EY’s review of the UK oilfield services (OFS) industry analyses 2017’s trading information – turnover, growth, EBITDA and exports – of UK registered OFS companies in five subsectors: reservoirs; wells; facilities; marine & subsea; and support & services.
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UK oilfield services: can the industry secure a successful future?
Despite there being a general sense of gradual recovery in the oil and gas sector, our eighth annual review of the UK’s OFS industry highlights that 2017 continued to be a tough year, and we expect that trend to continue into 2018.
While the OFS sector has most probably come through the bottom of the cycle, in 2017 there is clearly no let up in the pressure on costs. Therefore the strategy for the sector remains broadly the same: focus on competitive advantage; obtain pricing uplift through integrated service offerings; achieve economies of scale and have a clear commitment to technological innovation aligned with the agendas of the E&P companies. Of course the sector must also maintain a focus on people — the downturn saw a significant reduction in headcount and the consequent loss of a great deal of skill and experience from the OFS sector.
The UK OFS industry generated
£26.9bn turnover in 2017 and employed more than
The revenue from exports generated £10.5/bn in 2017.
The operating costs per barrel in the UKCS stabilised at around US$15/boe in 2017, after halving between 2014 and 2016.
Explore the oilfield services subsectors
- Turnover decreased by 34% between 2014 and 2017
- Export turnover accounted for 56% of 2017 total turnover
- Number of employees decreased by 1,620 between 2014 and 2017
- Turnover decreased by 43% between 2014 and 2017
- Export turnover accounted for 45% of 2017 total turnover
- Number of employees decreased by 6,186 between 2014 and 2017
Marine and Subsea
- Turnover decreased by 33% between 2014 and 2017
- Export turnover accounted for 42% of 2017 total turnover
- Number of employees decreased by 5,898 between 2014 and 2017
Support and Services
- Turnover decreased by 19% between 2014 and 2017
- Export turnover accounted for 29% of 2017 total turnover
- Number of employees decreased by 2,702 between 2015 and 2017
Explore our viewpoints
Transition in process
Andy Brogan, EY Global O&G Leader for Transaction Advisory Services, and Celine Delacroix, EY Global Oilfield Services Transformation Leader and EY EMEIA Head of Oilfield Services, discuss the transition process in the global oilfield services market.
Are green shoots appearing?
Stuart White, Transaction Advisory Director, shares his views on the slow return of confidence to the UK OFS industry, and where companies should focus to remain competitive and develop a critical differentiator.
The capital allocation battle
Are there signs that the downturn in the Norwegian OFS industry is starting to diminish? Espen Norheim, Stavanger based Partner, explains why he thinks the decrease in revenues is starting to flatten out.
Sentiment could be turning
To out-perform in the new lower for longer price environment, Dutch OFS companies will innovate in technology and commercial agreements, according to Netherlands Partner René Coenradie.
Transition in process
Despite the volatility seen during 2018, the OFS sector leaves the year in a largely similar position to the one it was in at the start of it. What has stayed the same, what is changing and what has changed?
At the top of the list of things that have stayed broadly the same is the market. Despite price gyrations, the operators have continued to pursue the strategies they adopted in response to the price crash which we discussed in last year’s report, e.g.
What is changing or has changed during the year? The following changes have had an impact on the OFS sector during 2018:
- Oil and gas price outlook: It is hard to say whether a slowing global economy and oil demand will balance out with the very public signal from OPEC+ producers that they are prepared to take the necessary actions to balance the market. Operators appear to be working on the view that current market levels will persist, and are making budgeting decisions accordingly.
- Accelerating roll out of new technology and digital technology: Whether it is subsurface or back office, the operators have seized on new technology as a means to cut costs and improve performance, with pilot programmes beginning to move to full scale roll out. However, it is likely to come with the requirement for the OFS sector to invest to align with different operator systems. Industry wide formats do not look like they are gaining much traction at the moment.
- Tightening US$ monetary conditions: While it may not seem to be the most immediate factor in OFS performance, given that the majority of oil and gas projects are financed by debt (in particular US$ denominated debt), tighter monetary conditions do have an impact, especially for those dependent on expensive and riskier debt finance.
- Transition of operator ownership in mature basins: Another factor that has amplified the impact of changing debt market conditions in the mature basins has been the continued migration of asset ownership from Majors with access to cheap balance sheet financing to independents and private equity backed companies with a greater reliance on external financing.
Taken together, these factors leave the OFS sector in a challenging place. While the threat of insolvency has receded for most, the challenge of delivering an acceptable return to investors remains. In particular, the sector as a whole struggles to articulate how it will deliver the kind of earnings growth that could support a higher valuation, as can be seen from the decline in the share price of its publicly listed components during the year, despite improved financial performance. We think the best responses to this remain broadly as we set out at the beginning of the year and companies should:
- Focus on technologies or activities where they have the kind of competitive advantage that supports activity and acceptable margins
- If scale permits, extend the scope of integrated service offerings that can attract premium pricing
- Where a definitive technological or operative advantage cannot be sustained, build scale to enable a lower cost base that can allow sustainable margins. Where possible use digital technologies to control costs too
- Engage with the Operator’s technology agendas. Initially as a defensive measure to ensure market access, but also to explore areas where a differentiator can be established.
The implications for the M&A agenda continue to be:
- Consolidation by activity or area to drive competitive advantage and costs
- Bolting on entities with adjacent viable technologies
- Exit markets or areas where activities are subscale or undifferentiated.
Finally, during the year, discussion and commentary has continued around the overall energy transition.
While the scale of this is unquestioned, both its precise nature and the speed at which it will happen remain subject to considerable uncertainty. Despite this, OFS companies have technologies and skills which will be key to the roll out of the changing energy mix (including the continued scale up of natural gas and build out of renewables).
If the sector wishes to articulate a growth story, then demonstrating a presence in this supply chain is likely to be key, and selected and disciplined M&A activity around this space would be well received by investors.
Are green shoots appearing?
2017 was another tough year for the UK OFS sector. Yet there were signs in 2018 that the bottom has been reached: upstream margins have improved and capital structures repaired, the transfer of upstream assets to North Sea focussed operators continues, the number of projects reaching FID has increased, significant cost restructuring has been completed and investor appetite in private OFS companies has picked up.
However, while opportunities are certainly increasing for the more nimble companies in the UK, it is uncertain when these factors may translate into increased activity levels, and unlikely that overall activity is going to return to 2014 levels any time soon.
This makes it all the more important to have a clear long-term growth strategy, whether through developing and implementing new technology, expanding geographic presence, diversifying into adjacent markets, or driving consolidation and building scale. The ability to partner with customers in their preferred ways and offer multiple commercial models will also be a critical differentiator, and might even be the key to survival for many contractors.
With margins still tight, these long-term imperatives need to continue to be balanced with rigorous cost discipline. Focus will need to remain on exiting unprofitable or subscale activities, ensuring cost savings are sustainable, managing liquidity carefully and resolving any legacy issues with capital structures. The challenges facing management in navigating through this period don’t look like abating any time soon.
The capital allocation battle
The 2014/15 downturn in the Norwegian OFS industry continued through 2017, but with diminishing strength. The strong growth in revenues in the period 2011-2014 when oil prices averaged well above $100 per barrel has been reversed, and current aggregate revenues are now back to 2007 levels. We note that 2017 has been yet another challenging year for all segments in the OFS value chain. However, the sharp decrease in revenues from 2015 and 2016 have somewhat flattened out, as revenues fell 13.3% compared to 26.7% last year.
The cost inflation observed up until 2014 has also challenged OFS companies’ ability to generate profits. This can be explained by the swap from older and lucrative contracts to lower day-rates and short time horizon contracts. Consequently, several cost-saving programmes have been initiated by the industry operators in order to meet with the E&P companies lower-for-longer regime. As a result, the large restructuring programmes we have seen have led to a net job reduction of more than 36,000 – equivalent to a 27% reduction in jobs from the peak in 2014.
Overall cost levels have come down significantly over the last two years, and new development projects have hence regained competitiveness in the capital allocation battle. Recent efficiency gains are likely to be sustainable, but could potentially challenge the classic supply and demand analysis for offshore services. With more efficient assets and processes, these efficiency gains may offset some of the increase in the demand for offshore services.
We expect E&P spending to remain at current levels until investments in existing facilities and new subsea facilities start to pick up in 2019 and beyond. However, consensus investment forecasts do not expect a return in the foreseeable future to the levels seen in 2013 and 2014 .
Sentiment could be turning
Over the past few years the E&P spending levels have remained low, putting pressure on the market for OFS. Consequently, margins in the sector have been squeezed and many companies focused on short-term transformations with immediate cash results. The number of employees dropped severely. Moreover oil price level seems to have stabilised on a new lower level (~60 USD/bbl), hampering investments in new more difficult reservoirs and impacting the OFS project pipeline.
We expect that OFS companies will continue to focus on cost discipline, including managing headcount, but the focus of (Dutch) OFS companies will shift towards more structural transformations, such as creating more integrated offerings and innovating in technology and commercial arrangements, in order to sustainably out-perform in this new lower oil price environment.
There are signs that sentiment could be turning.
2018 was a low point for exploration, but there appears to be a renewed confidence and appetite for exploration across the North Sea region. Moreover, CAPEX levels are expected to increase in 2019 albeit at moderate levels. Price levels in the OFS sector are expected to improve, but still remain affected by overcapacity in many sub-segments.
In addition, we see an appetite of privately backed/owned investors, eager for North Sea assets, who are breathing new life into the region and also bringing a ruthless focus on cost control. Renewable energy will continue to provide market opportunities to exploit knowledge, technology and assets. The question is whether the Dutch OFS companies can benefit from this ‘cautious optimism’ in the short term and strengthen their position in the value chain, since it is unlikely that overall activity is going to return to 2014 levels any time soon.
Given its strong heritage and innovative and flexible character, the Dutch OFS industry will remain a significant factor in the Dutch economy and will continue to play an important role in the global oil and gas industry. Through focusing on innovation, sustainability and consolidation, companies are looking to lay the foundation for future success in the Dutch OFS industry.