Adios Sugar Plum Fairies, It’s Back to Reality OR This Ain’t Musical Chairs

By: Chris Frevert, Managing Director

(Let me preface this article by stating that I work in a world of probabilities, not possibilities. So, while it is certainly possible that the oilfield services/manufacturing industry will return to 2013 highs and ill-prepared companies can and will be sold, it is not probable, and I’ll explain my rationale.)

Well, the new year has begun and the stale air of low activity in early 2016 is behind us. We have a new presidential administration set to take office that appears to have some drive to put American energy producers at the top of American energy policy. That should be good news for the industry as well as consumers.

That’s the good news. Here’s the bad news for most of the oilfield services people reading this; if you weren’t able or chose not to sell your company during the last up-cycle, the likelihood of you selling this time is just as slim. And that not-so-subtle message is why I couldn’t choose between the two proposed titles of this article.

In keeping with the recent Christmas holiday, I’ll start with the Sugar Plum Fairies (SPF’s for short). Since the downturn became less “this is a temporary blip” to “crap, when will this end,” I’ve met a number of business owners and their executives who believe we will return to the ‘good ol’ days’ and buyers will be lining up to purchase their companies if they simply hold on and make it through. That feeling, my friends, are the Fairies dancing in your head. Like the much-wished-for new Corvette or BassMaster that didn’t appear under your tree this year, those buyers won’t magically appear either.

The industry, from producers to investors to the actual processes of removing hydrocarbons from the earth, has gotten smarter and more efficient in the way they operate. Producers have learned to drive profit from sub-$40 oil, multi-national service companies have learned to drive profit by cost-cutting, and investors lost enough money in the last cycle to be cautious about where to place their money moving forward (don’t even get me started on the macro issues of commodity pricing, rig count, etc.)

That gets back to the SPF’s. If you’re betting that your mere survival is enough push against a smarter, more efficient marketplace, then my suggestion is to listen to the Fairies dancing in your head and proceed with the following exit plan: Pocket as much money as you can during this next up-cycle and get to know your local Ritchie Bros. rep. The first, because it will likely be your best shot at growing your retirement fund and the latter because you’ll want to work this guy or gal for the lowest commission possible when you have to sell your equipment for the rest of your nest egg.

The smarter buyers or investors, those who know your industry and how to make money in it, are in the marketplace now and actively looking for the best-in-class companies to invest in or looking for bargain basement purchases to shore up other investments. So, if you’re one of those folks who thinks that you can continue to run your company the way you did during the ‘good ‘ol days’ with ‘head-in-the-sand’ management strategies, poor accounting, rundown equipment, etc., you’re probably (probability, not possibility) going to be disappointed in your plan.

This brings me to the second title choice. A lot of business owners and their Boards of Directors were under the impression that the last cycle would continue forever (or at least until THEY exited) and much like the children’s game of musical chairs, they would be the winner if they were the last man/woman/company out. To all of you who were part of the “I should’ve taken the $_x_ million that I was offered” Club on the last round, you know the pain of seeing that ship sail out of the harbor. Here’s why it might be even more painful now: some of you who were waiting for the highest price were likely getting those offers from dumb money. Now, that doesn’t mean the people making those offers were dumb, just that many of those prices were inflated by money coming from groups whose core business was in healthcare, IT, or restaurant franchises and not those with energy backgrounds i.e. chasing returns in a hot market. The unfortunate effect is that a large portion of your big payday was in soon-to-be worthless stock or some other consideration that has no value today. So, if you want to partner with smarter money and a greater chance of having your consideration rise in value, you have to be one of the aforementioned best-in-class companies – or make the changes necessary to become one.

Albert Einstein is credited with defining insanity as “doing the same thing over and over again but expecting different results.” Resolve to make 2017 the year you take an objective look at your company and make the changes necessary to move forward. If you’d like to know more about how to enhance your probability of selling, or finding a growth partner, let’s talk.