The oilfield services and equipment sector – much like the rest of the oil and gas industry – is a little worse for wear, with deals slim and bankruptcy rampant.
But PPHB – the acronym for Parks Paton Hoepfl & Brown – is managing to eke out deals despite the environment. The 15-member, Houston-based boutique investment bank was founded and is led by former oilfield service executives – who also did time in investment banking – so they have a good perspective on the industry.
Since its formation in 2003, PPHB has advised on more than 150 transactions with $10 billion in value, including mergers and acquisitions, capital raises and, most recently added, debt financings. Among its deals this year: It advised Superior Energy Services on the sale of its plunger lift and gas lift unit in November to B29- and Crestview-backed Endurance Lift Solutions. It’s also sold whole companies to firms backed by Quantum Energy Partners, Clearlake Capital and Intervale Capital, shed Intervale-backed Epic Lift Systems to Red Bird- and Sallyport-backed Tally Energy Services and worked on Mohawk Energy’s recapitalization by Buckthorn Partners working with Coretrax .
Co-founder Joe Hoepfl – who spent his early years at Pool Energy Services and Apache Corp. and later at Raymond James and CIBC – recently spoke with The Texas Lawbook’s Claire Poole about the state of the market and his outlook for next year.
Q: Why did you and your partners form the firm?
A: When we first started in 2003, all the original partners came from industry, but we all had parallel careers in investment banking. We formed the firm due to our common and complementary backgrounds in the industry.
Q: How has the business changed? A lot has certainly happened.
A: A lot has happened. We went through a period where development of the shale business led to opportunities in the oil services industry. A lot of capital was put to work to fuel the growth. Both strategics and private equity were active in buying those entrepeneurial businesses or making investments. But this industry is cyclical, and we’ve had some fits and starts. The 2008-2009 global crisis – and the recovery thereafter – and in 2014 the shift in fundamentals – given OPEC’s change in stance – led to a big change in oilfield industries. There have been some ups and downs since 2015 but now the focus is on the use of capital, efficiencies and capital discipline. It’s led to a true change in the performances of businesses and a change in capital deployment and discipline.
Q: So what’s the climate today?
A: Those who have a commodity service business are having trouble competing and those who have a true sustainable advantage, whether it’s technology or some speciialized offering, are in a better position to compete. But there’s a hyper-focus on liquidity and balance sheet strength and M&A has become much more challenging. Competitors are finding it difficult to compete in their own product lines while the market is focused on cash flow generation. It’s a changing and evolving model for leadership and management teams and how they position their companies.
Q: Does your firm handle mostly sell side assignments or do you do some buy side as well?
A: We’ll do buy side, but our primariy focus is sell side and capital formation, both equity and debt.
Q: What kind of deal flow are you seeing out there? Based on your tombstone count, it seems like an average year for the firm this year.
A: Amazingly, it’s near flat and that feels like a Herculean effort to see what we’ve been able to accomplish. We’ve heard from others that there are no deals in the sector and we’ve had several reach the finish line. It’s been very, very challenging to get them completed at the right values and structures.
Q: What kind of deals are getting done?
A: It’s all over the map. There’s been some element of stress-related deals, corporate carveouts and opportunistic, high-quality companies that we’re still trying to see if there’s a value point for buyers and sellers.
Q: Are conditions getting better with the stability of oil prices?
A: No. There is a view that next year, on the service company level, will probably be flat or even a bit lower given the sense that operators are reducing capex budgets modestly. That continued pathway for the oilfield services industry doesn’t lead to a robust M&A marketplace. It’s going to be challenging for the near- to medium term.
Q: So what are you doing to combat that?
A: We have to be judicious on the types of deals we work on, to try to focus on those specific deals that we think we can get done. It takes some creativity to find buyer and sellers.
Q: Can you give me an example of a deal that’s indicative of the environment right now?
A: If you look at all of the tombstones, each tells a story. We do have some completed deals and deals in market right now that have an energy technology bent to them, with the push toward digitalization, software and automation still very much in focus. Those deals will continue to get done. There’s also an emphasis on certain sectors with a growth element, like water and production-related companies and artificial lift. They have visibility.
Q: But how about the run-of-the-mill service companies?
A: We’ll be opportunistic, but rank-and-file commodity deals will be more challenging.
Q: What’s private equity’s role in the deal flow? Up or down?
A: I would say that on the buy side for private equity, the bar has been raised very high as to what they will pursue and transact. And on the sell side, it’s a very difficult market to transact at values that make sense. So unless there’s a near-term need to sell, they’ll be holding on longer than they would have liked.
Q: So are some looking at extending their time horizons, merging their portfolio companies together, as we’ve seen in the upstream, and the like?
A: I wouldn’t single out any private equity group. But they’re all thinking that if they don’t transact in the near term, what are their options? They might extend their horizons.
Q: You launched the popular “Musings from the Oil Patch” newsletter 10-plus years ago authored by Allen Brooks, a well-known oilfield services research analyst. This year you added an “Energy Technology Musings” newsletter as well. Why?
A: Because of the level of interest and the changes that are coming in the services sector with technology-enabled industries, it made sense to focus on that space. We want to be active in it.
Q: Are there deals happening in that space?
A: Selectively. No doubt that’s an area of interest. If a sustainable technology delivers value to the operator, it would get more interest than other deals in the marketplace.
Q: Several oil and gas-focused boutique investment banks have merged with larger banks, but you have not. Are you intent on staying independent?
A: We enjoy what we do and we don’t have any mandate or desire to do anything with another group. We work hard and we want to keep providing value to our clients.
Q: Which law firms do you run into on deals?
A: It varies, from Locke Lord to Vinson & Elkins to BoyarMiller. You name it, they’re all still trying to be active in the space. They’re all feeling the pain of lower levels of deal flow and they’re still active.
Q: How has the entrance of national law firms into the oil and gas industry changed who you’re seeing on deals?
A: It hasn’t been a dramatic shift. There are always ebbs and flows of different law firms that make a stronger push in the sector and then have a changing of guard or leadership.
Q: So what’s your outlook for deal flow?
A: We still have good levels of a backlog, so we do believe that this industry is not going away. We believe there will be continued transactions and there will be buyers and sellers looking to move forward – and hopefully we’ll play a role in that transaction marketplace. It’s hard to say whether deal flow will change dramatically given some event, but you usually don’t see it until it’s here.
Q: How about oil prices, which seem to staying between $50 and $60 per barrel?
A: It does feel like we’re range bound right now, which is not necessarily a bad thing. People can plan a bit better if they have a good sense of where commodity prices are, but there will be continued emphasis on how capital is deployed. Even if commodity prices pick up a bit, I’m not sure it would have a big impact on the services sector.
Q: Do you expect more bankruptcies?
A: I think it’s almost inevitable to see some continuation of that. Certain companies have too much leverage and not enough cash flow, so there will be more filings.