Oil chiefs quids in as pipe dreams pay off

ALTHOUGH it was a year in the making, last week's blockbuster tie-up between Wood Group and Production Services Network still managed to culminate in a series of late nights and lots of lost sleep before it was signed off on Sunday morning.

The frantic buzz of activity starkly contrasts with the deal's origins, which date back to a casual dinner between two neighbours in a local Aberdeen hotel.

PSN chief executive Bob Keiller and his Wood Group counterpart, Allister Langlands, chose an outside venue even though they live just a mile apart.

"We started conversations about a year ago when Allister and I met informally, but it took quite a few months for us to fully understand the opportunities that combining the businesses would bring," says Keiller.

A formal offer emerged late in the summer, and work began in earnest on the 607 million deal to create the world's largest provider of brownfield services to the oil and gas sector.

Though a long time in the making, many believe the transaction could mark a revival in corporate activity with the potential to create a new generation of multi-millionaires across the north-east of Scotland.

Keiller is expected to get about 35.2m from the sale of his 10 per cent stake, which he acquired through the management buyout that formed PSN in 2006. Chief financial officer Duncan Skinner is said to be in line for about 28m, while five other directors - Ali Green, Zeffrey Lucas, Peter Brown, Bill Nicholson and Jerome Lynch - each stand to gain about 16m. Among the other beneficiaries is West Coast Capital, Sir Tom Hunter's investment vehicle, which is set to make 31m on its 7 per cent stake.

Despite such windfalls, 46-year-old Keiller and his fellow senior managers will continue with their day jobs at the combined brownfield services business of Wood Group PSN. He says he remains "absolutely committed" to further expanding Wood Group PSN, which will have 22,000 employees globally when the deal is completed early next year.

"I see the most exciting years of my career ahead of me," he says. "I am in this for the long haul."

It may be that sticking with the day job is also a bit of a sign of the times, as some believe that Aberdeen's cash-flashing days of old are unlikely to be repeated with anything approaching the brass of decades past.

"I think that was very much of its day," says John Rutherford, head of corporate UK for law firm McGrigors. "Now you are much more likely to see a steady path and a careful path being trod."

Even so, there is a rising sense of prosperity in the offshore market, with further mergers and acquisitions on the horizon.

Though Wood Group and PSN grabbed the headlines in Scotland, other major deals announced the same day reflect the growing importance of technology designed to extract oil from tricky places. General Electric of the US splashed out 800m for the UK's Wellstream Holdings, which makes flexible pipes that are essential for deep water drilling. Further abroad, Australia's Transfield Services said it would pay 365m for Queensland-based Easternwell, which has expertise in extracting gas from coal seams.

"The world needs fossil fuel energy, even though we are de-carbonising, because of the growing demand from countries like China and the west's ongoing love affair with cars," says David Hunter, analyst with M&C Energy. "As those fossil fuels become harder to extract, greater technical and engineering skills are required."

Hunter says the long-term outlook for energy prices also gives firms more confidence to invest for the future. Higher prices make older fields and difficult deposits financially viable, while also boding well for new green technologies that will feed off the expertise of the traditional offshore exploration sector.

"All of these things play absolutely to the strengths of the Aberdeen oil and gas industry," says Hunter.

For smaller players in oil services, there are further factors driving the merger and acquisition trend.

As demand for their services from major players increases, they will need to increase their scope and scale. Despite the relatively high price of oil, pressure to screw down operating costs is leading to tighter profit margins, giving additional impetus to consolidation.

McGrigors' Rutherford says foreign buyers are also interested in tapping into the network that has built up around Aberdeen during the past five decades. Though North Sea oil is past its heyday, it still has many productive years ahead, and offers a useful bridgehead into other regions such as Africa and India.

"We have a number of American clients who are kicking the tyres on deals at the moment," says Rutherford, whose firm advised PSN on the Wood Group deal.

In the field of exploration, both Premier Oil and Soco International have been touted in recent weeks as potential prey, while Faroe Petroleum remains among the sector's perennial takeover targets.

South Korea's KNOC has inherited a 27.5 per cent stake in Faroe through its acquisition of Dana, which has stoked speculation that Aberdeen-based Faroe could be next on the state-backed firm's extensive shopping list.

Faroe, headed by chief executive Graham Stewart, also counts Scottish & Southern Energy on its list of investors after the utility group took a 5.1 per cent stake earlier this year.

Premier Oil, which is registered in Edinburgh but operates mainly in the North Sea, Middle East and southeast Asia, has for the moment been ruled out as another KNOC target. However, industry tittle-tattle in more recent days has linked Premier to Petronas, Malaysia's state-owned oil and gas producer.

Though AIM-listed Xcite Energy has been hit by weather-related delays to work at its Bentley field off the Shetland Isles, its shares have still performed strongly this year, making paper millionaires of executive directors Steven Kew, Richard Smith and Rupert Cole. Each owns more than six million shares in the business.

Douglas Crawford, partner at Dundas and Wilson, says all of this underlines the growing confidence within the sector which is paving the way for more merger and acquisition activity.

"It has been quiet in the oil and gas sector from an M&A perspective for a couple of years now," Crawford says. "But now we have seen the oil price stabilise, and we are coming out of recession as well.

"Vendors are reluctant to bring their company to the market if it is not trading well, or if they can't properly predict near-term performance. Once the underlying market they are operating in has stabilised, that provides the platform to come forward."

Rather than a boom, Crawford predicts a "more orderly" progression as sellers and buyers return to the oil and gas sector. "There is going to be a lot of activity, but many of these companies will have been through this process before," Crawford says.

A revival will most certainly give a shot in the arm to Scotland's professional services sector, which has suffered from a dearth of corporate activity during the last couple of years. Some fortunate investors will also benefit from healthy returns, though PSN's Keiller claims he has yet to splash out in anticipation of his own personal windfall.

"That is not my style at all. I still live in the same house I lived in 17 years ago when I worked offshore, and my kids go to the same state school. I like to keep my feet on the ground."