Energy services quarterly update PwC Corporate Finance In this issue

www.pwc.com/ca/energy
Q4 2015 | Issue 2
Energy services
quarterly update
PwC Corporate Finance
In this issue
in conversation
in review
in depth in touch 2
3
7
8
As a painful 2015 for many energy services
companies fades into memory, we unfortunately
find ourselves in the midst of what is shaping up
to be an even more difficult 2016. Gone are the
predictions of converging supply and demand
factors supporting higher WTI prices in the near
term and, by extension, higher activity levels for
the oilfield services industry in the back half of
this year. A combination of resilient non-OPEC
production, continued market share protection
by OPEC, and bearish indicators on the
demand side of the equation have pushed many
projections for recovery into 2017 or beyond.
Another common question is “what will recovery
look like when it finally arrives?”
Energy Services M&A activity in 2015 didn’t
live up to the hype, driven by a combination of
uncertainty, excess capacity in every segment
of the industry, the always present valuation
gap and very limited access to capital. We
expect M&A and restructuring activity to ramp
up quickly in Q2 2016, and we are already
seeing an increase in calls and engagements
as compared to six months ago. The primary
drivers are lenders forcing companies to take
substantial actions, and management teams
concluding that continued downsizing won’t
be sufficient in order to survive in what is now
an extremely competitive industry. As a result,
many of our industry’s well-known companies
will either merge, be acquired, or disappear. On
the bright side, companies with strong balance
sheets and defensible market positions will find
an abundance of opportunities to consolidate or
expand over the next several quarters.
For our CEO conversation, we had breakfast
with Andy Pernal from Strad Energy Services a
few weeks back. Strad is taking steps to extend
its service offering to customers outside the
oil and gas space, a trend that we expect to see
other companies undertake in order to increase
utilization where possible. See more from Andy
on page 2.
As always, we welcome your feedback and are
available to discuss M&A and financing questions
at your convenience. For those of you with
U.S. operations, our Houston corporate finance
team has 8 professionals, with a focus on energy
services and industrial markets clients. If you’d
like a virtual introduction to the Houston office,
please ask us...or if you are planning to attend
the Offshore Technology Conference (OTC) in
early May we can arrange a meeting in person
while we are all there.
Regards,
PricewaterhouseCoopers Corporate Finance LLC
Registered broker/dealer and member of FINRA and SIPC
in conversation: with Strad Energy Services
Execution is tricky, as
“
no company wants to take
Andy Pernal,
Chief Executive Officer & President
Strad Energy Services
Q.
Given the diversified nature of Strad’s
product and service offerings, how have
you adapted your business model in the past year
in reaction to falling commodity prices?
Last year, 30% of our revenue was generated
from work in the energy infrastructure
space, mostly from power transmission and
pipeline construction projects. This customer
segment is less affected by low oil prices and
projects are still driving forward. Related to
energy infrastructure projects are increasing
environmental standards, which are driving
the demand for equipment at job sites. The
environmental component of various projects
is helping to expand the market for Strad in
ways that didn’t previously exist or weren’t large
enough to pursue.
Q.
How is Strad working to maintain long
term relationships with its customers
to ensure continued success as the economic
outlook improves?
Strad values our relationships with customers
and strives to maintain them through the ups
and downs of the commodity price cycle. We
believe it is difficult to gain back trust once
you’ve left, so we have decided to scale back but
not completely exit any of our existing markets.
Energy services quarterly update | Q4 2015 Vol. 2
on balance sheet debt with
future earnings in question
and stock‑based mergers can
be difficult to value in this
environment.
”
Q.
What do you expect the M&A landscape
to look like in the energy services space in
the next 12 months?
We believe that the outlook is relatively negative
over the next 12 months. The energy services
space will see consolidation for companies that
are forced to execute a transaction because of
financial distress. However, we believe that
non-financially stressed companies will also
seek to do deals as well. Execution is tricky, as
no company wants to take on balance sheet debt
with future earnings in question and stockbased mergers can be difficult to value in this
environment.
Q.
When you’re not in the office or the field,
where can we find you?
My wife and I have three sons, so for many years
a lot of my spare time was involved in coaching
and organizing on the hockey rink or baseball
diamond. That’s changing now and I have more
time to enjoy outdoor activities like skiing and
golfing as well as being active with community
volunteering. Travelling and exploring new
places is also a passion.
2
in review: transactions
Shawcor acquires
Flint Field Services Tubular Inspection and
Management assets
BV Investment Partners
acquires geoLOGIC systems
Calfrac closes bought deal
private placement
• Transaction closed November 26, 2015
for $35.5MM
• EV/Revenue 0.8x • Advances Shawcor’s expansion in
oilfield asset management and valueadded services
• The Global Poly business allows
Flexpipe to extend its current service
offerings in Western Canada
• Supports Shawcor’s strategy in
composite production systems
• Transaction closed October 20, 2015
for an undisclosed purchase price
• Transaction closed December 22, 2015
and raised $27.5MM equity
• Issued 20 million shares at a
discounted price of $1.35 each as part
of an “equity cure” to avoid violating
its agreements with lenders
• The equity cure will be placed into
a segregated account where it will
remain unless needed to prop up
debt-to-earnings ratios over the next
two years
Canadian Energy Services
acquires Sialco Materials
Superior Plus aquires
Canexus Corporation
• Transaction closed December 10, 2015
for undisclosed purchase price
• Transaction announced October 6,
2015 for $932.0MM
• EV/EBITDA 8.5x
• Strengthens and expands Superior’s
specialty chemicals platform
• Greater diversification across core
businesses, leading sodium chlorate
producer, improved production
capabilities
• Vertically integrates with JACAM and
PureChem business units
• Augments product lines and
capabilities
• Expands the specialty chemicals
business, provides consumable
products throughout O&G lifecycle
Energy services quarterly update | Q4 2015 Vol. 2
• Demonstrates continued PE interest
for companies with leading market
positions
• Provides additional investment capital
and resources to execute geoLOGIC’s
growth strategy
3
in review: market comparables (1/3)
Production
10,000
5,000
8,000
4,000
C$ millions
C$ millions
Drilling
6,000
4,000
2,000
0
Aggregate market cap
(26%)
0
TTM revenue
December 31, 2015
Aggregate market cap
December 31, 2014
(28%)
Pumping
(30%)
TTM revenue
December 31, 2015
(9%)
Construction
6,000
20,000
C$ millions
5,000
C$ millions
2,000
1,000
December 31, 2014
4,000
3,000
2,000
15,000
10,000
5,000
1,000
0
3,000
Aggregate market cap
December 31, 2014
(73%)
TTM revenue
December 31, 2015
(24%)
0
Aggregate market cap
December 31, 2014
(15%)
TTM revenue
December 31, 2015
(5%)
As at December 31, 2015
Sources: S&P Capital IQ, PwC Analysis
Energy services quarterly update | Q4 2015 Vol. 2
4
in review: market comparables (2/3)
Transportation
Waste
15,000
C$ millions
C$ millions
12,000
9,000
6,000
3,000
0
Aggregate market cap
December 31, 2014
(36%)
TTM revenue
December 31, 2015
(56%)
TTM revenue
December 31, 2015
(27%)
US
1,500
C$ millions
1,200
C$ millions
Aggregate market cap
December 31, 2014
(14%)
Camps
900
600
300
0
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Aggregate market cap
December 31, 2014
(36%)
TTM revenue
December 31, 2015
(16%)
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
Aggregate market cap
December 31, 2014
(9%)
TTM revenue
December 31, 2015
(13%)
As at December 31, 2015
Sources: S&P Capital IQ, PwC Analysis
Energy services quarterly update | Q4 2015 Vol. 2
5
in review: market comparables (3/3)
TTM EV/EBITDA multiples, by sector
12.0 x
10.9 x
10.0 x
9.4 x
9.2 x
9.0 x
7.7 x
8.0 x
7.0 x
6.0 x
4.9 x
4.6 x
4.0 x
Drilling
Camps
Construction
US
Production
Pumping
Transportation
-x
Waste
2.0 x
TTM EBITDA, by sector
2,000
1,800
1,816
1,628
1,600
1,169
1,200
1,000
800
600
477
261
202
Pumping
Production
Transportation
Construction
0
Drilling
200
200
Waste
400
Camps
C$ millions
1,400
As at December 31, 2015
Sources: S&P Capital IQ, PwC Analysis
Energy services quarterly update | Q4 2015 Vol. 2
6
in depth: market data
Numbers of wells drilled
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Q1
Q2
Q3
2013
Q4
Q1
Q2
Q3
2014
Q4
Q1
Q2
Q3
2015
Q4
Source: CAODC
Canadian service rig activity: Active rig count
Canadian drilling rig activity: Active rig count
800
600
700
500
600
400
500
400
300
300
200
200
Nov-15
Sep-15
Jul-15
May-15
Jan-15
Mar-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
0
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
0
Sep-13
100
100
Source: CAODC
Source: CAODC
Index data
20%
10%
0%
-10%
-20%
-30%
-40%
Source: Bloomberg
Energy services quarterly update | Q4 2015 Vol. 2
1yr WTI
1yr S&P/TSX
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
-50%
1yr S&P/TSX Oil & Gas Equip. & Services
7
in touch: PwC Corporate Finance Team
For further discussion, please contact:
Calgary
Houston
Josh Matthews
Managing Director
+1 403 509 6675
[email protected]
Curt Karges
Managing Director, PricewaterhouseCoopers
Corporate Finance LLC
+1 713 356 5835
[email protected]
Kimiko McCarthy
Assistant Vice-President
+1 403 781 1839
[email protected]
Gregg Byers
Managing Director, PricewaterhouseCoopers
Corporate Finance LLC
+1 713 356 6322
[email protected]
Lauren Ellis
Associate
+1 403 509 7469
[email protected]
Farhan Sher
Director, PricewaterhouseCoopers Corporate
Finance LLC
+1 713 356 4668
[email protected]
Edmonton
Francesca Donati
Director
+1 780 441 6780
francesca.donati@ ca.pwc.com
Gordon Gee
Vice President
+1 780 441 6770
[email protected]
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