Review of the UK Oilfield Services Industry

EY’s review of the UK oilfield services (OFS) industry analyses 2015’s trading information – turnover, growth, EBITDA and exports – of UK registered OFS companies in five subsectors: reservoirs; wells; facilities; marine & subsea; and support & services.

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With the worst of the downturn over, and signs of recovery more prevalent, the UK oil and gas sector has reached tipping point, with the supply chain playing a pivotal role.

The future viability of the oilfield services industry will be largely determined by the decisions and actions taken by leaders in 2017. It is essential the hard-won benefits achieved as a result of the unforgiving low oil price environment, such as greater efficiencies and innovative approaches, are sustained as the oil price recovers.

The UK OFS industry showed its credentials as a global leader by employing agility and courage over the last two years. There is now the potential to grow further domestically and internationally, but these opportunities are unlikely to be realised unless strategies shift in focus from short-term survival to long-term success.

Consolidation: Transforming the value chain
More fragmented than ever, the oilfield services industry is adapting to the new environment and is starting to consolidate as a response to fundamental changes in its customer base. What are the drivers of this consolidation, and how do they differ from previous consolidation waves? How is the oilfield services industry responding, and what are future expectations?

EY - Review of the UK oilfield services industry

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UK oilfield services industry at a glance

Despite tough trading conditions, the UK OFS industry remains a significant contributor to the UK economy, generating turnover of £35bn in 2015 and employing more than 139,000 people.

EY - UK Oilfield Services

UK Oilfield Services
There was a 12% reduction in turnover between 2014 and 2015. The top 100 global listed OFS companies saw a 19% decline over the same period, with a further reduction of 26% forecast for 2016, and we would expect UK OFS companies to follow this trend, albeit the extent of the decline may be lower. There is optimism for 2017 with the top 100 listed OFS companies forecasting 12% revenue growth; but, margins are still expected to decline.

EY - Facilities

Facilities
The 12% turnover decline in 2015 was higher than expected and resulted from the completion of a large construction project and a drastic reduction in non-essential spend by E&P companies. We expect a turnover decline in 2016 and potentially 2017, but this should not be as severe for UK OFS companies as for other segments, thanks to the long-term contracts UK OFS companies hold.

EY - Reservoirs

Reservoirs
Reservoirs experienced an 18% turnover decline in 2015, with EBITDA margin reducing from 9% in 2014 to 5% in 2015. There has been a large reduction in exploration spending on seismic in the UK Continental Shelf (UKCS) and, globally intense competition for the remaining work has had a detrimental impact on prices. There are indications that the bottom has been reached for Reservoirs, but any recovery is likely to be modest at first given the continued low oil price.

EY - Wells

Wells
Turnover declined 14% in 2015 but, EBITDA margin increased 1% as the impact of the extensive cost savings initiatives more than offset turnover decline. We expect further turnover declines in 2016 and 2017 as pricing pressures remain due to oversupply in the global market, reduced backlogs and an expectation of continued capital constraints.Turnover declined by 14% in 2015, however EBITDA margin increased by 1% as extensive cost savings initiatives implemented more than offset the turnover decline. We expect further turnover declines in 2016 and 2017 as pricing pressures will remain due to oversupply in the global market, reduced backlogs and an expectation of continued capital constraints.

EY - Marine and Subsea

Marine and Subsea
Turnover declined by 13% in 2015 and EBITDA margin fell from 13% to 10% due to lower vessel utilisation, increased pressure on rates and delays to a number of maintenance programmes. We expect the turnover declines to continue in 2016 and 2017, but there are pockets of growing demand such as greenfield developments in the North Sea. Further consolidation/alliances are likely, given the high cost of subsea developments.Turnover declined by 13% in 2015 and EBITDA margin reduced from 13% to 10% due to lower vessel utilisation, increased pressure on rates and delays to a number of maintenance programmes. We expect the turnover declines to continue in 2016 and 2017 but there are pockets of growing demand such as greenfield developments in the North Sea. Further consolidation/alliances are likely given the high cost of subsea developments.

EY - Support and services

Support and services
Support and Services saw a 9% turnover decline in 2015 due to cutbacks on non-essential spend and reductions in contractor rates in the recruitment subsector. EBITDA margin was flat, however, due to cost savings implemented through restructuring programmes undertaken in response to the decrease in activity. Given that we expect continued pressure on discretionary and non-essential spend, turnover is expected to decline in 2016.

Top five themes

Read our 5 key themes integral for success of the oilfield services industry.

Internationalisation
 

The oilfield services industry is one of the UK’s export success stories. However, in 2015 the total value of exports decreased for the first time since our review commenced in 2008 and as a proportion of total activity had decreased to 40%, from a high of 47% in 2010.

 

Given the maturity of the UKCS; what more can be done to target higher growth regions and build international businesses of scale?

Technology
 

The oil and gas industry has traditionally been regarded as one of the world’s most advanced users of technology. With ever-increasing volumes of data able to be handled, data analytics and digital technology has the potential to transform operating models.

 

With the pressure on costs; how does the UK maintain investment and continue to ensure it is at the forefront of innovation?

People
 

Recent years have been very challenging for people working in the oilfield services industry, with many businesses going through several cost cutting exercises and now operating with the leanest workforces they have had for many years.

 

When activity increases, how will the sector address potential skill shortages and ensure there is not a return to a ‘war for talent’? What can be done to maintain the attractiveness of the sector to young people entering the workforce?

Consolidation
 

Globally, the oilfield services industry is adapting to the new price environment and is starting to consolidate in response to the fundamental changes in its customer base and the impact of technology.

 

How will UK companies respond? Will they join the early movers or will many investors see this as an opportunity to exit?

Decommissioning
 

Decommissioning has long presented specialist late-life operations and decommissioning companies and the UK oilfield services industry with an excellent opportunity to grow a significant UK line of business and develop an international centre of excellence. Yet progress has been slow.

 

What more can be done to deliver an optimum decommissioning solution for the United Kingdom Continental Shelf and unlock the potential to develop world-leading expertise?

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