Starters’ orders for the oilfield services market?

The oilfield services and manufacturing sector has seen a very difficult last few years. This has been even more acute, coming on the back of the longest boom period the market has ever known. There has been a collapse in the market, making decisions even more difficult, and critical. Judging by the number of emails that bounced back during a recent survey of ours, and industry announcements, we estimate that we’ve lost around a third of supply chain jobs across the sector.

The impact of the price collapse

Since the 2014 nose dive in the oil price, activity levels across the offshore development, operations and integrity management space have declined considerably. We believe the down cycle has stripped 40% off global E&P budgets. This has resulted in green and brownfield project FID delays, cancellations and deferred Opex through restricted IRM and integrity management programmes.

Global Upstream Capex Outlook

The new normal

Substantial pressure has been placed on the supply chain to reduce costs and increase standardisation of equipment and services, while increasing operational efficiencies. The ultimate goal of the operator is to bring supply chain prices down to a level where project breakevens are in-line or close to prevailing commodity price. Profitability across the supply chain is negligible with the majority of margins in the single digits. In the worst cases we have witnessed negative margins as contractors try to secure work below cost, to boost utilisation and maintain market presence.

There are opportunities in the market

Having to reduce costs has been painful. The last few years have been all about managing down the costs base, resulting in diminished capacity, and laying the foundations of the recovery.

One of the privileges we have at Wood Mackenzie is being able to engage and listen to people from across the industry. This gives us a view into the current psyche of the upstream business. We recently ran our annual Global Upstream Cost Survey, focused at the intersect between operators and supply chain. We gauged opinions on sector recovery and there was strong agreement that the majority of the price declines have been captured. And while there is still some downside risk in 2017 we expect this to be the bottom, with recovery beyond that.

Where these opportunities will arise

Investment opportunities do exist. We believe there are short-term opportunities across early phase engineering, differentiated technology in hardware and software, IRM and integrity management, and low-cost OSV and construction tonnage supported by experienced management. The major driver is the resetting and rebalancing of the cost base. This can be achieved by buying discounted assets and strategically positioning for an industry recovery. Relinquishing debt, harnessing client relationships and the optimisation of services and applications provides a clear advantage over a legacy OFS sector approach.

Weighted average of date of sub-sector market return

A new balance

By achieving a greater balance between chasing Capex development projects and Opex life of field, companies can also realise opportunities. Global IRM and integrity management work has been pushed to the right over the past 24 months, resulting in a backlog of integral work that has to come back into play to sustain offshore infrastructure safety and production capacity. The application of optimised, cost effective solutions and technologies is the obvious answer to unlocking this potential revenue.

What’s the future for oil field services?

The current expectation across the sector is for a recovery starting between 2017 and 2018.  The recent OPEC agreement to cut production has provided a fair wind for a market recovery, however, we will need to see this turn of sentiment endure to provide the solid base required.   Any market recovery will initially be a slow drip feed of project FIDs resulting in a controlled uptick in activity while keeping prices as competitive as possible. Operators will need to build on their recent control of supply chain costs while managing the green-lighting of new Capex projects and limiting cyclical price increases. Given the recent supply chain capacity reduction and levels of duress, we believe this to be a sizeable challenge.

A time for bold decisions?

We see the door starting to open for further M&A and consolidation opportunities. It’s a great entry point for those trade players with resilient balance sheets or private equity and special situation funds. They can take advantage of the rebasing of costs ahead of a recovery in the market. So the green shoots of optimism are beginning to appear, though it’s not for the faint hearted as an appetite for risk is required to gain a first mover advantage. Deal timing is everything: wait too long and the market will be flooded with investment pushing up prices; go in too early and additional losses will materialise.

Be ready for the opportunities

The window of investment opportunity has started to creak open and will remain open to the risk-savvy sector specialist able to identify a solid, well-priced solution or service over the next year. Beyond this, opportunities will diminish as investment floods the sector and drives sell-side price expectations well above where they should be.

 

For more content from our Transaction Support consulting team, please download our recent perspective, Oil and Gas M&A Market: more gridlock ahead?

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Malcolm joined Wood Mackenzie’s Upstream Consulting Team in 2007, having spent ten years working in the oil field service sector. He worked in the service sector both in a field and management capacity. His industry experience has seen him work with a wide range of operators and in many different locations. In particular Malcolm has extensive experience of the North Sea, Nigeria and Brazil. During his time in Brazil he established the local entity, set up operations and developed the business through long term contracts with Petrobras, the IOCs and local and international service contractors. Malcolm has lead Wood Mackenzie’s oil field services offering working with OFS, OEM and financial companies to provide advisory services on due diligence, strategy and market projects. Complementing the diversity of the supply chain, amongst others, projects include analysis of deepwater, shelf and onshore rig markets, mature fields, subsea equipment, IRM and AIM services, operator trends and portfolios, EPCM, pipelines, and offshore vessels. Malcolm has an MSc in Petroleum Engineering from Heriot Watt University.

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