Regina 鈥� When it comes to recapitalization in the oilpatch, it鈥檚 something Jason Moser, partner, investments with PFM Capital Inc. in Regina had been thinking about.
PFM鈥檚 portfolio includes investment in two drilling companies, several exploration and production companies, a midstream company and other oilfield services operations. Moser sits on several of the boards of these companies.
Asked about the need for recapitalization in the oilpatch, both in an equipment sense and financial, given it鈥檚 been three years since the downturn hit, and few companies have been replacing their iron, Moser replied, 鈥淣o surprises, but there鈥檚 limited free cash flow, outside capital or senior debt available for most sub-sectors in energy services perhaps outside of a few isolated cases/management teams.
鈥淲hen or if that money comes available, there still needs to be a suitable return on the assets to be generated in order to make those needed investments/replacements you talk about.鈥�
He added that should be required anyways. 鈥淥ne good by-product to come out of the downturn is people actually look at a return on capital/equity and make investment decisions based on that versus just growth for the sake of growth.鈥�
Moser went on, 鈥淚n some cases perhaps, with whatever the base level of activity is 鈥� obviously a lot of the idle equipment may not be required (or required for oil and gas purposes) so therefore no maintenance or refurbishment needed if it鈥檚 obsolete or just redundant. The balance of equipment it will be a struggle, I imagine, to start doing that maintenance that was put off and finding the suitable shops/people to do it.鈥�
Moser pointed out that the number of wells drilled in Saskatchewan now is not remotely close to what it had been a few years ago, but a lot of the infrastructure is built to handle those earlier numbers.
When it comes to capital for the oilpatch, he noted, 鈥淚t鈥檚 tough. Not too many companies have zero bank debt or cash in the till. In an ideal world, if you had zero debt, you might not elect to work some particular equipment in some cases, right now, because you鈥檙e not getting sufficient return on capital for your equipment. But unfortunately, for many, that鈥檚 not an option. There鈥檚 other intangibles, like keeping your market share, keeping your presence and keeping your people.鈥�
鈥淚n the real world, you may have to adapt to the reality you鈥檙e probably going to be working your equipment at economics that don鈥檛 support it for a period of time, to keep your people and keep your business viable. In the event that you do have a bit of surplus cashflow, you do have to earmark some of that for recertifications and maintenance capital. You have to put that away, just as you would pay your people, or pay your overhead, to the extent you can. Inevitably, it鈥檚 going to come up,鈥� Moser said.
PFM has done some investments into the oilpatch over the past year, but Moser describes those investments as 鈥減inpoint.鈥�
鈥淲e鈥檝e done a few isolated cases. A few producers, where we鈥檝e seen they鈥檙e really good stewards of capital. Probably what鈥檚 required, in this cycle, we think is different than where it was previously growth at any cost. Now it鈥檚 a producer or service company getting a good return on capital and someone whose efficient at spending that capital.
He said one good thing is now people are applying the same standards to energy companies that they do to any other company. 鈥淐an you actually produce net income and sufficient margins?鈥� he questioned.
He thinks there鈥檚 a correlation between net income, retained earnings, and value creation in this cycle. I think, if you look at it from the public side, it鈥檚 all relative, but those that do have net income, I think they鈥檝e fared better. It is reflective that they鈥檙e actually creating value even after depreciating the assets or equipment. It鈥檚 also reflecting some underlying characteristics of the assets and management team.
鈥淥n the service side, again, it is difficult. We鈥檙e looking for someone who can differentiate themselves on something other than price, because that鈥檚 a race to the bottom,鈥� Moser said. He added that if a company has a product or service that we see you can differentiate yourself, outside of price, and there鈥檚 a possibility you can maintain and grow market share, even in this flat commodity environment, that鈥檚 of interest. That may mean working in multiple geographies and/or adding complimentary business lines.
PFM鈥檚 investments are generally 鈥減atient capital,鈥� with a usual investment horizon of five to seven years. Moser said, 鈥淧eople鈥檚 business plans have been interrupted by two to three years. That horizon has expanded and it鈥檚 a different world now. For producers, the critical mass, the size, has increased. You don鈥檛 see the same appetite to buy, finance or bank 500 - 1000 barrel a day producers, either. So if that threshold has increased, probably, by definition, your business plan has as well. It necessitates a longer business plan, the same on the service side as well and bigger service companies may be required to work for increasingly larger producers.鈥澛�
