Outlook for oilfield services


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This is the first edition of the Deloitte Outlook for oilfield services. The forward-looking report is based on in-depth interviews with 12 executives of oilfield services companies. Its purpose is to obtain companies’ views of their current business environment and where they think the market is heading, both in the short and long term.

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Outlook for oilfield services

  1. 1. Cautious optimism Outlook for oilfield services March 2014
  2. 2. Outlook for oilfield services Cautious optimism 2 Where are we now? 1. Positive factor: Short and long-term crude oil prices consistently above $80/barrel • Long-term expectations of hydrocarbon prices drive the level of oil and gas (O&G) operator capital spending. • This, in turn, determines their need for oilfield services. • Based on cost curve analysis, most industry specialists argue that the market balance currently is somewhere between $80  and $100 per barrel. • If crude oil prices were to drop below $80 per barrel, or where the marginal cost of producing a barrel of oil becomes too high for a sustained period, operators would look to reduce production and delay or abandon planned projects. Rebased to 100 Source: DataStream 01/01/2007 01/07/2007 01/01/2008 01/07/2008 01/01/2009 01/07/2009 01/01/2010 01/07/2010 01/01/2011 01/07/2011 01/01/2012 01/07/2012 01/01/2013 01/07/2013 01/01/2014 Figure 1. Philadelphia Stock Exchange oil services index (OSX) relative to West Texas Intermediate (WTI) and the New York Stock Exchange All Shares index (NYSE ALL) 0 50 100 150 200 250 OSX WTI NYSE ALL
  3. 3. Outlook for oilfield services Cautious optimism 3 Where are we now? 2. Positive factor: Robust future demand for oil and gas continues to drive spending on oilfield services • As Figure 2 shows, demand for hydrocarbons is expected to increase. • In the UK, Department of Energy and Climate Change projections show that OG will continue to make up over 70 per cent of the UK’s primary energy mix to 2030. • An increasing portion of projects will be located in greater depths and in new geological, geographical and technical frontiers. These will drive demand for specialist equipment and skills. • At the same time, the OG industry faces the rapid decline of mature assets. Million tonnes of oil equivalent Source: BP Energy Outlook to 2035 Figure 2. Global energy consumption by fuel Renewables Hydroelectricity Nuclear Coal Natural Gas Oil 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 203520302025202020152012
  4. 4. Outlook for oilfield services Cautious optimism 4 Where are we now? 3. Positive factor: A customer with a growing appetite – the continued rise of the National Oil Company • Customer base is slowly shifting from International Oil Companies (IOCs) to National Oil Companies (NOCs). • NOCs are growing in size, number and influence: NOCs and their host governments today control some 80 per cent of the world’s proven and probable oil reserves. • NOCs are the biggest spenders in terms of capital expenditure: The ‘Barclays Supermajors’ list shows that of the 15 OG operators that spend over $15 billion globally, eight are NOCs. Their capital spending is expected to grow faster internationally in 2014 than that of the IOCs during the same period. • NOCs also present a challenge: IOCs and most independent operators are European or North American and share common cultures, and technical and engineering skills with oilfield services (OFS) companies. Most NOCs have widely differing technical expertise and strategic objectives. Some NOCs have also become more active in developing assets or investing in research and development.
  5. 5. Outlook for oilfield services Cautious optimism 5 Where are we now? 4. Positive factor: The impact of the unconventional revolution continues although at a slower pace • The shale revolution is ‘dislodging’ part of the OG supply chain. It also has implications for the downstream and midstream sectors, it is helping revive the US petrochemicals industry and is paving the way for the renaissance of the US manufacturing sector. • Shale is changing the way many OG and OFS companies think about their asset portfolios. Investments in Canadian oil sands now look less attractive. • Many OFS companies benefited from early stage involvement in US shale gas developments. However, a number of interviewees now believe that the shale gas boom has passed its peak and are not reallocating resources with the same magnitude that they once did. $ per thousand cubic feet Number of rigs Source: US Energy Information Administration and Baker Hughes North America Rotary Rig Count Archive, US Monthly averages by state Figure 3. US natural gas industrial price and US monthly average rig count 0 2 4 6 8 10 12 14 US natural gas industrial price – $ per thousand cubic feet (LHS) US monthly average rig count (RHS) Jan 2001 Jan 2002 Jan 2003 Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2013 Jan 2012 0 500 1,000 1,500 2,000 2,500
  6. 6. Outlook for oilfield services Cautious optimism 6 Where are we now? 5. Positive factor: Financing • Most of the top global and mid-tier companies interviewed indicated that access to funding has not been a significant issue. Therefore, these companies are focusing on getting the best deal from the wide range of financial products on offer. • Smaller companies more often turned to private equity rather than sourcing funding from banks or the financial market. This, also, was available for most companies Deloitte interviewed. • In general, investors seem to be interested in the OFS sector. This is because they can access the OG sector without being exposed to the volatility that smaller OG exploration and production companies face.
  7. 7. Outlook for oilfield services Cautious optimism 7 Where are we now? 6. Challenge: OG operator focus on cost control • Figure 4 shows a steady increase in project costs. • Cost rises are due to majors having to move to challenging and politically riskier parts of the world, higher employment costs, increasing project complexity and shareholders expectations of dividend payments. • The combination of these factors forces OG operators to cut capital and operating expenditure. A number of oil majors have all recently announced that they will reduce capital spending in 2014, compared with 2013. • The shift in OG companies’ attitudes towards cost reduction provides OFS companies with a new focus. Source: Bernstein Energy, Financial Times and DataStream Figure 4. Brent crude oil price ($ per barrel) and marginal cost of production ($ per barrel) 0 20 40 60 80 100 120 201220112010200920082007200620052004200320022001 Brent Current Month FOB $/bbl Crude Oil WTI Cushing $/bbl Marginal cost of oil production $/bbl
  8. 8. Outlook for oilfield services Cautious optimism 8 Where are we now? 7. Challenge: Talent shortages to continue • Skilled talent shortages is one of the most often cited factors that has a negative impact on an OFS company’s performance. • Companies are concerned that once engineers with 20-30 years’ experience retire, a gap will develop for staff with experience in leading large and complex projects. This age group is also important for training the next generation of engineers. • Companies are spending more on recruitment and training, have established training programmes and aim to set up apprenticeship programmes. Some are recruiting from regions with lower salary expectations, others are looking at sectors such as manufacturing or the military. Percentage of total membership Source: Society of Petroleum Engineers Figure 5. Society of Petroleum Engineers membership by age range 0% 5% 10% 15% 20% 25% 65+60-6455-5950-5445-4940-4435-3930-3425-2920-2420 1997 2012
  9. 9. Outlook for oilfield services Cautious optimism 9 Where are we now? 8. Challenge: Oil Gas industry’s cautious attitude to innovation • There is an increasing need for innovative technologies to reduce the cost of developing resources and increase production from declining fields. • But companies are becoming more risk averse as projects are getting more complex and capital intensive. Shareholders also support this and are cautious of the potential short-term cost increases associated with the introduction of new technologies. • The OG industry is slower than other sectors to adopt new technologies. The UKCS is considered particularly slow in this respect, or as one respondent aptly put it: “The UK rushes to be second”. • While the UK industry and research councils promote deployment of existing technology and development of new ones, this activity has to be more centrally coordinated, focused and accelerated. There is a need for more collaboration between OG operators, OFS companies, academia and the regulator.
  10. 10. Outlook for oilfield services Cautious optimism 10 Where are we now? 9. Challenge: Regulatory environment • Regulatory certainty: A must. Most OFS interviewees commented on the importance of a stable, predictable regulatory framework and tax regime. Some argued that recent tax changes made the UK system more complicated and are eroding the industry’s trust in the regulator. • Health and safety regulations: A positive differentiator? Companies believe that strict Health, Safety and Environmental (HSE) regulations are both necessary and useful for the sector. Some interviewees felt that being able to navigate complex HSE regulatory systems should be viewed as a competitive advantage. • Increasing local content requirements. International OFS companies interviewed believe that increasing pressure from governments to employ a larger proportion of their workforce locally can significantly reduce the attractiveness of projects where a skilled workforce is not readily available
  11. 11. Outlook for oilfield services Cautious optimism 11 What is next? 9. Challenge: Regulatory environment OFS companies have mixed views of US shale opportunities. Some have taken advantage of the shale boom, but they all highlighted that the competition is intense. More opportunities could exist in the downstream, midstream and petrochemicals sectors. Many consider the Middle East politically risky, while Brazil’s complex regulatory system deters others. While many OFS companies have been successful in Russia, China and India, some consider these countries as low priority due to high barriers to entry, political risks and transparency issues. The mature markets of the UK and Norwegian Continental Shelves, including oil fields west of the Shetland Islands, still provide substantial opportunities. OFS companies are interested in deepwater in Nigeria, Angola and Gabon in West Africa, Zambia, Mozambique and Tanzania in East Africa and the Falkland Islands. Southeast Asia, particularly Malaysian and Indonesian deepwater are considered attractive. Key: Attractive market Mixed views “Not a priority” market Figure 6. World map of opportunities
  12. 12. Outlook for oilfield services Cautious optimism 12 What is next? Mergers and acquisitions: Further consolidation on the cards • All interviewees expect that the strong MA activity in the OFS sector will continue in the near future. • The main driver behind acquisitions continues to be vertical integration. • The second most popular driver interviewees mentioned was access to new international markets. • Interviewees noted a new trend of small companies being acquired for their attractive pipeline of orders. • The US unconventional shale boom has resulted in a surge in the number of small companies offering services. Many believe that there are too many companies now in the sector and this could lead to consolidation in the near future. • The recent profit warnings among both small and mid-tier companies were mostly due to lost or postponed contracts. These had a negative impact on share prices and could accelerate the speed of MA activity in 2014.
  13. 13. Outlook for oilfield services Cautious optimism 13 What is next? Limiting factors in the short and long term Short-term limiting factors • Deteriorating market conditions • Political risk • Complex regulatory environment • Brand credibility • Competition from Southeast Asian countries • Acceptability of technology • Technological breakthroughs • ‘Black swan’-like events Long-term limiting factors • Lack of a route to customers • Lack of a regulatory framework to develop shale resources • Demand side efficiencies
  14. 14. Outlook for oilfield services Cautious optimism 14 Looking further ahead What will the OFS sector of the future look like? • More of the same • More technology and automation • More efficiency • More risks taken • More new forms of collaboration and ownership
  15. 15. Outlook for oilfield services Cautious optimism 15 Looking further ahead What will the successful company of the future look like? • Global... yet local • Diversified… yet focused on core functions • A good global citizen and a good employer
  16. 16. Outlook for oilfield services Cautious optimism 16 Looking further ahead Long-term opportunities • Deepwater • Decommissioning • Frontier regions • Arctic • Unconventional resources worldwide
  17. 17. Outlook for oilfield services Cautious optimism 17 Contacts Julian Small UK Leader – Energy Resources Global Leader – Oil Gas Tax 020 7007 1853 jsmall@deloitte.co.uk David Paterson UK Sector Leader – Oil Gas 020 7007 0879 djpaterson@deloitte.co.uk Jon Hughes Partner – Corporate Finance 020 7007 1980 johughes@deloitte.co.uk Derek Henderson Managing Partner – Aberdeen 01224 847344 dehenderson@deloitte.co.uk Graeme Sheils Partner – Audit 01224 847706 gsheils@deloitte.co.uk Shaun Reynolds Director – Corporate Finance 01224 847319 shreynolds@deloitte.co.uk Author Netti Farkas Manager – Insight 020 7303 8927 nfarkas@deloitte.co.uk
  18. 18. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. © 2014 Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198. Designed and produced by The Creative Studio at Deloitte, London. 33649A