Review of the UK oilfield services industry
UK Oilfield Services Sector: Fit for the future?
The price of oil has fallen from a high of around US$115/bbl in 2014 dipping below US$30/bbl for the first time in over a decade, with exploration and production companies having significantly reduced capital expenditure in response. Alongside any price increase, price volatility will also need to reduce before the sector can make informed investment decisions and gain confidence that any price recovery is sustainable.
The effect of sustained price volatility
The oil price decline has resulted in many projects being delayed or cancelled; margin pressure on both capital projects and operation and maintenance contracts; and a lack of visibility over future orders, creating stress across the UK upstream supply chain. Companies most severely affected have been those with asset-heavy businesses and those exposed to capital projects.
A number of companies have been partially protected in 2014 and 2015 as they have focused either on more robust production activities or on working through pre-existing backlog. However, there are major uncertainties around replenishment of backlog and general activity levels in 2016.
Around 40% of turnover generated by UK oilfield services companies comes from overseas markets. Those companies with specialist products and services that can be exported are seeing lower UK demand partly compensated by international markets. Although overall exports were flat in 2014, certain markets, such as the Middle East, have been less affected, while others, such as North America, have been hit harder.
Click on an image below to find out more about the sectors that make up the UK upstream oil and gas supply chain:
Operating in the ‘new normal’
The UK oilfield services sector is responding to the low oil price environment by:
- implementing cost reductions and efficiencies
- driving efficiencies in project delivery
- changing how it engages with customers
- targeting sectors out with upstream oil and gas.
Companies are also focused on working capital and cash management, and are examining capital structures. Stakeholders need to take a medium rather than short term view on market recovery to support these businesses.
Leaner, stronger and fit for the future
Consolidation in the market is inevitable. Many of the best value-generating deals have been done in previous downturns. Now is a great opportunity to add technological solutions and a geographical presence, and deliver a step change in cost reduction through effective integration and economies of scale.
It is a challenging period for the oil and gas market, but there are world-leading capabilities in the UK supply chain providing hope for the future.
Companies that proactively look for opportunities to improve resilience, engage with their stakeholders and make targeted, strategic acquisitions, could find themselves emerging from the current downturn leaner, stronger and well placed to capitalise on the recovery.
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