Struggling Oil Services Urged to Act as Capital Squeeze Looms
(Bloomberg) -- Oil service companies struggling with a slump in demand will need to act fast to bolster their balance sheets and make deals before capital becomes scarce, Norway’s largest bank says.
More rig and offshore service companies will be forced to take action as demand has dried up, according to Ottar Ertzeid, DNB ASA’s head of investment banking.
“It’s smart not waiting too long -- there can be limited availability for new capital,” Ertzeid said in an interview in Oslo on Thursday. “There will be some winners in consolidations as there always are, so it’s interesting times both on restructuring and M&A the next couple of years.”
With Brent crude at about $45 a barrel and demand for rigs and vessels slumping, the Norwegian oil service industry has seen funding options shrink with the junk bond market virtually closed to the sector.
“For regular bond issues it’s practically closed because the price will be higher than to issue equity,” Ole Einar Stokstad, head of credit research at DNB, said in an interview. “Either demand must pick up from a sustained increase in oil prices or debt will have to be reduced in the companies. There must be some restructuring or consolidation.”
Reduced revenue and the higher probability of companies turning to the equity market to raise capital has seen the Oslo Boers OBX Oil Service Index slump 22 percent during the past 12 months. The DNB High Yield Norway Total Return Hedged Index has fallen more than 10 percent over the same period.
Earlier this month offshore surveyor Petroleum Geo-Services ASA raised about 920 million kroner through selling new shares while Electromagnetic Geoservices ASA sold shares, bought back bonds and extended the maturity of a bond. Siem Offshore Inc. also raised about $100 million in a rights issue in September.
“We see already that work has started but I don’t think you will see material transactions before next year,” Ertzeid said. “It’s starting in 2016.”
Other investors are betting on the industry, including HitecVision AS, a private equity firm that bought stakes in Prosafe SE and Kvaerner ASA this month. The deals follow a series of transactions in Norway that included Russian billionaire Mikhail Fridman’s $1.6 billion purchase of EON SE’s Norwegian oil and gas assets. Ferd AS Invest doubled its stake in seismic surveyor Petroleum Geo-Services in December.
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