Review of the UK oilfield services industryJanuary 2016

29Review of the UK oilfield services industry January 2016

05Facilities

30 Review of the UK oilfield services industry January 2016

Facilities

Figure 24: UK upstream oil and gas supply chain sub-sectors

Supply chain categories: Reservoirs Wells Facilities Marine and Subsea Support and

Services

Tier 2:

Main contractors and consultants

► ►Seismic data acquisition and processing contractors

► ►Well services contractors

► ►Drilling contractors ► Well engineering consultancies

► ►Engineering, operation, maintenance and decommissioning contractors

► Engineering consultants

► ►Structure and topside design and fabrication

► ►Marine/Subsea contractors

► Heavy lift/Pipe lay contractors

► Floating production storage units

► ►Catering/facility management

► ►Sea/air transport ► ►Warehousing/logistics

► ►Communications ► ►Recruitment ► ►Training ► ►Health, safety and environmental services

► ►Energy consultancies

► ►IT Hardware/software

Tier 3:

Products & services suppliers

Components

Sub-contractors and sub-suppliers

► ►►Geosciences consultancies

► ►Data interpretation consultancies

► ►Seismic instrumentation

► ►Drilling and well equipment design and manufacture

► ►Laboratory services

► ► ►Machinery/plant design and manufacture

► ►Engineering support contractors

► ►Specialist engineering services

► Specialist steels and tubulars

► ►Inspection services

► ►Subsea manifold/riser design and manufacture

► ►Marine/subsea equipment

► ►Subsea inspection services

Figure 25: Analysis of Facilities turnover and EBITDA margin by sub-sector

Currency: £ million 2008 2009 2010 2011 2012 2013 2014

Engineering, operation, maintenance and decommissioning contractors

4,245 4,042 3,968 4,675 5,176 5,709 5,390

Engineering consultants 195 234 259 288 350 394 482

Structure and topside design and fabrication 251 383 351 455 650 646 857

Machinery/plant design and manufacture 1,972 2,140 2,067 2,210 2,533 2,709 2,797

Engineering support contractors 778 767 792 875 1,030 1,206 1,180

Specialist engineering services 508 533 610 650 829 1,107 1,303

Specialist steels and tubulars 487 441 435 545 435 813 609

Inspection services 355 372 374 391 472 541 517

Turnover 8,790 8,912 8,855 10,089 11,475 13,125 13,135

Engineering, operation, maintenance and decommissioning contractors

3.7% 3.9% 6.3% 6.4% 6.6% 6.4% 0.7%

Engineering consultants 9.6% 6.8% 3.9% 3.9% 4.2% 2.9% 3.8%

Structure and topside design and fabrication 10.0% 8.8% 5.4% 7.3% 6.2% 8.0% 8.5%

Machinery/plant design and manufacture 11.4% 13.2% 13.3% 12.1% 12.8% 12.7% 12.2%

Engineering support contractors 7.6% 6.3% 5.7% 6.4% 6.9% 7.6% 7.2%

Specialist engineering services 7.9% 6.1% 7.7% 7.7% 10.2% 10.3% 11.1%

Specialist steels and tubulars 6.1% 5.6% 5.2% 6.0% 6.5% 5.6% 5.4%

Inspection services 16.4% 19.3% 15.6% 16.9% 16.5% 14.9% 17.3%

EBITDA margin 7.0% 7.5% 8.2% 8.1% 8.6% 8.4% 6.3%

05

31Review of the UK oilfield services industry January 2016

Summary of resultsIn 2014, the Facilities supply chain comprised 32% of the total UK upstream oil and gas supply chain turnover.

Figure 26: Summary of results 2008–2014

Currency: £ million 2008 2009 2010 2011 2012 2013 2014

Number of companies 457 497 514 524 537 539 543

Turnover 8,790 8,912 8,855 10,089 11,475 13,125 13,135

Growth trends — turnover n/a 1.4% (0.6%) 13.9% 13.7% 14.4% 0.1%

EBITDA 613 665 727 814 985 1,105 822

EBITDA margin 7.0% 7.5% 8.2% 8.1% 8.6% 8.4% 6.3%

Tax on profits 159 146 139 167 197 131 144

Number of employees 53,085 50,658 49,723 52,752 57,436 59,414 61,971

Wages 2,229 2,247 2,238 2,359 2,618 2,922 3,111

Key highlights of the Facilities supply chain category results ► Large construction works are typically carried out overseas,

usually in lower cost geographies. The UK companies in our analysis are typically involved in either an engineering role, construction of topside equipment including modules, or the operations and maintenance of the facilities.

► Turnover increased by £4.3 billion between 2008 and 2014 (CAGR 7%). We have identified 543 companies in this segment of the supply chain and in 2014, 425 companies generated turnover of less than £20 million. Companies with turnover in excess of £100 million, 32 in total, generated 60% of the total 2014 Facilities turnover.

► Turnover did not fluctuate significantly between 2008 and 2010 but there was a significant upturn in each of 2011, 2012 and 2013. There was an increase in activity in all sub-sectors in the Facilities supply chain but in particular from engineering, operation, maintenance and decommissioning contractors, driven by:

► Increased investment in the UKCS (2013 capital spend was the highest for more than three decades at £14.4 billion)

► Increase in UKCS brownfield activity in 2011 to 2013. As the UKCS is a mature region, substantial modifications and upgrades of installations are required by the ageing infrastructure to assist with extending the productive life of fields

► Operating expenditure rising from £7.0 billion in 2011 to £8.9 billion in 2013.

► Turnover growth in 2014 was minimal primarily due to: ► A reduction in activity in engineering, operation,

maintenance and decommissioning contractors as 2013 included a number of major projects that moved offshore and achieved first oil/gas in the second half of 2013 which were not repeated in 2014 and large construction projects coming to an end

► A reduction in activity in Specialist steels and tubulars due to Oil Country Tubular Goods (OCTG) demand declining in the UKCS and overseas due to the political situation in certain locations (e.g., Algeria and Egypt) offset by

► A large increase in activity levels for a number of specialist engineering services companies.

► EBITDA margin did not fluctuate significantly between 2008 and 2013 because a large number of the major players operate under multi-year contracts, which allows companies to manage their cost base in line with forecast activity levels. Wage increases were typically being passed on to the end customer in line with contractual terms. However, this also implies that the contractor pay cuts announced by a number of OFS companies in this supply chain category will also be passed on to the end customer.

► EBITDA margin declined by 2ppt in 2014 primarily as a result of the engineering, operation, maintenance and decommissioning contractors sub-sector EBITDA margin declining from 6.4% in 2013 to 0.7% in 2014. This was a result of a significant loss provision which had to be recorded in relation to a gas plant project in Shetland, construction of which is expected to be completed in 2015.

► The number of employees increased by over 8,800 between 2008 and 2014 and the average salary increased from £42,000 in 2008 to £50,000 in 2014 (CAGR 3%), There is a significant fluctuation between average salaries across the sub-sectors within Facilities, with employees involved in the more specialised niche sub-sectors typically receiving higher salaries. The number of employees increased by 2,500 from 2013 to 2014 against a backdrop of flat overall turnover.

32 Review of the UK oilfield services industry January 2016

Facilities continued

Geographic analysis of Facilities turnover

Figure 28: UK and export turnover 2008-14

0

2,000

4,000

6,000

8,000

10,000

2008 2009 2010 2011 2012 2013 2014

£mn

UK Exports

Figure 29: UK and export turnover CAGR 2008-14

0%

5%

10%

15%

Under£50mn

£50mnto £100mn

£100mnto £250mn

Over£250mn

UK Exports

► There was a significant upturn in UK turnover in 2011, 2012 and 2013 which resulted primarily from the engineering, operation, maintenance and decommissioning contractors sub-sector due to the increase in brownfield activity in the UKCS and the structure and topside design and fabrication sub-sector due to a number of large EPC contracts in the UKCS. There was minimal growth in 2014 as noted above due to large projects in 2013 not repeating.

► Export turnover increased year-on-year from 2008 to 2013, driven primarily by the machinery/plant design and manufacture and specialist engineering services sub-sectors as a result of targeted growth from overseas markets.

► Whereas engineering, operation, maintenance and decommissioning contractors (and related Tier 3 supporting sub-sectors) generate a large portion of turnover from both UKCS capital projects and long-term operations and maintenance contracts, machinery/plant design and manufacture companies service the global market, with over 50% of turnover in this sub-sector being from exports.

► As can be seen in Figure 29, there was significant export growth for companies with less than £50 million turnover. These companies (primarily in machinery/plant design and manufacture, engineering consultants, inspection services and specialist engineering services sub-sectors) tend to have specialised equipment or services and use this technical expertise to grow and expand by exporting into the global market. For companies with turnover between £100 million and £250 million in 2014, these also had significant export growth primarily driven by the growth and expansion within the specialist engineering services sub-sector.

Figure 27: Analysis of turnover between UK and exports

Currency: £ million 2008 2009 2010 2011 2012 2013 2014

UK 5,869 5,713 5,692 6,604 7,527 8,910 8,925

Exports 2,921 3,199 3,164 3,485 3,949 4,215 4,210

Turnover 8,790 8,912 8,855 10,089 11,475 13,125 13,135

Exports as percentage of turnover 33% 36% 36% 35% 34% 32% 32%

*where disclosed

33Review of the UK oilfield services industry January 2016

Key trends in Facilities

Figure 31: UKCS operating expenditure by region

0

5,000

10,000

15,000

20,000

25,000

2008 2009 2010 2011 2012 2013 2014 2015 2016

$mn

Northern North SeaCentral North Sea

Southern Gas Basin West of Britain

► Unit operating costs (UOC) rose to a record high of £17.80/boe in 2014, which many observers consider unsustainable if the UKCS is to remain an attractive basin for companies to operate in. As a result of cost reduction and efficiency initiatives implemented, UOCs are expected to decrease to £17/boe in 2015 and a UOC reduction of £2/boe–£3/boe is expected by the end of 2016 (Oil & Gas UK’s 2015 Economic Report).

► We would expect 2015 results for the companies in the Facilities supply chain segment to decline as a result of a reduction in capital projects and non-essential maintenance work, although again there will be a level of protection from the number of long-term contracts which are in place. EBITDA margins will also be impacted by the lower level of activity and pricing reductions in an already lower margin segment of the supply chain. The extent to which companies have been successful in implementing cost savings and efficiencies will be a key factor in whether the impact of these factors can be offset, either fully or in part.

► There are opportunities for companies in the Facilities supply chain segment to expand into overseas markets requiring expertise in mature field optimisation and field redevelopments, as well as the specialist skills these companies have in other areas. In addition, decommissioning is a relatively new area for these companies and if companies can adapt their operating models to support this work, it could create significant growth potential both in the UK and globally.

Figure 30: Listed Facilities companies results for the period from January 2015 to June 2015 (1H2015) versus the period from January 2014 to June 2014 (1H2014)

Currency: US$ million

1H2015 1H2014 Variance Variance %

Turnover 8,944 9,973 (1,029) (10.3%)

EBITDA 748 687 61 8.9%

EBITDA margin 8.4% 6.9% 1.5 n/a

Backlog* 35,332 37,540 (2,208) (5.9%)

► We have analysed the divisional results for the listed parents of the top five companies in the Facilities supply chain category — as a number of the companies do not publish results for 9m2015, we have compared the results for the first six months for each of 2014 and 2015.

► Turnover has reduced as a consequence of lower levels of activity on capital projects, cancellation of a number of engineering projects and reduced project and non-essential maintenance work. Yet the decline is not as severe as other categories of the supply chain as these companies tend to operate under long term operations and maintenance contracts and, as such, have a level of protection against the reduction in activity, as well as being diversified across geographies, other parts of the supply chain (e.g., downstream) and other complimentary industries. Even so, the full year results may show a larger turnover decline if the activity levels have continued to decrease from June 2015.

► There has been a 1.5ppt improvement in EBITDA margin resulting from a reduction of overheads and focus on cost efficiencies by these companies, and the cost savings delivered by the successful integration of an acquisition by one of the companies.

► Where available, we have analysed backlog and this has only shown a decline of around 6% for 1H2015 against 1H2014. Again this is driven by the long-term nature of a large number of the contracts which these companies operate under.

UK ► Given the UKCS is a mature basin, Facilities spend is mainly

operating cost driven with a focus on production and the maintenance required on the ageing infrastructure. As a result of the large cuts to capital expenditure budgets, this will become even more prevalent in 2015 and 2016.

05

05

34

Viewpoint: Facilities

The Facilities segment has a degree of protection against oil price movements due to the long-term contracts under which it operates, albeit at lower margins. Although turnover may be less affected, we would expect to see pricing pressures from heightened competition for new contracts and companies accepting lower margins to replenish their order books.

As a result, companies will need to focus on reducing their cost base to survive in a lower oil price world. One potential area of cost saving is integrating past or future acquisitions. We have reviewed over 50 recent OFS mergers and synergies typically realised were between 6% to 8% of target revenue, which demonstrates the scale of the potential win from a successful transformational acquisition. The largest cost synergies are typically found through back-office consolidation, examples of which are consolidation of management teams, elimination of duplicated activities (e.g., HR and finance), third party spend reduction (e.g., procurement savings through rebates and increased scale), IT savings and optimisation of the tax structure. Speed of synergy benefit realisation, as well as the potential scale of cost savings, must be a key consideration given current market conditions.

Tim Bunnell Director Operational Transaction Services

Review of the UK oilfield services industry January 2016

Facilities continued

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

How EY’s Global Oil & Gas Sector can help your businessThe oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively.

© 2016 EYGM Limited. All Rights Reserved.

EYG No. DW0585

19355.indd (UK) 01/16. Artwork by Creative Services Group Design.

ED None

In line with EY’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

ey.com/oilandgas