With Brian Williams, Managing Director – Carl Marks Advisors
Q: How do you explain the large valuation gap between public and private oilfield services companies?
A: As the price of oil increased and stabilized in the $50 to $55 per barrel range, public equity investors were keen to find ways to get exposure to increasing oilfield activity that was likely to ensue. Several public IPOs and private 144a equity offerings were consummated in late 2016 and early 2017 to take advantage of growing investor appetite and valuation multiples in the 7x to 8x 2018 EBITDA range.
Public companies that still had potential balance sheet problems sold equity at these higher valuations to solve their problems. At the same time, smaller private companies struggled to attract investor interest at any value as the private equity and strategic buyers that play in this space were focused on maximizing value of their existing businesses with no need to pick up additional capacity or service lines.
Q: Are these companies growing fast enough to justify their valuations?
A: In January, the market was telling us that these companies were going to grow faster than analyst expectations by paying the multiples to projected 2018 EBITDA. However, over last two months, concerns over rapidly growing US oil production has caused share prices for oilfield service companies to pull back 20% to 30% resetting values to more typical forward year EBITDA multiples of 5x to 6x.
Q: Looking ahead, how is this lack of capital likely to impact the private oilfield service companies that continue to have debt loads that current cash flows can’t support?
A: I think we will see another wave of oilfield service company restructurings in 2017. Despite improving activity, in many cases pricing and utilization are not improving enough to generate cash flows sufficient to support current debt levels. In addition, debt facilities that were put in place during the boom in 2013 and 2014 are maturing over the next 18 months. These companies also lack the liquidity to fund investments in working capital and equipment upgrades that are needed to take advantage of growing oilfield activity.