Oil and Gas' Lackluster M&A Activity Decoded

When markets start to stabilize, more mergers and acquisitions (M&A) activity is expected.

So far that hasn’t been the case for the oil and gas industry.

“Traditionally, price volatility has resulted in lower valuations, but currently, the bigger impact is really just lack of capital and lack of risk appetite around assets, particularly in upstream,” Brooks Shughart, managing director for private equity frim First Reserve, said recently during the Mergermarket Energy Forum in Houston. “The upstream space has not generated returns in any commodity price environment over the last 10 years.”

Expectations of massive consolidation after the downturn didn’t bear much fruit.

“Last year was supposed to be the year of consolidation. Well, it didn’t happen,” said Terry Padden, director for Simmons Energy, an energy investment banking firm. “Even prior to that, we were expecting consolidation coming out of the downturn, and it didn’t really happen in a big way.”

Padden said oilfield service companies in particular are in desperate need of consolidation.

“Over the past year, we’ve started to see upstream consolidation, such as the Anadarko deal,” he said. “That gives a lot of the smaller service companies pause because you don’t need to be bigger just to be efficient. You need to be bigger to have relevance.”

Patrick McWilliams, partner for private equity firm NGP, shared his view from a slightly different lens.

“We’re trying to find really great talent, so we spend a lot of time talking to executives of the great operating companies,” said McWilliams. “When you build those relationships, you start gaining insight into the mentality of how the companies are being run. You look under the hood of what’s going on in the boardrooms and it’s just really bad misalignment.”

McWilliams said, as a private company, they spend a lot of time trying to get investors aligned with management teams to really focus on driving shareholder value.

“It’s hard to do and we don’t always get it right,” he said. “And it’s really hard to do in the public environment. What could make obvious sense in a spreadsheet may not necessarily make obvious sense from a social dynamic perspective.”

McWilliams said the industry has been essentially sitting around for about 10 years saying it needs more corporate to corporate M&A.

“Through five years of ‘lower for longer,’ enough pain has set in … now it’s ‘okay, we have to scale, we have to create synergies and we have to drive value,’” he said. “Are we really at that tipping point where we’re going to see a lot of it? Who knows? But we’re starting to see more of it.”

Lessons from Weatherford

M&A can make – and, at times, break – a company, perhaps the most recent example coming from Weatherford’s recent announcement to file bankruptcy.

“Weatherford is a classic example of a company that was built through 100 percent M&A – aggressive M&A,” said Padden. “Adding a lot of pieces together, there were some very good business lines in Weatherford, but there were a lot of things that probably should not have been pursued.”

Things can turn from a fairytale to a nightmare.

“If you don’t manage it correctly, you find that, like with all big companies … the best people who work with Weatherford are gone,” Padden said. “Business lines have gone to competing companies in many cases, so it’s probably that the company honed in on M&A and lost focus. [Weatherford] got to scale through a strategy that ultimately didn’t work and then when you lose good people – even if you’ve got a good business – you’re not going to be able to keep that going.”