With experience in investment banking and corporate development, Robert Bryan, director of strategy and corporate development at Aegion Corporation, shares his insight on M&A activity in the oil and gas sector and an engineer’s space in upstream finance.
The drastic fall in oil prices that the industry has experienced in the last year has proven to be a crucial test in financial resilience. To battle the slew of reduced upstream operations, companies may have found this as an opportunistic period to research potential counterparts with the right tangibles for mergers and acquisitions (M&A).
The financial state of the company is usually not the driving factor but it is certainly a factor. If a company is flush with cash or has the ability to go out and secure cheap debt, it can make the M&A process easier and more attractive. Conversely, if a company is struggling, it may not be in a position to acquire anyone and may be looking at alternatives itself. Main drivers of M&A deals are strategy-based, such as acquiring targets that are new or complementary in geography, technology, or product. For example, if your roustabout group is weak on the West Coast, you may target maintenance providers in California.
The consensus appears to be that the effect of declining oil prices has yet to be determined in the M&A market. As companies continue to be affected by reduced prices, particularly as it relates to anticipated 2015 Q3 and Q4 earnings, it will drive conversations and evaluations about future strategy. Also, financial covenants (rules and metrics put in place by banks to protect themselves from defaults, such as minimum coverage ratios and debt-to-equity thresholds) will be tested as performance falters, and this could drive distressed M&A activity as companies become cash-strapped or banks pressure them to get into covenant compliance. However, many companies in sound financial condition will prefer to ride out the cycle and target a transaction once their earnings have rebounded.
When evaluating a company, you look at quite a few different metrics. A common metric used for establishing a value is applying a multiple to EBITDA (earnings before interest, taxes, depreciation, and amortization). EBITDA is a financial metric that determines the net income (revenue minus expenses) with interest, taxes, depreciation, and amortization added back. It can be used to compare the profitability between companies and industries, as it eliminates the financing and corporate structure effects.
There is a lot of work that goes into determining the correct EBITDA and the appropriate multiple, but the idea is EBITDA is a proxy for cash flow and the multiple represents a payment for future earnings. As an oversimplified example, if a company has USD 100 million of EBITDA and you agree to acquire them for 8.0×EBITDA, the transaction value would be USD 800 million.
There are certainly differences between oil and gas and other industries. I wrote about these differences in a previous TWA article. [Vol. 8, Issue 3, Pages 10–13]. Commodity prices can have a significant effect on M&A in the oil and gas space. Exploration and production (E&P) companies are capital intensive and rely heavily on their existing reserves and their ability to replace depleting reserves. Coupled with exposure to natural resource prices, E&P companies have unique characteristics.
Oilfield service company valuation is generally similar to that of non-oilfield companies. The main difference is the inherent commodity risk, which may reduce the company’s value given the level of uncertainty around future earnings and natural resource prices. As such, multiples may be lower or a larger discount factor may be attributed to future estimated earnings to account for the increased risk to earnings.
I am involved in the M&A process from start to finish. The first part of the process is identifying target companies to pursue for strategic alliance or acquisition. This includes doing research and talking with executives, sales people, and field personnel within my company. Once a dialogue is initiated with a target, the evaluation begins from both a qualitative and quantitative perspective. From the evaluation, you work to establish a value and transaction structure that works for both you and the target. Once you have agreed on the terms, the due diligence phase begins, which includes taking a detailed look at the target’s financials, customer relationships, and employees.
As an investment banker, you typically work on more sell-side assignments vs. buy-side assignments. Sell-side projects include an owner (usually a corporation, private equity group, or entrepreneur) who is looking to sell or recapitalize their business. The selling process can be lengthy and involves the initial due diligence on your client: an appraisal exercise to evaluate the company’s operations and financial data, developing the materials, contacting buyers, and ultimately negotiating a deal. A key component to the sell-side process is identifying and contacting the right buyer prospects.
On the buy-side, you are out looking for companies to acquire. There are similarities in the process as you identify targets to contact on the buy-side as well, but you are asking them if they would be willing to talk to you about a transaction vs. trying to sell them a business.
I studied business as an undergraduate and always had an interest in finance. Originally, I got my foot in the door on the retail side as a financial adviser, which I did for about 3 years before realizing it was not ultimately what I wanted to do. I began researching investment banking and started reaching out to alumni in the field, with whom I was able to have conversations and establish connections. Ultimately, I was able to get a position as an analyst with a middle market investment bank and eventually worked my way up to vice president.
Key factors for getting my first job in corporate finance were researching what the role entailed (i.e., long hours and a lot of financial modeling), being persistent in staying in touch with my contacts without being too pushy, and being enthusiastic about the job. It is a competitive space, but a lot of factors go into hiring someone and technical capability is not always first on the list, particularly given how much has to be learned on the job. So, an engineering or government major can do as well as a finance major, if they have the right mindset and attention to detail.
Oil and gas engineering backgrounds are especially valuable in upstream M&A as it is helpful to know about the complete E&P process. To conduct a merger or acquisition, you need a good mix of qualitative and quantitative skills. You need to be able to analyze a business or industry and articulate complex concepts to a business owner or potential buyer. There is certainly an aspect of salesmanship as well. From a quantitative perspective, my experience has been that folks with engineering backgrounds can do very well because the math in the finance world is not as complicated as math in the engineering world. Also, attention to detail is one of the most important traits when dealing with M&A transactions, as a misplaced comma or sloppy work can have serious repercussions.
For nontechnical professionals, it can be a challenge to get into an upstream M&A role. At the analyst or associate level, you are competing with people from different backgrounds, so it is very competitive but certainly possible to secure a position. If you are an established professional in a nontechnical role and are looking at a position as a vice president or above in the M&A sector, it would be very difficult given the knowledge necessary to run a transaction coupled with the intricacies of the upstream space.
Robert (Bobby) Bryan is director of strategy and corporate development for the corrosion protection group at Aegion Corporation. Before joining Aegion, he spent several years as an investment banker and financial advisor in companies based in Houston and St. Louis, Missouri. Bryan holds a BA in managerial studies and sports management from Rice University and an MBA from the Red McCombs School of Business at the University of Texas at Austin.