Oil services M&A boom coming; ‘Hold on’ Bear Stearns says

July 30, 2007

rig1.jpgThe queasy credit markets is bad news for private equity buyers and the M&A banking groups that have financed the leveraged buyout boom.  Stocks have sold off partly on the assumption that the LBO premium is wearing off all sectors.

But Bear Stearns says don’t count the oil service and equipment industry out of the M&A game.

Bear Stearns analyst Robin Shoemaker predicts the sector will soon experience a “transformation” through mergers and acquisitions.

The prediction comes as corporate buyers are feeling emboldened amid rising pressure on private equity firms and the dozens of leveraged buyouts they have in the pipeline.  In short, while LBO shops may have a hard time getting deals done, don’t count strategic buyers out.

Shoemaker points out that private equity’s role in this sector has been limited so far:  

“Strategic buyers account for essentially all recent M&As in oilfield services. Financial buyers are observing from the sidelines, at least for now. Strategic buyers are able to factor operational synergies into their valuations of target companies, giving them an
advantage over financial buyers.”

Shoemaker adds:

“Since the beginning of 2006, the most rapidly consolidating industry subsectors have been manufacturing (38% of transaction value), drillers/drilling rigs (19%), and
geophysical/reservoir services (12%). Recent deals also encompass engineering/construction and production/well services.”

“We believe that the surge in M&As in oilfield services that began in early 2006 will continue, and possibly accelerate very soon,” the note read.

An acute skilled labor shortage, a high-stakes race for technological leadership,  overcapitalization, and undervaluation are the reasons cited.

Recent deals that could spark the Oil M&A spurt include the $18 billion combination between Transocean and GlobalSantaFe, two of the largest oil drillers, and the $2.1 billion takeover of Lone Star Technologies Inc. by U.S. Steel Corp. 

Companies Bear Stearns highlights as having the most attractive characteristics for a potential acquirer are Grant Prideco, Pride International, Noble Corp., Rowan, Tesco Corp., Key Energy, Hornbeck Offshore, Willbros Group, T-3 Energy Services and Dresser-Rand.

Bear Stearns said it changed its recommendation on the sector to “market overweight” from “market weight”.

(Photo: Reuters file)

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