2016 is nearly upon us, and 2015 will go down in history to be one of the worst years for the oilfield service industry. With a booming industry in the previous few years, 2015 showed us how the oil service market became the victim of a plummeting oil price and fierce cost cuts. The services industry has started a transformation.
Figure 1: Service companies' revenue (local currency), segment exposure and stock price change 2015
2015 represents the worst downturn in the oilfield service industry since the 1980s. The average oilfield service purchases went down by approximately 19% in 2015. This compares to -12% in 1999 and -9% in 2009. Unlike the last two recessions, this time we witness a multi-year downturn similar to what we experienced in the early 1990s, with 2016 continuing to contract -9%.
Looking at how the different oil service players stood through the year of 2015, we observe large differences. The service companies most resilient to the downturn were those exposed to long lead items – such as Subsea and EPCI – having built up a large backlog from the boom in 2010-2014. If we look at the quarterly market development we expect these segments to start to decline by more than the average for Q4 and into 2015. Companies like Technip and Aker Solution benefitted from positive currency effects, making them economically rather stable. Companies exposed to Well Service and Commodities – such as Baker Hughes and Halliburton – fared worse. The cut in shale activities in North America had a large impact on these companies due to the high well service intensity for shale developments. The decline will start to taper off as most of the price deflation and activity cuts are already taken out. Schlumberger fared slightly better due to their more international footprint. Seismic companies such as CGG and PGS were also heavily affected due to the total collapse in seismic purchases.
In terms of stock prices we can also observe large variability. The financial markets are judging companies on how well they have been navigating through the downturn in relation to cost cuttings, defending their margins and dividends as well as their specific market outlook.
Figure 2: Oilfield service revenues by quarter
Leaving one bad year behind brings us one year closer to recovery. However, Rystad Energy does not believe the recovery of the oilfield service industry will occur in 2016; we need to wait until 2017. E&P companies are still cutting costs and for many service companies 2016 will be even worse than 2015. Hence, 2016 will be a significant year as the services industry completes its transformation. The most noticeable trends are:
- Continuous cost cutting and lay-offs. Service companies have so far announced lay-offs of about 16% compared to 2014, and we can expect more to come.
- Service companies will continue to seek new alliances.Strategic collaborations where service companies can take upon a larger part of the value chain and get introduced to projects early on will cut projects costs and improve margins. The agreement between Saipem and Aker Solutions is the latest of many new alliances.
- M&A as well as bankruptcies will grow at a faster pace in 2016. The number of covenant breaches will increase as the earnings are declining and large service companies or new entrants will pick up the pieces.
- E&P lock-ins. Price wars among service companies have led and will continue to lead for more companies offering multi-year frame agreements to lock-in E&P companies’ activities in certain segments, regions and project types.