PE Live: OFSE sector being reshaped by downturn
Oilfield services and equipment companies that survive the era of low prices are likely to emerge leaner, more innovative and with a greater focus on green energy
The dramatic fall in demand and prices for oil and gas due to the Covid-19 pandemic is forcing oilfield services and equipment (OFSE) companies to reinvent their business models, participants in the fourth PE Live webcast heard today.
“In more than 20 years, I cannot remember fundamentals deteriorating so quickly. And there is still plenty of uncertainty to how markets will develop, whether demand will ever go back to pre-crisis levels and what it all means for the OFSE sector,” says Celine Delacroix, global head of oilfield services at professional services firm EY.
This OFSE sector was still recovering from the 2014-15 oil price crash when the pandemic started but “it is sad to say that the majority of companies were struggling, and many of them only surviving”, she says.
Companies were already facing tough competition in a shrinking market, due to oil companies aggressively cutting capex over the last few years. They were servicing too much debt, generating poor returns, not attracting investor interest and—for many— not creating enough value for their customers, according to Delacroix.
Catalyst for change
While Covid-19 is posing significant challenges to the sector, Delacroix says it could lead to positive change.
“I think this crisis is going to be the catalyst for OFSE companies to put their houses in order, to adopt better capital discipline, to accelerate their innovation, to increase their collaboration with their customers and to transition to clean energy and even towards other industries,” she says.
“The path ahead is going to be very rocky—but I have no doubt that we are moving towards a much better industry globally, which would be more profitable, more innovative and greener than ever before.”
For now, companies are focusing on preserving cash and managing their liquidity. “I expect that, once this is sorted, attention will focus on what we call the ‘next and beyond’, as the market is likely to have changed fundamentally.”
Companies that are in better shape are starting to think about new commercial models, technology and whether it makes sense to be in certain markets and product lines, she says. “They are starting to make some very tough strategic decisions to reposition themselves for the long term in this new market environment.”
While almost all previous price crashes have been precipitated by a fall in demand, “this time we have seen an unprecedented drop. I do not think anybody knows where the bottom is or what the recovery will look like,” says Mick Pickup, managing director, European oil & gas equity research, Barclays Investment Bank.
“The path ahead is going to be very rocky—but I have no doubt that we are moving towards a much better industry globally” Delacroix, EY
In addition, OFSE firms are in “very difficult place” because “the recovery was only just beginning”, he says. While he says the closest historical comparison is the 1980s “they are not cash-rich like they were” back then.
“What is coming out of this earnings season is that the cuts are hitting the companies now. It normally takes a period of time before it hits but this has been a very, very sharp downturn. I think it is unprecedented.”
While he says “some of the bigger companies have more strength”, he notes that, for example, one seismic company that issued equity in recent months is already talking about rephasing payments. He notes that other companies with plans to issue new equity have put their plans on hold and others are slashing dividends.
“These moves are drastic,” says Pickup. “Dividends have been cut, costs are coming down and capacity is being idled as quickly as it can be at the moment. Companies are trying their best to preserve cash... there will be some who struggle with that or others will take this as an opportunity to capitalise.”
Energy services firm Wood, which has diversified away from purely supporting oilfield producers, refers to recent events as a ‘triple-P shock’—meaning it is affecting people, the planet and profits—that goes beyond normal financial considerations.
“We are seeing a humanitarian crisis, impacting people. Now we are talking about the challenge around profits, and we are still in a climate emergency,” says Martyn Link, chief strategy officer at Wood. “We are clearly in a really, really difficult situation.”
“At Wood we talk about 'controlling what we can control' and we have a good record in previous downturns. But this one is different, there is a much greater focus on lives and livelihoods. How do we take care of people, make sure they are safe but also coping with all the challenges that they're facing?”
He adds that one of the big responses he has observed in the industry has been “How do we build back better?”. He says the industry now has time to reflect, so when the rebound arrives it is better prepared.
“How do we make sure that we are doing things that are in line with where we want to go? And, be able to balance those triple-P issues better in the future? We are having discussions with our clients around not just how to survive, but also how to thrive.”
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: