Gordon Carstairs comments on the use of technology in oil and gas. Gordon is an M&A Assistant Director with a background of working with UK based Oilfield Services companies and their associated supply chains. Having spent four years working in Aberdeen he has been involved in the transaction landscape for a significant period and recognises the growing importance of O&G tech as a subsector for investors.
Following a period of rebalancing and with oil prices now stable, I believe investment opportunities will become increasingly apparent in the Oil and Gas sector. The impact of the oil price crash in 2014 on Oil and Gas M&A activity was stark. The market faced increased scrutiny and sensitivities, and investment decisions and acquisitions slowed. The outcome was decreased competitive tension and ultimately lower transaction prices were paid to shareholders.
The question for investors is where are the best deals and the most value to be found? I think the answer lies in the application of innovative technologies in the sector with three key factors supporting this conclusion.
Oil and Gas Technology Centre
The £200m Oil and Gas Technology Centre (“OGTC”) was set up by the UK and Scottish Governments in 2016 with a core purpose – to help unlock the vast quantities of oil in the North Sea by making access economically viable. The Centre acts as a testing ground for emerging technologies that showcases their value. It also serves to facilitate crucial access to some of the larger oil and gas operators who will benefit from the tech.
A wall of frustration had developed where exciting tech businesses struggled to access decision makers while operators complained about the lack of innovation in the sector. Today, the OGTC supports businesses in many ways, including growth investments from this government fund and operational support - the OGTC will become an increasingly fertile ground for M&A activity. The technologies that emerge from the OGTC, and others like them, offer attractive investment opportunities.
Oil and Gas software; appetite and pricing
The BDO M&A team has recently been involved in the sale of a UK-based Oil and Gas software company. The company’s proprietary software reduces drilling risks and associated uncertainties in the E&P process. Historically, the vast swathes of investment in the exploration process made inaccuracies costly but manageable. With the right tech this is no longer the case - reducing costs by eliminating errors and shutdown times is increasingly important.
The pricing dynamic and buyer appetite in this software company deal reflected the quality of the product, scalability and global use. The pricing also reflected the value that investors place on “sticky” recurring revenue models.
Private Equity and Oil and Gas
Private Equity firms have historically embraced working in cyclical industries. In fact, it is a key part of many investment strategies.
In the past three years, some of the more rudimentary PE energy investments felt the downturn strongly. Particularly, those that relied on volume sales had become increasingly commoditised. The visible period of riding out the storm produced casualties but perhaps now is the time to reinvest. From my perspective, PE investment in the sector will continue to look for the best returns and these will come from businesses that can add significant value and avoid becoming commoditised. PE houses will also look to avoid investments that will suffer in a price crash. At present Oil and Gas technology appears an obvious opportunity as it needs to enhance efficiencies many in the sector identified during the low oil price years.
Technology in the form of robotics, analytics and automation has been disrupting a growing number of industries. I am confident that emerging technologies will create new opportunities but there will be some losers in the sector. Oil and Gas corporate finance professionals and investors must adapt to keep pace and remain competitive.
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