Strong growth, dearth of talent make oil engineers hard to buy

* Amec (Other OTC: AMCBF - news) and Petrofac (Berlin: P2F.BE - news) both linked with takeover target

* Growth into new areas through acquisition attractive

* Deals hard to close because of risk of people leaving

By Stephen Eisenhammer

LONDON, Dec 5 (Reuters) - Strong growth projections combined with a dearth of talent in the oil and gas sector are making oil services engineering firms tricky takeover targets for bigger cash-rich rivals, investor and banking sources said.

Agreeing on price is a challenge when targets have high growth forecasts, which often command a higher valuation and fuel shareholders' expectations of a big takeover premium.

At the same time, buyers are unwilling to pay too much of a premium given that a key asset and source of value - the workers - can easily leave once the deal is done, given their engineering expertise is in high demand across the industry.

Although one of the best ways to get more talent is through acquisitions and there is plenty of M&A speculation, no major bids have come through recently.

In the last weeks, British media have reported that UK engineers Amec and Petrofac are looking at Swiss-based peer Foster Wheeler (NasdaqGS: FWLT - news) . Sources close to the companies said no formal talks were underway.

Amec also made a $1.1 billion approach for rival Kentz earlier this year which Kentz (Frankfurt: 3UJ.F - news) rejected saying it undervalued the company.

Larger European contractors, cash-rich thanks to years of rapid growth, are keen to maintain the pace by expanding into new regions like Africa or the United States and newer specialisms such as liquefied natural gas (LNG), deep water, and shale.

Petrofac, which had cash reserves of $485 million in June, is looking to expand its offshore division by building a vessel for laying pipes and installing platforms. It has not publicly said it is looking for takeovers.

Amec, which had $325 million cash in August, has said it is hunting for acquisitions and will consider returning cash to shareholders if no deal is struck.

Kentz has said it is on track to achieve double-digit growth this year, while Foster Wheeler has reported a strong order backlog indicating it should grow strongly next year.

A top 20 shareholder in Kentz told Reuters he was happy to toe the management line in regard to rejecting the Amec bid unless the price was a lot higher than the $1.1 billion offered - a 22 percent premium to the share price at the time.

"There aren't that many good reliable growth companies out there ... A 35 percent premium might represent just 14 months' growth," said the shareholder, who did not wish to be named. "Sometimes the bids can look on the low side."

Kentz shares are up about 31 percent in the last 14 months and they trade at a forward price to earnings ratio of 12.4 against 16.1 for Foster Wheeler, 11.5 for Amec and 10.2 for Petrofac, according to Thomson Reuters (Frankfurt: TOC.F - news) data.

UNCERTAINTY

From the buyer's side, the price might not look so low given uncertainty over whether engineering staff will stay.

The chronic shortage of skilled personnel in the oil and gas sector is illustrated by the way it has driven up salaries. Hourly earnings in the sector in the United States have risen 62 percent over the past decade, according to the U.S. Bureau of Labor Statistics. Job site Rigzone puts the global average annual salary in the sector at $98,000.

"Integration is more challenging in people businesses ... often a lot of people leave," one sector banker said.

"It makes it that much harder (for acquisition targets) to ask for and/or achieve a very significant premium to market ... Getting overlap on value is not easy," the banker added.

Another sector banker stressed the scarcity of these deals. The last decent-sized British engineering deal in the oil space was Wood Group (Frankfurt: JWG1.F - news) 's takeover of PSN for just under $1 billion three years ago, they said.

"There have not been many of these deals. Amec has been looking for a deal, as has Petrofac and Wood Group, for 10 years. Only Wood Group has done anything," the banker said.

Acquisitions of smaller businesses with interesting technology remain common in the sector, however, like Wood Group's recent purchase of well integrity specialist Intetech or Amec's takeover of U.S. nuclear services firm AES (Frankfurt: AES.F - news) .

"Certainly at the smaller end we're seeing quite a lot of transactions," a different banker said.

Some of the smaller takeover targets are on the hunt themselves. Kentz Chief Executive Chris Brown told Reuters the company should be making an engineering acquisition in the next few months to bolster that part of the business. Brown said interest in his company had not got in the way of his own shopping.