Business Sales in the Oil-and-Gas Industry: Insights from M&A Specialist Gary Papay
While some aspects of a business sale are nearly universal, every industry has distinctive qualities that affect the spectrum of factors, from market value to likely buyers. The oil-and-gas industry is certainly no exception.
One of the nationally recognized leaders in oil-and-gas M&A is Gary Papay, president of Pennsylvania- and North Carolina-based CK Business Consultants and a founding partner of IBG Business and The Oil & Gas Advisor. An expert in the marketing and sale of companies in the propane sector, Gary offered valuable insights in a November 2022 discussion about the state of the oil-and-gas market in the U.S.
“One of the brighter spots in the oil and gas industry is the propane sector,” Gary noted, “because it’s an environmentally friendly fuel, very versatile, and you can use it for about anything. There are a lot of interested buyers out there, and that’s where the big money is today.”
“After that, only certain segments are really attractive at this time. We see a lot of consolidation in the C-store and gas station area, and the same is true in the lubricant sector. At the same time,” he continued, “heating oil is in the mature stage of its life-cycle and is showing signs of dwindling down. National buyers are showing relatively little interest. When heating oil companies go to market, the potential buyers appear to be mostly local or regional players.”
“To zero in on the more attractive segments within the industry, I would include – in addition to propane operations, lubricant producers and C-stores – sectors such as fuel distributors, pipeline terminals, and trucking.”
Noting that trucking might seem like an outlier when discussing the oil-and-gas industry, Gary noted that he and his IBG colleagues consistently leverage their industry knowledge and influence to serve sellers in related industries – such as trucking.
“Many of the petroleum and propane distributors we work with are also in the trucking business,” he noted. “A lot of them are common carriers that supply their own needs and supply other marketers at the wholesale level or just by holding their products for them. Everybody seems to like trucks in this industry – you go to a trade show, and about half the floor is covered by vehicles.”
Returning his attention to the oil-and-gas industry in general, Gary said, “We see quite a bit of caution out there, just based on the current administration and its war on fossil fuels. There’s concern about that, I think you’re seeing that more so in the production end – from exploration and drilling on down to the companies that service the wells and pipelines.
“The oil-and-gas industry is getting hammered by politicians who just don’t seem to get it. You can’t phase-out fossil fuels overnight just because you or your supporters or the environmental lobby doesn’t like them. The fact is, until further notice, our country runs on fossil fuel, and there’s just no replacement for it at this time. We should all strive for a cleaner planet and an ‘all of the above’ energy policy.”
Who’s Buying? One of the distinctive qualities of oil-and-gas business sales is the buyer profile. In many sectors, companies are being acquired by private equity groups and other “professional buyers.” Not so, in oil and gas, says Gary.
“Most of the oil-and-gas companies we sell are acquired by strategic buyers – that is, a buyer who is already in the business – as opposed to a private equity group. A strategic buyer can take a company and realize significant savings, eliminating a lot of overhead and folding it right in to their business.”
Industry Roots. Gary knows what he’s talking about, having been in the propane and petroleum industry for 46 years, both in the corporate world and as an intermediary in a long string of successful mergers and acquisitions. His first-hand knowledge of the industry dates back to 1976.
“When I got out of college, I went to work for a large northeastern petroleum company owned by Agway, Inc. Two weeks after I started there, the district manager asked me to help him with a propane acquisition. We were growing like crazy, and over the years I gained a lot of experience in petroleum and propane company acquisitions.”
Gary worked his way up the ladder – plant manager, corporate propane operations manager, district manager, division operations manager – and played a key role in the company’s acquisitions and divestitures and business valuations. After 18 years in corporate management, he decided to move on to pursue new opportunities and a new role in the industry.
“I left to join CK Business Consultants, an M&A business transactions firm that specialized in oil-and-gas-related companies. I bought the company in 1999 and expanded the scope of our deals into the manufacturing and distribution sectors, but oil-and-gas has always been a major focus – propane, heating oil, gas stations, convenience stores, lubricants, wholesale fuel distribution.”
Early in his M&A career, Gary gained an appreciation for the importance of being perceived as an industry insider, and over nearly a quarter-century of handling the sales of propane and other businesses, he has paid his dues, along with his colleagues John Johnson and Matt Frye at IBG Business’s Tulsa office.
“We’re involved in a number of petroleum and propane associations around the country. For example, I’m a past member of the National Propane Gas Association board of directors, and I continue to be involved with that organization.”
IBG’s industry background is a major advantage for Gary, John and Matt, and it is a tangible benefit to their oil-and-gas clients.
“Being known and recognized at trade shows, maintaining strong relationships with industry leaders and trade association executives, really makes us effective in marketing a business and finding the best-fit buyer,” Gary emphasized. “It helps us speak the language, know what’s going on in the business, know the buyers, and know where to go with a company that’s on the market.”
“We have a very extensive database,” he continued, “built up over 40-plus years, of people in the industry who we can contact right off the bat with a particular transaction. With our industry experience and visibility, when we put a company on the market, we pretty much know what the buyers are looking for. That helps us create our marketing materials and structure our CIMs (confidential information memorandum).”
Preparing for Sale. The IBG website has extensive content devoted to the process of preparing a business for sale. If the owner of an oil-and-gas company is looking to put his company on the market, there are specific preparatory steps that they should take to maximize their ultimate value.
“As with companies in general, market value in the oil-and-gas sector is shaped by expectations for future profitability. An owner can help those expectations by cleaning up the company’s books – pulling out the vacation home in Florida, the golf club memberships, the grandkids’ tuition, and so on – as part of accurately recasting the financial information. Also, having top management in place, retaining a loyal, long-time employee group, is always a plus.
To help sellers maximize their market value, several years ago Gary made a short list of 10 top value drivers of a petroleum and propane business:
- Profitability: 3-5 years of consistent profits and healthy gross profits per gallon
- High propane tank ownership, which assures stable and loyal customers
- Annual gallons: a steady increase in annual gallons sold
- Quality customer base – i.e., high-margin residential customers, auto delivery, budgets, committed commercial and wholesale customers, and branded distributors
- Adequate bulk storage capacity, which mitigates supply disruptions and allocations
- Quality assets: well-maintained trucks and freshly painted tanks and facilities
- Safety: compliance with all regulatory requirements and training
- Great customer service: something to be proud of
- Exceptional employees: experienced, well trained, loyal, professional
- Good records and systems: modern accounting and software systems, proof of propane tank ownership, solid environmental controls, and efficient dispatch and billing procedures
“Adhering to those value drivers,” said Gary, “has helped a lot of my clients attract multiple buyers, shorten the time to close, and avoid leaving money on the table.”
War Story. Successfully working with hundreds of business owners during his 46-plus years in the M&A profession has left Gary with a lot of good memories – including one deal in particular that ranks at the top of his list of war stories.
“We were marketing a propane company up in New York. The principal was an older gentleman – a World War II vet, very colorful guy – who was very involved in the propane industry. He and his wife owned the company, but several years earlier the underlying real estate had been conveyed to their children.
“We had the deal pretty well put together, but when it came to having the kids sign off on the real estate piece, things got complicated. One of the daughters had passed away, and we had a challenge in getting her estate to go along with the deal. We accomplished that, but in the meantime, we could not find the owners’ son. We finally learned that he was in Switzerland, on a skiing trip somewhere in the Alps, and we ended up hiring a courier to find the son, get his signature in all the required places, and return the documents to the U.S. in time for the closing.
“Just when we thought we were ready to close, the title company informed us that they could not deliver a clean title to the real property. A bank had a lien that secured a loan from years earlier that everyone thought had been paid off, and the bank had been sold a couple of times since then, and the title company could not find a release.
“In those days, when a deal was in the closing stage, everyone sat around a table in the attorney’s conference room, sometimes for a day or more, until the deal closed. Luckily, our seller had a very good accountant who was at the table. He called his office and had his people go back to the physical archives at their warehouse, where they found a bank statement that showed the loan with a zero balance. They faxed it over, and the title company said, ‘Okay, we’ll go along with that.’
“And that’s how we got the closing done.”