Comment: Pricing heats up for energy information

Whilst oil prices are at their lowest since 2004, and at levels not thought possible only 12 months ago, the same cannot be said of the valuation of energy information businesses. Last month saw the announcement of a $650m acquisition of OPIS, marking IHS's return to major M&A activity, while Argus Media, the UK-based energy price reporting and information business, has appointed Bank of America Merrill Lynch to advise on a possible sale.

The long-mooted sale of Argus has sparked intense interest among strategic and financial acquirers with a long list of private equity firms expressing early interest, maybe eyeing a repeat of Wood Mackenzie's success, a business which provided strong returns for a succession of private equity owners ahead of an eventual trade sale to Verisk last year.

This interest is no surprise: subscription B2B information businesses are often considered the apex of what constitutes an attractive business model for private equity investors, with their combination of predictable and highly cash-generative subscription revenues, high margins and typically strong market positions driven by the must-have nature of information and the limited scope for alternatives.

Energising industry
Over the last four years, data compiled by Plural Strategy Group shows energy has been a stand out information vertical, outperforming the overall B2B information industry in terms of top and bottom line. Over this period, only Risk Information has achieved greater levels of growth and profitability.

Argus has in many ways been a standard-bearer for the sector. It is an independent, family-owned business that has taken deep sector insight, turned it into hard data for traders, analysts and executives, and in the process has become a global leader. However, some observers will note that much of this growth took place against the backdrop of very high oil prices. Potential acquirers surveying the scene in 2016 will be asking themselves what $30 per barrel oil prices means for spend on information and why investor sentiment remains so strong.

Potential acquirers surveying the scene in 2016 will be asking themselves what $30 per barrel oil prices means for spend on information and why investor sentiment remains so strong" – Jim Easton, Plural Strategy

The first thing to say is that, common to many other industries, there is a long-term, secular trend towards greater use of, and spend on, information, which is both supply-and demand driven. In the case of energy information, this spans the whole value chain from exploration, investment, extraction, refining, transport and trading. In all of these areas, high-quality information can drive tangible efficiencies.

Need for knowledge
Nevertheless, few businesses are genuinely immune to the commodity cycle. Vendors of specific project-related data (for example seismic data for exploration, or weather data for offshore drilling and maintenance) are likely to feel the impact of reduced activity and capital expenditure. The benefit of selling pricing information is that the need for data is no less compelling in a cheap-oil environment, as long as the number of active traders and investment firms continues to increase. Indeed, the ongoing volatility in commodity prices only exacerbates the need for better visibility among traders, and other buyers and sellers. Information providers addressing this segment should continue to thrive in the current environment.

Argus is certainly not the only strong performer in this regard and the private equity community will continue to pursue other businesses of this type, even in an uncertain economic environment. The greatest challenge for financial sponsors is competing with strategic bidders that spot the value in these assets earlier in their development. Examples include ICIS Heren, a leader in petrochemicals and gas pricing data, within Reed Business Information; or Genscape, a DMGi business, which uses sophisticated technology – in this case measuring electricity flow through power cables in the US – to create valuable real-time demand data for users and traders.

Argus itself has been an active acquirer, bolting on niche assets, often in less liquid commodity classes, long before they reach sufficient scale or profitability to become private equity targets. With strong interest in energy, commodity and related transport information likely to continue through this phase of the cycle, it is likely that the search for new and emerging assets in the lower-mid-market will become ever more intense.

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