Published on February 28, 2014
Energy & Industrial Sector Observations KPMG: Oil & Gas One of Four Industries Expected to Dominate M&A in 2014. About 56% of those O&G companies surveyed said they would be initiating an acquisition in 2014. Middle-market deals were expected to dominate, but energy executives predicted slightly larger deal sizes. Of those who said they would do a deal, 11% expected their deals valued at $500 million - $999 million, 23% expected between $250 million - $499 million and 56% expected less than $250 million. Their primary reason for doing a deal was to expand their geographic reach (25%) and to expand their customer base (14%). A substantial 57% predicted that their own industry would be the most active. Executive said they were motivated by the desire for growth. (KPMG, LLP Monthly Press Release – January 2014) Inorganic Opportunities to Drive Growth Fueled U.S. Oil & Gas M&A. Accelerated M&A activity in the U.S. oil and gas industry throughout 2013, which included a strong uptick in the last three months of the year, led to 182 total deals accounting for $115.9 billion in total deal value for the year. As companies, continue concentrating on sustaining growth and maximizing shareholder value, PwC expects continued interest in M&A activity in the sector throughout 2014. During the final three months of 2013, there were a total of 51 oil and gas deals with values greater than $50 million accounting for $41.7 billion, a 154 percent increase in deal value from the 43 deals worth $16.4 billion in the third quarter of 2013. (Pricewaterhouse Cooper Press Release – January 28, 2014) Shale Plays Fuel Energy M&A. “Overall, M&A activity has been robust for a number of years in oil and gas,” said Doug Meier, PwC’s U.S. energy sector deals leader. “We see that (trend) continuing as companies in the space focus on portfolio optimization – further investing in those assets that are generating strong returns and divesting those assets that are generating lower returns.” According to PwC, 27 deals in the final quarter of 2013 were related to shale plays. Shale deals had a combined value of $23.8 billion, up 338% sequentially. There were 79 shale deals that contributed $53.2 billion in value for all of last year, marking an additional two deals and $1.5 billion in value versus 2012. (Fox Business – January 28, 2014) Reuters: North American Energy Boom Remaking World Order. North America's energy revolution is remaking all aspects of the global economy and international relations in what has turned out to be the most profound shift in the second decade of the 21st century. If fracking has not yet made the United States "energy independent", it has certainly created a crucial source of competitive advantage and given policymakers much more room to manoeuvre. Since 2008, net energy imports have almost halved, to just $217 billion in the first 11 months of 2013. In 2013, the country is expected to have imported the fewest barrels of crude oil since 1994. (Reuters – January 29, 2014) Sector Update | February 2014 phone 972.831.1300 | web WS-iBank.com 102 Decker Court Suite 204 Irving, Texas 75062 972.831.1300 WS-iBank.com
2 IHS Report Predicts 20 Years of Stable Natural Gas Prices. The price of U.S.-produced natural gas will remain stable and relatively low for at least the next two decades, boosting opportunities for exploiting the fuel’s economic and environmental benefits, according to an IHS report. The report projects that natural gas will sell for an average $4-$5 per million Btu, adjusted for inflation, through 2035. The price of crude oil will remain three to four times higher on an energy-equivalent bases, IHS said. Viewed as increasingly scarce just a decade ago, when its price rose above $15 per million Btu, natural gas produced from unconventional tight reservoirs now is plentiful and cheap, leading to reassessments of the entire U.S. energy landscape. IHS said unconventional natural gas resources totaling 900 trillion cubic feet can be produced economically when gas trades at $4 or even less. “This means that the North American natural gas resource base can accommodate significant increases in demand without requiring a significantly higher price to elicit new supply,” IHS said. (Fuel Fix – January 16, 2014) IEA Sees Higher Oil Demand. World consumption will climb by 1.3 MMBoe/d, or 1.4%, to a record 92.5 MMBoe/d, the IEA said in its Oil Market Report. The increase of 90,000 barrels a day from last month follows the first year of annual demand growth in developed nations since 2010, it said. “Upside risks to oil demand growth are much more relevant this year than the same period last year, where concerns were for downside risks to materialize,” Miswin Mahesh, an analyst at Barclays Plc in London, said. “Demand-supply metrics in the oil market are moving toward a relatively better equilibrium this year as further North American production gets on board.” Amrita Sen, chief market strategist at Energy Aspects Ltd., a consultant in London said “There is hardly an inventory buffer. The fact that demand increases for much of 2013 was coming from unfamiliar territories - the OECD - meant that it was overlooked for many months. If this year has any surprises in stock, they are more likely to come from the demand side.” (Bloomberg – January 21, 2014) Remarkable Rise of Texas Crude Oil. November production for Texas reached a 33-year high and was 36% of all U.S. crude oil. Oil drillers in Texas pumped out an average of 2.797 million barrels of crude oil every day (bpd) during the month of November, which is the highest daily oil output in Texas in any single month since at least January 1981, when the EIA started reporting each state’s monthly oil production. Compared to a year ago, oil output in Texas increased by 25% in October marking the 27th straight month starting in August 2011 that the state’s oil output has increased by 25% or more on a year-over-year basis. Remarkably, oil production in Texas has doubled in just the last two and one-half years, from 1.39 million bpd in May 2011 to 2.797 million bpd in November of last year, and that production surge has to be one of the most significant increases in oil output ever recorded in the US over such a short period of time. (American Enterprise Institute – January 31, 2014) Broader Middle Market M&A Trends Historical M&A Volume 6,000 5,000 Transaction Valuations (Completed Deals < $500 Million) (EBITDA Multiple; Completed Deals<$500 Million) 9.4x 9.2x 8.5x 8.4x 8.4x 8.2x 7.9x 7.4x 7.4x 7.1x 7.0x 10.0x 10 Year Avg. = 3,763 8.0x 4,000 6.0x 3,000 4.0x 2,000 2.0x 1,000 0.0x 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sector Update | February 2014 phone 972.831.1300 | web WS-iBank.com
3 Energy Stock Price Performance U.S. Rig Count 2,250 90.0% 2,000 80.0% 1,750 70.0% 1,500 60.0% 1,250 50.0% 1,000 40.0% 750 30.0% 500 20.0% 250 10.0% 0 0.0% Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14 Oil Gas % Oil (As of January 31, 2014) Basin Permian Eagle Ford Williston Red – New York Stock Exchange Composite Blue – Oilfield Services Index Green – Exploration & Production Industrial Stock Price Performance Rig Count 484 214 179 YoY Rig Change 20 -25 -13 % Change 4% -10% -7% U.S. Industrial Manufacturing (ISM) 75.0 70.0 65.0 60.0 55.0 PMI 50.0 45.0 40.0 35.0 30.0 25.0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 (As of February 1, 2014) Red – New York Stock Exchange Composite Blue – Industrial and Infrastructure Nov-13 Dec-13 Jan-14 PMI Sector Update | February 2014 phone 972.831.1300 | web WS-iBank.com 57.3 56.5 51.3
4 Notable Energy & Industrial Transactions Announcement Date Acquiror Target Target/Transaction Description Transaction Value ($M) Energy & Industrial Manufacturing and Services 1/30/14 1/29/14 1/24/14 1/23/14 1/22/14 Packers Plus Energy Services CMC Machine Works/Eagle Downhole Solutions CMC Machine is a Texas-bas company that performs machining services that provide manufacturing capabilities to companies; Eagle Downhole is a Texas-based company providing downhole tools and product development solutions to solve completion and production issues -- Pipeline Supply & Service/Goldman Sachs Merchant Banking Industrial Air Tool/ ZS Fund Texas-based distributor of handling equipment, industrial tools, MRO & safety supplies, spare parts and aftermarket repair & rental services to upstream and downstream oil and gas and industrial markets -- Insight Equity Holdings Midstate Berkshire/SAC Capital Massachusetts-based company that machines and 2 assembles large & small scale components with 250,000 ft of manufacturing space and 100+ multi-axis CNC machines -- MicroSeismic Reservoir Imaging Acquisition of U.S. assets of MicroSeismic that include wireline units and equipment for downhole microseismic data acquisition services -- Texas-based provider of wellhead sales & installation, frac stack rental and installation, field service and repair of valves/wellhead and field greasing of production and frac equipment -- Canary, LLC American Wellhead 1/22/14 Enserco Midstream Frac Resources Texas-based provider of frac sand storage, transloading and logistic services -- 1/21/14 Cunningham Energy Pettey Oilfield Services Through a merger transaction with Pettey Oilfield Services, a new company, Cunningham Oilfield Services, was formed which will provide contract drilling, well service & swabbing rig, cement, plugging, trucking and wellsite, right-of-way & pipeline construction services -- 1/20/14 1/16/14 1/14/14 1/6/13 General Electric Flotek Cameron Eclipse IOR Services Acquisition of Cameron’s Reciprocating Compression business which provides reciprocating compression equipment and aftermarket parts & services $550.0 Texas-based provider of enhanced oil recovery technologies and services, including water control polymers, sweep improvement technology, mobility control polymer flooding, injectivity improvement and permanent clay stabilization $7.0 IronGate Energy Services/ Clearlake Capital Green Light Energy Services Bakken-based provider of rental services, including work string components and pressure control, completion & production-related equipment and services -- DXP Enterprises B27, LLC Global supplier, with multiple offices in Texas, Oklahoma and Louisiana, that provides pump and integrated flow control solutions and $285.0 Sector Update | February 2014 phone 972.831.1300 | web WS-iBank.com
5 Notable Exploration & Production and Midstream/Downstream Transactions Announcement Date Acquiror Target Target/Transaction Description Transaction Value ($M) Exploration & Production and Midstream/Downstream 1/31/14 1/30/14 1/24/14 1/22/14 1/21/14 1/10/14 1/3/14 Liberty Resources, LLC Undisclosed seller Undisclosed buyer Hess Corp. Athlon Energy, Inc. Undisclosed seller Acquisition of assets located in the Williston Basin that consist of 53,000 net acres producing over 4,000 Boe/d $455.0 Sale of assets located in the Utica Shale that consist of 74,000 acres producing primary dry gas, which brings Hess’s total divestment total to over $8 billion since 2013 $924.0 Acquisition of assets located in the northern Midland Basin that consist of 5,656 net acres with current production of 750 Boe/d with 60% oil $88.0 Acquisition of assets located in the Niobara Shale, specifically the Denver-Julesburg Basin, that consist of interests in 40 wells and 28,727 net acres $30.0 Pacific Energy Development (PEDEVCO) Undisclosed seller Undisclosed buyer Chesapeake Energy Corp./Chaparral Energy Concentrating on reducing financial complexity and refocusing on core assets, Chesapeake sold its 20% stake in Chaparral Energy; this sale would value Chaparral at approximately $1 billion $215.0 Undisclosed sellers Two separate acquisitions of properties located in the Williston Basin that consist of a combined 20,800 net acres and 350 Boe/d $74.6 Acquisition of assets located in West Virginia, Virginia and Kentucky that consist of 400,000 acres with royalty income from 2,5000 active natural gas wells $60.1 Emerald Oil, Inc Pardee Resources, Co. Undisclosed seller Sector Update | February 2014 phone 972.831.1300 | web WS-iBank.com
6 Wilcox | Swartzwelder & Co. Wilcox Swartzwelder & Co. is a boutique investment bank, specialized in delivering high quality financial advice exclusively to owners of middle market companies and oil and gas properties in the energy and industrial sector. Advisory services include company sales, mergers and acquisitions, private placements of debt and equity, oil and gas property acquisitions and divestitures, institutional capital raises, and general corporate finance matters. Through its merchant funding activities, the Firm acts as direct investor providing flexible capital to support small, entrepreneurial companies. Principals have more than 40 years of combined investment banking experience, closing over 100 transactions with an aggregate value in excess of $3.9 billion. They have also acted as investors with capital at risk, operators and board members in multiple companies, having navigated through various business cycles and completed transactions in both up and down markets. The Firm is fully licensed and registered. Securities are offered through PetroGrowth Energy Advisors, LLC, a registered broker-dealer and member of FINRA/SIPC. Notes: The information and views contained in this report were prepared by Wilcox Swartzwelder & Co. LLC and should not be construed as an offer to buy or sell or a solicitation to buy or sell any financial instruments or to participate in any trading strategy. The information contained herein is believed to be reliable, but Wilcox Swartzwelder & Co. LLC makes no representation as to its accuracy or completeness. Indices: Dow Jones U.S. Select Oil Equipment and Services Index (DJSOES), Dow Jones U.S. Select Oil Exploration and Production (DJSOEP), Industrial Select Sector SPDR (XLI), NYSE Composite Index (NYA) Data Sources: Dealogic, Capital IQ, Stockcharts.com, Baker Hughes, RigData, Rig Zone, Energy Information Agency (EIA), Association of Energy Service Companies (AESC), Institute of Supply Management (ISM), Wilcox Swartzwelder Proprietary Energy and Industrial M&A Database Copyright © 2014 Wilcox Swartzwelder & Co. LLC, all rights reserved. Sector Update | February 2014 phone 972.831.1300 | web WS-iBank.com
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