Plans for two of the biggest names in the sector to join forces reflects the need to cut more costs but is also a sign of improving confidence, writes Perry Gourley.
When senior figures from the North Sea met at a seminar in Aberdeen recently to assess prospects for 2017 and beyond, they predicted M&A activity would emerge as the big theme for the oilfield services sector as businesses start to move out of survival mode.
Companies that are in reasonable shape are beginning to think strategically againAlan Kennedy
That confident forecast was proved bang on the money by yesterday’s announcement from Wood Group that it had agreed to buy rival Amec Foster Wheeler in a £2.2 billion deal.
The prediction of an upsurge in M&A activity was made on the back of some signs of stability returning to oilfield spend and activity after a recovery in the oil price.
After the seminar organised by KPMG, its UK head of oilfield services, Alan Kennedy, said that the growing sentiment in the sector was that the market had “stopped getting worse”, prompting firms to look ahead to new opportunities.
“Companies that are in reasonable shape in terms of their balance sheets, have sorted out their finances and have stabilised trading at today’s lower level are beginning to think strategically again and looking ahead three to five years. M&A growth through acquisition is a big tool in the box when there’s limited organic growth to be achieved through new projects in the current market,” he said.
While much of the coverage of the proposed takeover yesterday focused on the opportunities for cost-cutting, Wood Group’s chief executive Robin Watson was also keen to stress the deal’s growth angle.
“Not only is it a good transaction, it gives us a fantastic business moving forward and it’s an exciting proposition for everyone involved,” he told The Scotsman.
“It’s a good opportunity for us to create a global project engineering and technical services player, and it’s a great Scottish, British, success story. The global proposition is compelling and gives us a broader end-market exposure which brings great career opportunities for our staff.”
The City reacted positively with analysts highlighting the benefits for shareholders in two companies which have been hit hard by the impact of the fall in oil prices.
Although the current price of $51 a barrel looks decidedly healthier than the sub-$27 which prices fell to in January 2016, it is also a far cry from the $115 seen in the summer of 2014. Both Wood Group and Amec Foster, which provide services to oil and gas projects globally, have inevitably suffered as the production and exploration companies have slashed spending.
While oil prices have recovered to some degree and signs of a return to spending are emerging, caution abounds and the ramp-up in capital expenditure is slow-paced.
The boards of both firms argue that such an environment makes it an ideal time to join forces. Creating an organisation with a combined value of about £5bn will provide greater scale and scope for efficiencies as both businesses look to deliver more for less.
Philip Barker, partner and head of industrials at Cavendish Corporate Finance, agrees. He said: “The transaction will provide important benefits for both groups, which will be able cut costs by up to £110m, diversify their offering, cross-sell to the wider client base and become more competitive.”
Mike van Dulken, head of research at Accendo Markets, believes the deal “signals logical consolidation as those that operate in and around the energy sector exit the toughest of times and aim to enter the new era of lower prices on a stronger footing, able to better weather any future storms”.
As well as those potential storms, the companies believe the proposed deal will also put them in a better position to benefit from the upturn in E&P activity and investment. There’s certainly signs of improving confidence among many clients of Wood Group and Amec, borne out by the return of M&A activity.
That’s been no more apparent than in the North Sea where Wood Group built its business. In recent months more than $6bn of assets have changed hands including the $1.24bn acquisition of Ithaca Energy by Israeli-based Delek Group and Royal Dutch Shell’s $3.8bn disposal of North Sea assets to E&P company Chrysaor. BP has also agreed to sell stakes in the Magnus oil field and the Sullom Voe Terminal to EnQuest in an $85m deal.
The recovery in oil prices has also seen increased investment in some lower cost locations for extracting shale gas, a sector which both Wood Group and Amec Foster Wheeler have significant interests in.
Against that backdrop, the boards of other players in the oilfield services sector will be tasking their corporate advisers to look at possible deals. Yesterday’s announcement could well spark a flurry of activity as competitors look at how best to respond to the prospect of two of the industry’s biggest names joining forces.