Future looks more positive for UK oilfield services sector, report says

The fall in oil price continued to impact the UK oilfield services (OFS) sector in 2016 with turnover falling by 15.5% but the future looks more positive as pressure from external factors eases, according to EY’s Review of the UK Oilfield services industry.

However, the report warns that the industry’s approach to recovery in 2018 could prove critical for long-term success, EY, a provider of advisory, assurance, tax, and transaction services, said.

For the second consecutive year the UK OFS sector reported a decline in turnover, from £35.7bn in 2015 to £30.2bn (-15.5%) in 2016, with reductions across each of the supply chain categories (Facilities, Marine and Subsea, Reservoirs, Support and Services and Wells) the report reveals.

The majority of the UK OFS companies experienced a difficult 2016 with less than 2% achieving growth in excess of £10m. However, there were companies that experienced growth as a result of acquisitions, growth in overseas activity or diversifying into other sectors.

In addition, EBITDA margin for the OFS sector fell by 0.8% as cost saving initiatives, such as headcount reduction failed to offset the impact of the low oil price environment.

Long term success for the UK oilfield services sector will rely not only on the continued application of greater efficiencies but an active commitment to a sustainable future for the industry.

Derek Leith, EY Partner and Head of Oil and Gas Tax, said: “Industry leaders have taken action to make operations as lean and efficient as possible which has helped them ride out this downturn. However, cost cutting and headcount reduction cannot continue indefinitely.

“A shift towards greater innovation in systems, processes and technologies could help drive operational costs down further while also enabling the sector to respond to an increase in activity which appears to be on the horizon.”

Leith added: “The industry is entering a more positive environment where oil price is rising and production is increasing as a result of both improved efficiencies and new fields coming on line but this cannot give license for old habits to creep back in. Long term success for the UK oilfield services sector will rely not only on the continued application of greater efficiencies but an active commitment to a sustainable future for the industry.”

Investment is urgently required

During the downturn, operators have been managing declining rates by improving production efficiency, rather than investing in standalone projects. New extraction techniques requiring relatively low upfront capital costs can make a reasonably effective impact on stabilizing production levels. While this works in the short term, a continued lack of investment in new projects is not sustainable in the longer term, the report says.

Derek Leith continued: “The UK Continental Shelf (UKCS) remains attractive for investment but the competition for scarce capital is increasingly intense. One of the greatest assets of the UKCS is the extensive infrastructure which makes extraction potentially more appealing than in younger, less expensive basins around the world.

“There were only two new field approvals in 2016, compared to ten in 2013 and more investment is needed urgently in order to Maximise Economic Recovery and keep the UKCS internationally competitive.”

Diversification & consolidation

The lower oil price has impacted the oil and gas industry globally with a contraction of activity leading to fierce competition for capital. As the UKCS is a mature region, with high operating costs and fewer development projects than in recent years, the need for UK OFS companies to diversify their operations by sector or geographically through exports will become ever more pressing, according to the report.

Export figures show a slight increase in activity with exports as a percentage of turnover from UK OFS companies rising from 40% in 2015 to 41% in 2016. However, there was an absolute decline of £2bn, as a result of the overall contraction in the sector.

Derek concludes: “UK OFS companies cannot rely on growth in the UK alone to increase revenues and must both internationalize and diversify their operations to ensure long term survival. While it is encouraging to see a rise in export activity it is concerning that access in overseas markets is still very modest.”

Jon Clark, EY’s Head of Oil and Gas Transaction Advisory Services, said: “Mergers and acquisitions have also helped companies to diversify by adding new capabilities but consolidation is set to have a wider impact for the industry as a whole.

“A rise in transactions is expected, driven by access to proven technology or new markets, removing excess supply or resetting capital structures.”