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The Norwegian oilfield services analysis 2019

2 | The Norwegian oilfield services analysis 2019

Contents

4 Introduction

5 Executive summary

9 The bottom has been passed for the reservoir and seismic segment

11 Higher activity for offshore drillers in 2018, but still some fundamental challenges to overcome

15 Lower break even levels for oil companies have brought shelved projects back to the market

20 Flattish 2018 for offshore operation companies as we are still in an early phase of recovery

23 Good future earning potential for decommissioning companies

24 More promising outlook for the Norwegian OFS industry

25 Growth across all segments

26 Viewpoint on the UK sector

27 Method

The Norwegian oilfield services analysis 2019 | 3


Introduction

Welcome to the 2019 edition of the annual EY review of the Norwegian oilfield service (OFS) industry. In this report, EY teams quantify the size and development of this diverse industry and analyze the dynamics across the value chain.

EY teams have been conducting the Norwegian OFS analysis every year since 2006, and the report is developed and expanded each year in line with the development of this large and diversified industry. EY teams also issues annual reports covering the UK- and the Dutch-based OFS industries.

In the 2019 edition, the OFS company database has been updated to reflect the addition of new legal entities to the empirical data set as well as removal of those entities that are no longer predominantly serving the oil and gas (O&G) industry. The EY database now holds a total number of Norwegian-registered OFS companies in excess of 1,100.

We hope that you find this report informative and useful and we welcome any feedback that you may have.

Norwegian continental shelf (NCS) oilfield service revenue

Rev

enue

, NO

Kb

0

100

200

300

400

500

600

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Aggregate 2018 revenues


Executive summary

The development in revenues finally turned in 2018After several years of decline following the oil and gas downturn, we observed in the 2018 EY report that the sharp decline in revenues from 2015 to 2016 had somewhat flattened out. In 2018, the OFS market experienced increasing revenues, finally reversing the long-lasting downturn. The EY report shows that aggregate revenues have increased by 5.9% to NOK306b in 2018.

However, despite the increase in revenue, the aggregate earnings before interest, taxes, depreciation, and amortization (EBITDA) margin decreased 1.2ppt to 5.9% in 2018. We note that the EBITDA margin has been declining for several consecutive years.

OFS revenue growth has been driven by higher activity from the EFI suppliersThe largest segment in terms of revenue — the engineering, fabrication and installation (EFI) segment — experienced a 11.2% increase in revenue during 2018, being the segment with the highest growth in 2018. Decommissioning was the segment with second highest growth in revenue, experiencing an increase of 10.2%. The only segment with declining aggregate revenue in 2018 was the operation segment, which saw a decrease of 1.6% compared with 2017.

Asset values aligned with current market conditionsThe consequences of the prolonged low oil price has forced large impairments upon the OFS industry. After large write-downs of assets in 2015 and 2016, impairments are down to 2014 levels. In 2018, the aggregate impairments decreased by almost 5% compared with 2017 to NOK8b. As a consequence of the large impairments, depreciations have also come down as the asset base has been reduced.

The more reasonable asset values have enabled EBIT margin to improve. In 2018, the aggregate OFS EBIT margin increased by 0.9ppt to -2.6%.

2014 2015

Norway OFS revenue and profitability

Rev

enue

, NO

Kb

Revenue EBITDA EBIT

Profi

tabi

lity,

%

-10%-5%0%5%

10%15%20%25%30%

-200-100

0100200300400500600

2016 2017 2018

Norway OFS revenue and profitabilityR

even

ue, N

OK

b 20172018

0

50

100

150

200

Rese

rvoi

ran

d se

ism

ic

Expl

orat

ion

and

prod

uctio

ndr

illin

g

Engi

neer

ing,

fabr

icat

ion

and

inst

alla

tion

Ope

ratio

n

Deco

mm

issi

onin

g

18

75

142

54

118

77

157

53

1

Depreciation and impairment

Cos

ts, N

OK

b

Depreciation Impairment

23

2824 23

18

9

23 22

8 8

0

5

10

15

20

25

30

2014 2015 2016 2017 2018

EBIT per subsegment

EBIT

, NO

Kb

Reservoir and seismic E&P drillingEFIOperation Decommissioning Aggr. EBIT margin

Agg

rega

te E

BIT

, %

-8%

-5%

-3%

0%

3%

5%

8%

-15

-10

-5

0

5

10

15

2014 2015 2016 2017 2018


Key financials per year and size segment

Currency: NOKb 2014 2015 2016 2017 2018

Employees (thousands) 131.6 112.7 101.2 95.3 94.5

Profit and loss

Revenues 520.6 457.5 337.1 289.1 306.2

Cost of goods 208.5 175.3 121.4 105.5 119.6

Labor cost 130.8 123.2 100.2 89.8 90.9

Other operating cost 119.4 112.7 89.2 73.2 77.7

EBITDA 61.9 46.3 26.2 20.6 18.2

Depreciation 23.0 27.9 23.7 22.5 18.3

Impairment 9.0 23.5 22.3 8.2 7.8

EBIT 30.0 -5.1 -19.8 -10.1 -8.0

Ratios

Avg. EBITDA% — small 6.2% 3.6% -0.6% -1.1% 4.8%

Avg. EBITDA% — medium 14.5% 10.8% 11.0% 9.4% 8.2%

Avg. EBITDA% — large 11.2% 10.4% 6.9% 7.1% 4.7%

Avg. EBITDA% — all 11.9% 10.1% 7.8% 7.1% 5.9%

2018 revenues and number of employees by size segment

Num

ber

of e

mpl

oyee

sRevenue No. of employees

0

10,000

20,000

30,000

40,000

50,000

0

50

100

150

200

250

300

<NOK100m NOK100m–NOK1,000m

>NOK1,000m

Rev

enue

, NO

KbR

even

ue, N

OK

b

Cost in % of revenue

Revenue Cost of goods Labor cost Other cost

521 458 337 289 306

40% 38% 36% 36%39%

25% 27% 30% 31% 30%

23% 25% 26% 25% 25%

0

100

200

300

400

500

600

2014 2015 2016 2017 2018

Small-sized companies turned the long-lasting downturn in profitability marginsThe Norwegian OFS industry comprised 1,136 active companies in 2018, of which 62.6% were characterized as small (annual revenues less than NOK100m), 31.5% as medium (annual revenues between NOK100m and NOK1b), and 5.9% as large (annual revenues higher than NOK1b).

The OFS industry is highly diverse in terms of revenues and number of employees. In 2018, the relative share of both large- and medium-sized companies increased by 0.8ppt and 2.8ppt, respectively. Large companies generally provide a wide range of services across the value chain, and many of these are global players. Small companies tend to be more specialized and focus on a narrower part of the value chain and specific technologies.

Aggregate profit margin decreased by 1.2ppt from 7.1% in 2017 to 5.9% in 2018, and hence continues its downward trend since 2014. Both medium- and large-sized companies saw declining profit margins compared with 2017. The small-sized companies, however, managed to turn the downward trend and reported a 5.9ppt improvement on the EBITDA margin. The EBITDA volatilities over time for each company size segment are indicative of the typical risk profiles. Smaller companies often have few and relatively larger accounts contributing to their earnings, as well as a limited coverage of medium- to long-term contracts. They are also often exposed by concentration geographically, either within their home market or toward specific export regions. As companies gain size, they are better positioned to allocate resources across a wider range of clients, OFS segments and geographical areas, and even toward markets outside the oil and gas industry.

After years of major cost reduction programs, operation costs are starting to increaseOFS companies have implemented major cost-cutting initiatives in response to the O&G downturn. As a result of large restructuring programs, we have observed a net job reduction of more than 35,000 employees since the peak in 2014, representing a 28% reduction of jobs. In 2018, we have observed a net job reduction of approximately 800 employees.

The overall cost levels have increased compared with 2017, mostly driven by increased cost of goods. In 2018, aggregate cost of goods in percentage of aggregate revenue increased by 3ppt to 39%.


NCS capex split in main categories

Cap

ex, N

OK

b

Source: Norwegian Petroleum Directorate

Development wells New fixed and floating facilitiesExisting facilities Pipelines and terminalsNew subsea facilities

0

50

100

150

200

250

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Forecast EY OFS analysis

Profi

tabi

lity,

%

Rev

enue

, NO

Kb

Revenue Adj. EBIT margin

-5%

0%

5%

10%

15%

-200

-100

0

100

200

300

400

500

2015 2016 2017 2018 2019 2020 2021

Investments on the NCS saw a solid growth in 2019, fueled by high activity in field development. Substantial investments have also been made in producing fields in order to improve recovery and extend the lifetime of the fields. Expected NCS capex presented by the Norwegian Petroleum Directorate suggests that investments in 2020 are expected to remain at the same level as 2019. The outlook from 2021 and onward is expected to remain relatively stable in the next few years, contributed by several larger projects on fields in operation as well as new field developments.

Overall, we estimate total OFS revenues will increase by 14% in 2019, where segments exposed to NCS capex, e.g., yards and rig companies, are expected to see the most positive growth. Going into 2020, we expect a more flattened development in revenues, as EY forecast shows a total growth of 2%. As NCS capex is expected to fall in 2021, we anticipate a negative change in aggregate revenue of 3% that year. EY forecast suggests that 2021 will be the most challenging for the EFI consultants and yards that are possibly facing double-digit negative growth.

The downturn in the Norwegian OFS industry appears to have passed the bottom, as the industry is gradually recovering. Although the industry managed to finally turn the long-lasting revenue downturn, it still has some fundamental challenges to overcome. With profit margins still tight, it is unlikely that the industry is going to return to 2014 levels anytime soon. However, we expect a gradual improvement of aggregate profitability to normalized levels.


The Norwegian OFS market experienced increasing revenues, finally turning the long-lasting downturn. The EY report shows that aggregate revenues have increased by 5.9% in 2018.


Key financials

Rev

enue

, NO

Kb

Revenue EBITDA ROCE

Pro

fitab

ility

, %

-10%

0%

10%

20%

30%

40%

-10

0

10

20

30

40

2014 2015 2016 2017 2018

4%

36%60%2623

4

Segment composition (2018)

Small <NOK100m Large >NOK1bMedium NOK100m–NOK1,000m

Number of companies Revenue

NCS exploration costs


36 36

53

0

10

20

30

40

50

60

05

1015202530354045

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Expl

orat

ion

cost

s (N

OKb

)

Exploration costs Number of exploration wells

The bottom has been passed for the reservoir and seismic segment

About the segmentThe reservoir and seismic segment includes Norwegian legal entities that operate seismic vessels for data gathering; companies that consult, analyze, interpret and display seismic data; and companies that manufacture and supply equipment for gathering and analyzing seismic data acquired for the E&P clients.

Reservoir andseismic

Exploration and production drilling

Engineering, fabrication and installation Operations Decommissioning

Reservoir and seismic• Since 2014, aggregate revenues in the reservoir and seismic

segment has declined by 46.5%. Due to the link with E&P companies’ exploration activities, the revenue development in this segment was impacted early in the cycle. Aggregate revenue in 2018 implies that demand for seismic data remained weak.

• In 2016, the revenue for multi-client services was, for the first time ever, higher than contract. Seismic companies focus more on multi-client seismic data since these have historically provided better returns, in addition to enabling companies keep their vessels utilized as demand cooled off. Competition in this market is growing, resulting in companies taking higher risk with lower pre-funding.

• Although the market for reservoir and seismic companies remained difficult in 2018, outlooks are now significantly better, as tender activity is picking up. Exploration cost on the Norwegian continental shelf (NCS) started to increase in 2018, and are expected to see further growth over the next two years, which is reflected in the companies’ backlogs.

• Aggregate revenues for the subsegment developed flattish with an increase of 2.5% in 2018. This implies that higher expected activity is materializing in the companies’ books. We believe that revenues are set to strengthen further over the next years. Aggregate EBITDA margin decreased by 4.3ppt to 34.2% in 2018. However, it is expected that the increased E&P spending, as well as lower break even levels for offshore developments will result in better margins going forward. This is supported by dayrates that have increased significantly in 2019.


Large-cap companies are key contributors to the overall increase in profitability for the segment.


Higher activity for offshore drillers in 2018, but still some fundamental challenges to overcome




Well services Rig companies Rig equipment companies

About the segmentThe exploration and production drilling segment includes companies that own or operate drilling rigs, as well as companies that deliver systems, products and services to these rigs and the wells being drilled. We have divided the segment into three subsegments: well service companies, rig companies and rig equipment companies.

Key financials

Rev

enue

, NO

Kb

Revenue EBITDA ROCE

Pro

fitab

ility

, %

0%

5%

10%

15%

20%

0

50

100

150

200

2014 2015 2016 2017 2018

4%

26%

70%

11263

23




Key financials

Rev

enue

, NO

Kb

Revenue EBITDA ROCE

Pro

fitab

ility

, %-5%

0%

5%

10%

15%

20%

25%

-10

0

10

20

30

40

50

2014 2015 2016 2017 2018

Well servicesThe subsegment includes companies that offer products, services and integrated project management for drilling and well construction, as well as intervention and other operations over the life cycle of a well.• Four consecutive years of declining revenues finally turned

in 2018, and the services subsegment gained 12.3% revenue growth from the bottom last year. This increase was driven by companies in the medium-cap and large-cap segments, as small-cap companies are still having difficulties in securing lucrative contracts that could turn the revenue development.

• Based on profit margins, it is evident that well service companies have regained some competitiveness as aggregate EBITDA margin for the segment rose by 8.8ppt to 14.5% in 2018, which outperforms the peak years 2013 and 2014 when revenues and activity were at all-time highs.

• Aggregate return on capital employed (ROCE) reached 14.8% in 2018, scratching 2013 peak of 15.1%.



Rig companies• The subsegment includes companies that own or operate

offshore drilling rigs. Several of the rig companies have their rig assets registered abroad, which likely impacts the relevance of the ROCE part of the analysis for this subsegment.

• Market fundamental for offshore drillers have improved somewhat over the last year, but we are yet to see this materialize in revenue growth on an aggregate basis. Total revenues for rig companies continued the downfall in 2018, but with diminishing strength. Our view is that there are still structural challenges to overcome, related to oversupply of rigs, better drilling efficiency that challenges the classical supply and demand model, unsustainable debt levels and high all-in cash break even levels.

• Due to the harsh environment, the NCS has historically demanded high-end rigs that flushed the market when oil prices were booming. Operators of such high-opex fleets are having difficulties in generating sufficient cash flow to cover operating expenses, debt repayments, tax and maintenance cost in the current day rate environment. Having a low cash break even is a key competitive advantage as it allows for positive cash flow at lower day rates. Operators of lower-opex rigs, typically jack-ups and shallow-water rigs, are likely to be in a position to underbid peers exposed to the deep or ultra-deep water segment with higher gearing and opex. However, these effects are in general muted on NCS given the asset specialization requirements.

• Profit margins among drillers have typically lagged on the oil price and E&P budget trends, due to contract durations, cancellation clauses and a general high level of infill drilling on the NCS during the cycle. Although drilling activity improved further in 2018, aggregate profit margins were down in the subsegment as a result of weak day rates.

• We reiterate our view from last year that technical enhancements have materialized in efficiency gains among drillers. Hence, each rig is able to cover a relatively larger share of demand, which offsets the impact from scrapping. However, these gains have been important contributions to lowering the offshore

development costs and consequently increasing offshore competitiveness in the capital allocation battle.

• The gap between book value and market value of drilling assets has become smaller as drillers have presumably passed the finish line with write-downs. In 2018, aggregate impairments were close to zero, and market specialists are claiming that asset values can now be defended by day rates for the first time in years.

Key financials

Rev

enue

, NO

Kb

Revenue EBITDA ROCE

Pro

fitab

ility

, %

-10%-5%0%5%

10%15%20%25%30%35%

-20-10

010203040506070

2014 2015 2016 2017 2018


NCS drilling activity

Num

ber

of w

ells

Development wells Exploration wells

Average 2008–13 Average 2014–19

0

50

100

150

200

250

300

201920182017201620152014201320122011201020092008



Rig equipment companiesThe subsegment comprises companies that offer systems and equipment for rigs and topsides. • While rig companies on their side are seemingly recovering

and regaining competitiveness, equipment suppliers remained battled in 2018. The market for new builds is still challenged by the oversupply of drilling vessels, and a recovery for the companies in this subsegment will remain on hold until we see a healthier balance of drilling vessels. In 2018, aggregate revenues developed flattish, and are still at levels ~80% lower than those observed in 2014 when activity peaked.

• Although market outlooks remains muted and revenues are seemingly lower-for-longer, rig equipment suppliers have made great effort in reducing direct operating expenses, which we saw materializing in the companies’ books in 2018. Aggregate EBITDA margin turned the negative development and increased 6.3ppt to 5.7%.

• The subsegment is highly consolidated as the two largest companies accounted for ~70% of the combined revenues in 2018. Consequently, the two companies are the key driver for the overall financial development in the subsegment. The abovementioned improvement in profitability is solely driven by the 10.8ppt increase in combined EBITDA margin for the two large-cap companies. In 2018 the two companies reported a combined EBITDA margin of 8.3%.

• Although demand for rigs has somewhat increased the last year, we still believe that outlooks for new builds will remain challenging, as the increase in demand will probably absorb the current excess capacity first, by means of reactivating stacked rigs. In addition, a focus on drilling efficiencies is also expected to somewhat offset a short- to medium-term increase in the demand for new rigs from the yards.

• While we wait for the more fundamental challenges to be sorted out, there is potential for equipment suppliers in the aftermarket, as the offshore original equipment manufacturers (OEMs) can focus on servicing and upgrading the automation aspects of their products and solutions. Another aspect is

landbased drilling, which are trending in favor of rig equipment companies. Such drilling processes typically requires a higher degree of techincal specification due to extreme length laterals where bigger and stronger rigs are needed. However, it is uncertain how these trends may impact offshore-oriented rig equipment suppliers in Norway over the next years.

Key financials

Rev

enue

, NO

Kb

Revenue EBITDA ROCE

Pro

fitab

ility

, %

-5%

0%

5%

10%

15%

20%

25%

30%

-10

0

10

20

30

40

50

60

2014 2015 2016 2017 2018

EBITDA drivers indexed

Inde

x

Revenue COGS

2014 2015 2016 2017 2018-1,0-0,8-0,6-0,4-0,20,00,20,40,60,81,0

Pex Ind.exp


Margins have typically developed negatively when shipyards have had high tender activity.


Key financials

Rev

enue

, NO

Kb

Revenue EBITDA ROCE

Pro

fitab

ility

, %

-4%

-2%

0%

2%

4%

6%

8%

10%

-100

-50

0

50

100

150

200

250

2014 2015 2016 2017 2018

9%

27%64%368

162

32




Key financials

Rev

enue

, NO

Kb

Pro

fitab

ility

, %

Revenue EBITDA ROCE

-30%-25%-20%-15%-10%-5%0%5%

0

5

10

15

20

25

2014 2015 2016 2017 2018

Lower break even levels for oil companies have brought shelved projects back to the market

About the segmentThe EFI segment includes Norwegian legal entities involved in equipment supply, manufacturing, construction and installation of offshore O&G production units — both surface (topside) and subsea.

We have divided the segment into five subsegments; shipyards; larger engineering, procurement, construction and installation (EPCI)/yards; subsea; consultants and engineering houses; and workshops and product suppliers.




Shipyards Larger EPCI/yards Subsea Consultants and engineering houses

Workshops and product suppliers

Shipyards• The subsegment includes shipyards that construct offshore

vessels such as PSV, AHTS and OSCV vessels.• Since 2012/2013 Norwegian shipyards have seen a material

decrease in orders of offshore vessels. Measured in number of vessels, orderbooks in 2018 showed that fishing vessels, well boats and service vessels to the aquaculture made up 40% of the total. Ferries and cruise ships made up 30%, whereas vessels to offshore wind developments made up 10%. Hence, shipyards have become less relevant as an OFS segment.

• In terms of activity, outlooks are now better. Orderbooks at Norwegian shipyards showed 98 vessels in 2018, with a combined contract value of NOK 48.2 billion. As a comparison, figures for 2017 and 2016 were 85 and 66 vessels with contract values of NOK 34.5 billion and NOK 28.3 billion, respectively. We see that higher activity is reflected in the reported figures, as aggregate revenues for the subsegment have increased 10.3% since the bottom in 2016. Margins are however further down due to strong price pressure from international shipyards and repercussions from the industry downturn in form of cost overruns and undelivered offshore vessels. Margins have typically developed negatively when shipyards have had high tender activity. Hence, we expect these to improve with the new orders from other segments, and a more reasonable spending level in the industry.


Key financials

Rev

enue

, NO

Kb

Pro

fitab

ility

, %

Revenue EBITDA ROCE

-5%

0%

5%

10%

15%

20%

-10

0

10

20

30

40

2014 2015 2016 2017 2018

NCS capex split in main categories

Cap

ex, N

OK

b


Development wells New fixed and floating facilitiesExisting facilities Pipelines and terminalsNew subsea facilities

0

50

100

150

200

250

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024



Larger EPCI/yardsThe subsegment includes companies that offer EPCI of production and processing modules and facilities. Companies in the subsegment are also major maintenance and modification contractors for offshore topside facilities and onshore processing and receiving terminals. • The fundamentals in the O&G industry have improved compared

with the past few years, with oil prices now at a higher level and an increasing number of final investment decisions for offshore projects globally. EPCI contractors have now put a four-year period of declining revenues behind as revenues bottomed out in 2017. Aggregate revenues increased by 4.4% in 2018. With the higher oil price, it is reasonable to believe that E&P operators are now more comfortable with investments in new developments. That said, O&G prices are still volatile and there is significant uncertainty regarding the timing of large investments in field developments. Pricing competition has remained fierce, both from Norwegian and international companies. Compared with a year ago, tendering activity is finally higher. E&P drilling on the NCS has remained robust, which all else being equal is a positive sign for long-term opportunities.

• However, we reiterate our view that it is worrying how the pipeline of new projects is decreasing now that several contracts on major fields such as Martin Linge, Aasta Hansteen and Johan Sverdrup are either completed or in the completion phase. Few sizeable discoveries have been made on the NCS since Johan Sverdrup, and it may take some time before new discoveries mature into newbuild projects. In order to meet the potential longer-term drop in newbuilding on the NCS, EPCI contractors can position for new segments and markets such as tiebacks with unmanned installations, larger modifications of offshore installations, offshore wind and decommissioning.

• Expected NCS capex presented by the Norwegian Petroleum Directorate suggested that 2019 and 2020 would bring a short-term peak in spending, compared with what we have seen in the past three years. It is noticeable, however, that investments in new and fixed floating facilities are expected to decrease significantly going forward, somewhat offset by higher investments in new subsea facilities. Absolute values are, however, small compared with the capital allocated to development wells that makes up approximately 40% of the total NCS capex.

• Although NCS capex outlooks are somewhat muted after 2019, it is worth mentioning that EPCI contractors have reduced their cost base significantly the past few years, and are now better positioned for a potentially lower-for-longer market. Last year, we observed that aggregate EBITDA margin rose to levels that were comparable to those observed in the period 2012–13, when the industry enjoyed oil prices well above US$100 per barrel. Aggregate margins developed flattish in 2018, which we interpret as these cost cuts being sustainable going forward.

EBITDA drivers indexed

Inde

x

Revenue COGS

2014 2015 2016 2017 2018

Pex Ind.exp

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8


Key financials

Rev

enue

, NO

Kb

Pro

fitab

ility

, %Revenue EBITDA ROCE

-5%

0%

5%

10%

15%

-30

-10

10

30

50

70

90

2014 2015 2016 2017 2018



SubseaThe subsegment includes companies that engineer and fabricate subsea equipment and companies within subsea umbilicals, risers and flowlines (SURF) and inspection, maintenance and repair (IMR). • The year 2018 ended with a surge of subsea tree awards as oil

companies locked in lower supply chain costs. It is, however, uncertain if this demand will continue to grow and allow OEMs to finally rebuild backlogs and regain pricing power. The high number of subsea trees ordered in 2018 reflects that the subsegment may find itself on the right side of a recovery. Although the increase in subsea tree orders has been a welcomed relief for the still-wounded subsea segment, we are still to see this to materialize in higher aggregate EBITDA margin and a positive ROCE for subsea suppliers on the NCS. We do, however, observe an eagerly awaited growth in aggregate revenues, which increased by 17.9% in 2018. It is worth mentioning that this increase was driven by companies in the large-cap segment.

• E&P companies have met the wave of onshore developments with a continuous lowering of the break-even level for offshore projects, and we believe that they have managed to regain some competitiveness in this battle. Presumably, this is also why we now see that shelved projects are coming back to market, although with reduced scopes or split into multiple phases. This typically means lower well counts and less work for OFS companies. We have repeatedly emphasized that sanctioning of new projects with higher well count is the most important driver for development-focused OFS companies, especially now that order backlogs are considered legacy-free.

• With backlogs cleared for older high-margin contracts and through the work done during the worst downturn, recent

years’ profit margins are better indicators of the pricing power among OFS suppliers. The cost inflation that came with the strong revenue growth up until 2014 is reversed, and OFS companies have the past few years proved to be adaptable to new market fundamentals. We observe that small- and mid-cap companies have increased EBITDA margins in 2018, whereas large-cap companies are still lagging on the positive profitability development. Large-cap companies made up 73% of the aggregate 2018 revenues in the subsegment, and 29% of the aggregate EBITDA. Subsequently, E&P operators are generating record-high cash flows as a result of significantly lowered hurdle rates. This could reflect that the pendulum is set to swing back in favor of suppliers.

• Where we observed a halving in the number of companies in the large-cap segment in 2016, we now see that more companies have reentered the >NOK1b revenue category in 2018, and we also see a growth in the number of companies in the mid-cap segment.


Key financials

Rev

enue

, NO

Kb

Pro

fitab

ility

, %

Revenue EBITDA ROCE

-15%-10%-5%0%5%

10%15%20%25%30%

-15-10-505

1015202530

2014 2015 2016 2017 2018

Key financials

Rev

enue

, NO

Kb

Pro

fitab

ility

, %

Revenue EBITDA ROCE

-5%

-3%

0%

3%

5%

8%

10%

-45-30-15

0153045607590

2014 2015 2016 2017 2018

Consultants and engineering housesThe subsegment includes companies that supply skilled personnel and consultants to the E&P operators and OFS companies. • As the activity in the oil and gas industry picked up in 2018,

consultants and engineering houses managed to turn the three-year period of declining revenues. On aggregate, revenues were up 19.1% in 2018. As projects have been redesigned for lower break even points, the appetite for support in cost efficiency programs have increased among operators and suppliers. In addition, focus on safety and sustainability within the energy transition have been key areas for the industry, which all else equal provides opportunities for consultants and engineering houses.

• When the industry was on a rise, a strong price pressure lowered profit margins for consulting and engineering services. We see that this trend has turned, as aggregate EBITDA margin increased for the second consecutive year in 2018, and are now 5.3ppt higher than the bottom in 2016. We believe that with the inevitable energy transition and strong focus on costs comes potential for consulting and engineering services in the coming years.





Workshops and product suppliersThe subsegment includes companies that design, develop, fabricate and sell products and systems to offshore installations, rigs and vessels. • Workshops and product suppliers are closely tied to the rig

activity, which have been low over the last couple of years. Hence, decreasing backlogs have characterized earnings and profitability. However, activity increased in 2019 as aggregate revenues rose by 12.2%.

• Despite a slight recovery in activity, profit margins have developed flattish since 2016. In the period from 2011, a strong price pressure has characterized earnings for workshops and product suppliers. Due to a prolonged focus on keeping costs low and maintaining lowest possible break even points for new projects, we believe that the recovery for profit margins will remain on hold for some additional time.


Profit margins have been declining continually since 2011, due to strong price pressures.


Key financials

Rev

enue

, NO

Kb

Pro

fitab

ility

, %

Revenue EBITDA ROCE

-5%0%5%

10%15%20%25%30%35%40%45%50%

-505

101520253035404550

2014 2015 2016 2017 2018

Flattish 2018 for offshore operation companies as we are still in an early phase of recovery

Reservoir and seismic



Offshore logistics Maintenance and modification Production

About the segmentThe operations segment includes entities that support oil companies in the production phase. We have divided the segment into three subsegments; offshore logistics, maintenance and modifications (M&M); and production.

Offshore logisticsThe subsegment includes companies that own and operate offshore vessels, helicopter companies and supply bases: • Activity started to pick up slightly for offshore logistics

companies in 2018, as we saw a flattish development in revenues. Years of decline are seemingly turning. The key revenue drivers for the subsegments are day rates for offshore vessels and helicopter transport of personnel offshore. The demand for offshore vessels increased in 2018, but the combination of reactivation of vessels from lay-up and vessels mobilizing between regions was again the main reason why day rates have only seen a modest increase in the period. Despite four consecutive years of decreasing profit margins, aggregate EBITDA margin was 9.9% in 2018, which reflects that the industry has had a lot to work on in terms of cost of services.

• Good news is that the number of vessels in lay-up were reduced in 2018; however, according to shipowners, reactivation of laid-up vessels was done based on firm contracts rather than on speculative basis. There are still a significant number of vessels in lay-up, many of which have been laid up for a period of more than three years. On the other side, newbuilds were scarce in 2018 — both in terms of new orders and deliveries.

Key financials

Rev

enue

, NO

Kb

Pro

fitab

ility

, %

Revenue EBITDA ROCE

-4%

0%

4%

8%

12%

16%

20%

-20

0

20

40

60

80

100

2014 2015 2016 2017 2018

13%

61%

26%

201107

9





Key financials

Rev

enue

, NO

Kb

Pro

fitab

ility

, %

Revenue EBITDA ROCE

-20%-15%-10%-5%0%5%

10%15%20%

-30

-20

-10

0

10

20

30

2014 2015 2016 2017 2018

Key financials

Rev

enue

, NO

Kb

Pro

fitab

ility

, %

Revenue EBITDA ROCE

0%2%4%6%8%

10%12%14%16%

0

5

10

15

20

25

2014 2015 2016 2017 2018

Offshore logisticst Maintenance and modification Production

Offshore logistics Maintenance and modification Production

Maintenance and modification (M&M)The subsegment includes companies offering M&M for offshore installations, including surface treatment, passive fire protection and inspection services:• The need for maintenance and modification work increased

with the general activity level on the NCS in 2018. Aggregate revenues for the subsegment rose by 8.2% in 2018, but are still at muted levels compared with the peak years in 2013-2014. However, we see that the great efforts made in cost optimizations and hours spent on MMO work have materialized in the companies’ books. Aggregate EBITDA margin strengthened further to 6.3% in 2018 and are now close to the levels observed in 2012-2013 when activity and margins peaked.

• We believe that deferrals and postponement of work done by E&P companies during the downturn are now seeing an end. The cost optimizations that have been made are proving to be sustainable, and with lower break-even levels shelved projects are reentering the market. Another key factor going forward is oil companies incentive to prolong the lifetime of existing fields, such as Equinor’s recent announcement of planning to prolong the lifetime of Statfjord.

ProductionThe subsegment includes companies active in production, supporting equipment and services, such as floating production storage and offloading (FPSO) units, facility management, waste management, communication and production operations:• Profitability in the production subsegment still stands out

as aggregate EBITDA margin remained stable at 12.9%. We have not observed such stability in profit margins during the downturn for any other segment in the OFS environment. However, revenues decreased for the third consecutive year in 2018, and are now at levels that are 27.4% lower than the peak observed in 2015.

• Our view is that the key reason for the stand-out margins is that companies in the production subsegment are less exposed to the operators’ capex budgets.


The decommissioning segment saw increased revenues in 2018.

Key financials

Rev

enue

, NO

Kb

Revenue EBITDA

Pro

fitab

ility

, %

-2%

0%

2%

4%

6%

8%

10%

-0,3

0,2

0,7

1,2

2014 2015 2016 2017 2018

3%

97%

4

2




Disposal and cessation costs on the NCS

Cos

ts, N

OK

b


0

2

4

6

8

10

12

14

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024




Good future earning potential for decommissioning companies

Decommissioning• In 2018, there were a total of six companies that had

decommissioning as their core business. As mentioned in the segment introduction, the number of companies with partial revenue within decommissioning is significantly higher. Aggregate revenues in the segment increased by 10.2% in 2018.

• We have seen that the lifetime of fields on the NCS are ever increasing due to technical enhancements. With the prolonged lifetime, decommissioning projects are delayed further out in the horizon. Hence, additional decommissioning projects are accumulating and will likely result in large orders for companies in this subsegment when decisions to close down and demolish installations are made.

• The aggregate profitability in the subsegment has varied fluctuated significantly over the last few years. In line with the market, aggregate EBITDA dropped to an historical low in 2016, as personnel expenses and other indirect operating expenses remained flat or increased whereas revenues dropped significantly. We observe that the two cost items have remained stable since, and hence, the key driver for profitability have been direct operating expenses, which have fluctuated significantly in the period. In 2018, these increased to levels observed in 2014, which materialized in negative aggregate EBITDA.

About the segmentThe decommissioning segment includes companies that primarily offer services related to the decommissioning of offshore installations. However, decommissioning-related services, such as plugging and abandonment (P&A), and infrastructure removal, form an integral part of the strategic and operational focus of many OFS companies, which have operational focus primarily in other segments.


More promising outlook for the Norwegian OFS industry

IntroductionThe downturn in the Norwegian OFS industry appears to have passed the bottom, as the market saw an increase in aggregate revenue for the first time since 2014. The outlook for 2019 appears to be promising, as we expect revenues to grow by 14%. Segments exposed to NCS capex, e.g., yards and rig companies, are expected to see the most positive growth. Going into 2020, we expect a more flattened development in revenues, as EY forecast shows a total growth of 2%.

As NCS capex is expected to fall in 2021, we expect a negative change in aggregate revenue of 3%. EY forecast suggests that 2021 will be the most challenging for the EFI consultants and yards that are possibly facing double-digit negative growth. Further, we expect a gradual improvement of aggregate profitability to normalized levels. However, with profit margins still tight, it is unlikely the industry is going to return to 2014 levels anytime soon.

Profi

tabi

lity,

%

Rev

enue

, NO

Kb

-5%

0%

5%

10%

15%

-200

-100

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Revenue Adj. EBIT margin



Growth across all segments

Reservoir and seismicFor the reservoir and seismic segment, the outlooks are improving as tender activity is picking up. As activity is increasing, the aggregate revenue is expected to grow at around 8% in 2019. For 2020, we expect to see further growth, albeit at a slower pace. As NCS capex is expected to decline in 2021, we expect a negative change in revenue of 5%.

E&P drillingThe E&P drilling segment is expected to see the most growth during EY forecast period. Although rig day rates are expected to increase in the coming years, they are still below historical levels. Rig equipment and well services companies are expected to take advantage of the steady state in NCS drilling activity as well as pick up in well intervention campaigns.

Engineering, fabrication and installationThe outlook for the EFI subsegment looks positive for 2019, as it is expected that these companies will benefit from several

hookups and field start-ups on the NCS. However, we expect a drop in 2021 following the forecasted decline in NCS capex. The subsea companies are expected to maintain a modest growth during the forecast period. The workshops and product suppliers are expected to see higher growth in 2019, followed by a period of modest growth in 2020.

OperationsWe expect a continued medium to high single-digit growth in revenues for M&M companies, driven by increased demand from delayed maintenance as well as an overall increase in producing NCS assets. The offshore and logistics subsegment is still struggling with overcapacity; however, we expect a reduction in number of vessels in lay-ups for the coming years. For the production subsegment, we expect a double-digit growth in 2019 primarily driven by the start-up of new fields, followed by a period of slightly negative growth in 2020 and 2021.

Norway OFS revenue growth rate forecast

Reservoir and seismic Exploration and production drilling Engineering, fabrication and installation Operations Total

8%

2%

-5%

15%

4%

-2%

15%

0%

-5%

11%

4%

1%

14%

2%

-3%

-10%

-5%

0%

5%

10%

15%

20%

2019 2020 2021

Rev

enue

gro

wth

Viewpoint on the UK sector

The unremitting pressure on the OFS sector has continued in 2018. Upstream companies continue to exercise considerable capital discipline in the light of the perceived longterm range-bound commodity price, and the added uncertainty arising on the speed and scale of the energy transition. The level of investment in unconventional resources in the US has been scaled back, taking out one of the drivers of growth in global OFS revenues. On a more positive note, there is some recovery in capital spending outside of unconventional resources, albeit the capital spend is still almost 40% lower than pre 2014 levels.

The global picture plays out fairly consistently in the UK. 2018 has seen the first increase in revenues in the sector since 2014, although that the recovery is a very modest 2.3%. Nevertheless, it represents a turning point given the reduction in revenues of 34% in the 3 proceeding years. Margin has also stabilized, with a slight increase of 0.1%.

One of the more surprising elements of the 9th UKCS OFS report is that the number of companies participating in the sector continues to increase, which is counter-intuitive at a time when revenues and margins have only just stabilized. Over the last few years many commentators have spoken of the inevitable consolidation in the sector, and indeed of the reduction in participants as a result of financial difficulty — yet neither of these has impacted in a discernible way.

The future for UK OFS companies remains positive, albeit challenging, as there are clear signs that upstream investment in conventional resources is picking up, and even if that is not fully reflected in the UKCS there will be overseas projects which offer export opportunities. Other areas of growth in the UKCS include the increasing demand for decommissioning services, diversification into renewables and other sub-sectors as energy transition accelerates, and building capacity in decarbonization as the oil and gas industry pivots toward net zero in its production activities.

Ernst & Young LLPDerek LeithEY Global Oil and Gas Tax Leader

[email protected]



Method

Data collectionAccounting information is publicly available from the Brønnøysund Register Centre. The companies’ business addresses as available in the register have been used to reflect the entities’ geographic location. The number of companies included in the analysis will vary somewhat depending on the availability of financial information.

In order to analyze economic activity by geographic location and across the OFS value chain, we have used the stand-alone financial statements of individual legal entities. As a result, large corporations have been analyzed through their constituent individual companies and not as a consolidated group. Intercompany transactions are not eliminated when financial figures are aggregated. In addition, the revenues of subsidiaries owned by a Norwegian holding company, but registered abroad, are not captured. The year 2018 figures have been modeled based on previous years’ where annual reports were not available by the time this report was prepared.

LocationThe regions used in the analysis have been chosen to reflect and illustrate the main clusters of OFS companies in Norway.

The regions are Rogaland, Hordaland, Agder, Møre (Møre og Romsdal and Sogn og Fjordane), BTV (Buskerud, Telemark and Vestfold), Trøndelag, Northern Norway (Nordland, Troms and Finnmark) and Eastern Norway (Oslo, Akershus, Oppland, Østfold and Hedmark).

Value chain segmentsEach company in the OFS portfolio has been reviewed individually and an assessment has been made with regard to the company position in the value and supply chain.

The value chain has the following categories:• Reservoir and seismic• E&P drilling• EFI • Operations • Decommissioning

Each of these categories are further broken down into subsegments to capture the huge diversity within the industry. Many of the companies will offer products and services in more than one segment in the OFS value chain. However, each company has only been categorized to the value chain segment in which they generate the majority of their revenues. For larger industrial conglomerates with multiple subsidiaries, each of the group companies have been allocated to its respective best fit OFS segment.

Inclusion criteriaA company is defined as a Norwegian OFS company if:• At least 50% of its turnover is generated in the O&G sector • It is a Norwegian-registered company

Some companies may have previously had more than 50% of its turnover generated from the O&G sector but do not meet the definition of a Norwegian OFS company in a particular year. Such companies may still be included in this year’s database to alleviate comparisons over time. As an example, shipyards are included in 2018 even though the share of turnover generated in the O&G sector is reduced and not all companies will meet the definition of a Norwegian OFS company this year.

Company size definition• Large companies: revenues of more than NOK1b• Medium-sized companies: revenues between NOK100m and

NOK1b• Small companies: revenues of less than NOK100m

Forecasting modelWe have estimated the revenue development for 2019–21 using a forecasting model with both quantitative and qualitative factors. The model is based on several approaches, which differ between the subsegments. These approaches include:• Analysis of historical correlations between OFS firm revenues

and macroeconomic variables• Financial reporting and forward guidance of listed OFS

companies • Market analysis of certain subsegments• Discussions with industry experts

CalculationsEBIT = earnings before interest and tax

Adjusted EBIT = EBIT + impairment

EBITDA = adjusted EBIT + depreciation and amortization

Capital employed = total assets – (financial long-term and short-term investments + cash) – (trade creditors + tax payable + public duties payable)

ROCE = adjusted EBIT/capital employed

CAGR ( = ([ending value/beginning value]^(1/# of years)) – 1


B20

004n

oEY Contacts

Transaction Advisory ServicesEspen NorheimEY Nordic Oil & Gas TAS Leader +47 928 02 [email protected]

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AssuranceTor Inge SkjellevikEY Nordic Oil & Gas Assurance Leader+47 982 06 [email protected]

TaxAstrid Foyn-BruunEY Nordic Energy Leader and EY Nordic Oil & Gas Tax Leader+47 415 12 [email protected]

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