Purchase of Flint by URS Corp. reflects deal trend
Service companies are retooling for an era of unconventional oil and gas
On the evening of November 30, 2011, Bill Lingard sat down to dinner at a restaurant in Denver, Colorado. He was then chief executive officer of Flint Energy Services Ltd. With him were Paul Boechler, the company’s chief financial officer, and Wayne Shaw, Flint’s chief operating officer.
They were joined by Martin M. Koffel, the chairman and longstanding chief executive officer of San Francisco-based engineering giant URS Corp. On the menu that night was Flint, around which Koffel had been nibbling for some time. (He first broached the idea of a merger with Lingard two months earlier, at an industry trade show in September, according to an investor circular).
Calgary-based Flint could be rolled into URS as a fourth business unit, Koffel told Lingard; its existing management would remain intact, with Lingard joining URS as president of a newly created oil and gas division. The Flint boss left Denver without making any commitments, agreeing only to discuss any potential offers with his board of directors (URS would offer $20 per share for Flint the following week, a bid that was subsequently upped to $24.50 and closed at $25).
Fast forward six months. Two days after his firm’s acquisition by URS closed, Lingard, in his new role at the combined company, consummated the $1.25-billion marriage by announcing the American engineering giant had won a $130-million construction contract at an oil sands plant near Fort McMurray. (Flint declined an interview for this story because its acquisition by URS had not yet received regulatory approvals).
For Koffel, the contract capped a courtship eight months in the making. “Flint, in our view, is the perfect fit for us, given our long-held ambition to expand our position in the oil and gas market,” he told analysts during a first-quarter earnings call. He noted that “well over 20 per cent” of the firm’s revenues would now be linked to oil and gas projects. “As you can tell,” he said, “we’re more than enthusiastic about this sector.”
The blockbuster acquisition of Flint by URS is not just an oil sands story, although it is certainly that. The deal reflects a broader shift, industry observers say, that follows a flood of investment into hard-to-reach reservoirs of crude oil and natural gas.
Much as the supermajors gained a toehold in shale gas and tight oil plays by swallowing their smaller competitors whole, the thinking goes, service companies are now beefing up to help shape development in an era where easy barrels of crude oil are an increasingly rare commodity.
“In terms of access to simple, easy hydrocarbon formations, they’re not there anymore,” says Rhys Renouf, managing director at KPMG in Calgary. “That’s why, in terms of technologies or skill sets or services that are related to the newer types of plays, that’s why there’s more demand for them, just because that area is growing, not only in Canada but around the world.”
Consider URS. The company has long done front-end engineering work for oil and gas clients, but has largely watched from the sidelines as North American rig counts spike. “If you look at the rig count in North America, April to April is up about 150 rigs,” said Bob Zaist, head of the energy and construction division at URS, addressing analysts during a first-quarter earnings call.
Buying Flint means URS can capitalize on service contracts. It also exposes URS to revenue streams in the oil sands, where spending is expected to top $180-billion over the next decade and production – much of it from in situ, underground extraction schemes – is poised to double, according to investment bank Peters & Co. “That’s another area where the combined company kind of hits the sweet spot for capabilities,” Zaist said, “and about 80 per cent of that resource is susceptible to that type of extraction.”
Flint’s appeal reaches beyond Fort McMurray, however. The Canadian Association of Petroleum Producers forecasts spending in Western Canada will hit $55 billion this year. More than half of it will target capital intensive resource plays, where well costs are high and drilling days are long. That makes firms that support such development – from providers of specialized tools that improve horizontal drilling to those, like Flint, which besides infrastructure handles fluids and transports rigs – particularly attractive to potential suitors.
In addition to the oil sands, URS wanted exposure to Flint’s general oilfield construction and servicing contracts. “They like the Bakken. They like those different avenues of revenue generation, besides just oil sands,” says Terry Freeman, managing director of Northern Plains Capital, who previously served on Flint’s board of directors, and from 1998 to 2007, as the company’s chief financial officer. Flint’s exposure to the boom in North American tight oil wasn’t the only reason URS was prepared to pay a 70-per-cent premium for the Calgary-based firm, he notes. “But I think it was an influential piece of it.”
Indeed, before it disappeared in the maw of its new American owner, Flint attributed a $60.2-million first-quarter gain in year-on-year revenues from its operations in the United States to field activity in Texas and North Dakota shale formations. First-quarter earnings before interest, taxes, depreciation and amortization from just the oilfield service business increased 21.5 per cent, to $19 million, compared to 2011.
Revenues from Flint’s Canadian operations jumped $185 million over the same period, following its acquisition, last October, of Saskatchewan-based Carson Energy Services Ltd. for roughly $162 million. Carson gave Flint a sizeable service and construction footprint in Prairie hotspots like the Bakken – the company “dominated” southeastern Saskatchewan, KMPG’s Renouf says – as well as emerging tight oil plays in eastern Alberta.
That advantage now belongs to URS, whose move into the unconventional space could serve as a template for future deals, suggests Bob Engbloom, a partner in the Calgary offices of Norton Rose Canada LLP. “I don’t think that’s the last one we’ll see,” he says. “I think you’ll see consolidation in the sector so that companies can better service those very high-demand, technical requirements of the energy industry.”
Some evidence of that shift is playing out thousands of meters beneath the Earth’s crust. In March, Houston-based Logan International Inc. completed a $39-million acquisition of Xtend Energy Services Ltd., an Alberta-based supplier of down-hole equipment that allows long-reach horizontal wells to penetrate oil-bearing layers of dense rock more effectively.
The deal makes Logan a North American force as companies drill wells deeper and with longer horizontal legs, Peters & Co. analysts Todd Garman and Aaron MacNeil pointed out in a spring research note.
Amid depressed stock market valuations and broader economic concerns in China and Europe, though, it could well be an anomaly. Just 31 per cent of 141 oil and gas executives surveyed by advisory firm Ernst & Young through February and March plan to pursue acquisitions this year, for example. “The problem is there’s a valuation disconnect,” notes FirstEnergy Capital analyst Kevin Lo. “Clearly, if you look at the public markets, everything’s trading at a discount.”
Oil sands operators are no exception. The earning power of big-name producers like Suncor Energy Inc., Canadian Natural Resources Ltd. and Canadian Oil Sands Ltd., to name just a few, has been strained by a combination of soaring U.S. light oil production, unplanned outages and export constraints, causing global interest in the sector to wane, according to CIBC World Markets.
Even Koffel seemed acutely aware that his acquisition of Flint had exposed URS to serious headwinds. “The real interest for us,” he told investors, as Canadian regulators signed off on the deal, “is the pipeline linking Canada with the United States. There isn’t anyone in the industry who isn’t closely following the fortunes of the Keystone pipeline.”