Capital Infusion: Dealmaker's Corner

    14 October 2013

    In this issue’s installment of “Dealmaker’s Corner,” Kevin Boardman, a partner in our private equity group, discusses private equity in the oil field services industry with Bruce Ross and Jerad McMayon, managing partner and partner, respectively, of OFS Energy Fund. OFS Energy Fund is a Houston-based private equity firm focused exclusively in this industry.

    Capital Infusion: Most private equity firms are generally industry agnostic. Why did you choose to make oil field services the focus of your firm? 

    Bruce: Although that may be true for many firms, we have deep industry experience in oil field services, and we believe this industry experience increases the value-add proposition to our portfolio companies and returns to our investors. Our investment team is located in Houston, the energy capital of the world. We have a large, well-established network within the energy industry and specifically, the oil field services sector that provides OFS with a competitive advantage in deal sourcing. The oil field services industry has certain characteristics that we believe make it very attractive for private equity: first, industry fragmentation and a tendency for talent to leave larger companies to form ‘re-starts’ in need of institutional capital; second, an inefficient capital market with banks reluctant to lend to or represent small, regionally-focused oil field services companies;  third, the industry’s highly cyclical nature that creates risks, but also rewards, for disciplined investors also make it appealing; and fourth, a trend towards increased service intensity and capital equipment requirements to unlock the large shale hydrocarbon potential of North America.

    Capital Infusion: Have you seen the oil field services industry evolve over the years?

    Jerad: Definitely. We’ve seen a move from wildcatting and exploratory wells to more of a manufacturing process. Increased service intensity due to longer laterals and more complex well designs. Increased focus on safety and redundancies. There have been significant innovations in seismic, fracking and subsea technologies, as well as substantial consolidation in almost all classes of services and equipment.

    Capital Infusion: How did the recent recession affect the oil field services industry?

    Bruce: The recession caused a reduction in demand for hydrocarbons and subsequent price drops, which forced E&P operators to rapidly reduce their budgets. But new technologies and the discovery of new crude reservoirs have enabled the industry to recover faster than other segments. We have seen large integrated service companies begin to de-lever and accumulate cash. Also, MLP’s with contracted cash flow have had access to low cost funds and have become significant developers of infrastructure in non-traditional oil and gas hot-beds.

    Capital Infusion:  Have you seen private equity firms moving more toward specific industry niches?

    Jerad: More broadly yes, but not necessarily in the oil field where there are very few professionally managed oil field service-focused funds with less than $200 million in committed funds. Our specialization allows for development of a deeper knowledge of the industry, so OFS can closely monitor trends and market opportunities. Institutional investor appetite to pick the ‘best’ managers in each segment and manage diversification internally helps attract quality partners, and we’ve definitely been beneficiaries of this.

    Capital Infusion: What are the keys to success for investing in the oil field services industry?  What kind of specialized knowledge and industry expertise does it require to identify promising investment opportunities in the industry?

    Bruce: Relationships with key industry stakeholders are critical. You have to partner with the right management teams, and focus on valuation and structures which ensure alignment of incentives with management. It’s also critical to optimize capital structures and engage in sound exit planning on the front end, which ultimately creates the flexibility to exit opportunistically in the face of changing risk/reward dynamics.