The number of mergers and acquisitions fell sharply to just 28 deals worth $1.9bn in 2020, down from 71 deals worth $21bn in 2019. Despite signs of a slight recovery this year, the OFS sector needs to adapt to the new reality in which overcapacity threatens returns on investment, MSI said.
Gregory Brown, an Associate Director with the firm, said: “OFS consolidation looks far more possible and necessary with each passing year; analysts have long called for it and the sector has responded with a stubborn refusal despite the clear industrial rationale. Discussions take place, but deals rarely come to fruition, almost always getting hung on valuations and the view that stock is grossly undervalued and doesn’t reflect invested capital.”
The situation is not unique to drilling companies or the OFS sector as a whole, MSI noted. However, in the exploration and production (E&P) field, deals involving consolidation are starting to happen. Rather than large cash premiums, stock-for-stock transactions at market value have provided a basis for a recent spate of E&P deals in the shale sector. This positive development could be replicated in the OFS sector, notably amongst drilling companies, MSI said.
Brown outlined two strategies: one, do nothing, “kick the can down the road” and hope for the best. Or two, cherry-pick assets that are stuck in complex bankruptcy proceedings and take advantage of distressed values to acquire assets at “generationally low prices”.
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