A New Reality
It’s time that the oilfield services sector woke up to the new reality that hunkering down for pricing to recover to levels last seen two downturns ago is just not a viable strategy for survival. Just look at how that’s been working out. The financial reporting news continues to be littered with energy service companies in distress or being sold for what is effectively salvage value. All while the industry press is now lauding the oil and gas companies for achieving financial health that has been both forced and gifted upon them by tight financial markets that is constraining activity, that some would say appropriately, and driving rising oil prices that many others are already objecting to. At the same time, year-on-year growth in spend projections on equipment and services in the upstream energy sector out over the next decade are projected to be flat.
Service companies that have fought hard over the last couple of years have become ‘lean and agile.’ First, they had to shrink down to the very core of the best of what they do to survive in a market that all but ceased to exist for several months as the industry was effectively shut down. Then, they had to try to bring their businesses back to life and provide some kind of incentive to get people to start to come back to work in a market that was hugely oversupplied, and where pricing had collapsed because at thirty-dollar oil, even the oil companies could only do the minimum possible to keep their businesses running.
Fast forward to today where things have improved in terms of activity and employment, but on the services side, not on pricing. The operators have done a great job of maintaining cost discipline and the ongoing announcement of record profits and positive cash flows is far from evenly balanced across the industry. And this time around it is not because companies on either side are over-bloated or inefficient, far from it; the entire industry as a whole has lost so many people that everyone is both short-staffed and short of experienced staff. A few simple financial flags indicate that services pricing continues to be suppressed. So, let’s just wait for demand to push pricing up, right? Wrong. Growth in demand is going to be flat or close to it for the rest of the decade. Equipment that hasn’t been refreshed since the last decade, and people that haven’t been trained since before that won’t last that long, and there isn’t the capital investment around to fix it, never mind talk about the Energy Transition.
Other than electrifying frac fleets which will take some time and a lot of capital that is not flooding in as fast as many think, the rest of the services industry are trying to find creative ways to engage in the Energy Transition discussion with the equipment and services they already have. And unless operators can provide electric power at the wellsite so that they don’t need to bring their own generators, there is not going to be a lot that many service providers can do about emissions in the near term.
Consolidation through acquisition or trading assets is not ingrained in the DNA of services companies like it is with operators. In general, service businesses have preferred to grow through expanding outwards across the value chain that they serve as their capabilities and scale have grown. In many cases they build on adjacent skills or products because services companies are specialists by nature. The larger integrated service businesses have also tended to grow by acquiring smaller services businesses, but closer inspection will show that this is largely done in a similar pattern.
Oil and gas companies are also facing an identity crisis of their own with the Energy Transition race. We all accept that we will need clean oil and gas energy and products for the foreseeable future, and we are uniquely placed for our industry to take charge of the narrative and to drive the solutions to these challenges. We are great at developing technology and so capturing and storing carbon or developing new technologies to make new products out of it is right in our wheelhouse once there is a sensible way to pay for it. And the services companies, as the innovators, designers, and technology partners of the oil and gas companies have a role to play in this emerging market.
Adapt to Grow
So what should the new business imperatives look like for oilfield services in this environment? In the same way that oil and gas companies need to form partnerships and alliances with emitters, midstream providers, and large EPC companies, service companies need to rethink their relationships with their customers and with each other. The most compelling way forward today is for those service companies who can find a way in with something to offer in this new ecosystem is to also become a partner, investor, or form a business alliance of some kind, with one or more of these groups.
Oilfield Services Companies as Alliance Partners and Investors was written by Chris Chia, Managing Director and Oilfield Services Lead. In the next few weeks, Chris will further explore the unique challenges and opportunities facing energy services companies.