How oilfield services companies can restructure for long-term growth

Many OFS companies in the Asia-Pacific region face intense competition, exacerbating overcapacity in a shrinking addressable market, significant debts and poor returns. Companies need to take a hard look at their value to both customers and the broader group of stakeholders, and allocate capital accordingly.

OFS companies can choose to scale up by acquiring businesses to increase market share, concentrate product and service segments and rationalize supply. For this approach to work, companies should have a concrete plan, capital resources to acquire sufficient market share and the requisite pricing power to maintain sustainable margins.

The other option is to scale down and be differentiated. This means divesting businesses that do not fit the strategic direction, are capital-constrained or are unable to build meaningful market share. Differentiation can be achieved by focusing on niche markets, driving offerings via technology and looking at new business models or partnerships.

In any case, capital must be allocated only to opportunities that allow the company to gain a competitive advantage in a particular product, service line or market.

The OFS business and its sales cycle have long been relationship-driven. How do you change an entrenched corporate culture that solely measures job performance in terms of sales made? The habits and attitudes that align with growth at all costs have led the OFS sector into trouble and will need to change. Shifting the corporate culture from a revenue- and growth-oriented mindset to one that focuses on returns will require new metrics and measurement tools. It also requires strong leaders who can drive the change, possibly new executives with proven return on capital employed experience outside the oil and gas industry.

Beyond the COVID-19 crisis, OFS companies must review and analyze what had happened, secure the business against future shocks, as well as deploy and adapt their future strategy in an agile way. Once they have addressed the immediate issues and started planning for what comes next, executives will need to turn their attention to potentially existential issues. Some of these include decarbonization, energy transition, long-term value creation and building a future-ready workforce.

The need to address climate change will only become more urgent. Diversification is inevitable for the upstream sector and presents an opportunity for OFS companies to expand their addressable markets, gain exposure to end markets that are expected to experience structural growth and redefine investor perceptions.

OFS companies can consider these options:

• Help operators become more sustainable by developing technologies to measure and capture emissions, as well as equipment, operations and products with lower carbon emissions
• Follow the lead of traditional oil and gas customers by increasing exposure to low-carbon energy sources, such as solar, wind and hydrogen, which are likely to experience structural growth in the coming decade
• Lead the energy transition and enter non-energy markets, developing a new customer base beyond traditional oil and gas customers

The Asia-Pacific OFS sector’s expertise in development and engineering, operations and maintenance, and project management is valuable to industries within and beyond energy. As entry into new sectors is likely to be highly competitive and protected by incumbents, smart strategic decisions will be vital. The company’s areas of expertise, assets and agility in navigating new markets will determine its success.

Environmental, social and governance (ESG) factors have become integral to the decisions of institutional investors. Capital and talent will shift toward organizations that create value in the long-term across a broader group of stakeholders, including employees, consumers, society and shareholders.

There is significant potential for OFS companies to identify and report metrics that communicate outcomes to these stakeholder groups, and institute systems, processes and mechanisms to measure ESG outcomes for corporate reporting to demonstrate the value generated by the business.

OFS companies should prepare for a world where the pandemic fallout intersects with the accelerating energy transition, in an environment where accessing capital and driving growth may require new, bolder approaches. Companies need to adopt new competencies and ways of doing business, and risk appetites may need to increase.