Permian Basin - Oil & Gas Mergers, Acquisitions and Divestitures

Permian Basin - “Let’s Do A Deal”
(M/A/D Trends)

Investment Banking Experts for the Energy and Industrial Sector
Securities offered through PetroGrowth Energy Advisors, LLC, member FINRA/SIPC.

Agenda
Introduction …………………………………………………………………………………….

I.

Permian Basin Activity is Highly Supportive for Deal Making……......... II.


Exploration & Production A&D Themes



Oilfield Services and Equipment M&A Themes

Case Study ………………………………………………………………………………………. III.

2

Boutique Energy & Industrial
Investment Bank for the Middle Market

Wilcox | Swartzwelder & Co. Overview
Leading boutique investment bank providing financial advisory solutions exclusively
to mid-market companies in the Energy sector.

Principals’ Successful
Track Record



Senior level commitment; “boutique” service; high quality advice and deal execution



Combine Wall Street background and training, Ivy League education, industry knowledge, middle
market investment banking experience and hard work to get deals done



Deal size generally up to $150 million
Industry specialization offers advantages to clients (knowledge, research and relationships)



Access to and ongoing communication with industry buyers/investors/capital sources



Rigorous, proven transaction process that yields superior results
Broad experience working with many complex deal types and structures in good and difficult markets



Industry and
Transaction Experts

Knack for understanding our client’s situation, positioning the company to unlock value,
creating a highly credible and compelling “story”, selling it to the right investors / buyers and
negotiating a favorable outcome



Bring Wall
Street Expertise to
Main Street





We Help Clients
Create Value

Principals bring almost 40 years of experience, more than 100 closed transactions with value in
excess of $3.8 billion



Team includes five others providing analytic and back-office support

3


Principals
Jason
Wilcox

Grant
Swartzwelder

Managing
Director &
Co-Founder

Managing
Director &
Co-Founder

Career





Career

18 years investment banking
Bear, Stearns & Co.
Raymond James & Associates
Growth Capital Partners






Education




20 years energy investment
banking/operations
PetroGrowth Advisors
The Principal Securities
Ensco plc / Arco Oil & Gas

Education

M.B.A. The Wharton School of U. of
Pennsylvania
B.S. Economics, Texas A&M
University
Econometrics, London School of
Economics




4

M.B.A. Harvard Business School
B.S. Petroleum Engineering, Texas
A&M University


Advisory Services
Helping clients define objectives, evaluate options and work side-by-side as advisor
navigating through the maze of transactional complexities – from start to finish.
Mergers & Acquisitions /
Company Sales /
Divestitures

Institutional Capital
Raising / Private
Placements

Oil & Gas Property
Sales & Divestitures

Financial Advisory

Refinancing /
Recapitalization /
Buyout
Merchant Banking /
Private Equity

5


Energy Industry Specialization Benefits Clients
Specialization offers numerous advantages to clients – research, industry intelligence,
capital markets knowledge, valuations, trends, investor and buyer relationships.
Energy

Industrial

 Oilfield Services & Equipment

 Electrical & Power

 Upstream Oil & Gas (E&P)

 Engineering and Infrastructure

 Midstream Pipelines, Gathering,
Storage & Blending

 Industrial Distribution
 Industrial Technology

 Downstream Services & Equipment

 Process/Flow Controls

 Environmental

 Specialty Chemicals

 Building and Construction

 Water / Wastewater

• Navigated through multiple cycles, completing transactions in periods of positive
momentum as well as extremely difficult circumstances

6


Extensive Experience With Strategic Buyers
Extensive experience marketing to and soliciting/negotiating with strategic players.
 Showed deals to over 155 unique energy services and equipment strategic buyers in 2012; have shown deals to over 500
unique strategic buyers of energy and industrial companies.
 Ongoing communications with various strategics and track and monitor those groups which have completed M&As and
submitted term sheets, bids, letters of intent and legal agreements for our deals; including deal terms, structures and
valuation metrics.

Energy Services

Exploration & Production

7

Industrial


Large Network of Institutional Capital Relationships
Strong relationships with a large network of active institutional capital providers and
investors focused on segments of the energy and industrial sector.
 Showed deals to over 195 private equity groups in 2012; have shown deals to over 500 institutional private equity groups,
senior and junior lenders, insurance companies, hedge funds and family offices focused on the middle market.
 Maintain ongoing dialog with capital sources; provides real-time market feedback and accurate valuation guidance.
 Track and monitor in our proprietary database those groups which have completed M&As in our target sector and submitted
term sheets, bids, letters of intent and legal agreements for our deals; including deal terms, structures and valuation metrics.

8


Experience; Track Record - Example Transactions
Experience spans over 100 transactions with aggregate value in excess of $3.8 billion.
Two State
Oilfield Inc.

Production
Specialty
Services

Company Sale to MRC Global
(McJunkin Red Man
Corporation)

Management Buyout and
Recapitalization

Acquisition of Genesis Gas
Gathering Assets

Company Sale to
Basic Energy Services

$20 Million Revolving Credit
$45 Million Term Loan
$25 Million Second Lien Loan

Company Sale to
Frac Tank Rentals, LLC,
Portfolio company of Lone
Star Investment Advisors

Recapitalization with
Silver Peak Partners and
Saybrook

Formed NewCo to Acquire
Certain Assets from Texas
Maximum Production, L.P.

Management Buyout of
Certain Assets from
Nighthawk Oilfield Services

Strategic M&A
Buyside Advisory

Senior Credit Facility

Private Placement

Senior Debt Financing

Financial Advisory to Evaluate
Strategic Alternatives

Recapitalization with Ancor
Capital Partners

9


What Does the Future Hold for
Energy M/A/D Activity?

Difficulty of Predicting the Future

11


Difficulty of Predicting the Future (Oilfield Services Index – OSX)
Oil price
reaches
$141.47/Bbl
(June 27, 2008)

European debt
crisis

Government
shutdown

Recession
begins
(April 2008)

Oil price drops to
$33.20/Bbl
(January 16, 2009)

Recession ends
(June 2009)

12


How Good is Your Crystal Ball?

“How frustrating. The crystal ball is down again”
Source: New Yorker – August 12, 1991

13


Permian Basin Activity
Highly Supportive for Deal Making

Key Exploration & Production A&D Market Themes
 Permian is one of the most coveted oil/liquids resource basins in U.S.
 Valuations reflect the “Permian Premium”
 Strong appetite from teams backed by private equity and small-cap public
companies
 Robust bidding for the “right” deal (with value given for upside)

15


Permian Basin Activity
Permian Basin Plays

Permian Basin Activity (October 30, 2013)

16


Permian Basin – Highly Coveted
Field/Reserve Size (Billion Boe)

Characteristics of Permian Basin

Spraberry/Wolfcamp
Eagle Ford

 Oil/liquids

Prudhoe Bay

 Stacked pays

Bakken

 Mature infrastructure

Delaware Basin

 Reserve potential

East Texas Basin

 Expected production increase
 Compelling rates of return relative
to other basins

0

2,000

10

20

30

40

50

60

Permian Basin Production (MBoe/d)

1,600
1,200
800
400
0
Jan-10

Jul-11

Jan-13

Jul-14

Jan-16

Jul-17

Source: Bentek & Energy Information Administration

17


Producer Valuations Reflect “Permian Premium”
Permian Index vs. DJSOEP Index (Last 12 Months)
100.0%
80.0%

60.0%
40.0%
20.0%
0.0%
-20.0%
Oct-12

Jan-13

Apr-13
Jul-13
Permian Index
DJSOEP Index

Oct-13

Permian Index: Diamondback Energy (FANG), Pioneer Natural Resources (PXD), Energen Group (EGN), Laredo Petroleum
Holdings (LPI), Cimarex Energy (XEC), Concho Resources (CXO), Callon Petroleum Company (CPE) and Approach
Resources, Inc. (AREX)
DJSOEP Index: Dow Jones U.S. Select Oil Exploration and Production (DJSOEP)

18


Public Markets Reflect “Permian Premium”
Valuation for Public Market Producers
12.0x
10.6x
10.2x

9.7x

9.2x

Focused (8.5x)

8.6x 8.5x
7.6x

8.0x

7.2x

6.8x 6.6x 6.6x

6.0x

6.1x 6.0x
5.7x

4.7x 4.7x 4.4x 4.4x 4.4x
4.3x

4.0x

Multi-Basin (4.7x)

19

SM

APA

DVN

WLL

HES

NFX

CHK

EOG

XEC

RE…

CLR

AR…

CXO

COG

LPI

EQT

ATHL

PXD

0.0x

FA…

2.0x

RRC

EV / 2014E EBITDA

10.0x


Production Valuation Time Horizon
Public

Private Equity

MLP

High-risk, high-rate

Flattening decline

Low-decline, stable cash flow

Net Production (Boepd)

600
500
400
$20,000 / Boepd
300
200
$50,000 / Boepd
100

$80,000 / Boepd

$100,000 / Boepd

$150,000 / Boepd

0
0

12

24

36

48

60

72

84

96

108

Months
20


Who is Buying Oil & Gas Deals?
U.S. Onshore demand over past 18 months.
$13.2

Private Equity
Large Caps

Permian Basin Valuations

$12.9

Small Caps

$125,000 - $150,000 / Boepd
6.0x – 8.0x FTM Cash Flow

$10.8

Midland Basin Valuations
MLPs/Trusts

$8.5

Majors

$5.1

Non-Traditional

$15,000 - $20,000+ / Acre (Core)
$10,000 - $15,000+ / Acre (Tier I)

$5.0

International JV
International
$0.0

Delaware Basin Valuations
$10,000 - $15,000+ / Acre (Core)
$5,000 - $10,000+ / Acre (Tier I)

$4.5
$2.5

$5.0

$10.0

$15.0
21


Private Equity and MLP Appetite
Private Equity

E&P Focused Capital

 50-60 teams backed by PEGs
hunting for platforms and ‘bolton’ acquisitions

$70
$60

$60.0

$50
$40

$34.0

$30

MLP’s
$20

 Growth through acquisition

$10

 Operational platform capabilities
to support rapid expansion

$0
Private Equity

MLP

 Distribution pressure

22


What Makes for a “Good” Oil & Gas Property Sale?
Characteristics

Informational Needs
 3rd party reserve report

 Assets > 30% Proved Developed
Producing (PDP)

 Maps

 Production > 150 to 200 BPD

 Financials

 Predominantly oil / liquids

 Clean property title

 Not excessive well count
 No well concentration > 25% of
total production/reserve value

Assets to Monetize
 Minerals

 Repeatable, predictable results

 Working interests (operating & nonoperating)

 Long life > 10 Years

 Royalties

 Limited lease expiries near term

 Leases (more difficult)

23


Key Oilfield Services & Equipment M&A Themes
 Selective demand by private equity and strategic acquirers for “platform”
and “bolt-on” acquisitions:
o

Manufacturers of niche products in high demand

o

Waning appetite for oilfield services

 Reasonable valuations
 Seller motivations
 Multiple bidders for deals

24


Positive Expectations Built into Oilfield Stock Prices

OSX - Oil Services Index

Capital Expenditures – U.S.

$300

2012 - $85 billion
2013 - $100 billion
2014 - $115 billion
2015 - $125 billion

$280
$260
$240
$220

Source: IHS, America’s New Energy Future, Sep 2013

$200
$180

$160

Capital Expenditures – Permian Basin

$140

2012 - $14 billion
2013 - $15 billion
2014 - $18 billion
2015 - $20 billion

$120
$100
Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

Source: Wood Mackenzie

25


Permian is Going Horizontal – Higher Service Intensity

400

Permian Basin Horizontal vs. Vertical Rig Count

350
300
250
200
150
100
50
Aug-11

Feb-12

Aug-12
Horizontal

26

Feb-13

Aug-13

Vertical


Who is Buying OFS Deals?
U.S. Oilfield Services and Equipment M&A Activity (1/1/13 – 9/30/13).

 WS&Co M&A Database: 98 transactions
o

50 companies were purchased by strategic buyers (51%)

o

31 companies completed a majority recapitalization with a private equity group
as a “platform” investment (32%)

o

17 companies were purchased by a strategic buyer backed by a private equity
group (17%)

 Approximately 50% were purchased by strategic buyers and 50% were
purchased by private equity groups (or private equity backed companies).
 On average there are 10-11 transactions completed each month;
however, the pace of transactions has accelerated significantly since
Q1'13.

27


Factors Influencing Owners’ Decision to Sell
Since 2009/10, many owners have created significant value; now time to “de-risk”
personal wealth

 Age (50 – 70)
 Need for assistance (capital, talent resources) to manage high growth
business
 Strong financial performance/good time for exit
 Tired; ready to devote time to other things
 No succession plan
 Competitive threats

28


What Makes for a “Good” OFS Deal?
Valuation Multiples (EBITDA)

Characteristics

 Niche Manufacturing

 Manufacturer of niche product /
value-added service provider

o

 EBITDA > $5 million

4.0x – 6.0x

 Value Added Oilfield Services

 Customer concentration < 25%

o

 Operating history > 5 years

3.5x – 4.5x

 Commodity Oilfield Services

 Growth

o

2.5x – 3.5x

 Experienced management team;
solid accounting/administrative
systems

 No
legal, environmental, tax, regulato
ry or HR issues
29


Who Is the Best Buyer?...the Buyer that Meets Your Goals
Financial Buyer

Strategic (Corporate) Buyer

 “Rate of Return” analysis

 “Buy vs. Build” strategic analysis
o

 Typically a majority purchase; partial
liquidity to seller with continued
minority ownership

Synergies

 100% purchase (with structure)
o
o
o

Seller note
Earn-out
Buyer stock

 Desire to continue as owner with a
financial partner
 Corporate governance

 Continuation as employee (“Or Not”)

 Future growth; ultimate exit (3-7 yrs.)

Other Considerations

 Clarify your goals in advance
 A suitor is not necessarily a qualified buyer
 Competitors are rarely the best buyer
 Difficult to predict whether a strategic or financial buyer will pay the most
30


How Can a Seller Achieve Maximum Price/”Best” Deal?
Create a competitive market among multiple, qualified buyers.
 Puts pressure on buyers to offer their best deal (eliminates “tire-kickers”)
 Creates alternatives; allows seller to simultaneously evaluate multiple offers and
determine “best” deal
 Allows seller to pick a buyer that meets his goals

 Seller maintains negotiating leverage and a position of strength
 Broad “market test” ensures achieving the highest market clearing price

32


Case Study: Middle Market Oilfield Service Transaction
 Since “beauty is in eye of beholder”; it pays to broadly test the market
 $40 million difference between initial high and low bids
Initial Indications of Interest ($mm)
$100.0
$90.0

$90.0
$82.5

$80.0

$80.0

$80.0

Financial Sponsor
Strategic Buyer

$79.7
$75.0

$70.0

$65.0

$65.0

$61.1

$60.0

$60.0

$50.0

$50.0
$40.0
$30.0
$20.0
$10.0
$A

B

C

D

E

F

33

G

H

I

J

K


Thank You!

102 Decker Court, Suite 204
Irving, Texas 75062
972-831-1300
Jason Wilcox: jason@ws-ibank.com
Grant Swartzwelder: grant@ws-ibank.com
Website: ws-ibank.com

34


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