Industrials Sector Comment – May 2014

Dato

IGAS Energy plc recently announced the £120m acquisition of Dart Energy plc to create the largest shale explorer in the UK. Consolidation such as this at the exploration level will undoubtedly offer opportunities to numerous companies operating in the supply chain. The British Geological Survey estimates that the Bowland Basin in Northern England could hold as much as 1.3tn cubic feet of gas. This means that as the exploration groups enhance their production programmes, even the most modest recovery rates could signal significant growth prospects for equipment and service providers in the supply chain.

Last year’s report on M&A in Oilfield Equipment & Services from Clearwater’s Industrials Team identified that the phenomenal changes seen in the unconventional gas market in the US could be replicated in the UK. Whilst the huge production volumes in the US are unlikely to be seen in the UK, the Government has already recognised the potential by issuing licenses for more sites across the country.

The nascent shale gas industry in the UK was given huge support in January, when Total became the first oil and gas major to invest in the sector. The group acquired a 40% stake in two shale gas exploration licenses in Lincolnshire held by IGAS Energy plc. This followed GDF Suez’s acquisition of a 25% share in 13 UK onshore licenses held by Dart Energy Ltd in October 2013.

Despite the lack of an established onshore oil and gas industry, the UK is in a great position to benefit from its considerable expertise in offshore exploration and production. Equally, UK players are likely to learn a great deal from their counterparts in the US, which may in turn accelerate the developments in the UK market.

According to the oil and gas consultancy Wood Mackenzie, the UK will be best placed to maximise its returns from shale gas exploration by having numerous players operating within the supply chain. The involvement of a range of participants in the provision of services and the supply of equipment is most likely to result in an exchange of ideas and techniques which will make the UK acreage a viable proposition for many years to come. From drilling equipment to materials supply and from transportation to environmental management, the opportunities are wide ranging and exciting for those with the requisite skills.

Despite shale investment being at a relatively early stage, the UK is in a great position to benefit from its considerable expertise in offshore exploration and production with access to technologies which will enhance the progress of the secto. Whilst a significant amount of this knowledge and manpower is located in Aberdeen, it is often overlooked that around half of the UK’s capabilities are located elsewhere. This in itself may prove to be a huge benefit to the shale gas industry and it begs the question of whether Aberdeen will become the focal point of shale activity in the UK. It can be argued that the city is in the wrong location to become the centre of the UK shale industry, that its offering is potentially over-priced and maybe even overly-focused on offshore technologies.

As a result, the epicentre for UK shale could possibly be located in Northwest England or Yorkshire – with some suggestion that Liverpool could take the key position given the volume of shale activity along the Mersey Basin and into other parts of Northern England. It remains to be seen whether the supply chain will start to mushroom in the region, or elsewhere, but it is evident that there are already a number of players in the UK that could benefit from the formation of a skills cluster to support the industry.

Collectively these factors beg the question of whether the market is ripe for mergers and acquisitions (M&A). Whilst the fragmented nature of the market can be advantageous from the point of view of knowledge sharing, it is inevitable that as the market develops there will be a greater need for players in the supply chain with the scale, manpower, expertise and equipment resources to meet the needs of the market. These issues are already attracting the attention of established players in offshore oil and gas, as well as private equity firms who recognise the timing of their investments into the sector will be critical.

As the market develops and the demand for engineering expertise evolves, it can therefore be expected that levels of M&A will rise and bring further investment into the supply chain. UK companies likely to be participants in any M&A include Weir Group plc, the LSE-listed manufacturer of drilling equipment, pumps and valves for the oil and gas industry. The group has already established a strong presence in the US shale market with its £431m acquisition of Seabord Holdings Inc in 2011 and the £148m acquisition of Mathena Inc in 2012. Others who will be monitoring developments closely will include engineering groups such as AMEC plc, IMI plc, John Wood Group plc and Rotork plc, as well as numerous North American players who may see expansion opportunities in the UK.