.25 $3.4 $3.6 Avg. Rig Count New Wells Drilled 9,5 7,8 7,15 4,85 2,45 3,45 4,375 6, 7,75 Production (Mcf/d) New Wells Drilled per Rig NA NA NA NA NA Domestic Natural Gas Production 1, Source: CapitalIQ, EIA, Spears & Associates 7

8 (Production - M b/d) (Production - Mcf/d) Trends by Basin Current Natural Gas and Oil Rig Count Oil Production Natural Gas Production 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, Oct-15 Oct-16 Oct-15 Oct-16 YTD Change in Rig Count

9 (Production - M b/d) (Price per Barrel) Offshore Trends Crude Oil Price and Rig Count $12 $1 $8 $6 $4 $2 $- Rig Count Crude Oil Price Notable Trends Avg. Oil Price E 217P 218P 219P 22P $94.18 $98.2 $93.22 $48.59 $42.2 $52.25 $62. $7. $8. Avg. Rig Count NA NA NA NA NA Wells Drilled Production (M b/d) Wells Drilled per Rig NA NA NA NA NA Offshore U.S. Production Source: CapitalIQ, EIA, Spears & Associates 9

10 (Price per Barrel) (Production - M b/d) (Production - M b/d) (% of Total Global Production) Global Trends Crude Oil Production % 1% 8% 6% 4% 2% % International U.S. Onshore U.S. Onshore % of Total Liquid Fuels Production and Consumption Balance Top 5 Petroleum & Other Liquid Producers United States of America 15.4 M b/d 2. Saudi Arabia M b/d 3. Russia 11.3 M b/d 4. China 4.72 M b/d Production Consumption Stock Change 5. Canada 4.51 M b/d Crude Oil Short Term Price Uncertainty $12 $1 $8 $6 $4 $2 $- Historical Price EIA Price Forecast NYMEX Futures Price Lower Bound - 95% Confidence Upper Bound - 95% Confidence Source: CapitalIQ, EIA, Spears & Associates 1

11 About Founders Investment Banking Founders Investment Banking (Founders) is a merger, acquisition & strategic advisory firm serving middle-market companies. Founders focus is on oil and gas, industrials, software, internet, digital media and healthcare companies located nationwide, as well as companies based in the Southeast across a variety of industries. Founders Skilled professionals, proven expertise and process-based solutions help companies access growth capital, make acquisitions, and/or prepare for and execute liquidity events to achieve specific financial goals. In order to provide securities-related services discussed herein, certain principals of Founders are licensed with M&A Securities Group, Inc. or Founder M&A Advisory, LLC, both members FINRA & SiPC. Founders M&A Advisory is a wholly owned subsidiary of Founders. M&A Securities Group and Founders are not affiliated entities. For more information, visit people make all the difference meet the founders investment banking TEAM Contact For more information, visit call us at , or contact the oil and gas team directly by Duane P. Donner, II, Managing Director ddonner@foundersib.com John W. Sullivan, Vice President jsullivan@foundersib.com Vaughn R. McCrary, Associate vmccrary@foundersib.com Joe H. Brady, III, Director jbrady@foundersib.com John F. Ortstadt, Business Development jortstadt@foundersib.com F. Jackson Poe, Analyst jpoe@foundersib.com Matthew T. Roden, Analyst mroden@foundersib.com BIRMINGHAM 224 Lakeshore Drive, Suite 425 Birmingham, AL Phone: Fax: DALLAS 565 N. MacArthur Blvd, Suite 1 Irving, TX 7538 Phone: Fax: In order to provide securities-related services discussed herein, certain principals of Founders are licensed with M&A Securities Group, Inc. or Founders M&A Advisory, LLC, both members FINRA & SiPC. M&A Securities Group and Founders are unaffiliated entities. Founders M&A Advisory is a wholly owned subsidiary of Founders. 11