16
Oil pressure Potential for consolidation in the oilfield services sector
Oil pressurePotential for consolidation in the oilfield services sector
1 Oil pressure
2Oil pressure
There are many factors putting pressure on oil price
Geopolitical changes and political unrest
Restrictive legislation and sanctions
DemandChinese growth narrative
Central bank decisions
OPEC decisions
Additional producer countries
Over productionReserves and spare capacity
Significant weather events and disasters i.e. hurricanes and oil spills
Changing cost metrics
Additional resources i.e. American shale and deep water
Market sentiment
Dollar FX rates
Oilfield services companies are responding by cutting costs, however more fundamental change is required to protect the sector’s future.
Whilst the oilfield services sector has benefitted in recent years through strong oil prices, companies are now experiencing major change and must address the consolidation opportunities this presents.
There will continue to be multiple variable factors that contribute to the volatility of oil prices and it is almost impossible to identify the new normal. Oilfield services companies are under pressure as a result of the price impact on their upstream oil company customers.
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Global capex is expected to drop by at least $220bn in 2015/16, with some EMEIA countries amongst the worst affected
Whilst exploration and production (E&P) opex spend has declined less, the global forecast for capex investment has declined markedly in the light of lower oil prices. When analysing country-specific data, it is apparent that changes in investment are geographically dependent.
Change in opex (FY15 to FY16)
Change in capex (FY15 to FY16)
% Change
Australia
United Kingdom
United Arab Emirates
Norway
Azerbaijan
China
Iraq
Brazil
United States
0
Angola
20–20 40–40 60–60
Source: Wood Mackenzie, EY analysis
Oilfield services companies need to position themselves to take advantage of the opportunities available and build optionality into their business model to be best placed for future market changes.
Change in forecast capex and opex between FY15 and FY16
The oilfield services industry is seeing the impact of macro-economic pressures and changing customer behaviour — presenting both opportunities as well as challenges.
► Significant price reductions demanded by customers
► $220bn of capital investment cut globally in 2015/16 — but some areas forecast to grow
► Rig count reduction notably in US and Canada but more stable in Middle East and APAC
► Weak order intake outlook and decreasing backlog across the sector
► Stretched balance sheets and reduced share prices in asset heavy companies
Generally share prices have fallen across the oilfield services sector and for some the impact has been significant. A key consideration should be transactions that deliver value through mergers, acquisitions, joint ventures or divestments.
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552 Engineering & construction
companies
Combined revenue: £8.6bn
A fragmented sector with over 1500 companies, many with limited market share: consolidation is inevitable
UK market structure, by sub-sector
20
40
60
80
100
120
140
Sep 13 Mar 14 Sep 14 Mar 15 Sep 15
Subs
ecto
r in
dex
valu
e (r
ebas
ed =
100
)
E&C − 34.8% Marine and subsea − 48.6%
Offshore support and services − 68.3%
Reservoirs − 76.4% Well services & drilling − 55.1%
–13%
–41%
–18%
–41%
–66%
–24%
–37%
–46%
–46%
–69%
–80%
–70%
–60%
–50%
–40%
–30%
–20%
–10% 0%
E&C
Well services
Reservoirs
Marine and subsea
Offshore support and services
% change Sep 2013–15% change Sep 2014–15
Change in market capitalisation Relative change in share price
Top 5 revenue earners
vs. rest of segment
Marine & subsea Offshore support & services
Well services & drilling
Reservoirs
Source: EY Review of the UK oilfield services industry, March 2015
*Referred to as ‘Facilities’ in EY Review of the UK upstream oilfield services industry
231 Marine & subsea
companies
Combined revenue: £5.2bn
469 Support & services companies
Combined revenue: £4.9bn
Engineering & construction*
Top 5 engineering & construction
companies Combined
revenue £4.6bn
212 Wells companies
Combined revenue: £3.4bn
Top 5 Marine & subsea
companies Combined
revenue £5.03bn
Top 5 support & services companies Combined
revenue £2.5bn
Top 5 wells companies Combined
revenue £3.8bn
81 Reservoir companies
Combined revenue: £0.5bn
Top 5 reservoir companies Combined
revenue £0.8bn
5 Oil pressure
6Oil pressure
Key drivers for consolidation
Oilfield services sub-sector
Operational priorities in current market
Potential rationale for M&A
Vessel operators ► Maintaining asset utilisation ► Maximising day rates ► Protecting existing contracts and
backlog ► Matching asset capability to
regional requirements ► Reviewing capex commitments
► Re-position within sector (e.g., between capex and opex projects)
► Acquire new capability ► Improve ability to serve tier-one
global clients ► Cost synergies ► Release or redeploy vessels
following consolidation
Equipment manufacturers
► Matching product range to market demand
► Optimising overheads ► Implementing flexible working
practices ► Managing inventory ► Understanding product
profitability
► Cross-sell products ► Acquire new technology, brands
or customers ► Optimise manufacturing footprint ► Reduce or improve absorption of
overheads ► Access low cost manufacturing ► Cost synergies
Offshore drillers ► Protecting existing contracts and backlog
► Optimisation of existing fleet ► Cost optimisation
► Broaden capabilities ► Cost synergies ► Fleet optimisation ► Release or redeploy rigs
Seismic ► Asset retirements ► Optimisation of existing fleet ► Multi-client activity ► Reprocessing of surveys
► Broaden service offering (eg., mutli-client, processing)
► Increase technologies ► Fleet optimisation ► Cost synergies
Key drivers for consolidation across the sector include:
► Step change reduction in costs through synergies
► Access to new geographical markets
► New technologies and services
Within the sub-sectors below, further consolidation rationale can clearly be identified.
Achieve economies of scale or improve market positioning
Consolidate
Generate value for investors through being acquired
Exit
Spread risk across geographies and new services or products
Create optionality
Free up cash through divestment, and focus management attention on key activities
Focus on core
7 Oil pressure
What strategies are available?
To protect and grow shareholder value, management need to make a clear assessment. Decide where you are best placed to deliver value through one of the strategies below:
Oilfield services companies that are close to the E&P customer, helping to secure production and cash flows, are likely to be more resilient.
Pre deal Post dealDeal identification
► Identify potential buyers and sellers
► Advice on negotiation ► Market expertise
Integration ► Establish integration
blueprint ► Prepare for Day 1 ► Underpinning
integration plan ► Integrate operations
and IT ► Deliver cost
reductions and synergies
► Identify further upside
Carve-out planning and execution
► Understand all standalone and stranded costs
► Estimate one-off separation costs
► Plan and deliver carve-out ready for sale
Exit readiness ► Prepare the business
for sale ► Achieve the best price
Diligence ► Understand the risks ► Validate the costs ► Pay the right price ► Identify additional
upside
If acquiring … If selling …
Exit
1: EY transaction database
8Oil pressure
How to do it?
The following steps are key to ensuring that value is captured, protected and maximised.
From our experience within oilfield services, cost synergies of up to 12% of target revenue1 have been achieved through transactions.
9 Oil pressure
EY brings you a wealth of experience, global reach and has proven ability in supporting oilfield services companies during transactions
EY has over
10,000 Oil & Gas industry specialists across the globe, with
a wealth of industry and functional knowledge
1
3
6
Divestment of a global marine contractor business
EY advised a global offshore contractor on its acquisition of a North Sea/GoM deepwater SURF and floater installation company. The target was carved out from a global OFS company
1
Merger of two major oilfield services companies
EY supported client and target company management to plan and execute the integration
2
Acquisition of a global EPC business
EY advised a global engineering services company in its key acquisition of a global O&G E&C company. The acquisition materially increased the size of the workforce from 30,000 to 45,000 and was a key milestone in the company’s transition from turnaround to growth
3
10Oil pressure
EY brings you a wealth of experience, global reach and has proven ability in supporting oilfield services companies during transactions
4
1
1 5
3
2
6
Acquisition of a well intervention services company
EY assisted the client with reorganising its existing European well intervention services business ahead of the acquisition of a middle-eastern competitor
4
Carve out of a subsea products business
EY planned and supported the reorganisation and sale of a subsea products business
5
Merger of two global EPC businesses
EY advised a major international engineering and consultancy company in its acquisition of another publicly listed E&C business. The transaction expands the client’s offering and geographic footprint, and allows for efficiency savings in reduced overheads
6
11 Oil pressure
Contacts
Andy Brogan
Partner — Global Head of Oil & Gas Transactions
Tel: + 44 20 7951 7009Email: [email protected]
Glenn Peters
Partner — Restructuring
Tel: + 44 20 7951 4423Email: [email protected]
Eraj Weerasinghe
Director — TAS, Valuation & Business Modeling
Tel: + 44 20 7951 0565Email: [email protected]
Tim Bunnell
Director — Operational Transaction Services
Tel: + 44 20 7951 4708Email: [email protected]
Barry Fraser
Executive Director — Lead AdvisoryTel: + 44 122 4653 255Email: [email protected]
Michael McCartney
Director — Capital & Debt Advisory
Tel: + 44 20 7951 3263Email: [email protected]
Céline Delacroix
Executive Director — Oilfield Services Corporate Finance
Tel: + 44 20 7806 9204Email: [email protected]
Michel Driessen
Partner — Operational Transaction Services
Tel: + 44 20 7951 8792Email: [email protected]
David Rees
Executive Director — Operational Transaction Services
Tel: + 44 20 7951 2171Email: [email protected]
Stuart White
Director – TAS Transaction Diligence
Tel: + 44 122 4653 9199Email: [email protected]
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13 Oil pressure
Notes
14Oil pressure
Notes
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