The oil and gas industry is growing at a record-setting pace and that growth is fueling merger and acquisition (M&A) activity for owners who want to exit at the top of a cyclical industry and buyers seeking growth through strategic investments or acquisitions, said David Mahmood, chairman and founder of M&A firm Allegiance Capital.
Dallas-based Allegiance Capital has already closed four oil and gas deals this year valued at more than $350 million. The deals ranged in size from $50 million to $125 million.
Mahmood believes now is an ideal time to sell an oil field services company. “Crude oil is selling for $110 a barrel,” Mahmood says. “Most projections show oil prices falling to $90 by 2017. They could go even lower, depending upon what happens in the market.”
“If the US continues to increase production at the current rate, we are going to overwhelm our refining capacity. North America can quickly become awash in oil and unless we’re allowed to export it, we’re going to have a supply situation that’s just got to drive down the price of oil. When you drive down the price of oil, companies that are very profitable at $100 a barrel may not be quite as exciting at $70 a barrel. When production exceeds demand, simple economics says prices fall,” he said.
Company values are always highest when well-managed organizations position themselves attractively within a growing industry. “It’s difficult to convince some owners to sell part or all of their company when they may be experiencing the best year in the company’s history,” said Mahmood. “However, oil and gas business owners who have lived through one or more episodes of the industry’s rise and fall know a downturn is coming, and nobody can predict when that will happen.”
According to Mahmood, it takes 9 to 12 months to sell a company. This timeline needs to be considered by any oil and gas company owner who is interested in selling. “If you started the sales process today, the transaction would probably close in the first quarter of 2015. It just takes time to properly market a company to the optimal buyers.”
Oil and gas companies are selling for higher prices in today’s market partially due to the fact that there is an abundance of capital sitting on the sidelines waiting to be invested. “There’s more than $1.1 trillion sitting in private equity and other funds that needs to be put to work. These investors are looking for good opportunities to work with well-managed successful companies to help them reach the next level of success, and investors will pay more today than they have in the past.”
Another factor influencing investor interest in oil and gas companies now is linked to a robust appetite for investments with promising growth potential over time. “These investors want to make long-term investments. While individual company owners may struggle to survive a downturn and still have time to recover, many investors who routinely hold companies for five years or longer can not only survive a downturn, but they are positioned to most assuredly make respectable ROI,” Mahmood said.
There are other more generic indicators that suggest that now is the perfect time to sell any business. The Warren Buffet Valuation Indicator, which shows what kind of premium is expected when a company sells, is calculated by looking at the US equity market capitalization of public companies divided by the gross domestic product. At present, the indicator is positioned at the highest level it’s been at since 2001, and companies are selling for premium prices.
Mahmood compares the oil and gas industry today with the housing industry of 2006-2007. “We worked with a few building supply companies back then who thought the housing boom would last forever. Look what they went through over the past seven years. If you are in oil and gas services, you sure don’t want to go through something like that,” he concluded.