Technical Background Valuable in Upstream Finance Jobs
Authors: Foianini Ivo , Roth Jakob , Cipto Reva , Bryan Robert 
Published: October 2015

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With experience in investment banking and corporate development, Robert Bryan, director of strategy and corporate development at Aegion Corporation, shares his insight on M&A activity in the oil and gas sector and an engineer’s space in upstream finance. The drastic fall in oil prices that the industry has experienced in the last year has proven to be a crucial test in financial resilience. To battle the slew of reduced upstream operations, companies may have found this as an opportunistic period to research potential counterparts with the right tangibles for mergers and acquisitions (M&A).

Most people believe that the financial state of a company is the driving factor for M&A. Is this true and if not, what other corporate functions serve a critical role in this process?

The financial state of the company is usually not the driving factor but it is certainly a factor. If a company is flush with cash or has the ability to go out and secure cheap debt, it can make the M&A process easier and more attractive. Conversely, if a company is struggling, it may not be in a position to acquire anyone and may be looking at alternatives itself. Main drivers of M&A deals are strategy-based, such as acquiring targets that are new or complementary in geography, technology, or product. For example, if your roustabout group is weak on the West Coast, you may target maintenance providers in California.

The sharp reduction in oil and gas pricing seen over the past months has been seen as conducive to increasing M&A activity. Is there an increase in M&A activity in the industry? Can you explain the potential metrics looked at to merge and acquire companies?

The consensus appears to be that the effect of declining oil prices has yet to be determined in the M&A market. As companies continue to be affected by reduced prices, particularly as it relates to anticipated 2015 Q3 and Q4 earnings, it will drive conversations and evaluations about future strategy. Also, financial covenants (rules and metrics put in place by banks to protect themselves from defaults, such as minimum coverage ratios and debt-to- equity thresholds) will be tested as performance falters, and this could drive distressed M&A activity as companies become cash-strapped or banks pressure them to get into covenant compliance. However, many companies in sound financial condition will prefer to ride out the cycle and target a transaction once their earnings have rebounded.

When evaluating a company, you look at quite a few different metrics. A common metric used for establishing a value is applying a multiple to EBITDA (earnings before interest, taxes, depreciation, and amortization). EBITDA is a financial metric that determines the net income (revenue minus expenses) with interest, taxes, depreciation, and amortization added back. It can be used to compare the profitability between companies and industries, as it eliminates the financing and corporate structure effects.

There is a lot of work that goes into determining the correct EBITDA and the appropriate multiple, but the idea is EBITDA is a proxy for cash flow and the multiple represents a payment for future earnings. As an oversimplified example, if a company has USD 100 million of EBITDA and you agree to acquire them for 8.0×EBITDA, the transaction value would be USD 800 million.