Mergers of oilfield service firms ramp up as drillers seek lower costs
Smaller companies finding it hard to raise capital as downturn drags on
Canadian drillers and other oilfield service providers have stepped up merger and acquisition activity, with more deals expected in coming months, as players battered by more than two years of weak oil prices look to lower costs and strengthen finances by scaling up.
Crude prices have stabilized from the lows of early 2016 and the big energy companies that hire drillers are increasing spending from depressed levels. That has spurred some drillers and related service companies to rehire staff and redeploy equipment after cutting costs to the bone during the downturn.
But many still find it tough to raise capital, increasing the pressure to do deals, said Alf Sailer, managing director of M&A advisory services for ATB Financial.
"The pace of M&A transactions, it really has picked up," said Sailer, who sees the trend continuing.
"The lenders are still nervous about oilfield service companies and the equity investors are also still nervous. We're not seeing either of those warm up to the oilfield services business yet."
Source Energy Services and STEP Energy Services recently raised money in initial public offerings that fell short of expectations, Sailer said, noting both have since traded at less than their IPO prices.
On Monday, Calgary-based Secure Energy Services said it will pay $26 million in a cash-and-shares deal for smaller rival Ceiba Energy Services, which had announced a review of alternatives last fall.
Interim Ceiba CEO Ron Sifton said the company decided it was too small to compete profitably in the oilfield disposal business and its depressed share price meant it couldn't raise equity to grow bigger. Adding debt was not an option.
"Our balance sheet was tapped out," he said.
Driller CWC Energy Services announced a similar process this month to find a way to grow again while reducing its high level of debt.
"We've come through two, two-and-a-half years of just sitting and trying to figure out how to survive," said CEO Duncan Au.
The recent consolidation trend started with a low-profile swap. Canada's largest drilling rig contractor by market capitalization, Precision Drilling, agreed in December to trade its Canadian coil tubing operations plus $12 million to Essential Energy Services in return for Essential's service rig business.
Since then, High Arctic Energy Services bought Tervita's production services division, driller Total Energy Services won a hostile takeover bid for rival Savanna Energy Services and fracking firms Trican Well Service and Canyon Services Group agreed to a share-swap merger deal worth $637 million.
In April, the Petroleum Services Association of Canada updated its drilling forecast for 2017 to 6,680 wells, a 60 per cent increase over its November forecast. It attributed the change to stronger crude prices after the Organization of Petroleum Exporting Countries and other nations agreed to curtail production in December.
Market still oversupplied
Since then, however, higher American production has weighed on prices.
Oilfield services analyst Aaron MacNeil of AltaCorp Capital said increased oilfield activity this winter helped Canadian service companies reactivate parked equipment, but the market is still oversupplied, making it difficult to raise prices after the deep cuts of the past two years.
"Companies below a specific size have been challenged to generate cash flow, even in a better activity scenario, so I think you're seeing a willingness to at least have a conversation about consolidation," he said. "You do need scale to be more profitable."
The Canadian Association of Oilwell Drilling Contractors said its drilling membership has fallen from 45 companies to 36 since 2014, with one more likely to be lost when the Total-Savanna deal is finalized.
Spokesman John Bayko said not all of the members were lost because of the downturn — the 2015 merger of Trinidad Drilling Ltd. and CanElson Drilling, for instance, likely would have occurred anyway — but some small drillers have dropped out as a cost-saving measure.
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