SMALL and heavily indebted companies in Singapore's oilfield services sector are ripe targets for merger and acquisition (M&A) deals as the industry consolidates, consultancy Ernst & Young said at a media briefing on Monday.
It added that private equity (PE) funds may also be keen to take advantage of cheap valuations to invest in the sector, though these firms are likely to go for companies with more robust balance sheets.
Consolidation in the industry is being driven by the recent slump in crude oil prices, which have slid by more than half since June last year.
Ernst & Young transaction advisory services partner Karambir Anand said that although oil and gas companies in general are suffering from the impact of the slump in crude oil prices, smaller oilfield services firms will be harder hit.
"The direct impact will be on the oilfield services segment. You can expect some of the larger global firms to come out of it - I won't say unscathed, but they'll still be okay.
"But the local firms, especially those which spent large sums on capital expenditure over the last few years, those are the ones that we think will suffer quite a bit. Particularly in some of our neighbouring countries, there will be a consolidation that will take place for sure."
That consolidation trend could happen in Singapore as well, Mr Anand said, adding that some small local oil and gas firms that are heavily in debt may default on their debt later this year. "No customers are showing leniency."
Small companies in the oil and gas sector are generally those with less than US$100 million in annual revenue, or around S$139 million. The consultants declined to mention specific company names.
There were four small listed firms that had debt-to-equity ratios of around 100 per cent or more, according to the Singapore Exchange's Stockfacts website. These were energy logistics service provider Hengyang Petrochemical, maintenance and repair company Mencast Holdings, rig operator Swissco Holdings and Technics Oil and Gas, a financially troubled firm that provides compression systems to the oil and gas industry.
Mr Anand added that another major source of M&A deals this year is likely to be PE funds. "Private equity now has more money than ever sitting there as dry powder ready to deploy, so we expect that probably in the second half of this year we'll see a lot of PE M&A taking place."
Sanjeev Gupta, who leads Asia-Pacific oil and gas consulting at Ernst & Young, said that oilfield services firms may be eyeing a chance to expand by snapping up indebted smaller players to gain more economies of scale.
As for PE funds, he said that those in South-east Asia tend to be interested in exploration and production assets and the oilfield service sector.
He noted that some PE firms may invest via convertible debt or mezzanine capital, which is a hybrid debt-equity financing instrument that may include an equity stake in the form of attached warrants. However, these funds will most likely opt to invest in oil and gas companies here through taking a controlling stake rather than through debt or mezzanine capital, given the current difficulty in getting financing for oil and gas companies and declining valuations for such firms, he said.
The overall value of oil and gas M&A deals in Asia excluding India fell to US$10.4 billion last year, down from US$11.1 billion the year before, Ernst & Young said.
The number of deals also fell from 101 in 2013 to 92 in 2014.
Correction: An earlier version of this article incorrectly stated, based on data from SGX's Stockfacts service, that Swissco Holdings' revenue for its most recent financial year was S$65.5 million. It was in fact US$65.5 million, or about S$91 million. The accompanying table has been revised to reflect this.