Oilfield service opportunities and cost efficiency to Ignite 2012 rebound
- Friday, October 2, 2009, 15:16
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Oilfield service opportunities and cost efficiency to Ignite 2012 rebound
Booming demand and record oil prices over the past five years drove expansion and provided increased business security for oilfield service firms and equipment suppliers.
For now, however, the boom seems to be over. A recent industry study by The Boston Consulting Group (BCG) shows that worldwide upstream capital expenditure fell by about 20% over the past nine months while an oversupply of equipment is threatening the industry in multiple segments – including jack-up rigs and offshore supply vessels.
The oil industry’s most prominent players are the oil producing super majors such as Exxon, BP and Shell – companies that rank among the largest in the world. To an increasing degree big national oil companies (NOCs) such as Petrochina (China), Pertamina (Indonesia), Petronas (Malaysia) and PTT (Thailand) should receive sizeable attention. A third group that attracts far fewer headlines but performs an ever larger share of operations for the super majors and NOCs are the oilfield service firms. The larger of these include Schlumberger, Halliburton and Baker Hughes.
Until oil prices peaked in July 2008 at $147 per barrel, oil companies were awash with cash and invested heavily in exploration and production. This significantly benefited oil service firms and equipment suppliers – who undertook parts of those operations on behalf of the oil companies or delivered equipment to them. The market for this segment grew by 14% annually from 2006 to reach $300 billion in 2008. The majority, 70%, was spent on drilling services and equipment. The other two major segments, oilfield services/equipment and geosciences firms accounted for $75 billion and $15 billion of revenues respectively.
Oil’s consequent collapse to $30 per barrel in December 2008 and its partial recovery to $70 today has resulted in oil producing firms cutting their 2009 and 2010 budgets. BCG’s research shows the overall expected 2009 capital expenditure for oil firms is 20% below previous years’ figures. As a result, for 2009 alone, oil service firm spending is expected to fall significantly from about $300 billion to about $220 billion.
The oil price collapse also had a clear impact on the market valuation of oil service companies. After registering a total shareholder return of nearly 50% in 2006-07, the annualised total shareholder return for oil service companies fell by 61% in 2008, a decline that exceeded other energy segments and the broader overall market. Only a moderate recovery has taken place.
While the immediate outlook may appear grim for oil services companies who over-invested in the past two years, based on demand, BCG sees some opportunities in the short term and expects the industry’s fundamentals to be strong in the long run.
To understand the prospects it’s important to de-average. The aggregated figures mask a huge disparity about the way companies act. While smaller oil companies have cut capex (capital expenditure) by about 40% on average, many of the bigger oil majors have been far less aggressive in curtailing spending. Some, such as Exxon, well known for charting its own course increased the company’s 2009 spending plans independent of short-term oil price volatility. Others, such as Chevron, have held spending at around the same level. Smart service companies, with the right customer mix in the right market segments, will therefore potentially continue to prosper in this environment.
Oil demand will recover. The International Energy Agency (IEA), a leading observer of the oil market, for example, has just corrected their demand forecast for 2009 and 2010 upwards by another 500.000 barrels per day – this is the third consecutive increase indicating a more bullish view on the recovery of the global economy and energy demand. This will not, however, lead to immediately higher oil or gas prices. Inventory levels are at record highs and oil producers sit on more than 5 million barrels per day of spare capacity. It will take some time for these inventories to deplete and spare capacity to run dry. The speed at which this will happen will depend on the speed of the worldwide economic recovery.Even more important is the oil supply. Just keeping oil production flat requires significant amounts of activity and capital. Arresting the global annual natural decline rate of 4% to 6% means bringing on-stream the equivalent of one new Saudi Arabia every two years – a significant driver of demand for oil service companies. In addition, as world oil supplies diminish, access to reserves and production becomes more difficult and results in rising technical complexity. This benefits oil services firms as they are able to sell increasingly sophisticated services just to get the same amount of oil out of the ground.
But the deeper challenge for oilfield services companies lies within their own industry and the forecasted supply for different segments. This is a real issue for firms in the near future. During the recent boom many firms initiated strong growth plans and placed large orders for new equipment. For example, the capacity additions for drilling rigs in 2008 and 2009 were as much as the previous 20 years combined, taking the current global offshore rig count close to 570 with more than 100 rigs to be delivered. Similarly, in the offshore supply vessels market, BCG expects to see new capacity of anywhere from a quarter to a third of the current fleet of 2,200 vessels added between now and 2012. All this hardware is going to hit the market regardless of demand and companies considering consolidation are advised to look at the current loss of value and not overpay for proposed mergers and acquisitions (M&A).
To survive the current downturn while positioning themselves for the next up-market BCG is working with companies in Indonesia, Malaysia, Thailand and Singapore to ensure they are in a position to prosper. In Thailand, for example, there is huge potential for growth in the working offshore fields once the border disputes with Cambodia are resolved. New activities are also expected in the waters off Vietnam.
BCG’s research has shown that by protecting financial fundamentals, even under low oil price scenarios of $30 to $40 per barrel, most oil service companies can survive. Key factors include managing for the long term. This includes investment planning based on an oil price of $70-90 per barrel and targeting longer-term growth plays in places such as parts of the North West Shelf of Australia, offshore Indonesia, or Brazilian and Chinese deep-water. To reap the benefits of the upturn companies need to act now. By strengthening their existing business by means of realised cost efficiencies and thinking through and assessing M&A opportunities it will be possible to remain stable and create a growth platform for the future.
For oil services, BCG’s research indicates that the near future will be difficult, but strong underlying demand should allow the industry to work through oversupply and enjoy very healthy returns when the market booms again in three to four years.
Dr Henning Streubel is a partner and managing director for the Boston Consulting Group, and leads BCG’s Energy Practice in Southeast Asia. Klaus Langner is a BCG partner and managing director and a core member of BCG’s Global Energy Practice.
* Published: 2/10/2009 at 12:00 AM
* Newspaper section: Business
Writer: Dr Henning Streubel & Klaus Langner
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