While oil price uncertainty remains and views on the robustness and speed of a general market recovery vary, some fragile stability is now returning to the market for most oilfield services businesses.
After two years of a constant downward spiral of cost cutting and headcount reduction, many executives and business leaders are now looking beyond immediate survival and beginning to think strategically again, about how to position themselves for future growth opportunities.
Industry forecasts of global and local oilfield spend now assume a modest return to growth in 2017 and 2018. But the short to medium uptick is still expected to be modest with overall spend remaining well below 2013 and 2014 levels. Forecasts predict differing levels of recovery in different geographies and sub sectors.
In this context of subdued organic growth but with more confidence in the medium term outlook, M&A growth through acquisition is likely to be a big tool in the box for ambitious business owners and management over the next couple of years.
In our view, short to medium term deal activity will be driven by the aims of acquiring technology and improving solutions that can be provided to customers, rather than seeking to simply add capacity or scale to existing functions. Continued internationalisation of businesses beyond the North Sea should be a theme of outward M&A, though the relative weakness of sterling may provide a boost to inward investment in the UK.
Private equity, whose interest in oilfield declined markedly over the past two to three years, is likely to re-acquaint itself with the sector. Although, it is still likely to be the most used source of development capital to private businesses in the sector looking to expand through acquisitions.
Within the North Sea from an operational perspective, we expect to see the move towards more integrated service provision continue. While as a firm we remain reasonably optimistic that the North Sea will remain an active basin for some decades to come, we have to accept it is a mature basin where rampant cost escalation in the decade leading up to the 2014 oil price crash, has threatened long term viability. Accordingly, we do not think the industry can afford to, or will simply return to 2013 ways of working, with inefficient supply chains and over-reliance on day rate contractors and cost escalation.
Particularly in relation to late life assets, owners and operators will seek more integrated supplier solutions, which in turn will mean companies look to extend the bandwidth of their services. In part, they will do so through acquiring businesses and then face the additional challenge of integrating these newly acquired entities into their expanded offering to customers.
The number of oilfield services transactions hit an 18 year low in 2016. However, modest recovery since then, coupled with a more positive macro oil and gas outlook, signals a meaningful increase in expected deal flow over the next two to three years, as the industry re-positions itself for growth.