26 Jan 2021
Norwegian oilfield services analysis 2020

Norwegian oilfield services analysis 2020

By Espen Norheim

EY Nordic Energy Corporate Finance Partner

Professional Energy Advocate and amateur rock guitarist. Based in Stavanger with keen interest within the sciences, international business and parenthood.

26 Jan 2021

In this report, we quantify the size and development of the industry and analyze the dynamics across the oilfield services value chain.

In brief: 
  • 2019 was a strong year for OFS companies as the industry showed an aggregated growth of 15.6%.
  • Several companies are adapting to the energy transition as low carbon solutions and renewable energy sources are becoming increasingly important in the strategic development across the industry.
  • COVID-19 and the collapse of the OPEC+ and Russia collaboration have disrupted global O&G markets.
  • We believe the fiscal stimulations imposed by the Norwegian government will have its most material effect on the O&G supply chain in 2022.

Welcome to the 2020 edition of EY's annual review of the Norwegian oilfield service (OFS) industry.

EY teams have been conducting the Norwegian OFS analysis every year since 2006. The report is developed each year in line with the development of this large and diversified industry.

In the 2020 edition, the OFS company database has been updated to reflect the addition of new legal entities to the empirical data set, as well as the removal of those entities that are no longer predominantly serving the oil and gas (O&G) industry. Our database now holds a total 1,115 of Norwegian-registered OFS companies.

As a new addition to the analysis, we have included an analysis of the renewables and green energy solutions segment. Our goal is to quantify the size and development of this diverse industry and analyze the dynamics across the value chain by applying the same methodology developed analyzing the OFS industry.

Strong development in revenues across the industry

After several years of revenue decline following the O&G downturn, we observed in last year’s report that the OFS market finally reversed the trend and experienced revenue growth. In 2019, the OFS market continued the recovery with aggregate revenues of NOK359b, an increase of 15.6% compared to 2018. The actual revenue growth of the industry was 1.2ppt higher than forecasted in last year’s report.

In addition to an increase in revenues, the aggregate earnings before interest, taxes, depreciation and amortization (EBITDA) margin finally increased after several years of decline. The EBITDA margin increased by 2.4ppt to 8.1%. Further, we note that for the first time since 2014, we see profitability in the earnings before interests and taxes (EBIT). The industry showed an aggregate EBIT margin of 0.4%, which is an increase of 3.1ppt from 2018.

OFS revenue growth has been driven by higher activity from the EFI suppliers

The largest segment in terms of revenue — the engineering, fabrication and installation (EFI) segment — experienced a 20.6% increase in revenue during 2019, being the segment with the highest growth of the year. Exploration and production drilling was the segment with the second-highest growth in revenue, experiencing an increase of 10.9%. The only segment with a declining aggregate revenue in 2019 was the decommissioning segment, which saw a decrease of 6.3% compared with 2018.

Increasing profitability driven by higher margins in the reservoir and seismic sector

The industry’s turnaround in terms of profitability is, to a large extent, driven by increasing margins in the reservoir and seismic sector, which is by far the most profitable sector. The reservoir and seismic sector had an aggregate EBITDA margin increase of 18.2ppt by 52.3%. Further, we see an increase of 8.4ppt in the aggregate EBIT margin for the reservoir and seismic sector by 11.9%.

The COVID-19 — a significant impact to set back the industry recovery

The outbreak of the COVID-19 virus had a profound impact on the global economy, and in combination with the interim collapse of the OPEX+ collaboration, the industry witnessed an unprecedented supply/demand spread, which immediately translated into a steep oil price drop. Lower oil prices, market volatility and national lockdowns have negatively affected activity levels on the NCS and will set back recovery. We expect that the Norwegian OFS industry will experience a 10% decline in revenues in 2020. Further, we believe the fiscal stimulations imposed by the Norwegian government will have a delayed effect that will materialize for OFS companies in 2022. Our forecast estimates a flat development in 2021 and a growth of 6% in 2022.

  1. Reservoir and seismic
  2. Exploration and production drilling
  3. Engineering, fabrication and installation
  4. Operations
  5. Decommissioning
Norwegian oilfield services analysis 2020
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Chapter 1: Reservoir and seismic

Strong recovery in 2019, but impacted by COVID-19

Reservoir and seismic turnover increased by 9.9% in 2019 as exploration activity reached its highest level since 2015.

The reservoir and seismic segment includes:

  • Norwegian legal entities that operate seismic vessels for data gathering
  • Companies that consult, analyze, interpret and display seismic data
  • Companies that manufacture and supply equipment for gathering and analyzing seismic data acquired for the exploration and production (E&P) clients

EBITDA margins increased by 18.2ppt to reach 52.3ppt due to higher contract pricing and the impact of substantial cost reduction schemes in prior years. In addition, within the reservoir and seismic sector, companies have, to some extent, successfully restructured and consolidated, which we assume have countered the supply/demand imbalance of the market somewhat.

Given the inherent dependency of this segment relative to its customers’ exploration budgets, we expect a difficult short- to medium-term market. Thus, we expect that the 2019 growth will be reversed, as the segment will experience a significant drop in its 2020 revenue.

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Chapter 2: Exploration and production drilling

Record high NCS well count in 2019

In 2019, the E&P drilling segment finally experienced double-digit revenue growth as the NCS well count reached an all-time high.

The E&P drilling segment includes companies that own and operate drilling rigs, as well as companies that deliver systems, products and services to these rigs and the wells being drilled.

We have divided the segment into three subsegments: well service companies, rig companies and rig equipment companies.

E&P Drilling

The segment’s aggregate revenue grew 10.9% to NOK86.5b. Rig equipment showed increasing profitability with EBITDA margins of 7.7%. For well services, EBITDA margins decreased by 1.6ppt but remain strong at 12.7%. After years of margin pressure and cost reduction schemes, well services has now shown increasing revenues and EBITDA margins for two consecutive years. Rig equipment experienced significant growth in 2019, with a 35.6% increase in revenue. However, the subsegment is still far off from the levels seen prior to the 2015 downturn. 

The rig companies market continues to be challenging with low EBITDA margins at 2.9% and very modest growth in revenues at 0.5%. The rig market continues to suffer from oversupply, which keeps day-rates from recovering after the 2015 downturn. However, the market situation was somewhat healthier than previous years, and the supply/demand balance in the harsh environment segment has improved with day-rates stabilized around USD300k to USD350k, and contract lengths increased.

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Chapter 3: Engineering, fabrication and installation

Continued recovery and strategic positioning for low carbon future

The EFI segment contributed with the majority of the Norwegian OFS 2019 growth.

The EFI segment includes Norwegian legal entities involved in equipment supply, manufacturing, construction and installation of offshore O&G production units — both surface (topside) and subsea.

We have divided the segment into five subsegments — shipyards; larger engineering, procurement, construction and installation (EPCI) yards; subsea; consultants and engineering houses; workshops and product suppliers.

EFI

The EFI segment contributed with the majority of the Norwegian OFS 2019 growth, both by being the largest OFS segment, as well as having the highest segment revenue growth at 20.6%. The aggregate EBITDA margin across the segment increased by 1.4ppt. However, the EBIT margin remains slim at 2.1%.

The aggregated revenue growth of the EFI segment was largely driven by strong growth in the larger subsegments yards, subsea and workshops and product suppliers, which increased revenues by 38.6%, 19.6% and 18.0%, respectively. The consultants and engineering houses subsegment also delivered strong results with revenue growth of 21.1%, while recovery is slower for shipyards, which grew by 5.0% in 2019. The EBITDA development per sub-segments has since 2017 been relatively similar, with the exception of shipyards, which has seen an increasingly negative trend since the O&G downturn. A more or less complete shut-down in the traditional O&G market at the onset of the downturn has resulted in price-pressure to win contracts within the traditional maritime segments.

O&G will continue to be the basis of operations over the next decade. However, we see that companies are adapting to the energy transition as low carbon solutions and renewable energy sources, such as offshore wind, are becoming increasingly important in the strategic development across the segment.

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Chapter 4: Operations

Offshore operation companies on the road to recovery in 2019

The aggregate increase in revenue for the operations segment is driven by increasing revenues within offshore logistics and M&M.

The operations segment includes entities that support oil companies in the production phase. We have divided the segment into three subsegments: offshore logistics maintenance and modifications (M&M) and production.

Operations

From 2014 to 2018, the aggregate revenue in the operations segment declined by 40.5%. In 2019, the segment showed first signs of recovery as aggregate revenues increased by 10.0% to NOK 58.6b. After years of decreasing profit margins, the aggregate EBITDA reached the bottom in 2018 at 9.8% and increased by 3.2ppt to reach 13.0% in 2019.

The aggregate increase in revenue for the operations segment is driven by increasing revenues within offshore logistics and M&M, which experienced revenue growth of 8.1% and 28.0%, respectively. Though the O&G market remained volatile and competitive in 2019, the market did improve. The increased activity resulted in steady order intake and increasing backlogs. Recovery is slower for the production subsegment, where development was flattish with a 1.7% revenue decline in 2019.

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Chapter 5: Decommissioning

Good future earning potential for decommissioning companies

We have seen that the lifetime of fields on the NCS are ever increasing due to technical enhancements.

The decommissioning segment includes companies that primarily offer services related to the decommissioning of offshore installations. However, decommissioning-related services, such as plugging and abandonment (P&A) and infrastructure removal, form an integral part of the strategic and operational focus of many OFS companies, which have operational focus primarily in other segments.

Decommissioning

In 2019, there were a total of five companies that had decommissioning as their core business. As mentioned in the segment introduction, the number of companies with partial revenue within decommissioning is significantly higher. Aggregate revenues in the segment decreased by 6.3% in 2019.

We have seen that the lifetime of fields on the NCS are ever increasing due to technical enhancements. With a prolonged lifetime, decommissioning projects are delayed. On the NCS, there are currently 12 concrete facilities, 20 steel floating facilities and 61 fixed steel facilities in operation. Some of these fields are approaching the end of their expected lifetime and are expected to be decommissioned in the coming years. Additional decommissioning projects are accumulating and will likely result in large orders for companies in this segment. However, it is not easy to estimate exactly when producing fields will shut down.

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Another setback for OFS as COVID-19 and the collapse of OPEC+ and Russia collaboration disrupts global markets

Introduction

2019 was a strong year for OFS companies as the industry showed an aggregated growth of 15.6% and increasing revenues in nearly all segments. However, the joy was short-lived as the outbreak of the COVID-19 virus had a profound impact on the global economy, and the collapse of the OPEC+ and Russia collaboration disrupted the global O&G market. Lower oil prices, market volatility and national lockdowns negatively affect activity levels on the NCS and will set back recovery. Thus, in our outlook for 2020, we expect that the Norwegian OFS industry will experience a 10% decline in revenues. As a result, we believe OFS companies will have to continue absolute cost focus to protect margins.

Our forecast indicates that 2020 will be most difficult for seismic companies as investment plans among energy companies have been revised and the demand for seismic services is significantly reduced. Going into 2021, we expect a more flattened development in revenues as our forecast shows an increase of >1%. We believe the fiscal stimulations imposed by the Norwegian government will have its most material effect on the O&G supply chain in 2022. Thus, we forecast the OFS industry aggregate revenue to grow by 6% in 2022.

Negative outlook across nearly all segments

Reservoir and seismic

For the reservoir and seismic segment, the outlook for 2020 is significantly negative as demand for seismic services has plummeted during the market turmoil. As a consequence, we expected revenues to drop by 33% in 2020. A majority of the reduction is due to postponements as E&P companies will protect cash flows during the economic downturn. For 2021, we believe the sector will experience increased activity and a growth of 5%. AS E&P spending is expected to increase in the wake of the COVID-19 crisis, we expect a 16% increase in revenues in 2022. Though activity is expected to pick up, it will take time for demand to reach pre-COVID-19 levels.

E&P drilling

The E&P drilling segment is expected to drop 12% in 2020 as the overall utilization of the total available drilling fleet is expected to remain at low levels. We believe the market will continue to be challenging through 2021, and our forecast suggests an increase of 1%. As the effect of the temporary tax incentive scheme aimed at E&P companies materialize, we expect E&P drilling activity to increase in 2022.

Engineering, fabrication and installation

Our forecast for the EFI segment estimates that revenues will drop by 7% in 2020. We believe that the revenue development will be flat in 2021 as the O&G downturn will be offset by growth in low carbon and renewables segments. In 2022, our forecast shows revenue growth of 7% as sanctioning activity on the NCS is expected to pick up.

Operations

For the companies in the operations segment, we expected revenues to decline by 7% in 2020. We expect the M&M to face reduced activity as projects are expected to be put on hold given the current economic climate. The offshore logistics segment will continue to struggle with overcapacity, and we believe a large number of vessels have to be taken out of the market to improve the supply/demand balance. The market will remain challenging for companies in the operations segment, and our forecast indicates a modest revenue development of 1% in 2021 and 2022.

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Renewables and green energy solutions on the rise

Our analysis shows that the market for renewables and green energy solutions in Norway is dominated by large industrial players.

The renewables segment includes Norwegian legal entities within renewable energy sources and sustainable energy solutions, excluding hydropower. Our goal going forward is to quantify the size and development of this diverse industry and analyze the dynamics across the value chain by applying the same methodology developed to analyze the OFS. However, we have included production companies when analyzing the renewables segment as these value chains tend to be more integrated compared to the value chains in OFS, where the line separating OFS and E&P is clear. We have built a database of companies for which their primary operation is within one of our predetermined subsegments.

The renewables segment has been divided into seven subsegments — battery technologies, biofuel, onshore wind, offshore wind, solar, hydrogen and carbon capture.

Renewables and green energy solutions

The segment has received increased attention over the last few years as sustainability issues become integral aspects of businesses in all industries. Our analysis shows that the market for renewables and green energy solutions in Norway is dominated by large industrial players, mainly operating in other industries such as O&G and are looking to diversify their revenue streams to more sustainable solutions. As such, companies with renewables and green energy solutions as their main business area still have a relatively small portion of the total market.

The segment is characterized by large capex requirements, and the majority of the companies are still in an early development or growth phase. When comparing the segment composition of renewables and green energy to OFS, there are clear structural differences between the two, highlighting the differences in the industries’ life cycles. Nearly two-thirds of the companies in the renewables and green energy segment have revenues less than NOK10m and account for just 2% of the segment’s aggregate revenues. When looking at the size distribution per subsegment, we find that biofuel is the largest segment among micro companies. We believe we will see strong growth in this segment as the Norwegian government continues to increase demands for the use of biofuel in road transport and aviation. However, a majority of biofuels used in Norway are still imported from other countries.

We see that most revenues come from the more traditional subsegments of onshore wind and solar and we believe these will continue to dominate the segment going forward. However, we have seen that subsegments such as hydrogen, battery technology and carbon capture have received increased attention from investors, and we believe new players will continue to emerge.

The majority of all hydrogen companies in our database have less than NOK10m in revenues, and none have more than NOK100m. Furthermore, nearly half of them were founded within the last three years. This suggests that these firms still are early in the commercialization phase focusing on R&D, where they can recruit high skilled labor from the traditional OFS companies. The hydrogen segment is mainly driven by startups, but we also expect to see more of the existing OFS firms venturing into green energy. Offshore wind is a segment that requires a set of skills and services closely related to what OFS companies have delivered historically. Since Norwegian authorities recently committed to open for the development of offshore wind on the NCS, we expect to see an acceleration of traditional OFS companies shifting their focus towards renewables.

Summary

The annual report is by far the most complete overview of the Norwegian oil service industry. The analysis is based on accounting figures for 2019 and data for the development in 2020. At the beginning of 2019, EY's forecasts showed revenue growth of 14.6%, as well as a positive development in profitability. Margins also increased in the industry - for the first time in several years. The renewable segment is an important part of the report going forward.

About this article

By Espen Norheim

EY Nordic Energy Corporate Finance Partner

Professional Energy Advocate and amateur rock guitarist. Based in Stavanger with keen interest within the sciences, international business and parenthood.