Falling revenues and severe pressure on margins across the global oilfield services (OFS) sector has been the indisputable trend for the past three years, but evidence is mounting that the industry has finally turned the corner. Based on the revenue numbers reported so far for the fourth quarter of 2017, global OFS revenues are now back to the levels seen in the first quarter of 2010, when the market was returning to health after the financial crisis that reared its head in 2008.
Figure 1 shows the annual revenues recorded by the top service companies operating in the South Asian market. With a negative compound annual growth rate (CAGR) of approximately -20% from 2014 to 2017, the revenues have almost been halved during that timeframe. The decline is due both to a reduction in activity and the excessive pressure being applied by E&P companies on contractors to lower their prices. For companies operating in subsea equipment and installation, engineering and operational and professional services, the trend shifted last year as activity levels picked up. Alas, companies that have locked in contracts with low margins will still face meagre results until more lucrative contracts are completed.
The South Asian OFS market is expected to see growth across most segments through 2020, as seen in Figure 2, but two important pillars for recovery in the region will be the subsea and rig markets. We have already seen an uptick in contracting activity for both segments, and that will in coming years be reflected in higher revenues as projects are delivered. In 2017, the subsea market had several large contracts, including an award secured by OneSubsea for the subsea production system on the R-Cluster project offshore India, and another won by TechnipFMC’s for the Rotan FLNG project. The collective value of subsea contracts awarded in the region in 2017 represented some USD 2.5 billion. By comparison, the combined contract value awarded for the segment in 2015 and 2016 was only USD 1.4 billion.
Drilling contractors experienced the largest revenue reduction in the region in 2017, falling more than 30% compared to 2016, but this segment is expected to have rapid growth towards 2020 as oil prices rebound. The offshore rig market in the region is dominated by jackups, which are highly exposed to workover and infill drilling. Since these types of projects typically have lower breakeven prices and shorter lead and payback time, it’s the first demand segment to respond to higher oil prices. Almost 30% of all new mutual contracts in the jackup market in 2017 were for work in South Asia.
Many of the largest oilfield service companies in South Asia are heavily dependent on their local market. Malaysian companies, for instance, generated almost 70% of their revenues from South Asia in 2017. Malaysian players such as Bumi Armada, MISC and Sapura Energy increased their share of international revenue during the downturn. Their revenues declined less during the downturn since they managed to win international contracts when they faced a weaker home market. While Rystad Energy expects offshore expenditure to increase in South Asia towards 2020, we forecast stronger growth in other offshore markets. South Asian oilfield service companies that can take advantage of international opportunities and reduce their dependence on local NOCs are likely to outperform.
RYSTAD ENERGY AT OTC ASIA
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