Winter 2012 Newsletter Focus on Shales

Winter 2012 Newsletter Focus on Shales

2011 Deal Growth Hot Spots

2011 was a solid year for transactions and extended the deal market recovery which began in 2010. Recent Buyouts data shows an 8% increase in the total number of reported transactions from 2010 to 2011. While this is only a modest improvement in deal market activity, it is worth taking a deeper look into how deal activity in individual sectors behaved. Health Care, Materials, Financials, and Energy were the hot spots for deal activity growth over the last year. In 2011, each of these sectors was up over 35% compared to 2010 based on announced number of deals. In particular, the number of Energy deals doubled compared to 2010. IGS completed a considerable amount of work in the Energy sector during 2011. One area we would like to highlight is unconventional oil and gas plays, including shales.

Focus on Shales

Shales have been an increasing area of focus for private equity investors across a range of fund sizes. Sizable estimates for recoverable oil and gas reserves, as well as continued improvements in horizontal drilling and fracking technologies, are driving significant growth in shale drilling and production. While the shales originated as a natural gas (dry gas) opportunity, exploration and production companies (E&Ps) are increasingly focused on oil and wet gas plays. This shift in focus is driven by the divergence in oil and natural gas prices that started in 2009 and has since continued. Wet gas plays benefit from the presence of natural gas liquids like ethane and propane, which have more closely tracked the trajectory in oil prices and can provide a significant boost to a shale play’s economics. This shift in focus by E&Ps bodes well for opportunities in oil shales like the Bakken (in North Dakota, Montana, and Saskatchewan) and the Permian (in West Texas), as well as the liquids-rich Eagle Ford (in South Texas). In working with clients on a wide range of shale-focused investment and strategy cases over the last two years, IGS has noted the severe capacity constraints across almost all service and product lines in the fastest growing plays, most notably the Bakken. This dynamic has contributed to pricing power and attractive margins for service providers with sufficient capacity to meet that demand. In the absence of a significant worsening in the global economy and resultant drop in oil prices, rig count growth of 15-20% p.a. is projected in the established oil and liquids- rich shales over the next two years. In addition, new and emerging plays continue to be identified, such as the Utica (a multi-state play centered in Ohio) and the Tuscaloosa Marine shale (in Louisiana and Mississippi). Given the evolving landscape for shales, the most interesting opportunities are those with portability across multiple plays. IGS has participated in both strategic support and diligence engagements covering the leading plays in the U.S. including the Bakken, Permian, Eagle Ford, Marcellus, Granite Wash, Haynesville, Barnett, and Woodford shales. Market segments IGS has analyzed include:

  • Fluid services management
  • Pipeline inspection services
  • Pumping unit and blowout preventer rental
  • Solids control
  • Surface casing, conductor, and water well drilling
  • Transportation and logistics
  • Well site maintenance, including wireline and workover services
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