It’s clear to those of us that monitor the M&A market and talk to buyers and owners of consulting firms on a daily basis, that M&A activity in the UK and US oil and gas consulting segment is gaining momentum. So much so that we thought it would be of interest to outline some of our insight into what’s going on in the industry, the impact this is having on consulting firms in this space, and what it all means for future M&A activity.
First let’s set the scene briefly. The industry faces specific challenges. Technology is creating some significant opportunities: activity to find oil and gas in ‘frontier’ areas – new and more challenging environments – is increasing. New drilling technology is providing the opportunity to exploit reserves that up to now haven’t been feasible. Mitigating this exploration are complicating factors such as mounting regulatory and stakeholder pressures, as well as an expected talent shortage over the coming years. Oil and gas companies are having to navigate more complex projects while managing risk and remaining compliant.
This gives rise to three major issues for the industry:
- How to manage the increasing complexities of oil exploration with a mobile workforce who require constant training to stay current
- How to reap the benefits of Big Data analytics for productivity and business value
- How to manage costs and protect margin in an uncertain and volatile price environment
It is not a surprise therefore, that the top three groups of consulting firm targets for buyers are:
- Engineering: services spanning project development, planning and feasibility studies through to design, project and construction management, and operations and maintenance
- Information Technology: acquisition and management of data (Big Data in particular for oil and gas) in real time, providing support for the adoption of platforms such as SAP, Hadoop and Oracle, and aggregating intelligence to create usable repositories of best practice and improved decision making
- Strategy & Transformation: services geared to developing strategies that manage risk, optimise organisations and improve their performance. Example services include organisational and operational change management, and process improvement through tools such as Lean, Six Sigma and Business Process Re-engineering (BPR)
The number of specialist consultancy acquisitions (those focussing solely on the oil and gas industry), has been gaining momentum since 2012, but always lagged behind the number of multi-disciplinary firms (those offering services to a wide range of industries including oil and gas) bought. In 2014 however, more specialist consultancies were acquired than multi-disciplinary firms.
When we examine who is buying consulting firms in this segment, there are four main groups: IT, Private Equity, Engineering and Strategy and Transformation. The majority of buyers (Private Equity being the exception) comprise of consultancies. It would appear then, that there is a consolidation effort with larger players snapping up smaller ones to gain new market share, generate revenue synergies or eliminate the competition.
To conclude, it would seem the outlook for consultancies in this space is good. Gaurav Sharma, oil & gas analyst and Forbes contributor thinks current conditions could also be an opportunity for those with deep pockets. ‘Consultancies are definitely in the market for oilfield services, IT infrastructure and training firms in particular, something which is not lost on private equity groups. As the pool of good quality assets up for acquisition is finite, buying well at the right price is what matters.’
The only caveat is that we are already starting to hear about the impact a declining oil price is having on oil and gas company spend on consultancy support in 2015. This may have an impact on M&A activity.
But as Sharma points out, ‘What we are seeing is an oversupply driven market correction. It’s not akin to what we saw in 2008 when the oil price fell from $144 per barrel to $37 as the global financial crisis sapped economic activity.’
And with the expected shortage of talent occurring over the next few years, and implied lack of capabilities to meet newly defined capacity, the time is ripe for consultancies to consolidate in this low-cost capital environment.