Oilfield services sector report is timely reminder of need for shared vision

EY’s recently published annual review of the UK oilfield services (OFS) industry shows that turnover of the UK’s OFS industry declined for a third successive year in 2017. Although the rate of decline reduced, more importantly the EBITDA (earnings before interest, taxes, depreciation and amortisation) margin decline in 2017, dropping by 2.2 percentage points, was the largest since the economic downturn started in 2014. Despite a growth in worldwide turnover in global OFS companies in 2017 and further forecast growth in 2018 to 2020, the sector share price index saw a significant reduction in 2018, demonstrating concerns about the speed of recovery in the sector and the underlying margin issues.

‘It’s not unusual for the recovery in the OFS sector to lag behind the recovery in the E&P sector, but the continued concerns with regard to global economic growth and thus demand for crude, and the ability for OPEC and other countries to achieve demand/supply balance has ensured that a very strong focus on cost control and capital spend has maintained a downward pressure on OFS margin,’ comments Derek Leith EY Global Oil & Gas Tax Leader.

‘In the UKCS there is clear evidence of returning confidence in the E&P sector with a significant increase in the number of sanctioned developments in 2018 and an increase in the number of blocks applied for in the 31st licensing round. However, operating cost per barrel has been maintained at 2016 levels, and reflects a 49% reduction from the high of 2014,’ he continues. ‘The UK upstream sector has emerged from the downturn with the highest production efficiency in a decade, with a much clearer focus on project execution, a willingness to adopt new technology and a steely resolve to maintain cost discipline. While the OFS sector has most probably come through the bottom of the cycle, in 2017 there is clearly no let-up in the pressure on costs. Therefore the strategy for the sector remains broadly the same – focus on competitive advantage; obtain pricing uplift through integrated service offerings; achieve economies of scale and have a clear commitment to technological innovation aligned with the agendas of the E&P companies.’

Leith adds: ‘Of course the sector must also maintain a focus on people – the downturn saw a significant reduction in headcount and the consequent loss of a great deal of skill and experience from the OFS sector. The companies that have a clearly articulated strategy around their employees and can demonstrate dynamic and rewarding career paths will be the most successful. With some of the global E&P companies exiting the UKCS and new investors entering the market, the changing of the guard, alongside an increasing focus on digital and commercial innovation presents opportunities for the UK OFS industry. Moreover, with exports still only averaging 40% of turnover, internationalisation into markets with stronger growth potential is an attractive proposition where companies can differentiate their offering to build scale quickly.’

Commenting on EY’s findings, Oil & Gas UK Supply Chain Director Matt Abraham says: ‘While this report confirms the pressures felt on the oilfield services sector throughout 2017, it is a timely reminder of the need to remain focused on stewarding a sustainable recovery. With increased project approvals, technological advances and improved operational performance, the UK’s oilfield services sector has worked hard to achieve its competitiveness against a challenging global backdrop. This hasn’t come without cost to many and indeed pressures remain. Industry isn’t sitting still and while these factors should produce a more positive landscape going forward, we remain relentless in our pursuit of Vision 2035… working to expand supply chain opportunities at home, internationally and into other sectors… strengthening [the OFS sector’s] resilience to volatile global oil markets and identifying diverse revenue streams.’