Oilfield services consolidationTransforming the value chain

Previous downturns, mega mergers and economies of scale 3

Why is this downturn different? 5

How the oilfield services industry is responding 8

Opportunity for M&A in the oilfield services sector? 10

How EY can help 11

Contacts 12

The oil and gas industry continues to experience one of the sharpest and longest downturns in its history. Unprecedented change is occuring, and a radical transformation of the industry has started.

Faced with changing customer behavior, some oilfield services companies are responding by embracing new technologies and contract models, fundamentally changing their business models and transforming their relationships with their customers. Others have not yet adjusted to the new market environment, facing balance sheet pressures or providing undifferentiated products and services in niche markets.

More fragmented than ever, the oilfield services industry is adapting to the new environment and is starting to consolidate as a response to the 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 the future expectations?

Contents

T he mega mergers among the maj ors in the late 1 9 9 0 s and early 2 0 0 0 s took p lace d uring the “ mid cy cle” w hen oil oversup p ly triggered the oil p rice to fall from U S $ 3 0 / b b l in 1 9 8 5 to U S $ 1 0 / b b l in 1 9 8 6 and then average U S $ 1 8 / b b l d uring the 1 9 9 0 s. T hese mergers w ere mostly d riven b y the b elief that b igger is b etter, w ith economies of scale lead ing to greater efficiencies and stronger balance sheets sup p orting comp lex mega p roj ects. T hey w ere also the p rod uct of glob aliz ation, w hich led to greater concentration in the hand s of a few mega cap s, not only in the oil and gas ind ustry b ut also in other ind ustries, such as the p harmaceutical and automotive ind ustries.

F aced w ith sup ermaj or customers and greater cost pressures, the oilfield services industry was forced to react and started its ow n consolid ation w ave. A s w ith the up stream and d ow nstream ind ustries, this consolid ation w as mostly horiz ontal, d ominated b y the comb inations of comp anies p rovid ing similar services and p rod ucts or op erating in comp lementary mark ets.

O il p rices started to increase again in the early 2 0 0 0 s and remained ab ove U S $ 9 0 / b b l for close to four y ears until O ctob er 2 0 1 4 . T his strong oil p rice environment sup p orted the oil ind ustry move into frontier areas such as d eep w ater and arctic regions, and it resulted in an increased cap ital sp end ing on finding and developing new resources.

W ith their customers d emand ing highly sp ecializ ed k now led ge, p rod ucts and assets, and commod ity prices rallying significantly from 2004 onward, the oilfield services industry grew quickly, which triggered another round of horiz ontal integrations. M eanw hile, the ind ustry continued to fragment as many comp anies w ith niche offerings started to emerge.

P rev ious d ow nturns , m ega m ergers and econom ies of s cale

Oilfield services consolidation: transforming the value chain 3

Oilfield services consolidation timeline

N ote: select group of announced transactions ab ove $ 2 . 5 b n value, as of end D ec 2 0 1 6 . Upstream transactions are highlighted in blue. Oilfield Services transactions are highlighted in red.

* I nd icates merger value.

S ources: B ak er H ughes ( rig count) , E Y .

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No. Date Acquisitions/mergers U S $b

1 A ug- 9 8 B ritish P etroleum A moco 4 8 . 2

2 D ec- 9 8 E x x on M ob il 7 3 . 7

3 D ec- 9 8 T otal F ina 1 2 . 9

4 A p r- 9 9 B P A moco Atlantic Richfield Company 2 6 . 8

5 S ep - 9 9 T otalF ina Elf Aquitaine 5 4 . 3

6 A p r- 0 0 A nad ark o P etroleum Union Pacific Resources 4 . 4

7 O ct- 0 0 C hevron T ex aco 3 5 . 1

8 N ov- 0 1 C onoco P hillip s P etroleum 1 5 . 1 7 *

9 F eb - 0 3 D evon E nergy O cean E nergy 5 . 3

1 0 D ec- 0 5 C onocoP hillip s B urlington R esources 3 5 . 6

1 1 J un- 0 6 A nad ark o K err- M cG ee & W estern G as R esources 2 3 . 3

1 2 D ec- 0 6 S tatoil N orsk H y d ro 2 8

1 3 M ar- 0 9 S uncor E nergy P etro- C anad a 1 5 . 9

1 4 D ec- 0 9 E x x on M ob il X T O E nergy 4 1

1 5 J ul- 1 1 B H P B illiton P etrohaw k E nergy 1 2 . 1

1 6 O ct- 1 2 R osneft T N K / B P 5 5

1 7 D ec- 1 4 R ep sol T alisman E nergy 8 . 3

1 8 A p r- 1 5 R oy al D utch S hell B G G roup 5 2

1 9 O ct- 1 5 S uncor E nergy C anad ian O il S and s 4 . 6

2 0 D ec- 1 6 G lencore/ Q atar I nvestment A uthority 1 9 . 5 % stak e in R osneft 1 0 . 8

No. Date Acquisitions/mergers U S $b

1 J ul- 0 1 T echnip Coflexip 3 . 1

2 S ep - 0 1 S anta F e I nternational G lob al M arine 3

3 S ep - 0 6 C G G V eritas D G C 3 . 1

4 J ul- 0 7 T ransocean G lob alS antaF e 1 8 *

5 J un- 0 8 S mith I nternational W - H E nergy S ervices 3 . 2

6 J ul- 0 8 China Oilfield Services L imited ( C O S L ) A w ilco O ffshore 2 . 5

7 A ug- 0 9 B ak er H ughes B J S ervices 5 . 5

8 J un- 1 0 A cergy S ub sea 7 5 . 4 *

9 D ec- 1 0 G eneral E lectric W ellstream H old ings 1 . 2 5

1 0 F eb - 1 1 E N S C O P rid e I nternational 7 . 1

1 1 F eb - 1 1 G eneral E lectric W ood G roup W ell S up p ort D ivision 2 . 8

1 2 J ul- 1 1 S ap uraC rest P etroleum K encana P etroleum 3 . 8 *

1 3 O ct- 1 1 S up erior E nergy C omp lete P rod uction S ervices 2 . 7

1 4 A ug- 1 2 N ational O ilw ell V arco R ob b ins & M y ers 2 . 5

1 5 A p r- 1 3 G eneral E lectric L ufk in I nd ustries 3 . 3

1 6 J an- 1 4 A mec F oster W heeler 3 . 3

1 7 S ep - 1 4 S iemens D resser- R and 7 . 6

1 8 A ug- 1 5 S chlumb erger C ameron 1 4 . 8

1 9 M ay - 1 6 F M C T echnologies T echnip 1 3 *

2 0 O ct- 1 6 G E O il & G as B ak er H ughes 5 0

Upstream transactions Oilfield services transactions

4 Oilfield services consolidation: transforming the value chain

The significant growth in upstream capex spend d uring the p eriod from 2 0 0 0 to 2 0 1 3 d id not generate a commensurate increase in p rod uction and reserves, and the oil p rice fall of 2 0 1 4 acted to intensify the challenges alread y faced b y the ind ustry in a high oil p rice environment. I n this challenging environment, the resp onse to the current d ow nturn is d ifferent, b ecause:

1 . O p erators’ b ehavior and comp etitive land scap e are changing.

2 . O nshore unconventionals have b ecome a new core resource.

3 . D igital is transforming the route to reserves and their monetiz ation.

O perators ’ b eh av ior and com petitiv e land s cape are ch angingT he resp onse to the d ow nturn has varied accord ing to various ty p es of op erators.

International oil com panies (IO C s )T he large cap I O C s continue to focus on increasing their cash flows to reduce their leverage and sustain their ab ility to meet their d ivid end p ay ment commitments. A comb ination of d ivestments, d ow nstream strength and w ork ing cap ital releases

has helped support balance sheets, while significant efforts have b een mad e to red uce an unsustainab le cost b ase. I O C s have managed this b y focusing on standardization and simplification measures and reducing project inefficiencies, while maintaining their focus on safe op erations.

The significant cost savings of the past two years have red uced the b reak even of a large numb er of p roj ects. A ccord ing to W ood M ack enz ie, the cost p er b arrel in the up stream sector has fallen b y 3 0 % comp ared to the average record ed in 2 0 1 4 w hile cap ex p er b arrel is d ow n 4 5 % . W ith many new p roj ects ex p ected to start in 2 0 1 7 and more w ork to d o to red uce cap ex sp end ing, the focus on d ivid end s and costs red uctions is ex p ected to continue, no matter the oil p rice.

I n ad d ition to further cap ex red uctions, a greater focus on op erational ex cellence is ex p ected , w hich likely will involve robust and significant structural changes. U nmanned facilities, p articularly in remote locations, provide significant potential for cost savings b y means of red uced health, safety and environment; utilities; and logistics costs. W here on-site personnel are still required, a rigorous assessment of solutions maintaining safe op erations and low p ersonnel count is p erformed , often in comb ination w ith favoring sup p liers w ith cross-trained sp ecialist functions.

W h y is th is d ow nturn d if f erent?

Oilfield services consolidation: transforming the value chain 5

Collaboration with oilfield service companies is increasing, p rimarily w ith resp ect to large and comp lex p roj ect d evelop ments, w here the need to sp read risk s is the highest. More and more, contractors are being required to innovate and use technologies to red uce costs, imp rove reliab ility , mitigate risks and improve project profitability, often on a shared risk - rew ard b asis. I n many cases, the trad itional “ cost-p lus” contracts are b eing rep laced w ith “ outcome- b ased ” contracts with the contractors bearing risks such as equipment failures d uring the d evelop ment of a p roj ect.

O n the other hand , w ith unconventionals changing I O C s’ ap p etite for b ig cap ex d evelop ments, I O C s are look ing for their sup p liers to b e ab le to sw itch on and off some large cap ex p roj ects. T he I O C s, lik e the ind ep end ents, are look ing for the supply chain to deliver onshore resources quickly, cheaply and efficiently, in a relatively commoditized way.

Ind epend entsThe independents have undergone significant ownership changes d uring the p ast few y ears, w ith many transitioning from publicly listed to private companies owned by private equity. T hese new mark et p articip ants are heavily focused on returns and more willing to share the risks and rewards with the oilfield services comp anies.

I t is lik ely that risk - sharing agreements w ill increase as p rivate equity owners further increase pressure on contractors to deliver b etter outcomes at low er costs. S uch arrangements could p rovid e contractors w ith an alternative ap p roach for achieving mark et success and p remium p rices w hen other more trad itional routes p rove unsuccessful, or w ith the ab ility to move into new mark ets ahead of comp etitors or to b uild p artnership s w ith k ey customers.

C ritical to the success of these arrangements w ill b e to d eep ly und erstand how the p rod ucts and services p rovid ed b y contractors d eliver value to the customer.

N ational oil com panies (N O C s )I n general, N O C s have also resp ond ed to low er oil p rices b y driving down costs and improving efficiencies in their oil and gas p rod uction activities. F or instance in the U A E , the A b u D hab i N ational O il C omp any has und ergone various initiatives since the ap p ointment of a new C E O in F eb ruary 2 0 1 6 , includ ing:

• R ed ucing head count b y ap p rox imately 1 0 %

• M erging tw o large offshore concessions A D M A and Z A D C O to benefit from economies of scale

• M erging three of its services units ( T he A b u D hab i N ational T ank er C omp any , the P etroleum S ervices C omp any and the A b u D hab i P etroleum P orts O p erating C omp any ) into one comp any

O ver the p ast few y ears, N O C s have also continued a long- term trend of look ing to tak e greater control of their resources and seek ing to d isp lace the I O C s b y using service p rovid ers in a more integrated manner. S uch ex amp les includ e S aud i A ramco’ s alliance w ith N ab ors to ow n, manage and op erate onshore d rilling rigs in S aud i A rab ia ( O ctob er 2 0 1 6 ) and j oint venture ( J V ) w ith R ow an to op erate offshore d rilling rigs in the country ( N ovemb er 2 0 1 6 ) .

M any N O C s are also focused on creating more value w ithin the hy d rocarb on value chain and are increasing their vertical integration by creating a cohesive business that efficiently op erates across the value chain.

6 Oilfield services consolidation: transforming the value chain

F or many N O C s, collab oration w ith service contractors is k ey to:

• R ed uce costs of services and materials

• A ttract and retain top talent

• D evelop new technologies

• P romote local content

• Promote the creation of jobs in the oilfield services industry and ad j acent ind ustries b y setting up local R & D centers, often link ed to in- country acad emic research and cosp onsored b y major international oilfield services firms

O ns h ore unconv entionals h av e b ecom e a new core res ourceT he N orth A merican shale revolution has led to structural changes in glob al oil sup p ly d y namics and d ramatically low ered the fundamental economic equilibrium price point. Most p articip ants in oil and gas mark ets now realiz e shale in p articular changes the game. B ecause of its ab und ance, the numb er of economically rational op erators involved , its short d evelop ment cycle, low risk profile and ability to deliver returns quickly, US shale w ill lik ely rep resent the marginal b arrel of p rod uction, at least in the med ium term and p otentially for much longer.

A s a result, the oil mark et clearing p rice is ex p ected to b e set w ith reference to N orth A merican shale. S hale p rod ucers are able to quickly respond to price signals. The speed from capital investment to initial p rod uction, coup led w ith the steep d ecline curve of shale w ells, means that the commod ity p rice cy cle w ill lik ely b e comp ressed to ap p rox imately three y ears. T he ab ility to lock in p roj ect economics w ith hed ges could lead to over-investment w hen p rice signals are d etected and might lead to more time sp ent in the trough versus the p eak through the p rice cy cle.

D igital is trans f orm ing th e route to res erv es and th eir m onetiz ationT he oil and gas ind ustry is one of the w orld ’ s most ad vanced users of technologies. H ow ever, to d ate, these technologies have been primarily focused on improving time to first oil and imp roving the effectiveness of hy d rocarb on ex traction, rather than ab ove ground op erational p erformance and end - to- end integration.

D igital has the p otential to d isrup t the oil and gas ind ustry on a scale equivalent to the US shale phenomenon by:

• C onnecting critical assets and red ucing sy stem failure w hich can easily result in costly and often life- threatening emergency situations

• M onitoring and collecting d ata in real time w ithout p reviously necessary human intervention

• M anaging, storing and analy z ing massive amounts of b usiness d ata to d rive b etter and faster d ecisions

• F urther increasing reservoir management and d rainage efficiencies

• Deploying digitally enabled technologies like artificial intelligence and rob otics, red ucing the need for human resp onses and changing the sk ill sets need ed

T he fund amental d river is simp le: leveraging the p ow er of d igital technology to transform b usiness op erations can d eliver real, sustained value to the b ottom line. A nd w ith oil p rices d ep ressed and the cost of technology low , the return on investment for d igital technologies and analy tics is attractive. G E ’ s merger w ith B ak er H ughes, announced in O ctob er 2 0 1 6 , p rovid es a clear ex amp le of the p otential for d igital in the oil and gas ind ustry . W ith a strong technology p latform and an ap p roach d esigned to b ring b usiness value to an asset- intensive client b ase slow to ad op t new technologies, G E is p ositioning itself to mak e the ind ustrial internet a strong component of a more efficient oil and gas industry.

U nconv entionalsT he d ramatic d ecline in oil p rice caused a heavy b low to many shale op erators, forcing them to focus on survival, p utting growth or acquisition strategies on the backburner. Although not heavily invested in b y E urop eans, U S unconventionals offer an interesting and strategically useful asset, d riven b y shorter cycles and flexible portfolio options, especially within the P ermian b asin, w hich now hold s nearly as many active oil rigs as the rest of the U S comb ined .

T he smaller op erators have either ad d ed new w ells to increase cash flows (within a less beneficial margin environment) or have stop p ed d rilling op erations and comp letions activity .

T here w as a mod est increase in activity d uring 2 0 1 6 , w ith the maj ority of transactions mad e in the P ermian b asin, w hich has low b reak - even p rices comp ared to other reserves in the U S , in ad d ition to many multip le horiz ontal w ells that can b e d rilled from one main w ellb ore. M ore than a third of

all transactions in 2 0 1 6 have targeted this shale p lay , und erscoring its attractive cost- structure and sub stantial resource p otential w ith multip le “ lay ercak e” reservoirs, allow ing multip le lateral sp read s targeting each lay ercak e from a main w ellb ore.

G row ing investment into the P ermian p lay w ill continue to outp ace other regions over the coming y ear, d riven b y W T I p rices, w hich stab iliz ed ab ove the U S $ 4 5 / b b l mark , continuous reb alancing in the U S mark et and the election of D onald T rump , w hich is ex p ected to send U S shale op erators b ack to w ork .

A s a result, more M & A activity is ex p ected w ithin the U S mark et, as w ell as b y international contractors w ho are try ing to p osition themselves in this mark et, p end ing mark et recovery in the rest of the world. Specific areas of interest includ e land d rilling and associated technologies, p ressure p ump ing, comp letion and p rod uction technologies.

Oilfield services consolidation: transforming the value chain 7

H ow th e oilf ield s erv ices ind us try is res pond ingThe segmentation of the oilfield services industry — the B ig F our, the d rillers and w ell services p rovid ers, the seismic comp anies, the engineering and construction companies, the equipment manufacturers, and the logistics providers — has started to change as b ound aries b etw een sub sectors b ecome more b lurry follow ing vertical consolid ation, and as d igital technologies and their imp act on op erations create new op p ortunities for all p lay ers.

T his transformation is only in its infancy ; how ever, b ased on the changes highlighted ab ove, the ind ustry could converge into the follow ing group s:

• T he integrated service providers w ho are lead ing the current consolid ation w ave and using the downturn to grow market share, acquire new technologies and capture project efficiencies through vertical integration and op p ortunistic acquisitions (these include the large OFS comp anies such as T echnip F M C and G E )

• T he specialists w ho are focusing on a niche p art of the mark et or a single or small set of technologies, offering sp ecialist p rod ucts and services, w ith or w ithout any d ifferentiation

• T he logistics providers w ho are p rovid ing assets ( vessels, rigs, helicop ters, etc. ) and a range of sup p ort services to the ind ustry and are resp onsib le for oilfield logistics, supply and training of p ersonnel, w arehousing, etc.

Integrated s erv ice prov id ersT he integrated service p rovid ers are b reak ing w ith the past, understanding that the cost-efficient d evelop ment of increasingly comp lex hy d rocarb on resources w ill not occur w ithout fund amental changes in their op erating mod els, innovative technologies and greater collab oration w ith the up stream ind ustry .

8 Oilfield services consolidation: transforming the value chain

R ecogniz ing the inex orab le d iminishing of b ound aries b etw een ind ustries, the integrated service p rovid ers are actively forming p artnership s or involving themselves in netw ork s w ith other organiz ations.

The recent collaboration agreements between some oilfield services comp anies and op erators ( such as D et norsk e, S ub sea 7 and A k er S olutions, or S chlumb erger’ s J V w ith G olar L N G ) illustrate this fund amental shift in how op erators and sup p liers might b e ab le to w ork together on some oil and gas d evelop ments, as one “ integrated ” or “ aligned ” team.

R ecent ex amp les of vertical integration illustrate the integrated service p rovid ers’ resp onse to the need to red uce overall p roj ect costs b y offering more integrated solutions and comb ining technologies, p rod ucts and services from d ifferent p arts of the value chain. Schlumberger’s acquisition of Cameron, for instance, comb ines ex p ertise in reservoirs and w ells w ith surface, drilling, processing and flow control technologies. T echnip ’ s merger w ith F M C illustrates the comb ination of engineering and p roj ect management cap ab ilities w ith technology , manufacturing and services cap ab ilities, in an effort to p rovid e greater value to customers at a low er cost.

I ntegrated service p rovid ers are w ork ing closely w ith op erators to d evelop lead ing p ractices and p rovid e the greatest value to their customers, lock ing out many of their smaller comp etitors, w ho might only w ork as their sub contractors w ith less control of their ow n sup p ly and associated margins. W ith a range of cap ab ilities in various p arts of the value chain ( e. g. , L N G , G T L , gas to p ow er) , they are ab le to p resent integrated solutions that are attractive to their customers and governments alik e.

The integrated service providers also benefit from a strong b alance sheet that allow s them to share some of the risk s and rew ard s in certain p roj ects and to b e more comfortab le w ith outcome- b ased contracts. B ak er H ughes’ recent agreement w ith C S L C ap ital M anagement and G old man S achs G roup ’ s merchant b ank ing d ivision to create a hy d raulic fracturing comp any illustrates how some integrated service p rovid ers are look ing to red uce their cap ital intensity to max imiz e sharehold er value as well as the return of some financial investors looking to create p ure p lay s op erating in niche segments of the mark et.

F inally , the integrated service p rovid ers are using technologies as a w ay to increase their mark et d ifferentiation and comp etitive p ositioning, and to create comp etitive hook s to secure new contracts in a mark et w here the numb er of contracts is d w ind ling.

A t the forefront of the changes in the ind ustry , the integrated service p rovid ers are ab le to choose in w hich mark et they w ant to op erate ( e. g. , niche versus mass mark et, commod itiz ed versus d ifferentiated offering) and to d rive consolid ation, w ith the goal to create a b road er p ortfolio of solutions and technologies to b e ab le to innovate and red uce cap ital and operating costs for the ultimate benefit of the customer.

S pecialis tsT he sp ecialists either op erate across the value chain and p rovid e niche p rod ucts and / or services or op erate in niche mark ets. W hile it is hard to generaliz e this mark et, it is lik ely that most of them w ill have some d ifferentiation through technologies or through b esp ok e assets ( for ex amp le in d rilling) , allow ing them to effectively comp ete w ith the integrated service p rovid ers. T o thrive as sp ecialists, they need to b e b est in class in their sp ecialty and mark et as their p osition may erod e rap id ly .

D ep end ing on their mark et p ositioning, they may b e d ealing d irectly w ith the op erators and could consid er risk - sharing contract structures, although most are lik ely to follow the general trend of acting more and more as sub contractors to the integrated service p rovid ers and other tier 1 sup p liers. N iche mark ets and technologies mak e them very attractive to the integrated service providers and to private equity, and it is therefore anticipated that the specialists will be involved in private equity-sponsored b uy - and - b uild and consolid ation transactions in the near term.

L ogis tics prov id ersW ith high leverage and many assets on their b alance sheets, the logistics providers face significant challenges in the current mark et and a b usiness mod el that is lik ely to b e challenged in the future. T hey need to j oin forces to survive the d ow nturn and to think ab out b usiness mod els that increase their d ifferentiation and value to op erators.

T hey tend to w ork d irectly for the op erators, although this might change as a consequence of the ongoing restructuring of both the sup p ly chain as w ell as the b usiness mod els associated w ith equipment, tools, consumables and personnel logistics.

T he logistics p rovid ers are facing a more aggressive ty p e of consolidation, primarily opportunistic and driven by the financial stress of many comp anies in this group . T hese includ e the offshore support vessel industry, which is currently significantly oversup p lied and highly fragmented and has b een strongly affected b y the sharp red uction in d ay rates and utiliz ation. These companies have significant challenges associated with their current structures and b usiness mod els. C onsolid ation is d riven b y the need to create larger entities with financial and operational strength to accelerate the timing of recovery b y removing more vessels from the market, with the creation of significant synergies as a k ey p remise for this more trad itional ty p e of consolid ation.

W hether they are large integrated service p rovid ers, sp ecialists or logistics p rovid ers, the k ey for these comp anies w ill b e to think strategically ab out w here they w ant to p osition themselves for the future. The question of how small companies will compete also remains, as op erators red uce the numb er of interfaces w ith sup p liers, encourage stand ard iz ation and seek b road er solutions and integration w ith their sup p liers.

Oilfield services consolidation: transforming the value chain 9

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O pportunity f or M & A in th e oilf ield s erv ices s ector?T he large transformational transactions alread y witnessed in the oilfield services sector are likely to b e the p relud e for a large w ave of consolid ation activity across the entire value chain.

T here are six d rivers of this transformation:

L ong- term ch ange in cus tom er b eh av iorT he current changes in the ind ustry , in terms of cap ex red uctions and op ex focus, seem to ind icate a long- term resp onse to an ind ustry that w as alread y struggling to deliver adequate returns with oil prices ab ove U S $ 1 0 0 / b b l. T his change is ex p ected to p ersist even if oil p rices grad ually increase. A s op erators are seek ing greater alignment w ith the sup p ly chain across the entire asset life cy cle, a continuation of transactions targeting vertical integration and technology is lik ely .

T ech nologyThe acquisition of technology is becoming increasingly imp ortant as the sector increases its investment in the d igital sp ace. T he ab ility to integrate technologies is going to be an equally important differentiator. Such p rovid ers can b ecome integral to a d evelop ment’ s success and w ill b e view ed increasingly as p roj ect

life cycle partners. Companies need to acquire the right talent and innovation cap ab ilities to navigate the changing business environment, and more acquisitions of technologies ( from the oil and gas sector or other ind ustries) should b e ex p ected .

M ark et s h are protectionA t the top end of the mark et, more consolid ation is ex p ected as large comp anies continue to consolid ate as a resp onse to their comp etitors’ consolid ation in ord er to p rotect mark et share, retain lead ership p ositions in k ey mark ets and p rotect their op erational leverage.

P ortf olio optim iz ationW hile several of the recent transactions have b een comp lementary w ith little overlap b etw een the entities comb ined , some p ost- merger d ivestments are still to b e ex p ected as a result of anti- trust p rocesses, p ortfolio op timiz ations and continued efforts tow ard op erational ex cellence.

W hen comp anies have op erated a range of loosely ad j acent services, more consolid ation should b e ex p ected to focus p ortfolios on the right offering and , in some cases, create p ure p lay ers b est ab le to service customers.

10 Oilfield services consolidation: transforming the value chain

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F inancial res tructuringsThe industry is undergoing significant financial restructurings w ith comp anies and assets b eing mark eted out of necessity as p art of b road restructuring or ad ministration p rocesses. W ith the d ow nturn continuing, more stress is lik ely to emerge w ith a resulting increased volume of d istressed transactions. T hese financial restructurings are also resulting in significant changes in the ow nership structure of many comp anies that are now ow ned b y their lenders, bondholders and/or other financial investors.

S o far, b ank s have tak en a sup p ortive stance w ith b orrow ers avoid ing any actions to enforce their security and tak e ow nership of assets. W ith the d ow nturn p ersisting and little to no signs of immed iate recovery in some segments, it remains to b e seen w hether this sup p ort w ill continue and w hat role banks and financial investors will play in this consolidation trend.

A s the mark et reaches the b ottom and the valuation gap b etw een b uy ers and sellers red uces, more investment from private equity and financial investors is expected. In some segments facing significant oversupply with no short-term sign of recovery , such as the d rilling and offshore sup p ort vessel markets, banks may find it harder not to crystallize their losses, w hich could lead to greater consolid ation or j eop ard iz e the b are ex istence of many comp anies in these segments.

Ind us try d iv ers if icationA s the oil and gas sector continues to und ergo transformation, external influences such as growing climate change and digital

d isrup tion are comp elling comp anies to look b ey ond their core sector for acquisitions. To reduce their carbon footprint, oil and gas comp anies are seek ing to increase the share of natural gas and to invest in renew ab les and clean technologies, w hich has driven several oilfield services companies to already focus on these mark ets. T he nuclear and p ow er ind ustries are also b ecoming of increased interest to some contractors as a w ay to red uce their volatility of earnings.

T hrough our closely link ed transactions ad visory , tax and ad visory service teams, coup led w ith our glob al team of 1 0 , 0 0 0 + oil and gas professionals, EY is equipped to provide independent, whole-life sup p ort and ad vice to our oil and gas clients d uring this time of fund amental change. W e have p roven sk ills covering the entire b read th and depth of our oilfield services clients’ businesses, including:

• Transaction advice — opportunity identification, advising on execution of mergers, acquisitions, divestments and carve-outs, j oint ventures and alliances, as w ell as und ertak ing b uy - and sell- sid e d ue d iligence.

• Financial and operational restructuring — advising corporates, banks, bondholders, private equity, alternative capital providers and other stakeholders on financial and operational restructurings, includ ing assessment of ex isting restructuring p rograms, evaluation and ex ecution of cost savings initiatives, negotiations w ith corp orates, b ank s and cap ital mark et p rovid ers of cap ital, and other cap ital p rovid ers, accelerated M & A p rocesses.

• Integration — determining and analyzing post-acquisition and merger integration and p ortfolio realignment.

• Capital agenda — improving capital needs at the corporate, p ortfolio, asset, p roj ect and b usiness unit levels, includ ing working capital, cash flow improvements, and debt and equity raising and/or refinancing.

• Strategy and performance management strategy d evelop ment and assessment, mark et access stud y , comp etitor analy sis, asset p ortfolio management, organiz ational imp rovement, sup p ly chain improvements in procurement, logistics, engineering, field op erations, manufacturing and d istrib ution; imp roving w ork

p rocesses, id entify ing k ey risk s to facilitate services of maj or capital projects, improving overall financial and management rep orting, sup p orting k ey b usiness and op erations imp rovements b y effectively d ep loy ing information technology .

• Risk management services — advising on business risks and d evelop ing p lans to accep t, id entify or cap italiz e on them, includ ing assessments ( assessing risk p otential and p rocesses) , imp rovement ( d esigning and assisting w ith imp lementation of imp rovements to achieve b usiness ob j ectives) and monitoring ( evaluating if p rocesses, initiatives and functions are op erating as ex p ected ) , as w ell as und ertak ing internal aud it p rograms to augment clients’ internal cap ab ilities.

• Tax advisory — advising on country fiscal regimes, tax structuring, transaction p lanning and imp act of alternative energy , as w ell as managing international assignments for k ey emp loy ees and und erstand ing tax consid erations in ex p and ing op erations to new countries.

• Fraud investigation & dispute services — assisting companies manage risk , investigate alleged miscond uct and measure the financial impact implications of disputes. Areas of focus include anti- fraud , corp orate comp liance, d isp ute services, forensic technology and d iscovery services and fraud investigations.

• Disruption management — digital offering — management of p otential d isrup tion, asset p erformance management, d igital supply chain, operations and field ticketing, digital tax, robotics p rocess automation ( R P A ) and corp orate functions, integrated p lanning and p ortfolio management, cy b ersecurity , d ata analy tics, d igital w ork er, w arehouse of the future.

H ow E Y can h elp

ConclusionT he oil and gas ind ustry is und ergoing a fund amental change, w hich is unlik ely to reverse if and w hen oil p rices increase. C omp anies need to emb race these changes and d ecid e w hich ap p roach to follow and w hich mark et to p lay in. T he integrated service p rovid ers are w ell- p laced to d rive the major changes needed in the industry — to be successful, they need to offer a genuinely d ifferentiated risk - b ased offer. T he sp ecialists ow n valuab le technologies and ex p ertise and need to b e b est- in- class from a cost and mark et p ersp ective to remain relevant in the new w orld . T he logistics p rovid ers currently face significant challenges and need to join forces and ad ap t their b usiness mod el to increase their d ifferentiation and the value they p rovid e to their customers.

T he ind ustry has changed rap id ly over the p ast tw o y ears. T he w ind ow to j oin the club of the integrated service p rovid ers is op en, for now .

Oilfield services consolidation: transforming the value chain 11

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C ontactsEY Global Oil & Gas Transaction Advisory Services contacts:

Andy Brogan+ 4 4 2 0 7 9 5 1 7 0 0 9 ab rogan@ uk . ey . com

Vance Scott + 1 3 1 2 8 7 9 2 1 8 5 vance. scott@ ey . com

Sanjeev Gupta + 6 5 6 3 0 9 8 6 8 8 sanj eev- a. gup ta@ sg. ey . com

Jon Clark+ 4 4 2 0 7 9 5 1 7 3 5 2 j clark 5 @ uk . ey . com

Oilfield Services contacts:

Céline Delacroix+ 4 4 2 0 7 8 0 6 9 2 0 4 cd elacroix @ uk . ey . com

Espen Norheim + 4 7 5 1 7 0 6 7 6 6 esp en. norheim@ no. ey . com

Hervé Wilczynski + 1 7 1 3 2 0 3 8 1 4 3 herve. w ilcz y nsk i@ ey . com