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2017 has been a new beginning for the service companies. With increasing oil prices, E&P companies have raised capital expenditures in the North American shale and the number of offshore projects by more than 50%. This has resulted in a restart of the oilfield service industry.
While 2016 was a year where almost all service companies experienced reduced revenues, 2017 has been a year where the average service market has increased. Players that beat the average market were mainly those exposed to North America and its shale business through delivering drilling and completion services. Vallourec delivering OCTG, saw a 32% growth in its Oil and Gas division in the first nine months in 2017. McDermott is also beating the market with its outstanding order intake in the Middle East, resulting in a backlog of more than $1 billion. There have also been companies that performed below average. Those are companies exposed to the offshore EPCI, offshore drilling and subsea markets. This set of segments has been hurt by the low project sanctioning activity in 2014-2016, as well as offshore capex being reduced by 18% in 2017.
Figure 1: 2017 service companies' growth
Besides revenue growth, we have seen oilfield service suppliers gain control and focus more on business development and strategy. When it comes to workforce trends for 2017, suppliers in the US have started hiring and have been increasing their workforce by 2% every month since October 2016. For the offshore market, suppliers have stepped down lay-offs and are in the last phase of completing workforce reductions. The number of significant M&A deals has also increased by 35% and reached 130, and we saw finally that offshore drillers started to consolidate. 2017 was also the year where bankruptcies took their toll on big offshore players. Tidewater, Gulfmark, CGG, Pacific Drilling and Seadrill filed for chapter 11. This M&A activity and bankruptcy led to increased pricing power among the suppliers. That caused suppliers to prevent unit prices from falling further, and average unit prices ended up at the same levels as in 2016.
For 2018 there could be as much as $200 billion worth of offshore and onshore greenfield projects to be sanctioned. This would result in a contract rally across most service segments, which would result in an average of 4% service price inflation across the value chain. It will still take a year before this will have an effect on upstream expenditures. The combination of inflation and ongoing activity will likely result in a 1% decline in the upstream E&P Capex in 2018, while the E&P Opex budgets are predicted to grow by 6%. This will affect various service segments differently. The highest growth in 2018 we expect is within stimulation services at 16% and OCTG at 11%. Growth in these segments is mainly made up by the shale industry in North America. The third segment that will witness double-digit growth is Engineering, with a steady level of FEED, studiesand more projects moving into detailed engineering for offshore in 2018. Construction and Installation is expected to shrink as new contracts are not able to balance the falling backlog. The same situation in the Subsea market, but we see more need for brownfield services and therefore Subsea segments will mainly grow at around 3%. Maintenance and Operations will mainly grow at low single digits.
Figure 2. 2018 service segment growth
While 2017 was the new beginning, 2018 will be the year of positioning for future growth. Offshore suppliers will start to recruit and within North America, skilled workforce could be a bottleneck. We expect that offshore margins will bottom out while the service utilization within shale continues to climb upwards and expand margins. A last round of mergers and acquisitions will take place before the market fully recovers as investors see potential growth opportunities. 2018 will be the year where the transformation of the service landscape is completed.
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