North Sea Oil Services Sector Suffers its Biggest Fall in Profits Since 2014 Crisis
The UK oilfield services sector (OFS) had another challenging year in 2017 with turnover for companies in the sector falling by nine per cent and earnings margins falling by 2.2 percentage points.
What was the largest fall in margin since the sector downturn in 2014 was revealed in Big Four accountant EY’s Review of the UK Oilfield services industry.
This is the third consecutive year that the UK OFS sector has reported a decline in turnover, from £34.8bn in 2015 to £26.9bn in 2017, with reductions across each of the supply chain categories (Facilities, Marine and Subsea, Reservoirs, Support and Services and Wells) the report reveals.
Worldwide turnover for global OFS companies in 2017 rose with further forecast growth in 2018 to 2020, however the PHLX oil service sector share price index declined 45 per cent between January and December 2018, reflecting investors’ concerns about the speed of the recovery in the sector and margin pressures.
Derek Leith, EY partner and head of oil and gas tax, said: “It’s not unusual for the recovery in the OFS sector to lag behind the recovery in the exploration and production (E&P) sector.
“However, the continued concerns regarding global economic growth, the demand for crude, and the ability for OPEC and others to achieve demand/supply balance, has ensured that a very strong focus on cost control and capital spend has maintained a downward pressure on OFS margin.
“While the OFS sector has most probably come through the bottom of the cycle in 2017 there is clearly no let-up in the pressure on costs.
“Against this backdrop, the strategy for the sector remains broadly the same: focus on competitive advantage; obtain pricing uplift through integrated service offerings; achieve economies of scale; have a clear commitment to technological innovation aligned with the agendas of E&P companies; and of course, focus on people by attracting and retaining the right level of talent.”
Capital investment into the UK Continental Shelf (UKCS) should remain at broadly the same level as 2017 despite an increase in project approvals/sanctions – there were at least 17 new developments approved in 2018, compared to around seven in 2017, the research shows.
Any uplift in capital spend that would historically have resulted from an increase in new developments has not occurred because of lower development costs and project delivery efficiency.
However, there have been positive signs in 2018. As well as the increase in new projects last year, progress on area plans has also been a highlight, with stranded fields – that would have previously been too cost prohibitive to extract reserves – now being able to be tied back to existing infrastructure.
There is also increased activity from major E&P companies readjusting their portfolios, with a number of assets coming up for sale, the report says.
Private equity activity funding is playing an active role in the UKCS due to major developments such as in the west of Shetland, demonstrating the world class nature of the basin.
These new players are looking to invest to prolong the life of mature fields, which will help increase activity for OFS companies.
Leith said: “Although production is expected to be strong through to 2020, there are longer-term concerns over production trends given the lack of new capital investment in the UKCS in recent years.
As the UKCS is a mature basin, smaller developments such as tie-backs are increasingly more likely, given they are more economic than building and installing new platforms.”
Source: www.insider.co.uk
