David McEwing: Oil will be back on top before too long

RESEARCH has found oil services could recover to peak levels of profitability in a few years, writes David McEwing

David Cameron talks to Totals managing director for the UK, Elisabeth Proust, as he tours Aberdeen harbour. Picture: Getty

A visit to Aberdeen by Prime Minister David Cameron along with analysts slashing oil price forecasts are both indicators of turbulent times and scrutiny of the long-term future of the UK Continental Shelf (UKCS).

So it was pleasing to release major research by Pinsent Masons showing that of 200 oilfield industry senior executives surveyed, an overwhelming 96 per cent believe oil services will recover to ‘peak’ levels of profitability.

It was even more encouraging that 28 per cent of those predicted recovery would be within three years (subject to an improvement in the oil price) while 48 per cent expect the UKCS to rebound within five years.

Preceding this turnaround will be a surge in mergers and acquisitions, driven by a mix of companies looking to internationalise operations, a desire to acquire game-changing technologies (a great deal of which has been developed from Aberdeen know-how) and those seeing opportunities from and turnaround of distressed assets.

Our report, Ahead of the Curve – Challenge and Opportunities in the Global Oilfield Services Industry – strongly suggests that while there is more pain to be endured, we are a long way from hydrocarbon Armageddon.

Having enjoyed nearly five years of continuous upward movement in the oil and gas sector, with prices anchored mainly above $100 per barrel, the oilfield services industry is now adjusting to a volatile outlook where ‘lower for longer’ is becoming a reality.

Significant changes have taken place in technology and engineering, as well as on the political and economic front, over the past decade. Drilling technology and capability has developed significantly. Wells now reach further horizontally and vertically, going deeper under water than ever before.

Energy supply and demand patterns have shifted across the globe. OPEC is no longer the only producer on the block, and the International Energy Agency (IEA) is not just an organisation of energy-consuming countries, with North America now an exporter.

Amid the current uncertainty surrounding oil and gas prices, a ‘low for longer’ environment is on the cusp of driving transformative changes across the board. The overarching sentiment among industry professionals is that consolidation will take place in the oilfield services sector in 2016.

This sentiment is reflected in the 86 per cent of survey respondents who expect global oilfield services M&A activity to increase over the next 12 months – out of those, 30 per cent expect a significant increase and 74 per cent, expect much of the activity to be driven by cross-border deals into new territories. Two-thirds of respondents expect the UK to yield opportunities for buyers, with emerging markets including Singapore, Indonesia, China, Nigeria and Mexico proving similarly attractive.

Nearly half of our respondents say the drop in oil prices has made them more acquisitive. While expansion into new geographies appears to be a strong driver for corporates, respondents are more hesitant when it comes to sector diversification with many concentrating on improving existing lines of business, namely offshore/subsea technology and equipment.

With oil prices having reached historic lows, the strain on services companies varies and much depends on local conditions as well as individual businesses’ resilience and the ability to secure finance. Our survey showed 49 per cent of oilfield services corporates have enhanced spending on R&D to maximise technology efficiency in order to enhance service and eliminate waste.

As the industry adjusts to new global trends by becoming leaner, our survey shows many investors and corporates are taking an innovative stance.

Looking ahead, we expect this next year to be a time of transformation and challenge that will bring forward the pioneering spirit that exemplifies much of the oil and gas sector. One thing is certain – there will be winners and losers from the current cycle – and while there can be no guarantees of success, sitting on one’s hands and ignoring strategic choices is simply not an option.

• David McEwing is a Partner in Pinsent Masons’ oil and gas team