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Beyond Cost-Cutting: The Opportunity For Oilfi Eld Services and Equipment Companies
Beyond Cost-Cutting: The Opportunity For Oilfi Eld Services and Equipment Companies
Upstream oilfield services and equipment (OFSE) com- Despite this, many OFSE providers left themselves
panies have been among the hardest hit in the energy poorly positioned by allowing costs to rise along with
sector since the start of the most recent oil price decline pricing and orienting themselves to higher-cost, tech-
in mid-2014. Their revenues have fallen significantly as nically challenging applications—profit pools that may
exploration and production (E&P) customers have slashed disappear for years in a low-price environment.
Capex and activity levels and pressured suppliers to cut
pricing. In fact, the leading OFSE companies saw a col- When prices fell, OFSE executives followed their tried-
lective 25% drop in revenue from the second quarter of and-true downturn playbooks. They cut capacity, reduced
2014 to the same quarter in 2015. Margins have also headcount and overhead, and tightened capital budgets
declined, though they have started to rebound in some as they waited for a recovery. But many have started to
subsectors as service providers have reduced costs. In awaken to the fact that the industry is at a once-in-a-gener-
total, the sector lost more than $130 billion in market ation strategic crossroads that demands conscious and
capitalization, with some segments hit harder than careful decisions about the future. The current down-
others (see Figure 1). turn could well rival that of the 1980s in duration, and
oil prices are likely to remain low for some time—well
Until the recent price decline, the OFSE sector had ex- into 2016 and perhaps beyond.
perienced a relatively smooth trajectory over the past
decade: Upstream operators outsourced much of the The industry that emerges from this low-price environ-
work across a growing industry, and operators paid a ment will look quite different from the one that entered
premium for availability as activity levels outpaced capac- it. Lower-cost volumes, particularly from the Middle
ity. As a result, prices for equipment and services soared, East, may continue to be strong, and North American
and OFSE returns—though cyclical—were above normal. tight oil, while challenged at current prices, will remain
Figure 1: While nearly all segments of the oilfield services sector have seen their revenues fall, some
have been hit harder than others, particularly in well services, drilling, procurement and topside processing
Oilfield services & equipment market, select segments, 2015 forecast (billions of dollars)
Offshore construction services
Operational services Automation and Platform drilling services Brownfield modules/modification
Insulation, scaffolding and surface electromaintenance Land workover rigs Hull/structure construction
152 95 90 86 79 69
100%
Artificial lift services Specialty
Metal, pipe chemicals
80 Drilling services Facility leasing Jackups/
and valve Drilling
Wireline and maintenance barges
tools
geoscience services Topside
60 Professional
services Land Drilling construction
Wellbore completion rotary rigs
Inspection fluids
40 and reentry services
and
maintenance Onshore
Support Casing and
20 Well stimulation Semi construction
services tubing steel
services submersibles services
(OCTG)
& drillship
0
Well services Maintenance Rigs and Drilling Procurement, construction
Operational and services drilling tools and and installation
professional services contractors commodities
Revenue decline (201415F)
>0% 05% 510% 1015% 1520% <20%
Notes: Data calculated from consolidated E&P expenditures; other sectors include topside and processing equipment; transportation and logistics; subsea equipment and installation;
engineering; and seismic, geological and geophysical
Sources: Rystad Energy (October 27, 2015); Bain analysis
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Beyond cost-cutting: The opportunity for oilfield services and equipment companies
2
Beyond cost-cutting: The opportunity for oilfield services and equipment companies
$1,000
500
2005
2006
200
2007 2010 2011
2012
100 2008
2013
2009
50 2014
20
10
0.001 0.01 0.1 1 10 100
Notes: Estimates based on Rystad forecasts of unconventional shale oil production and expenditures; BOE is barrels of oil equivalent
Sources: Rystad Energy; Bain analysis
and smaller capital budgets will delay some projects, • zero-base budgets to ensure costs are aligned with
though lower day rates and input costs will keep some the most critical and valuable activities;
running. Operators are working to radically simplify
their designs and engineer cost to make the econom- • radically simplify their operational footprint, supply
ics work at $50 per barrel. The industry will watch close- chain and logistics and ensure alignment with new
ly for signs of success as operators go through their capi- activity outlook;
tal planning processes next year.
• properly integrate acquisitions taken during the
Three imperatives for OFSE companies recent growth period; and
While they wait, OFSE leaders can look at three broad, • create a core set of standardized and modular-
strategic imperatives (see Figure 3). ized products.
Most executives are already well into the first imperative, Executives also need to reduce customer costs in a more
the short-term need to reduce costs by cutting discre- sustainable way, going beyond price reductions or trad-
tionary spending. Many are now looking for more ways ing margins for the duration. They should collaborate
to simplify their operations and generate more sus- closely with customers on a range of moves that radically
tainable efficiencies. Their goal is to create a leaner restructure the cost base of the industry by engineering
organization that can thrive in a low-price environment out cost, developing more efficient products and pro-
for years, coming out into a recovery in a stronger cesses, and seeking novel business models to better
position. Among the options: align with incentives. These tactics can include:
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Beyond cost-cutting: The opportunity for oilfield services and equipment companies
Figure 3: Three key imperatives for oilfield services and equipment companies
• developing integrated, just-in-time supply chains Finally, they should evaluate their business portfolio to
to reduce total cost of operations; look for opportunities to reduce their exposure to price
volatility, fill key gaps in their offerings and create op-
• exploring design-to-cost and value-engineering tionality to be able to respond effectively as the sector
approaches to engineer out costs; eventually recovers. They may choose to reorient their
product and geographic portfolios toward the lower end
• identifying areas where customers’ standards are of the cost curve, building on reduced costs of engi-
driving significant costs and constructively challenge neering and manufacturing. Or they may proactively
them to find ways to achieve the same objectives identify potential M&A targets to build scale and scope
at lower cost; and move lower on the production cost curve. Some
equipment manufacturers, those for whom oil and gas
• looking for selective areas where technology can push
is only one market among many, may consider exiting
costs down, as with condition-based maintenance;
the market entirely.
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