The first couple of weeks of 2016 have seen a continuing crash in the oil price, increasing pessimism about China’s economy and a corresponding bear market in stocks around the world. Oil is now trading at below US$ 30/bbl. leading to cuts in investments and lay-offs by oil producers (BP, Chevron, Shell, Total, Statoil and others) and suppliers to the industry, including service providers. Saudi Arabia is even considering partially floating Aramco to help finance its budget deficit, a major breach with the past
According to Wood Mackenzie, a research firm, oil companies have slashed investment by $200 billion for 2015 and 2016, leading to a drop in projects from 40-50 (what the O&G services industry can support in terms of capacity) to 5-10. As the price of oil is not expected to recover before well into 2017 (if at all that is -there are analysts who think it will never really recover and some are projecting a drop to $20/bbl.), the oil equipment and services industry is confronted with something akin to an existential crisis. In addition major industrials, such as GE and Siemens, increased their exposure to O&G over the past years and may need to rethink strategies.
GE made a series of O&G related acquisitions over the past 10 years turning this division into a major full service player in the industry, with an eye particularly on shale oil, including Vetco Gray (drilling and production systems, $1.9 bill., 2007), Hydril (drilling and production equipment and services, $1.12 bill., 2008), Dresser Inc (engines, valves and other equipment for oil and gas, $3 bill., 2010), Wellstream (piping, $1.3 bill., 2010), Wood Group’s well support division ($ 2.8 bill., 2011) and Lufkin Industries (pumps, $2.98 bill., 2013) -among others. The division is now GE’s third-largest manufacturing division and accounts for approx. $ 19 bill. or 12% of revenue and almost 20% of industrial sales, up from only 4% a decade ago. It could be that GE has enough clout to consolidate the equipment side of this industry (it has, for example, 30% market share in compression) while safeguarding margins at lower prices and volumes, nevertheless when plans are made with $100/bbl. price expectations and much bigger revenue streams this will be difficult. Focus on customer efficiencies through technology will be key (equipment standardization, rotating machine efficiencies, and, yes, the IIoT to improve productivity and yields while reducing costs).
Siemens, on the other hand, in a belated effort to catch up in O&G and also with an eye on shale, paid $ 7.6 bill. to acquire equipment maker (compressors) Dresser-Rand in 2014 at the top of the market (paying significantly more than GE in terms of profit multiples) and moved its Energy division HQ to Houston. When and if this acquisition pays off remains to be seen, the silver lining (of sorts) however is that 50% of Dresser Rand’s revenues in 2014 were service related.
While smaller players across the O&G Services industry are trying to rationalize or restructure operations
what is happening at the top of the market is very interesting strategically:
One strategy is to consolidate the market and bulk up to reduce cost and protect pricing power, which is essentially the thinking behind the $ 34.6 bill. proposed merger between Halliburton and Baker Hughes. For the time being the antitrust authorities in both the US and EU have not approved the deal (the DoJ has rejected the proposed disposals of businesses to avoid undue concentration as insufficient and the EU has announced a full scale investigation until end of May, which in many cases leads to deals being rejected).
The other strategy is for a service provider to acquire an equipment manufacturer and create improved solutions offerings on a large scale, as Schlumberger is trying to do with its $ 14.8 bill. acquisition of Cameron International. Forbes had a good analysis of the rationale for the deal. This on the product/service strategy:
Offering Integrated Solutions
Cameron is the world’s largest surface wellhead provider offering a vital set of valves, pumps, and blowout preventers which help to control the flow of oil from the underground reservoirs. The deal will allow Schlumberger to bundle its reservoir and well engineering and digital mapping technologies, with Cameron’s surface, drilling, processing, and flow control technologies to offer an integrated “pore-to-pipeline” product to the global oil and gas industry. This will provide a first-mover advantage to the company and enable it to grow its market share in the long term… Further, the deal will enable Schlumberger to diversify further into the deepwater market and leverage Cameron’s heavy-duty offshore drilling hardware such as gears and blowout preventers.
This is the chart from the Schlumberger / Cameron presentation -again from Forbes
A further interesting analysis by Forbes comparing the Halliburton and Schlumberger strategies, and favouring Schlumberger (which got unconditional approval from the US authorities). can be found here.
Nevertheless, as we have written in a previous article, whether it makes sense to compete as a solution provider depends on whether it is possible to integrate the elements of the solution in such as way that the total is more valuable than the sum of its parts
The example of the power industry shows that simple expansion in scope of supply –even to match customers’ vertical integration- is not necessarily a winning strategy. In fact it is not obviously a solutions strategy at all –because a solution requires tight integration of the elements it consists of. The degree of integration of the elements of a “solution” differs significantly across companies and offerings. However it should be self-evident that if these elements are not tightly integrated so that the total creates more value than the sum of its parts there is hardly point to the solution at all and customers can rationally prefer to buy the elements individually. Once the commercial/technical logic of a “solution” is broken each element is subject to normal product competition or even commoditization with the associated margin pressure.
On that the jury will still be out for some time.
Meanwhile in the technical services and maintenance market in Europe, following its decision a few months ago to organize its business into two independent units -industrial and buildings/facilities- and sell its power plant services and water technologies divisions (approx. € 1 bill. t/o combined), Germany’s Bilfinger announced that it has received a number of unsolicited bids for the buildings and facilities services business (the more profitable of the two). This development is probably not unrelated to the situation in the O&G markets and efforts by Bilfinger’s main shareholder Cevian, a private equity group, to stem losses on its Bilfinger stake -given that the company’s industrial service business has some significant O&G exposure.
When it announced its re-organization decision Bilfinger said that “in the course of its analysis, the Executive Board determined that there are no synergies between Industrial and Building and Facility”. This of course is in contrast to what is happening in the rest of the industry where companies are growing footprints and scope by acquisition and integration of industrial and facilities services businesses. This is a scale driven business where size and cost leadership trump domain expertise or special skills, at least usually.
ISS acquires leading technical services business
Zech acquires most of bankrupt Imtech Germany (in German)
Coor makes acquisition in industrial services
Whether Bilfinger’s industrial service division can be a viable stand-alone player remains therefore to be seen. In any case the restructuring/consolidation of the technical services market, following also the Imtech bankruptcy mid 2015, continues unabated.
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