The MENA oil and gas industry continues to evolve, driven primarily by technology and geographical expansion, writes Elie Salloum, senior VP at Clarkson.
Global oil and gas M&A activity has been consistently strong in the past two years. 2011 saw a considerable increase in the number of transactions worldwide which naturally indicates to the need for consolidation. In the MENA region, Lamprell and Tyco International have both recently made strategic acquisitions in different areas of the oil and gas value chain.
The oil and gas industry continues to evolve, driven primarily by technology and geographical expansion. Companies with a technological advantage in both safety and efficiency will continue to grow and prosper. For instance, managed pressure drilling has become prevalent and could be the future of the drilling industry.
Overall, M&A transactions in the oil and gas industry within the MENA region do not reflect the amount of oil and gas activity generated. The reason for less M&A activity in the industry is the highly nationalized structure. Prior to the early 1990s, NOCs (National Oil Companies) were principally the only ones operating in the industry. It was only when crude prices dipped below USD 10 per barrel that private investment began to enter the market.
Since the 1990s, established companies in the industry have flourished in their own relative sectors but few have managed to expand regionally. Most MENA oil and gas related companies focus operations on their home country with limited access elsewhere. Few companies have managed to emerge as regional players and fewer have expanded into international markets.
However, the regional companies are constantly in competition with their well-established international counterparts that traditionally have direct access to the NOCs in the region. As such, many regional oil and gas companies plateau once awarded work from their local NOC and inevitably rely on one or two clients for contracts. Most companies try to add services either directly or through agency agreements to increase their services and revenues alike. However, few succeed in expanding beyond the MENA region or even meaningfully within MENA.
In the oil services sector, technology is a major driver for cross-border contract activity worldwide. Different sized oil and gas related companies that are able to distinguish themselves from a technological and efficiency basis have been rewarded contracts from NOCs and IOCs (International Oil Companies) globally.
Moreover, the same technologically advanced companies are sought for acquisition by larger more established oil and gas competitors. The same patterns apply in the MENA region, and with larger emphasis today, as NOCs and IOCs strive to maximize production from existing wells.
In the next three to five years, and as long as the price of a barrel of oil is around the USD 100 mark, most industry analysts agree that consolidation will dominate. Regional smaller companies will have limited growth organically unless they heavily increase spending on research and design, or consistently win cross-border contracts. At the same time, joint ventures have become difficult given the international outlook of the industry and the high utilization rates for equipment. Increasingly, companies with proven technologies are expanding internationally alongside their larger clients.
Of course, not all sectors in the oil and gas industry are equally attractive. Currently, given the high equipment utilization rates both for onshore and offshore, the oil services sector is receiving the most M&A attention. All indications are that this sector will continue to expand internationally given the higher margins, less available equipment (due to utilization rates, technology progression, age and safety specifications), and continued growth in global energy demand.
Investors in the MENA region have been discouraged by the lack of available opportunities within the industry and the high valuation expectation from the sellers. Furthermore, unless the small regional companies have the available capital and technology to expand, they will continue to lose market share.
As Iraq, Saudi Arabia, UAE, and other regional countries continue to increase production of oil and gas, the upcoming years of operation will be instrumental for regional industry players that seek to participate in the growth. Given the recent technology enhancements and the dominating safety concerns in the industry, companies will need to uphold certain levels of standards or risk losing contracts. This trend has already begun and longstanding contracts are being scrutinized for inefficiencies.
Elie Salloum is a senior vice president with Clarkson Capital Markets, a firm regulated by the Dubai Financial Services Authority in the Dubai International Financial Centre. He has more than 14 years of regional and North American experience in investment banking, placement, and strategic planning. He as originated and managed the placement and execution of a variety of public and private transactions with a total value exceeding USD 5 billion.
The views expressed in this article are those of the author and do not necessarily represent those of Clarkson Capital Markets or of Zawya.
Zawya 2012
