A new report from PwC is urging oilfield services firms to grasp the nettle and reset their businesses to deal with the operational, financial and strategic challenges reflected in the new operating environment.
It warns that with no significant recovery anticipated in oilfield services until the end of 2017 at the earliest, those players unable to adapt to a lower oil price environment could go out of business.
According to the report, the diverse and fragmented nature of oilfield services has contributed to the sector’s slow recovery, with the North Sea set to remain challenged in the short to medium term in contrast to onshore North America and the Middle East. And in M&A terms, only a small number of transactions have concluded in oil services over the past two years.
But the report authors believe the sector can adapt, developing more agile business models that can flex and respond to market changes.
Drew Stevenson, PwC UK’s head of oil and gas deals, commented:
“While we’ve seen a wave of asset deals sweep across the upstream oil and gas sector, it’s clear that for OFS, the upturn is likely to be much more lumpy and uneven.
“The world in which OFS companies now operate has significantly changed over the last 18-24 months and if they don’t adapt now, they could be out of business in the medium term.
“In order to not only survive but thrive in this low oil price environment, players must reset their businesses, innovate and demonstrate an agility like never before. Those firms who can develop differentiating speciality plays around technology, geography or innovative services offerings, will become early beneficiaries as the upturn gains momentum – and be well placed to either acquire or merge with other companies as the recovery takes hold.”
To ensure their business models are fit for purpose, OFS companies are being encouraged to review their operational, financial and strategic imperatives. As part of this process, businesses should consider:
While cost and headcount reductions may have boosted balance sheets in the short term, could more efficient planning across the supply chain, logistics, and overall project delivery reduce costs further?
If non-core assets – business and equipment – could be shed rather than cold-stacked?
With client’s evolving focus in mind, are they confident that their business is clear on its core capabilities and is delivering them effectively to the right targets and in the right geographies?
For some companies, this transition will not come easily. But in an era underpinned by an unpredictable and lower oil price, now is the time for them to explore new thinking and risk sharing models and pursue greater industry collaboration.
Rob Turner, director in PwC’s oil and gas team, said:
“Across the sector, Private Equity will be a strong barometer for investment appetite and we believe they will play an active role in OFS M&A over the next few years, albeit not to the same extent as in the upstream sector.
“PE is likely to have a narrow focus, targeting those firms with technological differentiation, strong project pipelines and quality assets which makes it even more crucial for those seeking investment or growth to reset their business model sooner rather than later. It could help them reap the PE rewards.”