Experience with Oil / Gas Service Providers

March 06, 2018

by a searcher from The University of North Carolina at Chapel Hill - Kenan-Flagler Business School in Philadelphia, PA, USA

I'm looking to acquire a company that removes hazardous and non hazardous waste for oil/gas companies in Marcellus Shale. Decent multiple (3.5x) with ~5m in assets. What I'm trying to assess is the recession risk. Does anyone have experience in the industry and or any insight?

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Reply by a searcher
from Babson College in Boston, MA, USA

Prior to b-school I worked in capital markets and investment advisory. There was a solid demand for packaged MLP products in that sector during the drilling boom in PA, up through###-###-#### Look up Kinder Morgan's MLP and what happened to them. Production costs became a very big hurdle for frackers. I recall a lot of the wells needed to be re-fracked / drilled in order to keep them from running dry. The Saudi's increased their drilling to drive down crude prices and defend against shale/ fracking. It's a very cyclical and technical field and with a lot of political risk: taxes and tax credits were a big component of that industry during the boom; DC didn't tax drillers as much as they probably could have. The MLP's had a similar tax structure to REIT's. Obama and Romney had a lot to say about it during their election cycle. Try researching some of their commentaries during that post-recession period, ###-###-#### Given how many wells went out of business in the middle of the country, I think what you're focusing on: derivative businesses (waste removal) in the Marcellus area, have a better track record and would be a more conservative play versus being the GP of a well in Oklahoma. If you cold call the sales desks at any one of these places and say you have money to put to work for investors they'll send you research hoping you pick them: https://www.mlpassociation.org/mlp-101/list-of-current-mlps/ You can say you're still which prime broker to use for your fund

Reply by a searcher
from University of Pennsylvania in Houston, TX, USA

Two big considerations: a) the business is VERY relationship based. If you lose your "key bubba" who holds all of the relationships, you could lose 100% of your revenue, and b) success in that business right now is very dependent on exactly where your assets are located. If you have proximity to 2nd or 3rd tier acreage then you stand to lose a significant amount of business when prices dip (those are the first areas where capital spending is withheld when E&P wallets tighten up). I would also be careful on what you're saying is $5mm in "asset value". When rig rates drop and utilization falls across the board, the market value of the assets will be scrap value. Happy to chat more offline redacted my background is in oil & gas finance.

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