JUNE’S READING: PROSPERITY POSTPONED
According to McKinsey & Company some stability returned to the OFSE sector in Q1 2017, with strong US onshore performance offsetting moderate decline elsewhere. However, prosperity has not yet arrived as oil prices went sideways.
Quarterly perspective on oil field services and equipment: May 2017
The first quarter of 2017 was a major test of OPEC’s ability to enforce policy and control the market. It was successful in the former but, even after the latest news of an extension to its November 30 agreement out to April 2018, it has not entirely managed to assert market control. While OPEC has achieved close quota compliance, the resulting price recovery proved an opportunity for US producers to justify a rapid increase in output on the back of improving technology and falling costs. This additional production has already offset half of OPEC’s cut, and was reflected in a steady rise in the onshore US rig count—up another 200 on the quarter, and up over 60 percent on the low seen in May last year.
Nevertheless, OPEC and Russia are making an impact on stock levels globally, and pundits are split down the middle over likely market direction—with rising LTO output, technological advances, rising Libyan and Nigerian output, and questions over longer term demand among the bearish factors, and falling stocks, close OPEC/non-OPEC quota adherence, and rising Asian demand striking a more bullish tone. These opposing factors have caused uncertainty and explain the recent volatility. OPEC’s latest extension announcement may be enough to balance these opposing factors once again, supporting and stabilizing prices.
Despite the resurgent US onshore, upstream activity and investment elsewhere remained suppressed, with international rig counts down slightly. Weak forward crude price sentiment—reflected in a flat forward curve—has been particularly discouraging for offshore FIDs, which remain thin on the ground, with most spot rig demand coming from brownfield projects. This has meant mixed fortunes for OFSE companies, depending primarily on their exposure to the US onshore.
Overall, OFSE revenue fell slightly on the quarter, but this was largely due to a continuing poor performance from assets, which are most exposed to the depressed offshore, with services and EPC back in positive territory. Margins were up compared to Q4, and even up on the year for services and equipment—apart from assets, which are still suffering as higher-priced contracts expire. Returns to shareholders moved up with the oil price through Q4, but have fallen back significantly since the beginning of this year.
Looking ahead, surging US onshore investment and production is forecast to continue, even with prices at less than USD 50 per barrel. OPEC’s latest market intervention extending the cuts into 2018 pushed prices back up above USD 50 per barrel—enough to encourage US shale drillers to expand even more. Should shale production gain a hold outside the United States, the game could be over for OPEC—but that hasn’t happened yet.
For more information see ‘Prosperity postponed’ at http://www.mckinsey.com/industries/oil-and-gas/our-insights/prosperity-postponed