Oilfield Equipment and Services Clearthought 2016 – market trends Image

Under pressure

Consolidation

M&A within the oilfield services industry remains particularly active driven by market pressures, the need to access new innovation, and company survival. Consolidation among leading industry players keen to mitigate the effects of the low oil price, as well as improve their global reach and acquire new technologies, remains strong.

Recent deals involving the world’s biggest players typify the trend. For instance, Schlumberger Ltd’s €13.2bn acquisition of Cameron International Corp allows the industry giant to achieve significant
efficiency gains through lowering operating costs, streamlining supply chains, and improving manufacturing processes.

Cameron is a manufacturer of flow and pressure control equipment for drilling, pipeline, processing, refining, subsea and unconventional completion applications. There is also plenty of consolidation
potential among mid-sized groups which, given the market dynamics created by the sustained low oil price, are taking the opportunity to acquire smaller players struggling to survive in this climate.

Sub-sector activity

Sectors such as advanced polymers and chemicals, automation and robotics, drilling, flow control, hydraulic fracturing, inspection and testing, monitoring equipment, production logging, and subsea and waste management have all seen considerable M&A during 2016. We expect smaller and mid-sized oilfield
services companies to come to market as consolidation takes further hold within specific niches.

Challenges

The significant challenges facing the industry are themselves drivers of M&A activity. In particular, in this environment of lower demand for their products and services, companies are having to adapt their operating models and extract themselves from unprofitable operations and/or territories, which is leading to disposals.

However, these challenges also present opportunities for suppliers. With exploration and production customers looking to reduce their fixed costs, suppliers can respond by offering more collaborative ways of working together and by taking on some of their customers’ requirements. This is welcome for equipment suppliers and service providers as, in the long run, it will make their relationships with these customers more embedded and make it more difficult to remove these suppliers from the supply chain.

Equipment suppliers and service providers can also look at the standardisation of their offerings in order to generate efficiencies and savings for themselves and their customers. As such, market factors are driving innovation not only in equipment design but also in processes and working practices.

Private equity

PE has a strong appetite for the industry with a focus on niche, proprietary product development and oilfield services. The present period of flux in global energy markets creates particular opportunities for PE-backed M&A.

PE investors in the oilfield supply chain often adopt buy-and-build strategies, and in the current environment there is a lot of logic in bringing together businesses with complementary product offerings or services.

Recent PE deals include: Primary Capital’s acquisition of MSIS Group Ltd; Blue Water Energy’s acquisition of Drilling Systems Ltd; and Kohlberg Kravis Roberts’ acquisition of OCHL Globe Ltd.

New technologies

M&A remains particularly strong around disruptive and early-stage technologies. Examples include: testing rates of pipeline flow; chemicals based technologies; electronics to test integrity of pipelines; preventative technology; nondestructive technology; and technologies emanating out of shale. One knock-on effect of the shale industry is that it has made a lot of processes elsewhere across the energy industry more efficient.

Liquefied Natural Gas

With countries increasingly wanting to switch from coal-fired power to gas, demand for LNG is set to grow strongly and is driving M&A activity in the sector.

For instance, Royal Dutch Shell plc recently acquired UK oil and gas producer BG Group plc, a deal which makes Shell the biggest LNG producer of any oil company. In another deal, two Chinese state banks have lent more than €10bn to the Yamal LNG project to develop a LNG plant in the Russian Arctic.

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