Determining purpose and play
Value chain characteristics
Supply chain competence
Our proposed models are most likely to be successful on opposite ends of the supply chain competence spectrum.
- Competent and developed supply chain. A competent supply chain allows companies to be in control of their performance and the outcome, making risk- and production-sharing models feasible.
- Complex markets with an underdeveloped supply chain. Providing solutions across the supply chain in a complex market could fill the capability gap and serve as a reason for OFS companies to provide not only turnkey solutions, but also performance-based pricing models.
Characteristics of E&P companies
Companies with the following characteristics will be most attractive:
- Tier Two companies with upcoming field development projects. Many Tier Two companies have experienced challenging financial health and limited access to capital. Joint risk/reward and funding opportunities would help address these challenges.
- Private equity (PE) ownership. E&P companies with significant PE ownership place greater emphasis on life extension and pure financial return KPIs such as return on capital employed (ROCE). This opens the opportunity for partnering, offering larger packages of service, and sharing risk and value plays.
- National oil companies (NOCs). Mature NOCs are vertically integrated, have capabilities across the value chain and are typically willing to pay a premium for convenience. Conversely, immature NOCs typically lack certain capabilities, making them more likely to pay a premium.
History of collaboration
A history of collaboration through either industry clusters or joint efforts in product or service development ensures not only trust and transparency, but also strong networks across the industry. This will serve as a key driver for establishing new partnerships.
History of innovation
Certain plays and regions have a history of innovating and being at the forefront of technological enhancement. Our proposed models are more likely to be adopted in such plays because the operators are open to change.
As with the supply chain positioning factor highlighted earlier, being at either of the opposite ends of the risk profile spectrum is most attractive for OFS companies.
- Short-term plays. OFS companies are likely to prefer plays that allow them to quickly go to market and have a short-term developmental outlook. Challenging markets create pressure for short sales cycles, as companies have limited cash and want to reduce uncertainty and risk, which also enables them to be flexible. Investors are also interested in plays with shorter-term outlooks.
- Ultra-long-term plays in complex regions. Regions with a long-term outlook are attractive for OFS companies because there is room for a large company to develop a long-term partnership while building infrastructure, society and supply chains. However, this also presents greater risks.
- Limited reserve complexity. Low-risk plays, such as shales, are more likely to be preferred than higher-risk plays, such as deepwater projects. However, the superior technical capabilities of certain OFS companies can make higher-risk projects more attractive.
Complexity and political and regulatory stability
As above, projects on opposite ends of the political and regulatory spectrum are likely to drive success, per our proposed models.
- Stable political and regulatory environment. Most companies think long-term when entering partnerships and making investments. Companies are, therefore, more likely to invest in plays where the overall outlook is stable and where good infrastructure and other inputs are guaranteed.
- Complex regions with limited infrastructure. The need to build infrastructure enables OFS companies to increase their strategic importance across E&P and country development. Their role could entail infrastructure, societal and people development, and use of local content tailored to regions. Such plays provide an opportunity for a conglomerate of OFS companies to offer full-scale packages.
Access to capital
Access to capital is important because OFS companies need the financial strength and balance sheet to enter into alternative financing models. Capital availability depends on investor and lender sentiment, which varies across plays.
Low break-even point
Plays with a low break-even point are economically the most feasible because they are less likely to be canceled or deferred, while the profitability is high. Hence, such plays present limited risk for OFS companies.