Financing Oil Field Services in Current Low Priced Commodity - - PowerPoint PPT Presentation

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Financing Oil Field Services in Current Low Priced Commodity Environment

Denver Dealmakers Expo April 7, 2015 Chris Rockers- Managing Director

Marketplace Observations

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General Market Observations:

• Capital is NOT easy or readily available for OFS in the current environment
• The further away from “the drill bit” the easier financing becomes
• Most capital providers are “waiting for market to stabilize”
• Everyone is looking for a “bargain basement deal”
• It will take a special management team or opportunity to get to a financing close in

the next 3-6 months

• First step for all OFS businesses to finance businesses in current environment is

internal cost-cutting, workforce reductions, and business line rationalization

Most oil field services businesses now are forced to get “creative” with financing options

Oil Field Service Categories

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Oil Field Service Business Categories:

Publicly traded multi-national OFS businesses- examples include:

• HAL, SLB, CAM, WFT

Publicly traded North American OFS businesses- examples include:

• KEG, BAS, CJES, SPN

Privately owned North American OFS businesses PE backed - examples include:

• Beckman Production Services (SCF backed)
• O-Tex Pumping (White Deer backed)
• Liberty Oil Field Services (Riverstone backed)

Privately owned North American OFS businesses individual backed – examples include:

• Dupre Energy Services (multi-basin)
• Basin Holdings (multi-basin)
• Numerous single basin single service line businesses

Oil Field Service Capital Availability

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Publicly traded OFS businesses

• Traditional capital sources open but expensive
• Example: C&J Energy Service debt financing of Nabors unit acquisition
• Bigger OFS businesses using their liquidity (billions in cash on balance sheets) to

grab market share and push smaller players out of markets/business

• Generally, the bigger players are pricing services below cost and/or providing

service “packages” at low rates

Privately owned OFS businesses

• Private companies backed by “traditional” energy service private equity firms

generally entered current downturn “adequately” levered (1-2x TTM EBITDA)

• Commercial lenders appetite for new OFS private equity backed credit facilities is

zero

Privately owned businesses in particular are forced to get “creative” with financing options

Key Elements to Capital Availability

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Several Key Elements MUST be present for successful financing today

• Solid/proactive management team
• The team does not need MBAs but they need to have experienced a downturn

(2008/2009) and understand operations and financials

• Conversations with potential capital partners need to start BEFORE it is too late
• Service line focus at a minimum needs to be “Differentiated” (see examples below)

Less Differentiated / Highly Competitive Differentiated/ Mildly Competitive Highly Specialized/ Limited Competition

• Pad Construction
• Pipelining
• Roustabout
• Simple Equipment

Rental

• Fluids

Management

• Workover Rigs
• Drilling Rigs
• Trucking Services
• Tool Fishing

Services

• Wireline
• Pressure

Pumping/Fracking

Non-Traditional Capital Sources

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Non-traditional options today:

Distressed energy funds:

• Carlyle Group, Blackstone, KKR, Apollo, and others have raised billion $ funds

to invest in distressed energy asset

• Generally the focus is more on mineral/E&P/producing assets but for a big

enough OFS opportunity they will take a look

• Expensive and expensive

Individual investors/family offices:

• Flexible with investment structures (debt, preferred stock, equity, combo)
• Often open to both minority or majority investments
• Best partners in this group generally have experience investing in energy and

will not be alarmed by a down cycle

• Usually regionally focused and invest in smaller increments

Non-Traditional Capital Sources

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Non-traditional options today (continued):

Vertical Integration/Vendor Financing

• More available when services were in tight supply
• In current environment many of the vendors/integrators are feeling as much

pain as OFS businesses

• Key will be how many other OFS businesses are active in basin
• Examples – RockPile or Oasis

Business Development Companies (BDCs):

• Primarily debt focused
• Sometimes bring consulting/strategic help to portfolio companies
• Appraisals for equipment used as collateral for debt will be low

Mezzanine Funds:

• Usually they are not a good match for OFS businesses due to cyclical nature of

business but taking on this financing at the bottom of cycle is much less risky

• Expensive and could end up being a loan-to-own scenario

Case Study – Capital Structure Relief

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Rental Business/Solids Control Case Study

Summary: Key for financing: Strong and proactive management team

• 2014 EBITDA was in $10-12 million range
• Forecast 2015 for $4-5 million in EBITDA
• $10 million of asset backed debt with multiple commercial banks
• Majority of $10 million with large middle market bank with lots of OFS

credit exposure today. Capital Structure Goal: Management team would like to pay-down credit facility, potentially acquire some distressed OFS businesses in other basins, and buyout existing minority shareholders- estimated capital need $10 to $20 million.

• Traditional private equity has looked at company in the past but management

team/operating owners are not comfortable with traditional PE model.

• The management team is in early stages of acquisition discussions but waiting

for sellers pricing expectations to reach current market pricing.

• Alpina is advising to pursue a combo of debt and equity investment with a

couple family offices. The key is to get investment discussions far enough down the road that the investors are ready to go when acquisition targets hit distress.

Case Study – Growth Equity Investment

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Startup OFS Services Business

Summary: Key for financing: Strong and experienced management team

• 3 person management team deep customer relationships, Halliburton and PE

backed OFS operations experience, that was targeting a market/basin which was lacking an “independent” service option for customers.

• The management team was committed to investing their own money along with

new partner and had a clear understanding of standard equity investment structures. Capital Structure Goal: Management team needed a $15 to $20 million capital commitment to purchase startup equipment, yard location and fund first 12 months of operations costs until BE.

• Traditional private equity did not fit investment because there was no existing

cash flow or bank leverage opportunity.

• Family offices focused on slowing the initial purchase of equipment (1 versus 3

spreads to start) and “proving out” the market.

• The management team ultimately secured financing from a growth investment

fund focused solely on funding start up energy services businesses. The transaction closed in February 2015.