Post on 08-Jun-2020
C O N F I D E N T I A L | www.oliverwyman.com
Oilfield Services and Equipment Sector Market Opportunity Update
May 2010
1© Oliver Wyman � www.oliverwyman.com
Contents
� Introduction and executive summary
� Global energy industry and oilfield services trends
� Value flows: Oilfield services sub-sectors
� Oilfield services and equipment mergers and acquisition activity
� Oilfield services customer needs and investment priorities
2© Oliver Wyman � www.oliverwyman.com
Executive summary
Oil service industry trends
� The global financial markets have stabilized and oil demand and prices and capital spending are recovering– Given that oilfield services activity and investment are highly correlated to commodity prices, the sector’s
revenues and profitability have begun to recover– Global E&P spending is forecasted to rebound by 11% in 2010, partly reversing a 15% slump in 2009– In the long term, oil demand will continue to expand and the oil & gas service sector will continue to grow
� The combination of NOCs restricting access to easier-to-reach reserves, elephant-sized field potential and technological improvement has made deepwater development a critical source of international and national oil company growth in some portions of the globe
� The push to more challenging reservoirs (deeper, higher pressure and temperature wells) is yielding more robust and expensive equipment and services. However, operators are frustrated with some of the quality assurance /quality control inadequacies existing in service providers creating opportunities for superior service providers.
� Oilfield services M&A activity has plunged to its lowest level since 2005 due to a lack of available debt capital and high volatility in valuations within the sector
– Both asset and corporate deal values have fallen year-over-year– As a result, oilfield service company valuations are at near record lows relative to replacement costs and Net
Asset Values (NAVs)
Investment considerations
� Value will be created where business designs are constructed that take advantage of industry trends and do a superior job of meeting customers’ (producers’) unmet and future needs
� According to operators, oilfield service company equipment is often fairly equivalent for many providers and this not a differentiator – the differences are personnel expertise, project management acumen, and having local expertise in the area
There are compelling opportunities today for private equity to consider in the
oilfield services industry
3© Oliver Wyman � www.oliverwyman.com
Contents
� Introduction and executive summary
� Global energy industry and oilfield services trends
� Value flows: Oilfield services sub-sectors
� Oilfield services and equipment mergers and acquisition activity
� Oilfield services customer needs and investment priorities
4© Oliver Wyman � www.oliverwyman.com
0
1 000
2 000
3 000
4 000
5 000
6 000
1975 1980 1985 1990 1995 2000 2005 Q1
2010
$0
$20
$40
$60
$80
$100
$120
U.S. Middle East
Latin America Europe
Africa Far East
Canada Price of Barrel
Global E&P spending is forecasted to rebound in 2010
Sources: Baker Hughes, EIA, Barclays Capital, Oliver Wyman analysis.
• Global E&P spending is forecasted to rebound by 11% in 2010, partly reversing a 15% slump in 2009, according to Barclays Capital’s most recent semi-annual spending survey.
– A strong rebound is forecasted for North America, which saw the biggest budget cuts in the past year. US spending is seen up 12% , while Canadian budgets are seen climbing 23%
– Capex budgets outside of NA will be led by the national oil companies, who as a group are expected to increase spending by 10%
– Companies based in Asia, Africa, Russia and the Middle East are planning the biggest spending increases, while European companies are keeping their budgets relatively flat from 2009
� The increase in spending is attributed to recent increases in commodity prices and loosening credit markets
� On average, companies are basing their 2010 budgets on an oil price of $70.16 per barrel and gas prices of $5.21 per thousand cubic feet
� About 45% of the companies said they expect to spend a greater share of their budgets on exploration this year than they did in 2009, up from 16% in 2009. That is good news for the seismic and oil-service industries
� The companies listed horizontal wells and fracturing and stimulation as the most important technologies for 2010, both of which are important in shale gas production, with 3D and 4D seismic considered the third most important
Key observationsEvolution of worldwide drilling activity and oil prices(1975-2009)
Rig
co
un
t
US
D (1
975-0
9 in
flatio
n a
dju
ste
d o
n 2
009 U
SD
)
Oil p
rice
5© Oliver Wyman � www.oliverwyman.com
0
50
100
150
200
250
300
350
400
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
EIA forecasted oil prices suggest improving market values for oilfield service companies
Source: Compustat, Energy Information Administration, OW analysis.1 OSX Index: Baker Hughes, Inc., BJ Services Co., Cameron International Corporation, Global Industries, Ltd. , Halliburton Company, Nabors Industries, Inc., Noble Corp.,
National Oilwell Varco, Inc., Oceaneering International, Inc., Rowan Companies, Inc., Transocean, Inc., Smith International, Inc., Schlumberger Ltd., Tidewater, Inc., Weatherford Int’l Inc. All prices indexed at 100 starting in Jan 2002.
World crude prices versus OSX index1
Monthly, January 2002 – February 2010 ($USD)
Oil Service Sector Index (OSX)
World Crude Oil Price ($/barrel)
R2= 87%
% o
f Jan
uary
2002
EIA forecasted prices
6© Oliver Wyman � www.oliverwyman.com
Oilfield services revenue and EBIT marginsIncreasing oil prices have led to increased drilling activity, and oilfield services revenues and margins have begun to rebound as quickly as they collapsed
Oil Services Large-Cap: Revenue Growth
Note: Includes historical figures and MS vs. consensus projection of top line growth for the average of SLB, HAL, WFT and BHI.
-20%
-10%
0%
10%
20%
30%
40%
2005 2006 2007 2008 2009 2010E 2011E 2012E
Oil Services Large-Cap: EBIT Margins
0%
5%
10%
15%
20%
25%
30%
2005 2006 2007 2008 2009 2010E 2011E 2012E
2011eMS 19.5%
2011eConsensus
18.9%
2011e
MS 19.0%
2011eConsensus
16.5%
Note: Includes historical figures and MS vs. consensus projection of EBIT margins for the average of SLB, HAL, WFT and BHI.
2011eMiddle East/Asia
25.0%
2011eMiddle East/Asia
24.2%
2011eConsensus
16.5%
MS
Consensus
Middle East/Asia
2011eConsensus
16.5%
MS
Consensus
Middle East/Asia
Source: Morgan Stanley.
Middle East/Asia is projected to have relatively high revenue growth and
EBIT margins relative to other regions.
7© Oliver Wyman � www.oliverwyman.com
Exploration and production spending cycleIn large part, commodity prices determine the cash flow of producers which is followed by increasing cash flows to service and equipment providers
Current International cycle
E&P margins expand
E&P spending increases
Oil service pricing rises
Production increases
E&P margins contract
E&P spending decreases
Oil service pricing falls
Production declines
Commodity prices rise
Cyclical inflection points are driven by the expected returns from drilling.
8© Oliver Wyman � www.oliverwyman.com
0%
50%
100%
150%
200%
250%
300%
DO ESV NE PDE RIG RDC ATW
Price/NAV Range (since 2001)
Market values recovering but still at low end of trading rangesThe price-to-net asset value, price-to-book, and price-to-sales for oilfield services companies are at or near historic lows
Source: FactSet, Morgan Stanley Research.
P/NAV Range and Price Target (line)
Current P/NAV (2009A)
P/NAV Trading Range average for NE/ESV/RDC
Source: FactSet, Morgan Stanley Research, companies included: DO, ESV, NE, PDE,RDC, and RIG.
Standard Deviation Range
Average Offshore Drillers P/NAV
Oil Services and Equipment: Price/Sales
Source: FactSet, Morgan Stanley Research. Includes Services, Equipment and Land Drillers.
Oil Services and Equipment: Price/Book
Source: FactSet, Morgan Stanley Research, Includes Services, Equipment and Land Drillers.
Standard Deviation Range
Average P/S
Standard Deviation Range
Average P/B
40%
70%
100%
130%
160%
190%
220%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0x
8.0x
2001 2002 2003 2004 2005 2006 2007 2008 2009 201020001997 1998 19992001 2002 2003 2004 2005 2006 2007 2008 2009 201020001997 1998 1999
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
0x
4.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
9© Oliver Wyman � www.oliverwyman.com
Contents
� Introduction and executive summary
� Global energy industry and oilfield services trends
� Value flows: Oilfield services sub-sectors
� Oilfield services and equipment mergers and acquisition activity
� Oilfield services customer needs and investment priorities
10© Oliver Wyman � www.oliverwyman.com
Business design value creation across upstream servicesOliver Wyman analysis has shown that each services segment has its own value creation characteristics and outcomes
Upstream Oil Field Service Value Creation trendsMV/Sales 2003, 2005, 2007 and 2009
Source: Compustat, Oliver Wyman analysisNotes: Market values are as of December 31. Sales are for full year, except for 2009 which is annualized Q1-Q3
Within any
segment, there are
market and value
creation
opportunities driven
by both the
segment and the
specific business
designs competing
in the segment
1,4
0,6
0,9
1,1
0,7
1,6
3,1
1,7
1,2
1,7
1,41,3
2,5
4,6
0,91,0
2,22,0
1,3
3,1
3,4
0,81,0
1,9
1,3
2,1
2,3
U.S. Regional
Low-Tech
Services
Engineering &
Construction
Equipment U.S. Regional
High-Tech
Specialty
Reservoir Info &
Seismic
Services
Integrated
Global Oil
Services
Drillers
2003200520072009
11© Oliver Wyman � www.oliverwyman.com
Contents
� Introduction and executive summary
� Global energy industry and oilfield services trends
� Value flows: Oilfield services sub-sectors
� Oilfield services and equipment mergers and acquisition activity
� Oilfield services customer needs and investment priorities
12© Oliver Wyman � www.oliverwyman.com
$0
$10
$20
$30
$40
$50
$60
$70
$80
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
0
40
80
120
160
Asset Corp. Deal Count
Oilfield services and equipment mergers and acquisition activityBoth asset and corporate deal value falling year-over-year
Tra
nsacti
on
valu
e
US
$ b
illio
ns
Transaction value and deal count
Deal c
ou
nt
0
10,000
20,000
30,000
40,000
50,000
2005 2006 2007 2008 2009
0
20
40
60
80
100
120
140
160
Baker Hughes Global Rig Count Deal countG
lob
al ri
g c
ou
nt
Glo
bal d
eal c
ou
nt
With financial operating margins under pressure and important North American land rig
counts at recent historic lows, total dollar transaction value plunged to its lowest level since 2005
Source: Thomson Datastream, Baker Hughes, Oliver Wyman analysis.Note: Figures represent all acquisition, merger and swap reserve transactions >US$10MM.
13© Oliver Wyman � www.oliverwyman.com
Oilfield services and equipment mergers and acquisition activity: Geographies Deal values for exclusively U.S. companies make up a relatively small, and declining portion of global oilfield services M&A
2005-2008 % of deal value by global region
Canada,
5.0%
Globally
diversified,
69.2%
Europe,
9.9%
United
States,
9.5%
Africa &
Middle East,
1.2%
Asia Pacific,
2.0%
Latin
America,
3.0%
Former
Soviet
Union, 0.2%
2009 % of deal value by global region
Globally
diversified,
73.8%
Canada,
0.5%
Former
Soviet
Union, 4.5%
Asia Pacific,
7.1%
Africa &
Middle East,
3.0%
United
States,
6.1%
Europe,
5.0%
Source: Thomson Datastream, Oliver Wyman analysis.Note: Figures represent all acquisition, merger and swap reserve transactions >US$10MM.
14© Oliver Wyman � www.oliverwyman.com
Contents
� Introduction and executive summary
� Global energy industry and oilfield services trends
� Value flows: Oilfield services sub-sectors
� Oilfield services and equipment mergers and acquisition activity
� Oilfield services customer needs and investment priorities
15© Oliver Wyman � www.oliverwyman.com
Oil and Gas Customers (Operators): Representative needs
Future / Unmet NeedsCurrent Needs
� Reliability
� Advanced technology
� Responsible commitment
� Scale
� Customer-aligned organization
� Good safety record
� Lower cost and time for well completions
� Reduced risk, cost, & complexity of exploration and development drilling
� Improvements to conserve rig time
� Higher reliability downhole systems requiring less frequent intervention
� Better HP/HT designs to enable drilling and production in more severe environments
� Integrated solutions that are flexible for different applications
� Enhanced seismic imaging in sand dune areas and for more effective production management
� Improved formation evaluation capabilities, especially in carbonates
� Enhanced recovery methods
� Enhanced water management
� Enhanced sand management
� Enhanced well testing and multi-stage completion/stimulation
� Enhanced reservoir characterization and asset management
� More IWS applications
� Better flow assurance capabilities
The extent to which equipment and service providers are successful in the future
depends on how well their future business designs address customers’ unmet needs.
Source: Oliver Wyman interviews.
16© Oliver Wyman � www.oliverwyman.com
E&P environment drivers for oilfield services demand It is also critical to understand the oil and gas resource map and potential to identify E&P hot spots for services and trends that will impact current and future oilfield service markets
Difference between proven gas reserves 1998 - 2008 in 1012 m3
Gas reserves in 1012 m3
1988 1998 2008
109.72 148.01 185.02
+35% +25%
+ Net increase
- Net decrease
USA: 2.08
Canada: -0.12
Russia: -0.21
Norway: -0.88
Venezuela: 0.69 Nigeria: 1.71
China: 1.09Iran: 5.51
Qatar: 14.56
UAE: 0.43
KSA: 1.5
Egypt: 1.15
Iraq: -0.02Algeria: 0.42Turkmenistan: 5.43
Kazakhstan: 0.01
Kuwait: 0.3
Australia: 0.86
Indonesia: 1
Malaysia: -0.02
Source: BP Statistical Review 2008, Oliver Wyman analysis.Note: Top 20 countries displayed.
17© Oliver Wyman � www.oliverwyman.com
Attractiveness for E&P investment
Legend
Potential for hydrocarbon discoveries
Fiscal attractiveness
Political stability
High
Low
Medium
Canada GoM
Trin. & Tob
Colombia Venezuela
Brasil
Argentina Angola
Algeria
Libya
Nigeria
Eq. Guinea
Norway Russia
IraqAzerbaijan/Kazakhstan
EgyptIran
India
Australia
East Timor
Indonesia
Malaysia
China
E&P environment drivers for oilfield services demand Investment in E&P worldwide will continue to focus on prospectivity, terms and stability; shortage of new unexplored frontiers is shifting attention to mature assets
Source: EIA, IFP, PEPS, Oliver Wyman analysis.
18© Oliver Wyman � www.oliverwyman.com
Discussion: Opportunity assessment preferences
Market segment
� Equipment vs service?
� Hi-tech vs. low-tech?
� Drilling related vs production related?
Business model and financial
� Asset intensive vs people intensive?
� Preferred size?
� Controlling interest vs. minority interest?
Geography
� US only?
� ME & North Africa?
� Europe?
� Global operations?
1
2
3
Most investment firms need to set their preferences to ensure focus and alignment of firm
capabilities to manage any investment ultimately made
19© Oliver Wyman � www.oliverwyman.com
Oliver Wyman Oil and Gas Oliver Wyman’s oil & gas practice works with companies in all elements of the value chain.
� Strategic planning
� Network and portfolio optimization
� Growth strategy
� Business design
� Customer experience and site operations
� Post -transaction integration
� Acquisition due diligence
� Cost improvement
� Operations effectiveness
� Operational and financial planning
� Industry investment opportunity scans
� Asset value maximization
� Optimization of capital deployment
� Pricing strategies
� Risk reduction
Practice Capabilities and Focus Areas
Industries / Clients Served
Oil Field Services and Equipment
Upstream Midstream Transport and Logistics
Downstream InvestorsNatural Gas Marketing and Supply
� Rig, drilling, and seismic
� Engineering, procurement and construction
� General oil field and well servicing
� Independent E&P’s
� Major integrated oil
� National oil
� Pipelines
� Terminals / storage
� Trucking and distribution
� Fuels marketing
� Lubricants marketing
� Refiners
� Convenience retailers
� Marketers / jobbers
� PE/VC firms
� Strategics
� Investment banks
� Gas marketing
� Liquefaction and regasification
� Other LNG infrastructure providers
Bob Orr, Partner+1.713.276.2187
bob.orr@oliverwyman.com
Ryan Isherwood, Partner+1.713.276.2245
ryan.isherwood@oliverwyman.com
For more information, please contact:
20© Oliver Wyman � www.oliverwyman.com