PE Live: OFSE sector should embrace the transition
As the pace of the energy transition accelerates, oilfield companies are increasingly applying their engineering expertise to a more diverse range of applications
The oilfield services and equipment (OFSE) sector should embrace the energy transition and apply its expertise to the challenges faced by renewable energy and the creation of a hydrogen economy, according to the panellists on the PE Live 4 webcast last week.
The energy sector has experienced two blows—Covid-19 and the oil price crash—at the same time and was not immediately certain whether these would cause the transition to slow down—due to economic constraints—speed up or remain the same.
“12-18 months ago I would have worried whether companies had really committed to the climate agenda,” says Martyn Link, chief strategy officer at energy services company Wood. “But 2019 was a tipping point. There is unstoppable momentum in the drive to a low-carbon energy future… I believe we have crossed the Rubicon. There is no going back for the thousands of companies that have signed up to this journey.”
Link says this is driven by both “corporate ambition” and emerging governmental policies such as the European Green Deal, which could use the green agenda to stimulate the economy. He adds the Covid-19 lockdown is also having a psychological effect, with populations increasingly desiring change. “There is an opportunity to accelerate the journey. If I had to make a bet, I would say we may well have seen peak oil,” says Link.
He is not alone in this view. “My opinion is that this is going to accelerate the transition,” says Celine Delacroix, global head of oilfield services at professional services firm EY. “The majors are continuing this trend and many service companies are looking to follow their traditional oil and gas customers on their clean energy journeys. For larger companies, it is an opportunity to reposition and repurpose themselves and think about markets outside oil and gas—and lead this move rather than necessarily follow their traditional clients.”
“My opinion is that this is going to accelerate the transition” Delacroix, EY
The area any particular OFSE firm could grow into depends on its skillset, but there are many potential options. “The sector has very strong engineering and project management capabilities, which could easily be transferred,” says Delacroix. “There are very good, successful diversification stories in this market.”
Hydrogen & CCS
Hydrogen has been getting a lot of attention over the past year. “For the past year, there's been a lot of talk about it in oil and gas circles,” says Link.
While hydrogen suffers from a lack of capital, he expects this to change. “It certainly has a lot of potential—having a clean molecule is very attractive—but the cost dynamics are challenging, [and] a lot of new infrastructure and complex processes are required.”
He says this “sits really nicely within the oil and gas business model”. If companies have strong capabilities, “hydrogen presents an opportunity to continue using molecules, pipelines and processing equipment and potentially move into a new area”.
Link joined Wood in 2011, and the company has since been on a transformational “diversification journey”. It was 96pc concentrated in oil and gas in 2014, 85pc in 2016 and just c.35pc in 2019.
“I learned through the 2014/15 oil price crash was that it really helps leaders to be brutally honest, embracing that reality of how hard it is. We decided it was not just another cycle, it was a structural change and leadership made tough choices and big strategic moves… It is essential to stay one step ahead of the challenging market.
He says the other lesson is more subtle: learning the benefit of diversity of thought. “Ultimately talent is absolutely key. If you do not have the right talent to diversify, you are going to really struggle.”
While not every company will be able to make the transition, he says, “there are huge strengths in oil and gas around problem-solving, a real can-do attitude and relentless technical innovation. We can also learn from other industries.”
Start-ups vs OFS businesses
The price-to-earnings multiples of clean energy focused firms relative to OFS ones “are just on a different planet”, according to Mick Pickup, managing director, European oil & gas equity research, Barclays Investment Bank.
“There are so many transition, renewable, new energy concept programmes ongoing in the oil service companies,” says Pickup. “Every time I see a company present, there is something new. I am always surprised at the ingenuity of this industry. Whether hydrogen, floating solar or wind, carbon capture or waste recycling, it all falls into skillsets which are adaptable from the oil service industry.”
While investors are eager for exposure to the transition, often the most promising technologies are being developed within firms that have a much greater exposure to oil. “They are all doing things that investors want exposure to, but it’s all wrapped in this big overlying complex, which is predominated by the oil price,” he says.
“Every time I see a company present, there is something new. I am always surprised at the ingenuity of this industry” Pickup, Barclays Investment Bank
Currently, the problem is scale. “It takes time for transition to become a meaningful part of the business,” he says, adding that very few firms have split out renewables or transition into separate businesses. “This is largely because they do not merit being a separately disaggregated line. But this will build over time.”
The aim, over the next two years, is for transition and renewables to become more meaningful. “Targets are being set in place and they are talking about it more. It is their own transition, to reposition themselves for investors for the longer term.
“At the moment, new start-up companies with no revenues and no profit are getting valuations out there on the market. When I look at the underlying [transition] businesses of some [OFSE] companies, the opportunity sets are probably as good as these other companies. As it gets bigger, I think there will be more appreciation of it from the investor base.”
Environmental, social and governance (ESG) factors have become integral to institutional investors’ decisions—and this is already reflected in the corporate communications of many big integrated oil companies.
The “good news” is that European oil services come out towards the top of ESG metrics within the global energy sector, says Pickup. “They are doing the right things… they have embraced it particularly strongly in Europe,” he says, noting they are aligning themselves with international protocols.
“Ultimately talent is absolutely key. If you do not have the right talent to diversify, you are going to really struggle” Link, Wood
“There are genuine moves from a lot of these companies to become more ESG appropriate, and that is what investors are asking for. They are doing it because they have been asked to, and the good news is that they are all going in the right direction.”
Link adds that the “investor community—through the work of the UN Principles of Responsible Investing (UNPRI) and the Task Force on Climate-related Financial Disclosures and other initiatives—I see as keen as ever to drive this agenda.”
Scope three emissions
While tackling scope three emissions—in the oil and gas sector, those caused by the burning of its products—has lagged behind tackling those directly under the control of companies, this may be changing. There had been a degree of uncertainty over who was responsible, but now “we are now seeing in a number of companies embrace that responsibility”, says Link.
“Scope three gets to the heart of the question of who is responsible”—the producer, the manufacturer or the consumer. I already see companies taking the lead on this, probably ahead of regulation. A number of companies are leading the way and showing what they believe is possible. It will become more normal, part of good ESG reporting. It might not even need to be regulated in some countries, but it will just be an expected part of how to run a good business.”
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: