OFS quarterly: Is growth taking root?

September 2017 | Nikhil Ati, Marcel Brinkman, Ryan Peacock, and Clint Wood

Higher oil prices early in the year helped the OFS sector recover in Q2 2017, driven by strong growth in North American shale, and the promise of an improvement elsewhere.

Quarterly perspective on oilfield services and equipment: September 2017

Higher oil prices early in the year, combined with a lower cost base, helped the oilfield services and equipment (OFS) sector recover in Q2 2017, especially in the services segment. The US onshore saw continued strong growth building on Q1, and, while the rest of the world has yet to see an upturn, there are signs of improvement here too—despite spells of continued crude weakness over the last few months.

Control of the market slipped further from OPEC’s grasp as Q2 got under way, despite continued relatively high compliance to its November 2016 agreement, which, along with Russia, restricted output by 1.8 million barrels per day. This was partly down to rising output from Libya and Nigeria, which were both outside the deal. The OPEC-induced price recovery earlier in the year also proved an opportunity for US producers to lock in prices and continue to drill through Q2, helped by improving technology and reduced costs. The US onshore rig count was up another 60 on the quarter, and the offshore sector saw the first rise in rig numbers since prices began their slide in 2014.

The additional production ate into OPEC’s cuts, threatening further price falls, which pushed the group first to extend the deal to April 2018, and most recently to indicate it may be willing to constrain supply for even longer than that, alongside plans to clamp down on overproduction. The recovery in Nigerian output has now been capped and Saudi Arabia has even taken unilateral action to restrict output in August—which together with the other measures helped support prices.

Looking ahead, the OPEC/Russia alliance does seem determined to clamp down on any rise in supply beyond quota limits, with Saudi Arabia particularly motivated to raise prices ahead of its IPO, pencilled in for late 2018. In addition, the next six months are unlikely to see the sort of large volumes added by Nigeria and Libya again. In fact, the major risk is now to the supply downside in Venezuela, where political unrest could eventually threaten oil exports.

Other supportive factors are slowly falling stock levels, and, further forward, the impact of cumulative cuts in capex. Bearish influences on the market include continuing increases in US output, technological advances, rising Libyan output, and questions over longer term demand.

Overall, OFS revenue was up on the quarter and the year—for the first time since the oil price slide began. The recovery extended to all sectors, although assets were still down on the year. As demand has picked up, margins have also improved for services and equipment, but not for assets, where surplus rig availability, limited offshore activity, and low day rates continue to weigh on the market. The continued crude price volatility means service providers are focusing on increasing operational efficiencies to grow output and lower costs, with US onshore costs still well below pre-collapse levels, despite a recent uptick from higher activity. Returns to shareholders fell early in the year, but, apart from assets, saw some recovery in Q2.

Merger and acquisition activity continued with Schlumberger’s purchase of a 51 percent stake in Russia’s Eurasia Drilling Company, which is Russia’s biggest company of its sort—operating more than 650 offshore and onshore rigs, including four of the five rigs in the Caspian Sea. In addition, Altrad Investment Authority (a French equipment maker), bought UK oil services company Cape for around $430 million, as the sector continued a move toward consolidation. Other recent deals include Wood Group’s $2.84 billion purchase of Amec Foster Wheeler, Halliburton’s acquisition of Summit, the Technip–FMC tie-up, and completion of the merger between Baker Hughes and GE's oil and gas group in July.

Despite the prompt weakness, forward prices remained steady, steepening the forward curve and providing a glimmer of encouragement to longer-term projects, helping lead to a batch of major offshore final investment decision (FID) approvals in the quarter—which should help lift the fortunes of OFS companies with little exposure to the US onshore.

And, in a move that could signal the beginning of a new and expanding market for beleaguered asset companies, plans for the first jack-up rig designed for the emerging offshore wind industry were announced in June by Zentech Inc. and Renewable Resources International.

The events laid out above are part of our Quarterly Perspective on OFSE.


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About the authors

Nikhil Ati is an associate partner in McKinsey's Houston office, where Clint Wood is a partner. Marcel Brinkman is a partner in the London office and leader of McKinsey's oilfield service & equipment service line. Ryan Peacock is the oilfield services manager of McKinsey Energy Insights.

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