Quarterly Perspective on OFSE: Q2 2015
August 2015 | Marcel Brinkman, Ed Schneider, Clint Wood
Sector revenues contracted rapidly in the second quarter 2015, reflecting the impact of reduced capital expenditures by oil and gas companies. The most pronounced declines were seen by companies in the sector’s services, asset, and equipment categories, with respective sequential revenue falls of 15, 12 and 9 percent. Capex was 25 percent lower than in Q2 2014, with similar percentage reductions for companies across all sector categories.
This article is an extract of our OFSE Quarterly report.
Following a tentative recovery in the first half of 2015, recently oil prices have again declined – to around $45/barrel for WTI and $50/barrel for Brent – to realise the ‘W-shaped’ pattern we mentioned in our previous edition. Although June saw some companies proclaim that the bottom had been reached and the time was right for activity increases (e.g., Pioneer), the recent oil price decline has increased cautiousness about future spending. This has been underlined by more capex cuts announced by the Majors in their Q2 earnings releases.
In Q2 2015, oil and gas industry capital expenditure was 25 percent below Q2 2014 levels. Majors reduced spending by 23 percent, while US independents, internationally operating independents and NOCs cut back by 27 percent. Sequentially (i.e., versus Q1 2015), the spending decline was ‘only’ 7 percent, reflecting the capital expenditure ‘reset’ seen in recent quarters. However, the US independents, which had maintained spending until the end of 2014, were a stand-out category, reducing their Q2 capex by 19 percent to reach similar annual spend reductions as other types of oil and gas companies.
Consequently, Q2 2015 OFSE revenues were 22 percent below those in Q2 2014. Most pronounced is the revenues decline for services (down 29 percent) and equipment (down 23 percent). But assets and EPC companies also saw revenues fall significantly, down 17 percent and 12 percent respectively. Sequentially (i.e., versus Q1 2015), the sector revenue decline was 9 percent, which is a few percentage points above the fall in capex. We believe OFSE revenues closely follow the capex growth trend, albiet with a slight delay reflecting the time-lag between oil and gas companies booking expenditures and OFSE companies booking revenues. The backlogs differ between the various OFSE business models (services having the shortest, and equipment and assets having the longest).
Over the past four quarters, EBITDA margins have reduced significantly. Services companies lost 3.6 percent of margin, equipment companies 4.4 percent, and EPC firms 5.3 percent. Asset companies (which includes drillers), on the other hand, increased their EBITDA margins by 0.8 percent over the period, likely reflecting the high grading of the drilling fleet to newer, more capital intensive units which have a higher EBITDA margin to cover the capital costs. From Q1 to Q2 2015, services companies saw margins increase through a combination of strict cost controls and relatively good performances outside the US
About the authors
Marcel Brinkman is a Partner in McKinsey's London office.
Ed Shneider is a VP with Energy Insights.
Clint Wood is a Partner in McKinsey's Houston office.