John Sloan, Vice Chairman Allegiance Capital Corporation

Like the motion of pump jacks sucking up black gold from oil wells around the globe, M&A activity in the oil and gas industry also has its ups and downs. Recently, the dramatic drop in oil prices from $100 per barrel in August to below $80 in October has some oilfield service company owners wondering if they missed their opportunity to sell while the market was hot.

“The value of a proven, well-managed, successful oilfield services company is not totally immune from the latest drop in oil prices, but we haven’t seen any negative impact on what buyers are willing to pay for companies,” stated John Sloan, Vice Chairman, Allegiance Capital.

Sloan received the 2014 “Energy Deal of the Year” award from the New York Association for Corporate Growth and has been named to the American Business Journals Who’s Who in Energy list for 2012, 2013 and 2014. Allegiance Capital has closed more than $1 billion in middle market oil & gas deals.

Sloan believes there are six primary reasons why the values of middle-market oil & gas service companies are not always directly linked to oil prices. They are as follows:

  1. Investors are looking for successful companies – cash is available “The price of oil is important,” says Sloan. “However, company owners need to know there is close to$1.1 trillion that investors need to invest and they are looking for successful companies to buy. The key to maximizing company value is marketing your company to the largest number of qualified buyers who are most active in the industry.”
  2. Buyers determine a company’s value – not oil prices The value of a barrel of oil is not determined by what happens in one region of the U.S. The value is driven by the world oil markets. What is happening in China, Russia and the Middle East all impact the price of a barrel of oil in the U.S.

Sloan emphasizes that company values may also be driven by world markets. “If a company is not marketed both nationally and internationally, an owner may not receive a premium price,” he explains. “Company values are driven by supply and demand. Successful, profitable companies are in high demand now and the supply is low. The ultimate value of the company is based upon what potential buyers are willing to pay, not what is happening with the price of oil.”

  1. Strategic investors often pay more – for the right company As an example, Sloan cites an oilfield services company he worked with. “This was a unique company that owned a patent. We marketed it in the U.S. and the best offer was 8 times EBITDA. We sold the company to a British investor for 12 times EBITDA because the strategic investor wanted the technology to add to their existing product line.”
  2. You can’t time the market – it’s a moving target Owners of middle-market oil & gas services companies often think they can time the market. According to Sloan, that is virtually impossible to do. “Right now, the market for successful oil & gas services companies are impressive,” he emphasizes. “Investors have cash on hand. The industry has gained tremendous respect based upon its performance the last couple of years, and investors still see the industry as offering a good return on investment.”

Selling a middle-market company can take 9-12 months and it is virtually impossible to determine where the price of oil will be one year from today.

Trying to decide the best time to sell your company based on the price of oil today simply does not work. Timing of a sale must be based on the financial condition of the company. Investors are looking for good management teams with a solid track record of earnings and a long range forecast that provides for future growth.

  1. Family funds take a long-term view of investments – this changes the game As the oil & gas industry has grown, family funds have become more and more interested in investing. Family funds take a very different view on investments than many private equity firms. Family funds tend to buy and hold companies for an extended period of time, sometimes as long as 15 to 20 years. They are not looking for a quick return on investment. Rather, they are seeking a stable investment that will grow consistently over time.

“This is a game changer,” says Sloan. “Family funds have the financial resources to invest in proven middle-market companies long term and are very pleased to receive a reasonable return on their investment. They don’t require the 20-30 percent returns many private equity firms demand. The cyclical nature of oil prices doesn’t have the same impact on their investment decision. Family funds know that, in the long term, their investments will perform well and provide a consistent return.”

  1. International investors – new opportunities The oil & gas industry is an international business. Decisions made on the other side of the globe can have a dramatic impact on operations in remote parts of the U.S. On the other hand, the same international marketplace provides U.S. business owners with new opportunities to sell all or part of their business.

“International investors represent very unique opportunities,” Sloan explains. “Today, many countries have proven oil & gas reserves, but they do not have the technology or experience necessary to tap into those reserves. They know American companies can provide the technology they need and the experience required to get the job done quickly, and they are willing to pay for it.

What does this mean to owners of a U.S.-based oilfield services company that has developed a unique process or technology? It means that an international buyer may be willing to pay considerably more for your company than a U.S. buyer.”

Sloan specifically cited the opening of oilfields in Mexico and developments in China and the Far East as examples of areas where oil & gas production is set to explode. Demand for U.S. technology and experience will be high.

The price of oil can affect the value of a middle-market oilfield services company. However, the impact can be minimized and possibly even avoided if a company is performing well, has desirable technology and looks for potential buyers worldwide. Oil & gas companies are selling for premium prices today.

“If oil prices remain lower, the only change we may see would be in the way deals are structured,” Sloan explains. “Investors may begin asking owners to stay more financially engaged in the company for a longer period of time after a sale closes. However, we still believe a company is worth whatever the buyer is willing to pay. It’s extremely important to ensure your company is marketed well to maximize value and secure the best terms possible.”