Industry To See Oilfield-Services Consolidation By Well-Funded Competitors

Consolidation in the oil and gas industry is already under way—some forced—and more is to come, according to industry leaders at the CERAWeek 2009 energy conference in Houston, presented by IHS Inc.’s CERA.

Schlumberger Ltd. is prepared to take advantage of the opportunity, says Andrew Gould, chairman and chief executive officer. Several oilfield-service companies’ access to capital of the past five years has declined. Buying opportunities are available to Schlumberger of niche products, he says, and Schlumberger’s life-long capital-discipline policy will present the financing.

Bruce Bilger, managing director and chairman, global energy, for Lazard, says, “Great companies have been borne from consolidation in a downturn.” Some energy producers and service companies are caught in bridge loans. “There are candidates (for acquisition), particularly upstream service companies of less than $2 billion in value.”

The Lazard phone began ringing in November from management teams seeking capital-restructuring assistance. Some boards are seeking reprofiling in advance of expectations that covenant issues will need to be addressed later this year. Liquidity is the greatest concern. “M&A had turned down well before commodity prices turned down (last summer).”

Andy Safran, vice chairman of Citi, says the capital haves and have-nots are bifurcated: plenty do have access to capital, although many don’t want to sell equity right now. Dislocated are the sub-investment-grade companies, and those that will be facing bank borrowing-base redeterminations.

“It’s going to be quite profound.” The way limited access to capital is affecting producers “is not ‘one size fits all.’”

Is private equity available? Many private-equity providers continue to invest from existing funds, but Bill Macaulay, chairman and CEO of E&P and oilfield-services private-equity investor First Reserve Corp., says, “there’s no question fund-raising for private equity has declined precipitously…and I think that’s going to be witnessed for a while.”

Howard Newman, president and CEO of New York-based energy and financial-services private-equity investor Pine Brook Road Partners, says the retraction will “make our business a better business” through the discipline of having less access to investment capital.

He adds, “It’s nice to have a firm that’s investing in both energy and financial services right now.” Anyone who wants to know the short, “just follow us.”

Bilger says the investment question is whether the downturn is V-shaped or extended, such as that seen in the 1980s. “A lot of people think we’re in a V-shaped turn-around.” If so, the industry will bounce out of this quickly.

Macaulay says the energy industry has seen many cycles. “This one is dramatic…(but) it hasn’t done nearly the damage to the industry as that one (in the 1980s) did—I’d have to say ‘yet.’”

Newman adds, “We’ve seen all of this before…The fundamentals (of the energy industry) haven’t changed…You have to have seen this stuff before to not get scared by it.”

Safran says there is a distinction today in comparison with industry events of 1982. “What is extremely different today is the concurrent deterioration of financial markets.”

Macaulay notes another: “We came into the 1982 peak with a lot more surplus capacity…rigs, reserves…We came (into it) with a bigger bulge…We don’t have that kind of bulge (this time).” He notes that there were capital-markets issues in the 1980s as well. Resolution Trust Corp. was created by the federal government then to handle upside-down S&L loans, assets and collateral. The current capital-markets issues are more extreme, “but we’ve come in much more healthy.”

As for the weak U.S. dollar’s contribution to US$147 oil prices, Bilger says it was important. “If you look at (oil prices) in a currency other than U.S. dollars, it’s flatter.”

Newman adds this on what is a reasonable price deck: At $40 oil, you make a return; at $20, you don’t get your money back; and at $60, the government will take the excess.