Oil and gas companies are far too lax in the safety-critical field of non-destructive testing (NDT), says Desert NDT LLC CEO Larry Ames. Indeed, the memory of BP plc's disasterous oil spill from 2010, or coal extractor Massey Energy Co.'s numerous fatal accidents over the years, is still fresh in people's minds. Thus, the demand for companies like Desert NDT is high - inspection services that evaluate oil and gas pipeline systems and provide the necessary modifications or repairs to ensure safety.
Two days after announcing Ames as the new CEO, replacing former CEO Doug Frey, Desert NDT purchased Williston, N.D.-based T&K Inspection Inc. for an undisclosed price - the company's second deal since it was first acquired by Chicago private equity firm Sterling Partners last March.
"The M&A team had been working with T&K for a year," says Ames. Desert NDT also bought Midwest Inspection Services LP of Perryton, Texas, in September for an undisclosed price.
Before Ames stepped into his current post, which leaves Frey as a director on the company's board, he was CEO and president at Transfield Services, a maintenance and construction services business, operating in the energy and infrastructure space. Before that, Ames was a president at Day & Zimmermann, a family-owned company that provides industrial services to commercial and government customers. Ames expects that under his watch, Desert NDT will grow and expand its operations.
Are companies that provide NDT services likely to consolidate?
We think so. The NDT industry is very large. Our segment is focused on midstream energy and the gathering pipelines, processing plants and so on. That's our sweet spot. There's a ton of work as far as infrastructure goes in order to inspect and support oil and gas finds, horizontal drilling, fracking and all those technologies that have been used. Companies access these resources and now they've got to get them to market. We work directly for the owner of the asset or for third-party inspectors. When they have construction companies lay the pipe or build the plant, third-party inspectors come in and validate that the work was done to code. So we come in and do the technical inspection or the maintenance modification.
Since many of our clients own oil and gas properties all across the country, we can go out and find acquisition candidates that can be part of our larger group. We'd do the acquisition, maintain the local presence they have and combine them with our corporate strength in deploying assets. Most companies have demands that change. For example, one day South Texas will need to move assets to North Dakota, and this allows us to follow clients around the country as their needs change.
Are you going to keep using M&A as a growth option for Desert NDT?
Last year, the M&A team was very busy. I don't know how many deals we'll get done this year, but I have the team working hard to look for them. We really want to go out there and find kindred souls who are in places where it's difficult for us to do organic growth. We're still missing some coverage in the Marcellus and Utica shale plays and I'd love to find some companies out there. I'd also like to find some companies that do plant inspection services, which is different from field inspections. I'd like to grow that more rapidly as well. The relationships we have with local customers are important. Ohio has different rules than, say, Texas. So, there is value in buying a local company as sort of a springboard.
What do you look for in a target?
I'm very confident that as we grow, we only buy companies that have that same commitment. Quality companies make the transition much easier. We target family-owned businesses, or small businesses that have reached a certain level of growth or demand for capital. Either they can't access the public markets or their owners want to cash in.
What are the major challenges you anticipate?
Everyone is very concerned about safety and that's going to continue. As we scale and get bigger, we want to make sure we never deviate from that goal.
There's also a lot of emphasis on regulation between the federal and state governments. But, oftentimes, the industry has higher safety standards than the government and they're spending a fair amount of resources to make sure the maintenance and modification is done correctly. For example, the systems that have been in the ground for 20 years or so require constant monitoring and examination.
Do you worry about accidents and disasters at oil and gas sites, such as the ones that occurred in recent years under Massey Energy Co. in West Virginia?
I think that part of the responsibility of the CEO is to make sure the company ensures the safety of, not just our employees, but the public and environment as well. I think it's a good day when nothing happens like that.
It doesn't scare me, but making sure everyone's safe is something we have to manage and lead. That's what we get paid to do.