100 Jackson Street, Suite 101 • Denver, CO 80206 303.242.5755
Financing Oil Field Services in Current Low
Priced Commodity Environment
Denver Dealmakers Expo
April 7, 2015
Marketplace Observations
General Market Observations:
• Capital is NOT easy or readily available for OFS in the current environment
• The further away from “the drill bit” the easier financing becomes
• Most capital providers are “waiting for market to stabilize”
• Everyone is looking for a “bargain basement deal”
• It will take a special management team or opportunity to get to a financing close in the next 3-6 months
• First step for all OFS businesses to finance businesses in current environment is internal cost-cutting, workforce reductions, and business line rationalization
Most oil field services businesses now are forced
to get “creative” with financing options
Oil Field Service Categories
Oil Field Service Business Categories:
Publicly traded multi-national OFS businesses- examples include: • HAL, SLB, CAM, WFT
Publicly traded North American OFS businesses- examples include: • KEG, BAS, CJES, SPN
Privately owned North American OFS businesses PE backed - examples include: • Beckman Production Services (SCF backed)
• O-Tex Pumping (White Deer backed)
• Liberty Oil Field Services (Riverstone backed)
Privately owned North American OFS businesses individual backed – examples include:
• Dupre Energy Services (multi-basin) • Basin Holdings (multi-basin)
Oil Field Service Capital Availability
Publicly traded OFS businesses
• Traditional capital sources open but expensive
• Example: C&J Energy Service debt financing of Nabors unit acquisition
• Bigger OFS businesses using their liquidity (billions in cash on balance sheets) to grab market share and push smaller players out of markets/business
• Generally, the bigger players are pricing services below cost and/or providing service “packages” at low rates
Privately owned OFS businesses
• Private companies backed by “traditional” energy service private equity firms generally entered current downturn “adequately” levered (1-2x TTM EBITDA)
• Commercial lenders appetite for new OFS private equity backed credit facilities is zero
Key Elements to Capital Availability
Several Key Elements MUST be present for successful financing today
• Solid/proactive management team
• The team does not need MBAs but they need to have experienced a downturn (2008/2009) and understand operations and financials
• Conversations with potential capital partners need to start BEFORE it is too late • Service line focus at a minimum needs to be “Differentiated” (see examples below)
Less
Differentiated /
Highly
Competitive
Differentiated/
Mildly
Competitive
Highly
Specialized/
Limited
Competition
•
Pad
Construction
•
Pipelining
•
Roustabout
•
Simple
Equipment
•
Fluids
Management
•
Workover
Rigs
•
Drilling
Rigs
•
Tool
Fishing
Services
•
Wireline
•
Pressure
Non-Traditional Capital Sources
Non-traditional options today:
Distressed energy funds:
• Carlyle Group, Blackstone, KKR, Apollo, and others have raised billion $ funds to invest in distressed energy asset
• Generally the focus is more on mineral/E&P/producing assets but for a big enough OFS opportunity they will take a look
• Expensive and expensive
Individual investors/family offices:
• Flexible with investment structures (debt, preferred stock, equity, combo) • Often open to both minority or majority investments
• Best partners in this group generally have experience investing in energy and will not be alarmed by a down cycle
Non-Traditional Capital Sources
Non-traditional options today (continued):
Vertical Integration/Vendor Financing
• More available when services were in tight supply
• In current environment many of the vendors/integrators are feeling as much pain as OFS businesses
• Key will be how many other OFS businesses are active in basin • Examples – RockPile or Oasis
Business Development Companies (BDCs): • Primarily debt focused
• Sometimes bring consulting/strategic help to portfolio companies • Appraisals for equipment used as collateral for debt will be low
Mezzanine Funds:
• Usually they are not a good match for OFS businesses due to cyclical nature of business but taking on this financing at the bottom of cycle is much less risky • Expensive and could end up being a loan-to-own scenario
Case Study – Capital Structure Relief
Rental Business/Solids Control Case Study
Summary:
Key for financing: Strong and proactive management team • 2014 EBITDA was in $10-12 million range
• Forecast 2015 for $4-5 million in EBITDA
• $10 million of asset backed debt with multiple commercial banks
• Majority of $10 million with large middle market bank with lots of OFS credit exposure today.
Capital Structure Goal:
Management team would like to pay-down credit facility, potentially acquire some
distressed OFS businesses in other basins, and buyout existing minority shareholders-estimated capital need $10 to $20 million.
• Traditional private equity has looked at company in the past but management team/operating owners are not comfortable with traditional PE model.
• The management team is in early stages of acquisition discussions but waiting for sellers pricing expectations to reach current market pricing.
Case Study – Growth Equity Investment
Startup OFS Services Business
Summary:
Key for financing: Strong and experienced management team
• 3 person management team deep customer relationships, Halliburton and PE backed OFS operations experience, that was targeting a market/basin which was lacking an “independent” service option for customers.
• The management team was committed to investing their own money along with new partner and had a clear understanding of standard equity investment
structures.
Capital Structure Goal:
Management team needed a $15 to $20 million capital commitment to purchase startup equipment, yard location and fund first 12 months of operations costs until BE.
• Traditional private equity did not fit investment because there was no existing cash flow or bank leverage opportunity.
• Family offices focused on slowing the initial purchase of equipment (1 versus 3 spreads to start) and “proving out” the market.
• The management team ultimately secured financing from a growth investment fund focused solely on funding start up energy services businesses. The
