Selling an Oil and Gas Services Company

What a buyer is paying for

A buyer is paying for the cash the company produces from field work after the owner steps back. That cash comes from the number of crews or units working, the rate each one bills, and how many days a month they stay busy. Utilization is the word the industry uses for that last piece, and a buyer will ask for it by unit and by month, because a fleet that bills well half the year and sits the other half tells a different story than one that stays booked.

The second thing a buyer pays for is the crews. Experienced operators, supervisors who hold the relationship with the operator's company man, and drivers with clean records and the right endorsements are hard to find in most basins. If the owner is the person who wins the work and the field hands only run it, a buyer will see a company that depends on one phone number. Our post on owner dependency covers how to reduce that before you list.

Third is the book of customers. Producers and larger service companies give out work through approved vendor lists and master service agreements, and a company that is already on those lists has done something a new owner cannot copy quickly. Buyers will ask which customers are on paper, which are on a handshake, and how much of the revenue comes from the top two or three.

Why the cycle matters to the price

Nobody pays for the best year as if it will repeat. Buyers of service companies usually look at several years of earnings, adjust for the swings in activity, and settle on a level they think the company can hold. A company that shows steady work across a slow stretch, because it serves production and maintenance as well as new drilling and completion, tends to be valued higher than one that only works when rig counts rise.

That is worth thinking about before you go to market. Work tied to producing wells, such as hauling, workovers, chemical treating and water handling, is usually steadier than work tied to new wells. Neither is wrong, and we see buyers who want each. The owner should know which one the company is and be ready to explain how it behaved when prices fell.

Add-backs deserve care here. Owners of these companies often run personal trucks, family members and equipment purchases through the business. A buyer will accept reasonable adjustments that are documented and reject ones that are not. See add-backs and what counts before you build your list.

The fleet and the safety record

Every buyer will walk the yard. They want to see the rigs, trucks, trailers, pumps and tanks, check the age and hours, and read the maintenance files. Deferred maintenance gets found fast, and a buyer will price it as a cost they inherit. If a major piece is owned by a lender, a lien search will show it, and the payoff has to be handled at closing.

The safety record gets nearly as much attention as the iron. Operators screen their contractors on incident rates, experience modification rates, and the safety programs they run, and many require a rating through a contractor qualification service before a vendor can step on location. A company with a poor record or a recent serious incident may find that its customers leave a sale as soon as the new owner takes over. Buyers will ask for several years of incident logs, the written safety program, training records and the experience modification letters from your insurance carrier.

Insurance is its own conversation. General liability, pollution coverage, workers compensation and auto limits all come under review, and a buyer will want loss runs for the last several years. Gaps in coverage found late tend to slow a closing more than almost anything else on the buyer's list.

The records a buyer will ask for

Expect requests for business tax returns, monthly profit and loss statements, and a balance sheet that matches them. Buyers will ask for an aging of receivables, because operators often pay slowly and a long list of old invoices hurts the story. They will ask for field tickets and the invoices built from them, since the tickets show that the work was done and approved by the customer before it was billed.

They will also ask for the equipment list with serial numbers and titles, the fleet maintenance logs, driver qualification files, payroll with tenure and certifications, the master service agreements, vendor approval paperwork, insurance policies, and any equipment leases or financing. The guide on financial statements explains what clean books look like to a buyer and a lender.

What has to transfer

A service company holds a lot of paper that belongs to the company and not the owner. Master service agreements often carry a clause that requires the customer's consent when ownership changes, and some customers use that moment to renegotiate. Vendor approvals and safety ratings may need to be reissued or confirmed under the new owner. Truck registrations, operating authority numbers and commercial driver records follow their own paths, and environmental permits for any yards, disposal wells or tank storage have to be reviewed. Rules vary by state and your attorney confirms what applies to your company.

The yard and shop are usually leased or owned by the owner personally. If the owner holds the land, a lease to the buyer has to be written, and a buyer's lender will want enough term to cover the loan. Our post on real estate attached to the business covers how those pieces fit together.

What tends to sink a sale

Most of the failed deals we see in field services had visible causes. The top customer left, or reduced its work, during the sale. The books and the field tickets disagreed. An environmental question about the yard or a past spill came up late. A major piece of equipment turned out to need a rebuild the buyer had not planned for. A safety incident happened between the letter of intent and closing.

Confidentiality is a concern in this business because the crews talk to the customers, and the customers talk to each other. A rumor that the company is for sale can send an operator's purchasing group to line up a second vendor. We market a company without naming it, and buyers sign a nondisclosure agreement before they see anything that identifies it. The post on how we market a business confidentially lays out the steps.

How to prepare

Start a year ahead if you can. Get the books to match the field tickets, and keep the receivables current. Document the maintenance on every unit, and fix what has been put off. Review every master service agreement for consent language, and read your vendor approvals so you know what the new owner will need to renew. Build a second layer of supervisors who can hold the customer relationships, and write down the pricing practices that currently live in your head.

At Business Advisors of America we start with a valuation built from your own numbers, then prepare the materials a buyer and lender expect, and screen buyers before they see the yard. If you want to see how buyers tend to approach selling an oil and gas services company, that page is a good place to start, and a short call with us is the next step after that.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.