When First Reserve Corp. won the auction for Ohmstede Ltd. in the summer of 2006, banker Drew Spitzer, of Harris Williams & Co. said his client was getting into the right business at precisely the right time.

"This is an industry that has been under-invested," he said of Ohmstede's oil field service and shops.

And First Reserve's roughly $245 million acquisition, backed by around $60 million of equity, was a well-timed bet that ultimately reaped a tremendous windfall for the energy investor when it sold Ohmstede last September. EMCOR Group acquired the company for $457 million, a deal that generated a more than 7x return on equity for the investor group.

While the company's valuation skyrocketed during the 13 months separating First Reserve's acquisition and its sale, the investor wasn't the beneficiary of significant multiple expansion. The purchase price of Ohmstede jumped more than $200 million, yet the Ebitda multiple barely budged from the 7x valuation applied to First Reserve's initial deal.

The difference, however, was a significant jump in the company's performance. Following the First Reserve investment, the company made a commitment to better link its shops with its field operations, an initiative that reduced downtime for clients. Under First Reserve's watch Ohmstede poured capital back into the company, with much of the reinvestment being funneled toward bolstering the on-site repair team. It didn't take long for the company's market to take notice, and the client list quickly grew.

A source close to the company describes that industry players are finally beginning to understand "the value of uptime and the cost of downtime."

"Over the past 10 years, you've seen a lot of consolidation in this industry," Harris Williams' Spitzer notes, describing the oil field sector as a whole. The consolidation, however, has not resulted in fewer work opportunities for Ohmstede. In fact, as companies grow through acquisition, as opposed to green-field expansion, the oil refineries continue to age, requiring more on-site repair services. And repair services are tied to demand as opposed to commodity prices. Even if the price of gas slides, as long as the production stays consistent, Ohmstede's services should be required.

While First Reserve exited too quickly to see some of its initiatives realized, by laying the groundwork for expansion, new locations materialized almost immediately after the firm sold the company. And not long after the EMCOR sale, Ohmstede acquired competitor Redman Equipment & Manufacturing Co. for an undisclosed price. The deal expanded Ohmstede from its Gulf Coast base into California.

Both Spitzer and the source note that the Ohmstede sale worked well for both sides, as First Reserve took home a tidy profit and EMCOR assumed control of a company primed to continue its rapid growth.

Says the source, "The value of the company continues to grow. I'm not sure we can keep increasing the value exponentially."

It might warrant the question if First Reserve sold too quickly, but the firm's proceeds and Ohmstede's continued growth under EMCOR should quiet any second guessing.



Energy industry