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Posted by Roy Graham.

Some recent headlines: Crude oil prices were propelled higher at the end of January 2011 due to political unrest in Egypt and the Middle East.  According to the International Energy Agency Oil Market Report, global oil product demand has been revised up by 120 kb/d.  IEA reported that, at 87.8 mb/d in 2010, global oil demand rose by 2.8 mb/d year-on-year, and should reach 89.3 mb/d in 2011 (+1.5 mb/d year on-year).  There are many significant uncertainties that could push oil prices higher or lower than current expectations. 

Among the uncertainties are decisions by key OPEC member countries regarding their production response to the global recovery in oil demand; the rate of economic recovery, both domestically and globally; fiscal issues facing national and sub-national governments; and China’s efforts to address concerns regarding its growth and inflation rates.  In addition, even though Egypt is not a major supplier of crude oil or natural gas to world markets, the recent unrest in that country which has spread throughout the region raises concerns over world energy supplies.   Key transit routes for energy and other goods could be disrupted, while pipelines and ports could become targets for warring factions.

To read the 2010 Q4 Energy Newsletter for more Energy Market information click here.

Posted by Roy Graham.

As a member of CFA’s Energy Industry Practice Group, I keep abreast of developments in the U.S. energy markets. Each quarter we analyze the current energy climate taking into consideration a variety of factors and summarize it for you in our Energy Newsletter. For a complete look at the Q3 Energy Industry Newsletter, click here.

To view previous issues or to regularly receive our Energy Industry Newsletter, please visit our website to subscribe.

posted by Herbert “Bud” Boles

His point was that professional buyers are in the market everyday and need very little assistance in evaluating opportunities.  The individual buyer, no matter how sophisticated they think they are, is not in the market on an ongoing basis and therefore, will be less proficient and therefore a more risky prospect.

With that introduction, since joining CFA I no longer deal with individual buyers.  My concentration tends to focus on recapitalizations (recaps) where I represent a business owner that is looking to sell part of their business to gain some liquidity and continue growing their company aggressively with a financial partner over the next several years before ultimately selling. This financial partner is almost always a Private Equity Group.

There are several things I like about the Private Equity Groups.  First and foremost they have money (although there are a few exceptions).  Secondly, they are compensated primarily through equity stakes in transactions completed. Therefore they have a tendency to not waste their time or mine. While they may not always be able to specify what they are looking for, they are very competent at deciding quickly if they like an opportunity or not.

My approach to targeting prospective buyers starts with my knowing the Private Equity “players” that tend to concentrate on energy transactions. I like to keep my targeted group to a relatively low number (25) so that I can interact with them one-on-one to determine their interest — including who will be in the final five or so that gets to meet my client.  I can tell a lot by the questions they ask (are they knowledgeable) and by the obstacles they raise (are they positive) in discussing my client.

The last and certainly most important of the criteria is the chemistry between my client and the prospective buyer. Certainly their price has to be competitive, but the chemistry, normally solves this issue.

In summary, my screening process includes:  money, knowledge, interest, and chemistry.

While these guidelines will certainly apply to an individual buyer in a “brokerage” transaction; individual buyers are far more difficult to screen. Eliminating unqualified buyers is a key skill that an intermediary brings to his client. This skill ultimately saves the client valuable time.  At the end of the day, when a business owner thinks about selling his business it is critical that they keep their eye on the ball (i.e. continuing to run their business profitably) and minimize any distractions.  This time saving skill that an intermediary provides in only allowing qualified buyers to meet with business owners is “priceless”.

Case Study

Situation: In 2001 CFA was engaged by Bronco Manufacturing, an oil rigs parts specialist, to prepare a business valuation and assist in evaluating unsolicited offers over the next couple of years. Bruce and Max, the firms partners, asked CFA to take Bronco to market.  in 2004. Bruce was 60 and ready to retire while Max was 50 and wanted to grow the company more aggressively.

Solution: We considered a leverage buyout for Max, but determined a re-cap with a private equity group was a better strategy for both owners. This journey took three years and we kissed a lot of frogs along the way. We contacted over 100 potential acquirers. Ninety percent were Private Equity firms. From start to finish, Bronco received 11 letters of intent and ultimately found the right partner. The long time line may lead one to think something was wrong with Bronco, but that is not the case. The client was very selective. The good news was that the value of the company quadrupled during that period. This transaction illustrates the importance of patience, persistence and tenacity, as well as a belief that there was a “right” buyer for Bronco.

Case Study

Founded in 1964, M&M Pump & Supply is a leading distributor of comprehensive systems and components used in oil and gas drilling and production to gas producers and industrial customers located primarily in the Illinois Basin. The Company also provides oil field services such as hydrostatic pipe and tank testing and cleaning, delivery, and equipment rentals. M&M Pump & Supply retained the services of Corporate Finance Associates to identify and negotiate a deal with a strategic acquirer.

M&M Pump & Supply was acquired by DN Partners, a Chicago-based private equity firm with investments in lower middle-market companies generally based in the Midwest. (www.dnpartners.com). The Company specializes in partnering with management teams to facilitate corporate spin-offs, family succession transactions, recapitalizations, buy and build strategies, and management buyouts. DN Partners’ other business interests include manufacturing, packaging, printing, and communications.

Case Study

After trying unsuccessfully to complete a management buyout by the President and 25% owner, CFA was hired to make a Transaction happen. Working with both owners, CFA was able to bring the right balance of debt and Private Equity to the table to do a transaction favorable to all parties. The resulting value was 60% above what the owners had originally anticipated. They were able to select from four competing prospects. Taylor is a $160 Million company using 300 semi’s to transport crude oil from wells to Taylor’s pipeline injection points, so the structure had to allow the Cap X of adding new trucks as they grow.