After mergers and acquisitions (M&A) activity fell to its lowest levels in a decade in the first half of 2016, there was a notable pick-up in oilfield services (OFS) deals in 2017. However, with the rationale behind each deal varying, it is difficult to discern a clear single market driver behind these recent transactions.
Throughout the past three years, since the 2014 oil price drop, there have been a few significant, high-profile global transactions – for example, TechnipFMC, Wood Group Amec Foster Wheeler, Schlumberger Cameron, and the completion of the GE Oil & Gas and Baker Hughes merger.
Some of these larger M&A deals have been driven by the rationale of extending the footprint of services and products across the oilfield lifecycle. These and other transactions sometimes also reflect themes of geographical and service diversification, with many traditional OFS players now more active in downstream, renewables and industrial services.
Private equity, which has historically invested heavily in the sector, has been understandably quiet over the last three years, with the exception of a few specialist oil and gas investors taking a counter cyclical view and investing at what they hope is the bottom of the market.
However, most notable, is that there’s been very little true consolidation in particular sub-sectors, with only a few transactions being driven primarily by the logic of consolidating competitor businesses in the same segment of the supply chain.
To some degree Wood Group Amec Foster Wheeler had this characteristic in certain markets, such as the North Sea, though the Competition and Markets Authority intervention and the subsequent sale of the Amec North Sea business to Worley Parsons has meant that four Tier 1 players have remained in the local market.
Despite most companies experiencing significant challenges with reducing costs and headcount, there have been surprisingly few insolvencies and corporate failures. It is hard to envisage any other industry effectively losing 50% of its revenues and not experiencing a material change in the structure of the supply chain or change in the corporate landscape. However, whilst the number of competing players in most sub sectors remain the same as before, almost all of them are smaller, financially weaker and operating with lower margins.
North Sea Capex and Opex in 2014 totalled c. £27 billion, according to Oil and Gas UK, with the UK supply chain contributing £41 billion globally. In contrast, the total spend for UK Continental Shelf (UKCS) in 2018 is forecast to be in the region of £17 billion, with the total global output of the UK supply chain reduced to £27 billion. However, there are almost as many companies now as there were four years ago competing for a significantly reduced pie.
Looking ahead, whilst I am not brimming with confidence, the general view is that the offshore sector saw some improvement during 2017, with some modest upturn expected over the next two years. However, with only a small number of new Capex projects being sanctioned in recent times, this will undoubtedly result in a time lag in some areas before recovery is realised.
Pricing and margins remain under pressure, and there is still considerable over capacity in many parts of the market – although this varies by sub sector. Logically, consolidation between competing businesses would appear to be the quickest answer to address these capacity and pricing challenges.
At a time when activity levels and confidence were continually dropping with the end point unknown, bold consolidating transactions were probably not deliverable. However, with the market now viewed as having bottomed and some confidence reportedly returning, will 2018 see an increase in transactions and, in particular, increased consolidation with the impetus to rebuild margins and kick-start corporate growth?
Alan Kennedy, UK Head of Oilfield Services for KPMG