Flotation – The Better Alternative to a Trade Sale in the Oil Services Sector?
In 2005, 24 oil and gas sector companies floated on the London Stock Exchange, five of which operated in oil services and the remainder in exploration and production (E&P). A similar number of sector flotations are expected in 2006, despite a slow start to the year. Investor appetite for oil services and E&P flotations remains buoyant against the background of continued positive outlook for oil and gas prices. Although there is little doubt that investor appetite is now more quality conscious. Most of the recent E&P flotations focused on overseas acreage while the oil services sector is mainly UK-focused. Despite being a small sub-set of the quoted oil and gas sector, the UK oil services sector is growing quickly as more companies list. Half the total number of oil services companies on AIM listed last year. As a more conservative play on the continued strength of oil and gas prices, oil services companies should continue to attract growing investor interest. This should continue to result in public market valuations attractive enough for the companies themselves to entertain an IPO process rather than a trade sale. This is a view shared by Keith Morris, oil services analyst at Evolution Securities, who considers that "UK/Aberdeen–based oil service companies may be missing out on the opportunity to exploit the potentially significant difference between the value that can be realised through a trade sale compared to the EV/EBITDA multiple that can be obtained in the global service equity market through an IPO". Based on our knowledge of the oil services sector and our own recent experience – we have handled 47 IPOs and secondary issues since January 2004 – we believe that many in the oil services sector are now very much aware of the IPO opportunities.
Paul Hally is the head of the Oil & Gas corporate finance practice of law firm Shepherd and Wedderburn.