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North American OFS Sector Preparing for Transformational 2018

If 2017 proved to be a new beginning for the downtrodden oilfield services (OFS) sector, 2018 is expected to be the year that operators are positioned for future growth in both the onshore and offshore.

“Offshore suppliers will start to recruit, and within North America, skilled workforce could be a bottleneck,” said Rystad Energy analysts. “We expect that offshore margins will bottom out while the service utilization within shale continues to climb upwards and expand margins.”

Rystad also expects to see a last round of mergers and acquisitions (M&A) taking place before the market fully recovers as investors eye potential growth opportunities.

“2018 will be the year where the transformation of the service landscape is completed,” Rystad analysts said.

Evercore ISI’s James West and his team also see rising fortunes for the North American land-levered sector following a 47% year/year improvement in capital expenditures (capex) during 2017.

“Just as operations scaled back quickly with falling commodity prices in 2015/2016, the short-cycle nature of shale development has served as the basis for a robust upcycle,” West said. “While spending levels were still down over 50% from 2014 levels, the sheer advances in well complexity and completion intensity make it feel like (at least at the wellsite), that the industry is approaching overall peak activity levels.”

The new year should be another strong one for North America’s OFS operators, “headlined by continued pricing increases in completion-related services and accelerated bifurcation of the land drilling market,” West said.

A “critical bottleneck” is seen for the North American supply chain, particularly within last-mile logistics, or LML, a niche that has grown considerably as operators, for example, expand their sand/proppant businesses to be closer to the action.

“We expect U.S. spending to outpace Canadian spending,” with U.S. OFS capex rising 15% and Canada up 8% over 2017, West said. The gains are expected as the majors and international oil companies “commit increasingly to the hottest shale basins (the Permian, in particular).”

Evercore’s team also sees Canadian capex spend within the OFS segment to be more levered to natural gas/condensate prices, in addition to the seasonality of the winter drilling period.

The exploration and production (E&P) sector’s fortunes rose in tandem with rising oil prices in 2017, capex in North American unconventionals increased and the number of offshore projects rising by more than 50%, Rystad data indicated. Those two events have led to a restart for the OFS industry.

“While 2016 was a year where almost all service companies experienced reduced revenues, 2017 has been a year where the average service market has increased,” according to the Rystad team. “Players that beat the average market were mainly those exposed to North America and its shale business through delivering drilling and completion services.”

However, success has been uneven across the sector, with some companies performing below average, in part as project sanctioning fell off from 2014 through 2016. Offshore markets took a beating, in particular those exposed to engineering, procurement, construction and installation services, as well as drilling and subsea. Offshore capex fell by an estimated 18% year/year in 2017.

Along with revenue growth, Rystad’s team reported that OFS suppliers gained more control and focus over their business development and strategies during 2017.

“When it comes to workforce trends for 2017, suppliers in the U.S. have started hiring and have been increasing their workforce by 2% every month since October 2016. For the offshore market, suppliers have stepped down layoffs and are in the last phase of completing workforce reductions.”

Meanwhile, the number of significant M&A deals also increased in 2017 from 2016 by 35% to reach 130, with offshore drillers beginning to consolidate. Bankruptcies took a toll on some big offshore players, as well.

Big offshore operators including Tidewater Inc., Gulfmark Offshore Inc., CGG, Pacific Drilling SA and Seadrill Ltd. are being revamped after filing for Chapter 11 bankruptcies during 2017.

In turn, the M&A activity and bankruptcies created increased pricing power among the suppliers, according to Rystad. “That caused suppliers to prevent unit prices from falling further, and average unit prices ended up at the same levels as in 2016.”

Going into 2018, there may be as much as $200 billion worth of greenfield offshore and onshore projects ready to be sanctioned, according to Rystad’s team.

“This would result in a contract rally across most service segments, which would result in an average of 4% service price inflation across the value chain,” analysts said.

It may take a year before the inflation has an effect on upstream expenditures, though.

“The combination of inflation and ongoing activity will likely result in a 1% decline in the upstream E&P capex in 2018,” overall, while E&P operating capex budgets are predicted to grow by 6%.

Various OFS segments should react differently to the capex plans.

Based on its data, Rystad predicts the highest growth in 2018 is expected within the stimulation services segment, up 16%, while the oil country tubular products segment, aka OCTG, is expected to see 11% growth year/year.

“Growth in these segments is mainly made up by the shale industry in North America,” Rystad noted.

A third segment likely to witness double-digit growth in 2018 is engineering, with a steady level of FEED, or front-end engineering design, along with studies and more projects moving into detailed engineering for offshore in 2018.

On the other end of the scale, the construction and installation markets are expected to shrink as new contracts are unable to balance the falling backlog, Rystad said.

Analysts see a similar situation for the subsea market, “but we see more need for brownfield services and therefore subsea segments will mainly grow at around 3%.” Maintenance and operations subsegments are expected to grow in the low single digits.

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