Shareef Batata, senior vice president with Allegiance Capital, says the oilfield-services companies are involved in a growing number of M&A deals.
Shareef M. Batata, senior vice president with private investment bank Allegiance Capital Corp., has overseen investment deals valued at $1.5 billion across industries as diverse as semiconductors, pharmaceuticals and retail. Now the Dallas-based banker is spending much of his time helping oilfield services companies find buyers or new funding sources.
We asked Batata to talk about the current boom in mergers and acquisitions involving oilfield services businesses in Texas shale plays such as the Eagle Ford Shale.
Q: Your company has seen an upswing in the number of M&A deals involving oilfield services companies. Can you quantify that for our readers?
A: In the past 12 months, we have seen a significant increase in M&A deals involving oilfield services companies and the prices being paid. Since the first of the year, we have already closed four oilfield services transactions with a total value of $325 million. And, we currently have six more oilfield services companies under a letter of intent. The letter of intent defines the major terms of the sale and is agreed upon by the buyer and seller. We have also seen the (enterprise value-to-earnings before interest, taxes, depreciation and amortization) multiples for well-managed companies increase from the 4-6 range to the 5-7 range and higher.
Q: Why the surge in interest in oilfield services?
A: Many large strategic corporations are buying middle-market companies to secure or expand their presence in the market. Often they can purchase an existing middle-market company that already has an established client base for less than they it would cost to expand their own operations. Plus, by purchasing an existing company, they also purchase established customers and a company that has proven to be very successful in the market. We are also seeing interest from private family funds and private equity groups, because the return on their investment will be several times more than they can get by investing in other industries. There’s approximately $1.1 trillion sitting on the sidelines right now waiting to be invested. This surplus of cash is driving up both demand for good companies and the prices paid for those companies.
Oilfield services is a hot industry because it has grown exponentially in the last few years, and it has the potential to continue growing as shale plays expand. Investors are actively looking for the best investment that will generate the highest rate of return. It is the perfect time for oilfield services company owners to sell. The demand for quality companies is high, and cash is available. It is the perfect scenario for sellers in oilfield services today.
With the new technology, oil-and-gas exploration has really become more like manufacturing. The days of the wildcatter are over. With today’s seismic and geology technology, it isn’t a question of a well producing, it’s a question of how much. Therefore, controlling all the costs related to drilling and servicing the well are critical. Investors seek oilfield services as a very safe investment in companies that have a bright future.
Q: Are the creators of these companies looking to cash out or are they forging deals aimed at bringing in growth capital?
A: Owners in their late 50’s and 60’s want to cash out as much as possible. However, most understand that investors will want them to remain with the company for a few years as they transition the operations to new management. Therefore, older owners are often looking for a way to monetize the wealth they have tied up in the company and protect their families for the future. Younger owners are often looking for capital to grow the business to the next level. They see the potential but lack the cash to make it happen. We work with both types of owners and present a wide range of options to them, based upon what they want to do personally and financially.