Oil Field Services and Equipment Companies: A Background on the Industry and Valuation

The U.S. oil industry has a rich history dating back to 1859 when Edwin Drake drilled the first commercial oil well in Pennsylvania. The 20th century saw pivotal moments like the Spindletop oil discovery in Texas and the breakup of John D. Rockefeller’s Standard Oil Company in 1911. Post-World War II, the U.S. became a major global oil supplier, leading to technological advancements and the discovery of Alaska’s Prudhoe Bay. The 21st century brought the shale revolution, with regions like the Permian Basin driving U.S. oil production.

Despite challenges like fluctuating prices and environmental concerns, the industry is now navigating a transition toward sustainability and alternative energy sources, reflecting its ongoing adaptability and global influence.

The Development and Evolution of the Oil Field Services & Equipment Industry (OFSE).

The Oilfield Services and Equipment (OFSE) industry refers to a sector comprising companies that play a vital role in supporting energy companies engaged in the exploration, extraction, and production of crude oil and natural gas. These companies provide a range of specialized services and equipment crucial to the entire lifecycle of oil and gas operations.

The services offered by OFSE companies include drilling, well construction, reservoir evaluation, maintenance, and other technical expertise necessary for efficient and safe energy exploration.

The equipment supplied by these companies encompasses a diverse range of technologies and machinery tailored to the unique challenges posed by the oil and gas extraction processes. Overall, the OFSE industry is an integral part of the energy sector, contributing essential support to facilitate the discovery and production of crude oil and natural gas.

Oilfield Services Throughout a Well's Lifecycle

The services required on a well throughout its lifespan expand and evolve. There are a network of service providers that specialize in each one of these services in each basin throughout the United States:

A. Exploration / Evaluation:

  • Conduct geological surveys and studies to assess potential drilling sites.
  • Utilize seismic imaging and other technologies to evaluate subsurface conditions.
  • Make informed decisions on whether and where to drill wells based on exploration findings.

B. Drilling:

  • Physically drill wells into the earth to reach oil and gas reservoirs.
  • Position wells strategically to optimize resource extraction.
  • Employ specialized drilling equipment and technologies to navigate various geological formations.

C. Completion:

  • Implement processes and equipment to prepare the well for production.
  • Install casing and tubing to secure the wellbore and facilitate fluid flow.
  • Employ technologies such as hydraulic fracturing (fracking) to enhance well productivity.
  • Integrate well completion techniques to maximize oil and gas recovery.

D. Production:

  • Provide ongoing services and equipment to support continuous well production.
  • Implement maintenance and optimization measures to extend the well’s operational life.
  • Employ artificial lift systems, pumps, and other technologies to enhance fluid extraction.
  • Monitor well performance and implement secondary recovery methods as needed.
  • Oversee the well throughout its typical 20-30 year operational lifespan.

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If you are entertaining selling your company, feel free to request a consultation with one of our energy industry business brokers or M&A specialists to learn about our unique process and why we believe it is the best in the industry.

The Business Models That Private Equity Groups Look at Within The Oil Field Services (OFSE) Industry

Oilfield service companies employ diverse business models, each playing a crucial role in the energy sector.

Equipment Manufacturers

Equipment manufacturers, the first category, focus on designing, producing, and selling specialized equipment utilized in drilling rigs or during the production phase of wells. These companies contribute to the industry by supplying the necessary machinery and technologies that enhance the efficiency and safety of oil and gas operations.

Drilling Contractors

Drilling contractors constitute another key business model, owning and renting out drilling rigs complete with trained crews to execute well construction. These contractors are integral to the drilling phase, providing the physical infrastructure and expertise required for the extraction process. Their services are essential for companies seeking flexible and cost-effective solutions for well development.

Other OFSE Service Providers

Service providers form a comprehensive business model, engaging in a wide array of technological and logistical tasks throughout the entire life cycle of oil and gas production. From exploration and evaluation to drilling, completion, and ongoing production, these companies execute specialized services crucial for finding, developing, and maintaining oil and gas wells. Their multifaceted approach involves the application of advanced technologies and expertise, making them indispensable partners in the complex and dynamic oilfield industry. Together, these business models collaborate to drive innovation and efficiency, contributing significantly to the success and sustainability of the oil and gas sector.

Business Valuation Drivers for Oil Field Service Companies

Private equity groups and other investors assess the valuation of oilfield service companies through a multifaceted lens. Firstly, they scrutinize upstream capital spending, a parameter heavily influenced by the commodity price environment. The ebb and flow of rig and well counts directly correlate with the prevailing market conditions, guiding investors in understanding the financial landscape and potential returns on investment.

Geographic leverage is another critical factor in valuation. The behavior of oil companies in terms of spending varies depending on the location and productivity of a particular play. Investors carefully analyze the regional dynamics to gauge the potential growth and risks associated with specific markets.

Operational leverage comes into play as upstream companies strive to curtail operating costs in response to fluctuations in oil and gas prices. This cost-cutting endeavor, while beneficial for the upstream companies, can exert margin pressure on oilfield service companies, impacting their profitability and, consequently, their valuation.

Backlogs play a pivotal role, especially for equipment with extended lead times for delivery. Investors view backlogs as a leading indicator for earnings growth. A robust backlog suggests a steady stream of future revenue, providing investors with confidence in the company’s financial stability and growth potential.

In essence, investors carefully consider upstream capital spending, geographic and operational leverage, and backlogs to arrive at a comprehensive valuation of oilfield service companies. These factors allow investors to navigate the complex landscape of the energy sector and make informed decisions based on market dynamics and the potential for sustainable returns on investment.