Oilfield equipment & services industry performance: Roland Berger's annual newsletter
For many years, we have been helping oilfield equipment and services companies understand and improve their relative financial performance and shareholder return using the Roland Berger Winners' analysis. Each year, we review the performance of the industry and comment on hot topics. Our complete newsletter can be found here.
Another tough year, but a recovery in sight
A tough year for the oil and gas industry, 2016 started with prices dipping to sub-30 USD/bbl levels. It ended with meek optimism regarding an upcoming recovery. Despite the industry stabilizing in the second half of the year, virtually no companies returned their cost of capital. Industry revenues dropped by 26%, industry EBITDA margins slipped from 20% to 16%, invested capital fell by 10% in 2016. Many players broke debt covenants, with the number of bankruptcies doubling from 2015.
However, investors are optimistic in an emerging oil and gas recovery and the ability for the equipment and services industry to profitably grow from it despite the industry's bleak performance. The oil & gas equipment and services industry's stock performance markedly improved in the second half of the year driven by increased investor confidence. Shareholder value in the sector increased 36% in 2016 compared to 12% for the S&P 500 index.
Profitless growth – achieving profitability in the recovering North American onshore segment
Financial performance for North American onshore investments
In the US, the recovery is already underway. North America onshore became the hotbed of activity with rig count increasing by 70% between May and December. Equipment and services suppliers with high North America land exposure saw their revenues rise by 21% in the second half of the year.
However, this recovery has been profitless. EBIT margins have remained deeply in the red for the seventh quarter in a row. EBITDA margins hovered around 10% – half of their pre-downturn levels, despite clear improvements in SG&A spending.
What happened? First, North American onshore suppliers were unable or unwilling to materially increase prices as they focused on increasing their volume of activity to improve utilization. Second, suppliers faced higher incremental costs as they quickly re-commissioned plants, equipment and other assets that had been idling during the downturn. The less efficient equipment, which had been cold-stacked, under-maintained and even sometimes "cannibalized" for parts had to be quickly readied for service. Crews that had been sidelined had to be bid back into the oil industry. In total, this drove cost of goods sold up faster than revenues, negating any EBITDA margin benefits which should have resulted from greater scale and SG&A cost reduction efforts.
Going forward, North American onshore suppliers have a difficult task: continue to grow while improving margins to achieve acceptable returns in a low oil price environment. While the North American oil industry outlook is promising, oil & gas equipment and services companies in this space have a lot to live up to. Falling into old habits will not create winners.This is our annual newsletter for 2016; we will continue to analyze oilfield equipment & services performance throughout the year.
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Frederic Choumert is a Principal at Roland Berger, a global strategic consulting firm. Follow him here on LinkedIn