- UK Oil Field Services (OFS) sector returns to growth in 2018 – posting modest 2.3% increase in turnover
- 70 largest listed global OFS companies have forecast turnover growth to be 1% in 2019, followed by circa 5% growth in 2020 and 2021
- Despite green shoots OFS companies are still struggling to recover from the impact of the oil price slump and the unremitting pressure on pricing
- Expanding product portfolio, geographic footprint and adding new technologies to existing offerings will drive M&A
WEDNESDAY, 5 FEBRUARY, 2020: Following three years of declining turnover, the UK’s OFS sector returned to growth in 2018 posting a modest 2.3% increase in turnover – according to EY’s Review of the UK Oilfield services industry.
EBITDA margin for companies operating in the sector also increased marginally from 6.4% in 2017 to 6.5% in 2018, as pricing pressure continued, and a large number of lower margin projects secured during the downturn were delivered.
This uptick, albeit modest, demonstrates that the market is recovering slowly, with some signs of optimism across the sector, especially those companies with broad geographic footprints, technological capabilities or who have successfully started to diversify.
Globally, the OFS sector has been affected by five years of reduced upstream spend, lower commodity prices and margin erosion as companies competed to maintain activity during continued oversupply. Last year’s report was “cautiously optimistic” about the market in 2019 and 2020, on the back of an expected global increase in capex of circa 8% (2018 to 2019). However, capex growth was only 2-3% in 2019 and the expectation is of a similar growth rate this year.
However, there were signs of a global recovery in 2019. The 9th annual EY report analysed the reported results of the 70 largest listed OFS companies globally from 2014 – 2018 and have forecast turnover growth to be 1% in 2019, followed by circa 5% growth in 2020 and 2021.
OFS companies still struggling despite green shoots
Derek Leith, EY Partner and Global Oil and Gas Tax Leader, said: “While the OFS sector has seen modest growth in revenue and minimal EBITDA growth, it’s clear that companies operating in the sector are still struggling to recover from the impact of the oil price slump and the unremitting pressure on pricing. Overcapacity in parts of the supply chain has meant that companies are, in some instances, still chasing prices down where competition is most fierce and for almost all sub-sectors margin improvement has proved elusive.
“Against this backdrop and prevailing headwinds, the UK OFS sector needs to continue to innovate and digitalise, integrate service offerings, exploit niche opportunities, and take advantage of diversification as part of the energy transition.”
UK OFS well placed to capitalise on energy transition
In addition to contributing to the UK’s target of reducing emissions by 80% of 1990 levels by 2050, investors, banks, employees and communities are pressuring the oil and gas sector to transition to greener energies. With its heavy technology content, its wealth of talent and experience in renewables, the report says that the OFS industry can play a key role in solving some of the sustainability challenges the world faces.
Leith adds: “Energy transition presents both a challenge and an opportunity to the UK sector. Supporting customers to reduce carbon emissions from the production and use of oil and gas, helping develop carbon capture and hydrogen technologies, and expanding into alternative energy sources, such as wind, are all areas the UK is well placed to lead the world.
“Smart strategic decisions will be vital: balancing investing for growth, whilst continuing to target cost reductions; identifying opportunities that offer sustainable long-term higher returns and exiting lower margin activities; and assessing the risks and rewards of acting quickly versus waiting to take advantage of lessons learned by first movers.
“Many companies already have a significant focus on the renewables market, are developing into broader energy and industrial service providers with less focus on purely oil and gas and have started to create international opportunities for themselves which will support their recovery. There is space for more to be done but the UK should be well placed to capture the benefits of this transition.”
Reshaping the industry
The OFS sector is facing unprecedented disruption from technology, energy transition and changes in customers’ practices and landscape. This is occurring at a time
when companies face immense pressure to enhance shareholder value and returns.
Celine Delacroix, EY’s Global Oilfield Services Leader, said: “The time has never been more opportune to drive transformational changes to business models and ways of operating, when after years of subdued activity levels, several indicators point towards an improving market outlook.”
The report highlights a number of positive indicators for growth in the sector: the international rig count registered the highest year-on-year increment of 11% in 2019 since it began declining in 2015; oil and gas projects representing $200bn of investments were sanctioned in 2019; and the LNG market is witnessing a never been seen before supply boom with companies sanctioning 60+ MMTPA of projects in 2019.
Delacroix adds: “In order to capitalise on the emerging opportunities and to win back investors’ confidence, OFS companies will have to bring their house in order and create long-term sustainable business models.”
Transformational change will drive M&A
M&A will play a significant role for OFS companies looking to take advantage of these opportunities, in a sector that is still considerably fragmented.
Delacroix concludes: “Expanding product portfolio and geographic footprint, as well as adding technologies to existing offerings, will continue to be core themes driving M&A. Pursuit of asset-light business models and businesses that are returns-accretive will prompt companies to divest non-core, non-strategic assets. OFS companies will seek technology partners to help support their ability to offer digital solutions to clients and will also explore inorganic growth to venture into alternative energy businesses.
“While market conditions seem to be improving slowly, those companies able to seize the opportunities presented by energy transition and technological disruption will be the real winners in reshaping the OFS industry.”
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