Review of the UK oilfield services industry January 2016
Wells 04 Review of the UK oilfield services industry January 2016 23
Wells Figure 15: UK upstream oil and gas supply chain sub-sectors Supply chain categories: Reservoirs Wells Facilities Marine and Subsea Support and Services Tier 2: Main and consultants Tier 3: Products & services suppliers Components Sub- and sub-suppliers Seismic data acquisition and processing Geosciences consultancies Data interpretation consultancies Seismic instrumentation Well services Drilling Well engineering consultancies Drilling and well equipment design and manufacture Laboratory services Engineering, operation, maintenance and decommissioning Engineering consultants Structure and topside design and fabrication Machinery/ plant design and manufacture Engineering support Specialist engineering services Specialist steels and tubulars Inspection services Marine/Subsea Heavy lift/pipe lay Floating production storage units Subsea manifold/ riser design and manufacture Marine/subsea equipment Subsea inspection services Catering/facility management Sea/air transport Warehousing/ logistics Communications Recruitment Training Health, safety and environmental services Energy consultancies IT Hardware/ software Figure 16: Analysis of Wells turnover and EBITDA margin by sub-sector Currency: million 2008 2009 2010 2011 2012 2013 2014 Well services 2,309 2,321 2,477 2,409 2,617 2,719 2,884 Drilling 1,858 1,708 1,513 1,912 2,317 2,418 2,534 Well engineering consultancies 96 49 65 213 167 154 187 Drilling and well equipment design and manufacture 1,375 1,374 1,444 1,660 1,976 2,312 2,243 Laboratory services 113 154 154 164 219 173 171 Turnover 5,752 5,605 5,652 6,360 7,298 7,776 8,020 Well services 15.0% 13.7% 12.6% 10.7% 12.0% 10.5% 11.7% Drilling 5.0% 10.5% 8.2% 4.9% 7.4% 9.3% 9.6% Well engineering consultancies 6.8% 5.6% 3.1% 7.5% 5.4% 5.9% 11.5% Drilling and well equipment design and manufacture 20.6% 15.9% 17.5% 14.8% 17.5% 17.5% 25.3% Laboratory services 26.6% 21.8% 16.9% 13.4% 15.6% 10.6% 18.3% EBITDA margin 13.2% 13.4% 12.7% 10.0% 12.0% 12.1% 15.0% 24 Review of the UK oilfield services industry January 2016
04 Summary of results In 2014, the Wells supply chain comprised 20% of the total UK upstream oil and gas supply chain turnover. Figure 17: Summary of results 2008 2014 Currency: million 2008 2009 2010 2011 2012 2013 2014 Number of companies 177 194 200 206 207 210 211 Turnover 5,752 5,605 5,652 6,360 7,298 7,776 8,020 Growth trends turnover n/a (2.6%) 0.9% 12.5% 14.7% 6.6% 3.1% EBITDA 761 752 717 635 876 943 1,202 EBITDA margin 13.2% 13.4% 12.7% 10.0% 12.0% 12.1% 15.0% Tax on profits 176 148 128 120 159 123 189 Number of employees 20,023 19,410 19,456 20,344 20,945 23,050 23,018 Wages 865 909 942 1,000 1,089 1,217 1,307 Key highlights of the Wells supply chain category results Turnover increased by 2.3 billion between 2008 and 2014 (CAGR 6%). We have identified 211 companies in this segment of the supply chain and in 2014, 155 companies generated turnover of less than 20 million. The largest 7 companies generated 50% of the total 2014 Wells turnover. The increased complexity of the type of field which is now being developed (e.g., brownfield work on older depleting fields or wells under deep water, some with high temperature and high pressure) has driven growth in this segment. Turnover increased in 2011, 2012 and 2013 primarily due to an increase in the number of drilling rigs and ships operating in the UKCS, an increase in contract day rates, higher vessel utilisation, an increase in personnel levels and an increase in the level of export activity from drilling and well equipment design and manufacture companies. EBITDA margin declined in 2011 due to pricing pressure from customers and cost increases in the UKCS. There was a 2ppt EBITDA margin recovery in 2012 due to increased rig rates in the North Sea (Oil & Gas UK 2013 Activity Survey cited a 40% increase in semi-submersible and 66% increase in jack-up rig rates) and this was sustained in 2013. There was a further 3ppt EBITDA increase in 2014 primarily due to increase in rig activity (which generates very high EBITDA margins), reduced vessel downtime and lower repair costs incurred by the drilling. The number of employees increased by nearly 3,000 between 2008 and 2014 and the average salary increased from 43,000 in 2008 to 57,000 in 2014 (CAGR 5%), reflecting the lack of available skilled and experienced workers, particularly in Drilling 5. Turnover growth continued in 2014 due to a number of new vessels operating in the UKCS (e.g., semi-submersible rigs, ultra-premium harsh environment jack up rigs), as well as an increase in product sales and provision of services. However, there were a number of companies that felt the impact of the oil price decline and had a reduction in turnover as a result of having to renegotiate contract extensions at lower rates or had a contraction in the overall volume of business. 5 EY s Fuelling the next generation A study of the UK upstream oil and gas workforce Review of the UK oilfield services industry January 2016 25
Wells continued Geographic analysis of Wells turnover Figure 18: Analysis of turnover between UK and exports Currency: million 2008 2009 2010 2011 2012 2013 2014 UK 3,110 2,840 2,538 2,951 3,320 3,739 4,078 Exports 2,642 2,765 3,115 3,408 3,977 4,037 3,942 Turnover 5,752 5,605 5,652 6,360 7,298 7,776 8,020 Exports as percentage of turnover 46% 49% 55% 54% 55% 52% 49% UK turnover decreased in 2010 due to a reduction in the number of drilling units operating in the UKCS. UK turnover increased in each of 2011, 2012, 2013 and 2014, primarily due to an upturn in UK activity by well services and drilling. The increase in spend was reinforced by Oil & Gas UK s 2012, 2013, 2014 and 2015 Activity Surveys which state that for the UKCS: Exploration and appraisal well spending was 1.4 billion, 1.7 billion, 1.6 billion and 1.1 billion in 2011, 2012, 2013 and 2014 respectively There was an increase in capital spend of some 2.5 billion in 2011 (up to 8.5 billion), 3.4 billion in 2012 (up to 11.4 billion), 3.0 billion in 2013 (up to 14.4 billion) and 0.4 billion in 2014 (up to 14.8 billion). Export turnover has increased year-on-year from 2008 to 2013, driven primarily by the drilling and well equipment design and manufacture sub-sector and the well services. However, exports as a percentage of turnover declined in 2014 as the overall growth was primarily a result of new vessels operating in the UKCS and overseas activity for well services reduced. Whereas drilling generate a large portion of turnover from the UK (c.70%) as they tend to use the UK entities primarily to lease units in the UKCS, drilling and well equipment design and manufacture companies typically service the global market, with 69% of the turnover in this subsector in 2014 being exports. As the UKCS is a mature basin, many of the companies in this segment (excluding drilling which typically use local entities for overseas activity) have focused on expanding overseas for their growth strategies. This is highlighted as CAGR export growth exceeds CAGR UK growth across most of the revenue bandings (see Figure 20, and is particularly evident in companies with less than 50 million turnover which typically have the more specialised niche offerings. Figure 19: UK and export turnover 2008-14 mn 5,000 4,000 3,000 2,000 1,000 0 2008 2009 2010 2011 2012 2013 2014 UK Exports Figure 20: UK and export turnover CAGR 2008 14 14% 12% 10% 8% 6% 4% 2% 0% Under 50mn 50mn to 100mn UK 100mn to 250mn Exports Over 250mn 26 Review of the UK oilfield services industry January 2016
04 Key trends in Wells The Wells supply chain category is very reactive to oil price volatility, which has a direct impact on drilling activity. Any reduction in drilling activity has a knock-on effect on day rates that companies can charge for rigs and also results in excess supply sitting idle or being warm or cold stacked. As can be seen from Figure 21, the worldwide rig count has decreased steadily from December 2014 to November 2015 as a result of the decline in oil prices and the related reduction in activity. Figure 21: Worldwide rig count for January 2014 to November 2015 Number of rigs 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Source: Baker Hughes Incorporated Worldwide rig count However, EBITDA margin has only reduced by 1.8 ppt as companies have been managing their cost base and improving drilling efficiency in this period of lower activity. In addition, despite companies focusing on controlling their cost base, they are also still developing technologies to improve customers returns in a lower oil price world to ensure they remain competitive. Where available, we have analysed backlog and this has shown a decline of over 44% for 9m2015 against 9m2014, suggesting the revenue decline will continue at least into 2016, given the oil price is not predicted to increase significantly, if at all, over the next twelve months. UK In 2014, capital expenditure in the UKCS was 14.8 billion, the highest on record, but this was partially due to cost over-runs and project slippage on some of the large developments. It is expected to fall sharply in 2015 and very little new investment is expected to be sanctioned whilst the oil price is low (Oil & Gas UK s 2015 Activity Survey). Drilling activity has been declining in the UKCS (see Figure 23), particularly in relation to exploration and appraisal wells due to the poor exploration results over the last four years. Figure 22: Listed Wells companies results for the period from January 2015 to September 2015 versus the period from January 2014 to September 2014 Currency: US$ million *where disclosed 9m2015 9m2014 Variance Variance % Turnover 32,630 41,070 (8,440) (20.6%) EBITDA 5,640 7,843 (2,204) (28.1%) EBITDA margin 17.3% 19.1% (1.8) n/a Backlog* 8,020 14,341 (6,321) (44.1%) We have analysed the divisional results of the listed parents of the top five companies in the Wells supply chain category. As can be seen from Figure 22, there has been a steep decline in both turnover and EBITDA for 9m2015 against 9m2014. This is a result of a combination of persistent pricing pressure due to oversupply in the global markets, additional discounting on existing contracts and continuing decline in rig activity. Figure 23: Drilling activity on UKCS from 2008 to 2015 Number of wells 300 250 200 150 100 50 0 Source: OGA 2008 2009 2010 2011 2012 2013 2014 Q1 Q3 2015 Exploration, appraisal and development wells We would expect 2015 results for the companies in the Wells supply chain segment to decline due to the reduction in rig activity, with UK companies at greater risk due to the reduced competitiveness of the UKCS at lower oil prices as compared to some other basins. Review of the UK oilfield services industry January 2016 27
Wells continued 04 The OGA also recognises the issues facing this part of the supply chain and has actions to take accountability for the management of well data from operators to make sure high-quality data is made available to industry in a timely manner. It has already completed a rigorous analysis of failed wells in the Moray Firth and Central North Sea between 2003 and 2013, and presented its results at the Oil &Gas UK conference. Its findings highlighted the opportunity for significant improvement in fundamental technical work to avoid drilling poor quality prospects and it aims to implement a rigorous pre- and post-drill evaluation quality assurance process with operators as one measure to address this. Viewpoint: Wells At present, the well construction phase typically involves a number of OFS companies and there is a significant amount of time lost due to either waiting on another supplier or slippages resulting in scheduling issues. This needs to be addressed to optimise end-to-end well construction, which could be achieved by: establishing an overall co-ordinator to effectively manage the project schedule collaboration and joint venture agreements (which we are already seeing in the sector standardisation of design to reduce the number of bespoke elements and associated manufacturing costs. Together, this could reduce construction time and cost, which is imperative given the current oil price and to increase the attractiveness of the UKCS. Furthermore, production efficiencies have to be found and technologies to increase the lifespan of wells must be an area of focus for companies in this part of the supply chain. Andrew Deane Director Advisory 28 Review of the UK oilfield services industry January 2016
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