2019 will be seen as the year in which the international offshore industry staged its comeback against the seemingly unstoppable force of US shale.
At EV Private Equity (EVPE) we see compelling evidence for an underlying resurgence in the price of oil with commensurate benefits for the UKCS.
In 2014, Brent Crude was regularly trading above $100/bbl before plummeting over the subsequent years to a low of $28/bbl in early 2016, and finally stabilising to current levels of c.$63/bbl. Shale has in this context played a major role in macro supply and demand while assisting the US to become a net exporter. For example, US oil production increased from 9.1 million barrels per day (mbbls/d) in December 2014 to north of 12.9mbbls/d where it remains to this day.
A look ahead
Some public company CEOs believe that ‘peak shale drilling activity’ may have already been reached, which is due to constraints in access to capital and significant pressure to generate and return cash. To satisfy stakeholder demands, the shale industry will require the adoption of new technologies, such as those offered by Morphpackers and Workover Solutions. This will allow for intervention in existing wells and enhance ultimate recovery factors, which currently average 1-4%. This suggests most of the oil reserves are not produced from shale using the current methods available.
In comparison however, the Norwegian Continental Shelf (NCS) is now close to 50%. Notwithstanding the above, we expect shale oil production to keep growing in 2020 as new pipeline infrastructure comes online and US operators continue to innovate. That is, whilst the active rig count and pressure pumping jobs have reduced in 2019, the average length of lateral drilling has increased, meaning fewer jobs but enhanced production per well.
We predict a number of future-looking trends. Firstly, continued OPEC production discipline (which requires reasonable crude pricing to support indigenous social costs). Secondly, the prospective deceleration of shale production and finally, a global 18 year low on new discoveries in the international offshore sector will create pressure on global supply and demand resulting in the likelihood of a crude pricing improvement.
This, in turn, would stimulate an increase in capital expenditure from integrated and independent Oilcos towards international and offshore, with a more durable cashflow model. This can only bode well for the North Sea where we believe that most of the production increase will be focused around intervention and fast turnaround projects that can quickly return capital, such as subsea tie-backs, slot recovery and shallow field developments where CAPEX levels are lower.
This optimism is supported by the onset of recovery in the pricing and utilisation of jack-up and semi-submersible rigs. Concurrently, demand for subsea equipment has significant growth projected in 2021-23, which is one of the most robust lead indicators for offshore market activity.
EVPE is well positioned for this recovery as we’ve continued to invest in both our own organisation and our partner companies during the downturn. Our philosophy of partnering with excellent management teams and companies, whose offerings bring higher value and material net lower cost to customers, has seen us outperform the market during the downturn and capitalize on the opportunities provided by the ongoing recovery.
In the last year, at EVPE’s Aberdeen office, we have been preparing for this shift in the balance of power between shale and offshore through strategic partnership investments in innovative companies with a strong exposure to the sector. The combined Enterprise Value of the companies we invested in during 2019 was around $120m.
In January, we took a substantial stake in Banff-based Motive Offshore, which specialises in the manufacture, rental and inspection of high-quality marine equipment to the oil and gas, marine and offshore wind industries.
The strategy was reinforced in July with our major investment in Norway’s Enhanced Drilling, which has an enviable track record of innovation developing safer and more environmentally friendly solutions for top hole drilling and managed pressure drilling, which materially reduce CAPEX and OPEX levels versus alternatives.
In addition, we’ve actively developed our existing portfolio companies by pursuing acquisitions which add complementary products, services and global footprint. We will be announcing more such deals before the year is out.
Our confidence in this returning market is underpinned by high inbound interest in portfolio companies from large trade companies and private equity (PE) funds, which are seeking to support these businesses through the next phase of growth.
We have been closely monitoring the emerging macro trends of 2019 including the transformational impact of digital 4.0 technologies, the growing requirement to integrate Environmental Social and Governance (ESG) factors into all aspects of business, and the rapid emergence of net zero carbon strategies as part of the focus on energy transition.
EVPE’s portfolio is proof that our investment philosophy, through its long-term focus on companies that actively seek to improve safety, sustainability and efficiency in the sector, has anticipated these deep trends. As large operators move out of the North Sea and are replaced by nimbler and more incentivised PE-backed companies, innovative technological solutions will be required to maximise recovery of the estimated 20-30 billion barrels of remaining reserves in the basin. Going forward, these trends will continue to be at the forefront of our investment criteria.
A collaborative approach
Looking ahead, we will continue to work collaboratively with key industry bodies such as the Oil & Gas Technology Centre (OGTC), the Oil and Gas Authority (OGA) and the Oil & Gas Innovation Centre (OGIC) as they commercialise the next generation of technical innovation and promote technology adoption. In fact, the OGTC alone has co-invested £133 million in new technology programmes and approved more than 200 projects in areas from artificial intelligence to virtual reality, creating a genuine cluster of innovation excellence in the North Sea.
It was also positive to see a spotlight on the energy industry in recent political manifestos in the run-up to December’s general election, in terms of how each party proposes to attack the climate change emergency. This is sure to remain a priority issue in 2020 and beyond.
Against this backdrop there are many reasons to be cheerful. Net annual investment at the end of 2019 will be materially higher than in 2018 and looking ahead to 2020, we are confident that our three offices in Aberdeen, Stavanger and Houston will continue to engage effectively with existing partners as well as actively seeking exciting new investment opportunities.