Explore the data for each of five subsectors via the menu at the top. You can drill down into particular areas via the drop-down box and hover over the charts to see particular data points.
Chapter 1: Prevailing headwinds
Modest growth in turnover (2%) but minimal growth in margin
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.
There has been plenty of commentary on the oil and gas sector since the downturn in crude prices in 2014, and the emergence and significant influence of US unconventional production in causing the medium term oil price to be contained within a fairly narrow range. While the E&P companies have largely adjusted to this new reality, the oilfield service sector (OFS) has been under 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. Continuing uncertainty on commodity price, digital disruption, energy transition, mixed messages from investors, and climate change activism all combine to ensure that the OFS sector is still struggling to recover from the impact of the oil price slump. In particular, the upstream sector is exercising strict capital discipline, and a great deal of caution as it tries to navigate forecast demand for energy against a backdrop of sluggish global growth and unprecedented political activism. Importantly, the flow of capital into unconventional in the US has faltered, and therefore removed the main engine that has driven global oil and gas growth for the last decade. The uncomfortable truth is that capital investment in oil and gas, outside of unconventional, remains almost 40% below pre 2014 levels; and now unconventional capex spending is also stalled.
Globally the OFS sector has gone through a tumultuous time, with weak returns, and low investor confidence causing share prices to decline. While there is a gradual recovery resulting in some increases in turnover, and backlog, margins are stubbornly depressed. Regrettably, the situation in the UKCS show a strong correlation to the global market. Our 9th UK OFS report discloses modest growth in turnover (2%) but minimal growth in margin. Of course, averages can be misleading, and our report also highlights that certain subsectors are performing better than others, and within any subsector there is good and bad performance. Against this backdrop and continuing 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. However, it also needs to work with its E&P customers to develop a radically different narrative around the positive contribution that the sector can make to the energy transition, and reinvent itself as a progressive, inclusive, well governed, socially and environmentally responsible industry. Ignoring these issues presents an existential threat.
Almost
40%below pre-2014 levels of capital investment in oil and gas, outside of unconventional
Return to growth in 2018, albeit a modest
2%overall turnover for the UK OFS sector
Chapter 2: Reservoirs
Reservoirs see first year of significant growth since 2014
2018 is the first year of significant growth, following the impact of oil price decline on investment levels in exploration activity in 2014.
Reservoirs turnover increased by 12% in 2018 due to increased exploration activity. Higher contract pricing was achieved and a number of significant contracts were awarded. EBITDA margin increased by 4.4 ppt due to the impact of the ubstantial cost reductions in prior years. We would expect the 2019 results for the companies in this category to continue to show a recovery, driven by more 4D acquisition and demand for new seismic data. This is a market which has also restructured and consolidated and where competition is slightly less strong than in the past. The divisional results for the nine months to September 2019 for the listed parents of the top five companies in this segment showed gradual exploration market recovery in support of the development of new fields to counter production declines from existing fields, particularly in deepwater and ultra-deepwater reserves.
Chapter 3: Wells
Export revenue in wells grew by 12% compared to 2017
Although drilling activity in the UKCS declined from 2014, there are positive signs in 2019 with the number of wells drilled increasing.
In 2018, the Wells supply chain comprised 17% of the total UK upstream oil and gas supply chain turnover. Apart from the drilling contractors subsector, all other Wells subsectors experienced revenue growth in 2018, the first time since 2014. This was driven by increased activity across multiple product lines and locations, with improving oil and gas prices resulting in higher levels of drilling activity and demand for oil and gas equipment, parts and services. However, the drilling contractor subsector experienced lower day rates (an element of which related to renegotiating existing contracts to extend the term at reduced rates) and an increase in idle time/warm stacking. Export revenue grew by 12% compared to 2017 due to an increase in activity in Middle East and Africa, which has resulted in one company seeking to establish a manufacturing facility in Saudi Arabia.
Chapter 4: Facilities
Facilities turnover increased after three years of decline
In 2018, the Facilities supply chain comprised 32% of the total UK upstream oil and gas supply chain turnover.
Turnover for Facilities grew by 5% between 2017 and 2018, driven by contract renewals, multi-year contract awards and acquisitions. EBITDA margin also improved by 1.9 ppt due to successful project close outs, a change in revenue mix resulting from acquisitions positively impacting margin and streamlining of operational costs. The listed parents of the top five companies results for the six months to June 2019 showed a 13% turnover growth due to the impact of acquisitions but only 0.5 ppt EBITDA margin improvement as cost synergies/reductions were offset by a change in project mix and cost overruns on challenging project executions. We would expect UK companies in the Facilities segment to continue to be affected by fierce competition in this market, although diversification into clean energy and decommissioning could provide growth opportunities.
Chapter 5: Marine & subsea
Marine turnover continued to decline
A number of major Final Investment Decisions (FID) were reached in 2019, resulting in an increase in tendering and contract awards.
Marine and Subsea turnover continued to decline and decreased by a further 7% in 2018 due to sustained pressure on pricing, particularly in the North Sea. Large scale projects completed and were not replaced and a significant renewables project ended. EBITDA margin also declined by 2.3 ppt due to projects awarded during the downturn at significantly lower margins now being executed and higher third party lease costs being incurred. We would expect to see turnover continue to be impacted by low margin backlog being converted in 2019 and 2020, although the increase in FIDs in the UK in 2018 and 2019 could result in a gradual recovery. The lead times from FID to development however mean this may not result in significant growth in the near term.
Chapter 6: Support & services
Support and services turnover increased by 7% in 2018
In 2018, the Support and Services supply chain comprised 21% of the total UK upstream oil and gas supply chain turnover.
Support and Services turnover grew by 7% in 2018, with mixed results across the subsectors. The largest subsector, recruitment, experienced 15% growth due to an increase in activity outweighing projects demobilising in 2018. EBITDA margin also improved by 1.5 ppt as although the revenue growth in recruitment did not positively impact margins, lower operating costs resulted from favourable currency movements in the sea/air transport subsector. As the majority of the top five customers do not have listed parents, there is no financial information available in relation to 2019 trends.
However, we expect these companies to follow the overall global listed trends, with gradual growth in 2019, given the levels of demand in the UK are not expected to increase significantly in the short-term.
Summary
Recovery has started in the UK Oilfield Services sector, but will be slow, and margins remain under pressure. The market is shrinking, consolidation has not yet happened, and renewable energy transition pressures will continue – but the UK should be well placed to capture the benefits of this.