Oilfield Service Databases • DCube (Demand Database): Historical and forecasted opex and capex for global oil and gas fields, split on supplier segment and geography
Earnings season is on us and we observe that the announced spending cuts have been realized. Expected short term oilfield service purchases is expected at -8.0% CAGR for 2014-2016.
• SCube (Supplier Database): Reported revenue from oil service companies split on the same supplier segments and geographies as DCube
The latest SCube version (March 2015) provides extensive details on the different service companies outlook. There is a significant spread in the revenue forecasts, and SCube is ideal to analyze quickly potential market consolidation such as the HAL+BHI deal.
• RigCube (Rig Demand & Supply Database): Global, offshore rig demand (rig count) and supply based on bottom-up, field-by-field activity analysis
The latest RigCube version (March 2015) shows a decrease of 13 units in floater demand from 2014 (262) to 2015 (249). Jackups to be decreased with 25 units from 2014 (407) to 2015 (382).
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Low oil prices coupled with high costs have forced E&P companies to look at their activity and cost structure to be able to create positive returns for their owners. The large focus on cost cutting would hurt service companies and force them to reduce their prices. A 10-15% price reduction could be achieved on average assuming the oil prices and the market to normalize by the end of this decade.
Figure 1: Offshore E&P cost composition
In 2014 E&P companies spent about 540 BUSD and 900 BUSD in capital and operational expenditures to develop and maintain their oil and gas production offshore and onshore, respectively. This represents 42% of the upstream sales revenue; government take makes up 49% and only 9% is left as free cash flow to the E&P companies. In the search for improving their short term bottom line, they will need to focus on cost cutting, although fiscal regimes are as important. Splitting up the cost base into what was purchased in 2014 gives some interesting insights. 30% of the cost base offshore and 36% onshore is attributed to internal costs in E&P companies such as their own workforce, SG&A and transport tariffs. E&P companies in their search of improving organizational efficiencies. Further cost cuts can be achieved if E&P companies leverage on the activity cuts by using their achieved pricing power to reduce unit prices. Unit prices can be quickly reduced if service companies are willing to give up parts of their margins to be able to win the limited work offered in the market.
In total, 14% and 10% of the cost base offshore and onshore respectively is going directly to earnings to the first level of service providers (shaded areas in Figures 1 and 2). We have already experienced that the largest service companies have reduced their bids by reducing margins just to keep the engine going during the downturn. Margins will be cut first, but the service companies do all they can to streamline their business and push the pressure on costs further down in the value chain to the sub providers, as they need to maintain a minimum level of earnings to survive. If the whole value chain cuts their margins, it could translate to total savings of 25% for E&P companies. However, one would need to see sustained low activity over more than 2-3 years for the whole value chain, enough time for most of the contracts to be penetrated.
For offshore, the largest contributor to the purchases of oilfield services is actually the labor-intensive services such as maintenance and operations that made up about 21% of the cost base in 2014. To make swift cuts of these services is challenging as E&P companies will need to maintain asset integrity and production. Operational efficiencies would be the key goal as only 4% of the costs are allocated to related earnings and a large part of the market is locked in by long-term frame agreements. EPCI is another important cost driver for offshore developments. A fierce competition and a substantial part of the engineering, procurement and construction being moved to low-cost countries over the recent decade have led to low margins and limited price cut potential in the short term. This forces E&P companies to go after the drilling contractors which have had high margins in the range of 40%. By reducing rig tendering activity to a minimum, E&P companies could cut costs by 4% as drilling contractors would bid with their marginal cost for day rates.
Figure 2: Onshore E&P cost composition
The onshore market is naturally built up differently with well services and commodities being the obvious place the companies will cut. 26% of the costs is allocated to service providers’ operating expenses and 5% is ending up as EBITDA. In US onshore, where rig counts have fallen about 50% from the peak and well completions are being delayed, we observe large price pressures on drilling contractors and pressure pumpers. A 35% oversupply of horsepower for pressure pumpers can materialize up to mid teens price drop on average for 2015, similar to what was experienced during 2009. As a result, smaller non-integrated service providers will lose market share and market consolidation would be the end result.