Oilfield Services & Equipment
M&A Likely to Rebound; Why We Expect More Deals in 2013
14 January 2013 ¦ 26 pages
ir.citi.com
M&A Began to Recover in the Second Half of 2012 — The total value of oilfield
services M&A deals on a global basis was $25.1 billion in 2012, spread across 56
transactions. This was below the pace of 2011 when global M&A deal value was
$33.9 billion spread across 42 transactions. General economic uncertainty, a
wobbly oil price, and a drop in demand for oilfield services in the North American
shale plays explain most of last year's decline in M&A deal flow. We note, however,
that deal activity picked up in the second half of 2012 and we believe there are
compelling reasons to expect a rebound in the number of M&A deals and in average
deal size in 2013. Of the 56 M&A transactions valued at $50 million or more in 2012,
34 or 61% were announced in the second half of the year. Out of total deal value for
the year, $17.9 billion or 71% relates to deals announced in the third and fourth quarters.
What Are the Key Drivers of M&A Long-Term and Short-Term? — Over the long
term we believe that the primary drivers of M&A transactions in oilfield equipment
and services are an acute shortage of skilled labor, the race for technological
leadership, formidable barriers to entry in certain high-growth market niches, and
persistent low valuations of publicly traded small and mid-size companies. Another
factor that should help to boost the number and size of M&A transactions in 2013 is
a projected sharp decline in capital spending by large and small oilfield service
providers. A period of heavy capital spending from 2010-12 to capture opportunities
in oil and gas shale resource development in North America is over for now. Free
cash flows should increase substantially in 2013 as capital spending declines. This
leads potentially to an increase in the number and size of M&A deals (a pattern that
is consistent with prior M&A cycles).
Why Should Investors Care About the Pace of M&A Transactions? — Apart that
it's nice to own the shares of a company that is acquired for a premium, there are
other reasons to carefully monitor M&A deal flow across the various subsectors. An
increase in the number and size of deals is very likely to boost equity valuations
across the whole sector. Investors typically gain confidence when they see oil
service companies buying other oil service companies at premium valuations. If our
thesis is correct that the number and size of M&A deals will accelerate in 2013, then
a broad spectrum of stocks in the oil service and equipment sector could get a
boost to their pubic market valuations.
Key M&A Targets Identified and Ranked — We believe the most likely acquisition
candidates in our coverage at this time are equipment manufacturing and
deepwater focused stocks: DRC, RDC, LUFK, FTI, and FET. We see little impetus
for further consolidation of the North America oil services market in 2013. For
reasons related more to underperformance and undervaluation we have added
WFT as a prime M&A target for 2013. |
