Signs of the Peak: Oil and Gas M&A

Written By Nick Hodge

Posted December 21, 2010

A rash of events happened last week that can make you a ton of money.

Yet you probably only heard about one of them, and have already dismissed it as immaterial…

Rash Event #1

The Deal: Transfield Services Ltd. (AX: TSE) bought Easternwell for $567 million.

The Rationale: Here we have an Australian oil and gas service company buying a well builder and operator for an eyelash over a half a billion dollars.

Through the purchase, Transfield gains access to customers like BHP Billiton (NYSE: BHP), Cameco (NYSE: CCJ), Chevron (NYSE: CVX), Rio Tinto (NYSE: RIO), and Woodside Petroleum (AX: WPL)… all of which use equipment or services from Easternwell.

The acquisition will help Transfield better execute the $2.2 billion it’s won in contracts this year — and the $29 billion in the pipeline.

The Quote: From CEO Peter Goode: “Acquiring Easternwell enables Transfield Services to build out its existing suite of operations and maintenance services to include higher margin technical services.”

Remember the phrase “higher margin technical services.”

Rash Event #2

The Deal: Wood Group (LSE: WG) paid $958 million to buy private oilfield services provider PSN.

The Rationale: The new brownfield services provider will employ 22,000 people in over 30 countries.

PSN will bring existing clients like Royal Dutch Shell (NYSE: RDS) and Noble Energy (NYSE: NBL) to the Wood Group, roughly doubling its field service order portfolio to more than $6 billion.

The Quote: From the UK’s Telegraph: “The near-$1bn merger will create one of the world’s biggest engineering businesses serving depleting fields, mostly in the North Sea and North America.”

Remember the phrase “serving depleting fields.”

Rash Event #3

The Deal: GE (NYSE: GE) bought UK oil & gas services company Wellstream Holdings (LSE: WSM) for $1.3 billion.

The Rationale: Since Wellstream makes flexible risers and flow-line products, it will help GE capitalize on coming high oil prices. Wellstream is also active in Brazil, where GE would like to establish a position in recently discovered fields off the coast of Rio.

The fields off the coast of Brazil are some of the world’s biggest recent discoveries; but you have to go through 23,000 feet of water, rock, and salt to get to them. GE’s purchase is an attempt to compete with Petrobras (NYSE: PBR) in the region.

The Quote: From AP: “In agreeing to buy Wellstream, GE is looking to bolster its energy services business and tap into what is expected to be strong growth in drilling for oil in deep waters around the globe.”

Remember the phrase “you have to go through 23,000 feet of water, rock and salt to get it.”

The diagnosis

That’s a pretty severe rash we have here.

What could be the reason for it?

Some would argue high oil prices are the cause of the rash… I would argue high oil prices are another symptom of the rash.

Take another look at those three memorable phrases:

  • “higher margin technical services.”

  • “serving depleting fields.”

  • “you have to go through 23,000 feet of water, rock and salt to get it.”

I submit it’s not high oil prices that’s driving M&A; but rather a decline in discoveries of easily accessible oil.

These deals didn’t include drillers of easy-to-get-to stuff. Every single one involved a company that has expertise in getting energy from hard-to-reach places.

Wellstream makes flexible pipes for deepwater drilling. PSN specializes in boosting production from old wells. Easternwell has advanced coal-seam gas technology.

A recent Reuters write-up provides a similar second opinion:

…the stronger underlying theme is rising interest in techniques for reaching oil that’s hard to get at. Specialists want new capabilities — and the majors want bigger partners. Demand for traditional drilling equipment remains slack despite rising oil prices because new discoveries of conventional fossil fuel deposits have been scarce. Instead, the oil services arms race has focused on how to get at difficult deposits.

It’s the same reason Fortune recommended Transocean (NYSE: RIG) in its 10 Best Stocks for 2011 article, saying “production isn’t keeping up with demand,” resulting in “a greater need for deepwater drilling.”

The result will be continued mergers and acquisition in the oil extraction industry…

And smaller companies will be the biggest beneficiaries.

Finding a company with a novel way to extract oil is as good as gold. And the next buyout candidate may have just shown its hand.

It’s a small engineering firm with specialized “petro-frack” technology that’s already being used at 236 shale sites in North America. Companies like Apache (NYSE: APA), Devon (NYSE: DVN), and Husky Energy (TO: HSE) have all paid to use this technology.

Soon, those oil giants will want to own the technology for themselves. And when that happens, shareholders who got in early will walk away with a fortune.

Call it like you see it,

Nick Hodge


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