Quarterly Perspective on OFSE: Q1 2016
May 2016 | Marcel Brinkman, Clint Wood, Nikhil Ati, Ryan Peacock
The first quarter 2016 proved to be the toughest so far in the prolonged downturn for the oil & gas industry. As expected Operator capex fell sharply, taking Oil Field Services & Equipment (OFSE) sector revenues with it. Margins also fell as companies downsized to fit the smaller market, with companies wrestling to establish greater control over costs
Crude hit a low in January, but provided some encouragement as it rose later in the quarter, helping slow the rate of rig-count decline, and providing some indication that the market may have reached bottom. However, it is telling that despite the near 80 percent increase in the oil price since the depths of January, there is no tangible increase in activity levels. OFSE share values had moved down in line with revenue, but the recent firming of crude has encouraged speculative buying, causing stock performance to outpace that of OFSE sector metrics, as investors seek to position themselves for a further possible rise in crude.
Exhibit 1: Oil prices rebounded in the first quarter from lows in January, although the forward curve shallowed further
Exhibit 2: Rig count – rate of decline begins to slow
OFSE sector revenue fell by 30 percent versus Q1 2015, its lowest levels since 2008. The size of the fall was, however, a slight improvement compared to the Q4 quarterly comparison, which showed a 36 percent drop year-on‑year. Quarter on quarter comparison showed an overall Q1 revenue decline of 9.6 percent, a slight deterioration from 10.8 percent in the fourth quarter. These revenue falls correlate closely with seasonally adjusted capex cuts, which are expected to continue – the latest 2016 E&P spending surveys indicate capex in 2016 to be 25 percent below 2015, corresponding to a fall of 40-to-50 percent in North America and around 20 percent in international markets.
A major event in the OFSE market was the collapse of Halliburton’s $38 billion takeover of Baker Hughes, which ran into trouble from a US Department of Justice law suit, objections in Europe and complaints from within the industry. Halliburton took a hit with a $3.5 billion break-off fee, but Baker Hughes paid a hefty price as well driven by customer and strategic uncertainty. Both companies’ shares fell in the wake of the decision, but Halliburton by less than Baker Hughes. With oil prices stabilising, however, more consolidation is anticipated, and this was underlined by news of Technip’s merger with FMC as this report went to press.
In the Middle East, continued drilling is driving activity, which remains robust compared to other regions, as OPEC continues to preserve market share. Haliburton expects mature fields in the region to be the first part of the business to “tighten back up”, followed by mature fields in Asia.