Deal-Making Activity Remains Strong In Oil Services Sector
Notwithstanding the appreciation of crude oil prices during 2010, the frenzy of mergers and acquisitions (M&A) in the oilfield services sector continues. The bearish price environment of 2009 supported M&A activity on the back of attractive valuations and a desire to whittle down competition. During H1 2010, we saw a significant rise in such M&A deals, ranging in transaction value from US$125mn to US$9bn. The total value of service sector M&A deals in the period October 2009-August 2010 exceeds US$25bn. Higher crude prices have not deterred such activity, as companies continued to snap up specialists, viz. Schlumberger’s acquisitions of Géoservices and Smith International.
It is likely that the Macondo oil leak in the US Gulf of Mexico (GoM) brought further consolidative pressure to bear on offshore services companies, owing to (perhaps overblown) fears of a thicket of regulation being imposed on deepwater, offshore drilling. Rig providers such as Noble and Rowan struck deals this summer to acquire high-performance rigs. Other service players have been driven by a desire to offer their clients a more comprehensive range of technologies and services. Industry trends driving such acquisitions include greater use of hydraulic fracturing and pressure pumping (shale gas and liquids), deepwater exploration and the development of unconventional resources such as oil sands.
Resource nationalism has driven many countries either to bar industry majors from participating in upstream activity altogether, or to demand unfavourable terms. Majors have little option as their company valuations are driven by their ability to book reserves. In contrast, service companies, as engineering outfits, attract less visibility, and in their capacity as advisors, simply need to win cash contracts to provide technical services and fill specialisation gaps. As their technical capabilities grow, the synergies to be gained from an alliance between state-owned oil companies and service companies are significant.
Trading shares of oilfield services companies is one way to benefit from the long-term bullish trends in crude oil prices (which BMI sees rising to US$90/bbl in 2012) without the volatility of futures trading. Indices such as the Philadelphia Oil Service Sector Index are a route for those seeking this type of portfolio exposure.