The first half of 2016 has been tough for the oilfield service industry. The negative trends from 2015 continued into 2016 with further revenue decline, weaker margins and more layoffs. Nevertheless, the oil price has gradually increased since it bottomed out in January, indicating a turning tide for the oilfield service industry expected in H2.

For Q1 2016 companies reported a drop in revenue of 16% compared to Q4 2015. Seismic players faced the worst revenue decline, dropping by 22%, whereas companies exposed to maintenance and operations experienced a revenue drop of 9%. As companies will start to report their Q2 numbers in late July, we expect a further fall in earnings by approximately 10%. This will be the last quarter with double-digit drop, and we may see revenues beginning to increase in Q3 this year.

As revenues decreased, service companies tried to keep their margins by cutting costs. One way to do this has been through layoffs. In 2015, approximately 22% of the work force within the industry was cut. So far, we have seen additional 7% layoffs in 2016.

Another way to reduce costs has been to form alliances, making the companies able to offer integrated services for the whole value chain and avoid unnecessary complexity and risks. Some of these alliances have also materialized in M&A such as Schlumberger’s acquisition of Cameron (OneSubsea) and the Technip and FMC Technologies merger (Forsys Subsea). We have also seen the announced merger with Halliburton and Baker Hughes failing due to lack of regulatory approvals. These alliances and mergers have changed how the market operates. Schlumberger has strengthened its position as the largest player, while TechnipFMC could now position itself as the second largest oilfield service company.

The current challenge in the oilfield service market is also evident in the world of mobile offshore drilling units (MODUs), which is one of the service segments most affected by the downturn with a record decline in 2015.

Halfway into 2016, we have clear signs of the challenges facing the floater market this year. A large number of contracts have been terminated and further investment decisions are pushed back. We expect the current year to end with a reduction in floater demand by 24% from 2015’s level, an equivalent to a drop from 226 units to 172 in 2016.

Looking into 2017, we see a more stabilizing market after two years of turmoil with substantial decline. As the oil price is expected to rebound, we anticipate a recovery of the floater market towards 2020.

Gross utilization levels are declining further into 2017, assuming no further retirements. However, there is a need to continue the current retirement cycle in order to contribute to better market conditions and reduce the oversupplied floater space.

This article is for information and discussion purposes only and does not form a recommendation
to invest or otherwise. The value of an investment may fall. The investments referred to in this
article may not be suitable for all investors, and if in doubt, an investor should seek advice from
a qualified investment adviser. More

Source link