PE Live: OFSE consolidation needed to attract capital
Creating larger companies with a greater reliance on technology could provide the stable and larger returns that investors seek
The oilfield services and equipment (OFSE) sector seems set for a major overhaul as it seeks to attract capital amid low oil prices and technological change sweeping through the sector, according to the panellists on PE Live 4 webcast last week.
Innovation is one of the key factors that will drive change in the OFSE sector, according to Celine Delacroix, global head of oilfield services at professional services firm EY.
“Companies need to do more with less capital, less time and fewer people, so the need to innovate is going to be stronger than ever,” she says, adding that there is momentum towards remote working and operations, as well around artificial intelligence, machine learning and the internet of things (IoT). “I expect this to accelerate, and I also expect new technologies to be developed or acquired to support the energy transition.”
Big technological shifts that many people thought perhaps might happen far into the future are happening right now, according to Martyn Link, chief strategy officer at energy services company Wood.
“Investor interest in oilfield services? What investors?” Pickup, Barclays Investment Bank
“A lot of workers may not ever want to go back to hour-long commutes, if they can avoid it,” he says. “That will become an element in the ‘talent war’ that this sector will have to engage in to attract the top people. The technology is there, and it works. We have reached an irreversible point.”
For example, Wood announced a partnership with Honeywell in May to develop ‘connected worker’ products, “to help frontline workers access plant data in real time through augmented reality”. He believes the office arrangements will change as people become more conscious about their health and factors such as air quality. “Watch this space, I think there is a lot more to come.”
However, the OFSE sector must address its “poor track record” of generating returns if it is to attract capital, according to Delacroix. While companies can be good at building market share and capacity, this can have a “disastrous impact on share prices and valuations”, she says.
She finds it “very encouraging” when management says it is willing to forgo revenue to preserve the company’s return on capital. “But there is still a long way to go and significant cultural change is needed.”
OFSE companies should also seek to become “asset-light” by thinking about what they actually need to own as well as new ways of monetising assets, such as through lease agreements, as well as becoming more agile with leaner workforces. She also says that OFSE companies and oil and gas producers should form deeper partnerships that allow both parties to “thrive together”.
The final trend she identifies concerns the energy transition. “Companies are positioning themselves towards clean energy resources, renewables and so on… and I think this is going to accelerate as a result of the pandemic,” says Delacroix.
The attributes of successful OFSE firms of the future may require consolidation. “This time is different, and it will accelerate. The services sector is extremely fragmented and we do not need so many players,” says Delacroix.
OFSE companies are operating in a much smaller market, given the capex cuts of the oil and gas producers. “There are many distressed companies in the sector that are going to be in deep trouble. They will have no choice but to consolidate or divest some assets to pay down debt,” says Delacroix. “I expect capital providers, banks and funds to be ruthless in forcing this consolidation.”
Investor interest needs to rebound from a low ebb if OFSE companies are to fund fresh investment in the sector. “Investor interest in oilfield services? What investors?” says Mick Pickup, managing director, European oil & gas equity research, Barclays Investment Bank.
“A lot of workers may not ever want to go back to hour-long commutes, if they can avoid it” Link, Wood
“This industry has been on its knees for the past five years. It had only just been getting better. Restoring investor faith in oil services has been difficult. Share prices are back at the 2000s levels. Market caps are 80-90pc lower than they were.”
He says the problem is that the profile of OFSE companies is not aligned with investor preferences. “They have big volatility, low market caps and low liquidity. These are just not the metrics that investors need.”
He says his approach involves “finding angles” within the sector. “I am looking at the transition, renewables and other changes that are coming through—and looking for survivors in this mode… There is a chance for companies to reshape and refocus.”
At the start of the year, his outlook was “go big, go green and give back”, suggesting companies should look to consolidation, engage in the energy transition and aim to increase shareholder returns. While dividends have necessarily been reined in, “go big and go green are still perfectly valid scenarios for companies to start regaining a foothold with investors”.
While some US companies are clearly in difficulty, Chapter 11 bankruptcy procedures mean financial restructurings happen quickly. “Ultimately, it is likely that these assets will get developed over time, but the industry will not look the same as it was,” says Pickup.
“There's always money for good management teams with rational plans and sensible return policies, ones doing things the right way. That capital is always available.”
The fourth PE Live webcast, The OFSE sector: navigating the price decline, in association with EY, is now available on demand.
You can also catch up on previous PE Live webcasts on demand: