Private Equity Explores Oilfield Services Sector

Private equity firms are busy sizing up potential acquisitions in the oilfield services sector, even as many assumed the global credit crunch would knock some out of play.

One reason is that valuations for companies that help drill for and produce oil and natural gas have eased in recent months on expectations for moderating growth this year, especially in North America.

Analysts and industry experts also say prospects for growth in booming regions like the Eastern Hemisphere have stirred buyout firms' demand for smaller oilfield service companies, although tight credit markets have put the brakes on big deals for large-cap players.

"We are busier than ever," said Richard Spears, vice president of energy analysis and advisory firm Spears & Associates. "Right now, we have projects for 15 deals under way, when last year, at any one time, we had six or seven."

Investors and companies hire Spears to analyze businesses during the due diligence process of a transaction. Last year the Tulsa, Oklahoma-based firm advised on deals ranging in size from $100 million to $3 billion.

Spears said his private equity clients were sizing up businesses in well completion services, land and offshore drilling and production, and other parts of the oilfield services sector.

"It is across the board," Spears said, noting there was particular interest in companies in the fast-growing Southern and Eastern Hemispheres.

Recent deals underscore buyout firms' interest in oilfield services.

In February, First Reserve announced a deal to buy CHC Helicopter , which services the offshore oil and gas industry, for about C$1.5 billion.

Also last month, shares of Expro International Group soared after the British oil and gas field services company said it had received a proposal. At the time, bankers speculated that the suitor was a private equity firm.

And after the market closed on Wednesday, U.S. buyout firm Castle Harlan said it had a deal to buy Anchor Drilling Fluids USA for $250 million.

More Coming?

"There's an awful lot of M&A brewing in oilfield services," said a private equity firm's managing director who requested anonymity.

"Private equity still has a lot of money to put to work," he said, adding that valuations have fallen to attractive levels.

But the buyout firms may find themselves competing against some of the large publicly traded oilfield service companies for purchases.

In fact, chief executives of several of these companies said in conference calls to discuss fourth-quarter earnings that they were more actively pursuing deals. They cited not only better valuations but also a slowdown in activity from private equity firms.

"It's pretty clear that as valuations have come back and the private equity players have left the playing field, there are a lot more attractive opportunities out there," Halliburton CEO Dave Lesar said in January, "and it's something we're taking a look at right now."

The CEO of BJ Services echoed that sentiment.

Analyst Bill Herbert of research firm Simmons & Co said he expected private equity firms to snap up more small-cap oilfield service companies.

"There continues to be an exceedingly significant disconnect between public market and private market values, with private equity willing to pay significant premiums of 40-50 percent for small-cap service companies with either international franchises or technology that can be exported to international markets," Herbert said.

Herbert does not foresee "giant buyouts" because of the current situation in the credit markets, he said, but he does expect "a continuation of the feeding frenzy for smaller-cap deals."