A desire to capitalize on distressed situations, grow international market share and acquire new technology will drive a surge in M&A activity in the oilfield services sector during 2016, according to major new research from international law firm Pinsent Masons.

A survey of 200 senior executives across the oilfield services industry has revealed that despite unprecedented price volatility, 86% of respondents expect a surge of deal activity in the next 12 months. Seventy per cent said they were actively considering an acquisition within the next year.

Almost three quarters (74%) pinpointed expansion of overseas operations as the main driving force behind deal activity, with 70% expecting opportunism around distressed assets to drive deals, while 60% are looking at technology-driven consolidation. Corporates operating in the offshore technology and equipment segments were seen as the most attractive targets.



Respondents revealed that Singapore, Mexico, Indonesia, China and Nigeria are the most attractive emerging markets with falling valuations and new strategic deal structures presenting lucrative outbound investment opportunities against the backdrop of continued oil price volatility.

In more mature markets, two thirds (67%) of respondents said the UK would be likely to yield opportunity for buyers over the next three years.



Notwithstanding that, the report reveals optimism in the industry with an overwhelming 96% predicting UKCS recovery to 'peak' levels of profitability. Almost half (48%) expect the UKCS to rebound within five years, while over a quarter (28%) predict recovery within three years subject to a general improvement in the oil price.

The research found that 83% of respondents have based their five year investment strategy on an oil price range of $60-$80 bpd in the face of the new 'lower for longer' consensus across the oil and gas industry.


Global Head of Energy at Pinsent Masons, Bob Ruddiman, said: "The new landscape is very different from other downturns. We are in a more complex world where supply and demand and significant geopolitical events conspire with unpredictable consequences. Despite that, it's encouraging to see a sense of optimism and long-termism in the sector as oilfield services companies seek to find opportunity amid the undoubted challenges.

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David McEwing, a Partner in the oil and gas team at Pinsent Masons, said: "Much of the discourse around oil and gas deals has focused on the majors and how they will respond to a more volatile environment. However, it shouldn't be forgotten that the global oilfield services sector is on course to be worth $144bn by 2020, and is a significant employer and wealth creator.



"What our research shows is an industry on the cusp of transformation. Corporates are clearly looking to build out their international propositions and invest in technology which will maximize efficient recovery. It's no surprise that the UK stands out in that regard given the industry's focus on innovation and deep sea exploration – not least when we're seeing more of those types of projects in Asia.



"There is encouragement to be taken from the optimism surrounding UKCS. There has been discussion in some circles about whether UKCS could ever recover to previous levels of profitability, but an overwhelming majority of those we spoke to see a recovery within 3-5 years, and almost a third think this will happen before then.


"That said, there's no complacency and boards are clearly focusing hard on their corporate strategies. Yes there's challenge but for some that means a chance to challenge the status quo in a dynamic market."



The oilfield services sector is expected to be worth $144bn by 2020. Source: http://www.marketsandmarkets.com/PressReleases/oilfield-services.asp

According to the most recent estimates, in 2013 the UK the oilfield services was worth £27bn. Industry paid corporation tax of £0.6 billion, directly employed at least 134,000 people on an average salary of £50,000, and generated exports of £16.4 billion. http://www.ey.com/UK/en/Industries/Oil---Gas/EY-review-of-the-UK-oilfield-services-industry-key-highlights

About the survey

Pinsent Masons engaged Mergermarket to surveyed 200 senior-level executives, drawn from 150 corporates and 50 private equity firms. Ten of the most prominent banks in the sector were also surveyed on a qualitative basis. Interviews were conducted during H2 2015.

Corporate revenues of respondent companies are split between $1bn+ (31%), $101-1bn (30%) and $20m-100m (39%). The survey included a combination of qualitative and quantitative questions and all interviews were conducted over the telephone by appointment. Results were analyzed and collated by Mergermarket and all responses are anonymised and presented in aggregate.

All of the respondents have operations or investments in the UK oilfield services sector. 52% of respondents are headquartered in the UK, and the remaining 48% are headquartered outside of the UK but maintain offices in the UK – 26% in North America, 9% in the Nordic countries, 9% in other European countries, 2% in MENA, 1% in Australia and 1% in Russia.

Survey participants include: ACE Alfred Cheyne Engineering Ltd, Aker Solutions ASA, Archer Ltd, ARKeX Ltd, Awilco Drilling Plc, CETCO Energy Services, CIRCOR International, Inc., Crondall Energy Subsea Ltd, Dando Drilling International, Diamond Offshore, Drilling, Inc, DOF Subsea Group, Dolphin Drilling AS, EnerMech Ltd., Ensco Plc, Expro International Group, Flexlife Group Ltd, FoundOcean Limited, Geoquip Marine AG, Gulf Marine Services, Hunting Plc, KD Marine Ltd, MacDermid Offshore Solutions, Maersk Drilling Norge AS, MRC Global Inc, Noble Corporation Plc, N-Sea Group, Ocean Rig UDW Inc, Oilfield Solutions Ltd, PD&MS Energy, Petroleum Geo-Services ASA, Petroleum Technology Company, Prosafe SE, ROVOP Ltd, Saab Seaeye Ltd, Saipem Ltd, Saltire Energy Ltd, Sand Monitoring Services Ltd, Schlumberger, Scientific Drilling Controls Ltd., Sembmarine S L P, Technip S.A., Welltec UK Limited, Wood Group.

NYC-based PIRA Energy Group believes that low crude price is impacting non-shale lower 48 production. In the U.S., demand recovers but stocks increase to new high. In Japan, crude runs and imports declined and stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

U.S. Demand Recovers but Stocks Increase to New High

Reported demand increased after two weeks of holiday depressed demand. Commercial stocks still managed to build making a new all-time high and expanding the stock surplus to last year. It is hard for oil prices to go up despite how low they currently are while stocks are building, especially in the current fragile macro environment which weakens the demand for inventory.

Supply Delays Emerge, but Do Not Erase Price Weakness

PIRA is pushing back some start up dates on LNG production over the next 24 months due to weaker prices and a lack of buying enthusiasm from key contract holders. Sellers with take or pay contracts in hand to sell LNG or tolling will be more eager to fire up the liquefaction than producers with non-contracted volumes faced with a crowded spot market.

Spark Spread Renaissance: How Wide Can Spread Sparks Go?

The widening of the spark spreads is now a reality across the Continent, with Germany now seeing the most efficient gas units starting to move in the money. While fossil fuel requirements continue to shrink further, due to weak demand and growing renewable output, German gas profitability has the potential to rebound to 2010 levels, but this outcome will be entirely driven by the movements in gas prices.

LPG Rebounds With Crude, Natural Gasoline Slide Continues

U.S. Gulf Coast LPG prices rebounded strongly with the broader energy markets. February Mt Belvieu propane prices improved by 12% to 33.6¢/gal and butane settled 5 cents higher on the week at 47.8¢. Natural gasoline prices continued to underperform last week as the blendstock’s value sagged to just 93% of WTI, after weeks of trading at a premium.

Coal Prices Rebound, Limited Upside on China Risks

Coal pricing ended its string of weeks in which prices declined week-on-week last week, with Atlantic Basin prices leading the charge upward. For 1Q16, API#4 (South Africa) rose by the greatest extent, followed by API#2 (Northwest Europe) which also rebounded strongly. A notable jump in FOB Richards Bay physical pricing, where one buyer reportedly pushed the market higher perhaps on short covering, likely fed into the notable rise in API#4. FOB Newcastle (Australia) prices moved up modestly compared to the prior week. Over the short term, coal prices will remain under considerable pressure due to depressed oil pricing and weak coal demand from China.

Impressive Corn Exports

A nice jump in corn sales was credited as the reason for last week’s rally but there’s a bit more to the story. The export number of 1.157M MT was for the week ending January 14th, so all the buying theoretically could have taken place on the 11th and 12th when the corn market tested sub-$3.50 futures pricing. While interest in corn at that level is supportive, it does not indicate interest at current levels which are 20 cents higher than the lows.

U.S. Ethanol Output Drops, but Stocks Rise to a Three-Year High

Ethanol production declined to a four-week low 983 MB/D the week ending January 22, as manufacturing margins were the poorest since 2013. Ethanol inventories, however, built for the tenth time in twelve weeks, rising by 533 thousand barrels to a three-year high 21.9 million barrels.

Deterioration of Russia’s Reserve Fund Signals Trouble Ahead

Russia’s Reserve Fund, which helps cover federal budget deficits, deteriorated rapidly in recent months, falling by nearly 30% in the final quarter of 2015. But despite mounting economic pressures on the Russian government, domestic oil producers have flourished. A favorable tax structure and currency depreciation insulated Russian producers from weak oil prices over the past year. PIRA expects this momentum to carry into 2016. But the Russian government, which shouldered the burden of collapsing oil prices (along with consumers), may be running out of policy options. Collectively, these economic pressures are casting a shadow over our 2017 outlook.

Financial Stress Elevated

Financial stress remains elevated. The S&P 500 declined for the third straight week on a weekly average basis, though it was higher Friday-to-Friday. The other key indicators such as VIX, high yield debt (HYG) and emerging market debt (EMB) also continue to weaken. Total commodities continue to decline, and the U.S. dollar continues to generally strengthen.

Fracking Policy Monitor

Federal focus has moved to making sure already announced regulations are finalized and implemented. Regulation of activity on federal lands (fracking, methane emissions, changes to leasing) are expected to have limited impact on overall production volumes. Oklahoma legislators may soon be forced to address the impact of wastewater disposal. North Dakota continues to be responsive to industry concerns, relaxing regulations where production or profits are threatened. Limits on local control remain a key issue in Colorado where the state’s Supreme Court, new regulations, and submitted ballot initiatives will all soon collide.

Tepid Price Recovery Points to 2015 Weakness Transitioning to Even Weaker 2016

Over the past several months, Canadian dry gas production has been hammered by stiff competition in its traditional export markets, compounded by an extremely slow start to the traditional withdrawal season. Compared to the prior year, 4Q15 production declined, expanding the year-on-year losses experienced during the third quarter. More recently, a shift to colder temperatures across the U.S. and Canada seems to have alleviated fears of a record El Niño event, although PIRA still projects a milder-than-normal winter. The colder weather seems to have reinvigorated Canadian exports to the U.S. in the short term, but year-on-year production losses are expected to continue into 1Q16.

U.S. Ethanol Prices Rise/Margins Fall

Reversing a downward trend that pushed prices to a ten-week low the week ending January 22, ethanol prices rebounded driven by higher feedstock cost. Manufacturing margins declined as rising corn values overshadowed the increase in product assessments.

Global Equities Rebound

Global equities generally posted a positive week. In the U.S., energy and technology posted the strongest gains as energy prices staged a rally from multi-year lows. The banking and industrial tracking indices declined. Internationally, all the tracking indices posted gains. Emerging markets, BRICs, and China were the strongest. In the first three weeks of the New Year, global markets have declined about 8%.

Japanese Crude Runs Ease, Imports Fell and Stocks Drew

Crude runs eased fractionally, and implied imports fell back, such that stocks drew 0.92 MMBbls. Despite generally higher demand, finished product stocks rose 1.87 MMBbls. Refining margins remain strong, though they softened a bit on the week due to easing in all the cracks other than fuel oil. Other than middle distillates, all the cracks remain statistically strong.

Iran Cuts Gas Price for Petrochemical Producers

Iran's Oil Ministry cut the price of methane/ethane mix fed to the petrochemical industry by 38.5% on Saturday, sending most petrochemical stocks up. The price cut will boost petrochemical profits, though some industry managers say the pricing is still uncompetitive, putting Iran's sanctions-battered petrochemicals at a disadvantage vis–à–vis their foreign rivals, especially those in the Persian Gulf periphery.

Constructive Data from China, and Dovish Message from ECB

Recent Chinese data had a broadly constructive tone. Economic expansion remained solid, while receiving more contributions from the service sector. The labor market, meanwhile, generated a large number of new jobs. Some data were disappointing, however: the housing sector, for example, experienced a serious setback. The European Central Bank’s policy statements helped stabilize sentiments in financial markets. Global leading indicators for manufacturing remained weak.

Low Crude Price Impacting Non-Shale Lower 48 Production

PIRA estimates Lower 48 non-shale crude and condensate production decreased significantly through the course of 2015 primarily due to less drilling activity and less maintenance on base production. PIRA expects further declines in 2016 as drilling activity continues to decrease with depressed oil prices but does not expect material losses in stripper well production (a subset of non-shale Lower 48 production).

Iran Exports Increase Post Sanctions – Where Will They Go?

PIRA expects that Iranian production will increase by roughly 500 MB/D over the next couple of months. Although NIOC will try to quickly recover their former market export volumes into Europe that will initially be hindered by logistical and commercial issues. In addition, Iran will increase exports by drawing down some of their floating inventory, largely sour condensates, which are more likely to be placed into Asia. This all points to more initial incremental exports likely heading to Asia followed by a slower return to Europe.

Up, but Risk Premiums are Almost Gone, Will Storages Turn Off?

Absent the move up along with oil on Friday, European gas prices have been weakening in the face of quite a bit of added demand from power and heating. If a commodity is acting bearish to bullish factors, how can we expect gas to rise any time soon? The answer is sustainability. Pockets of short-term demand growth will not be enough to reverse course on spot prices. It's not exactly an issue of "too little too late;" at this point it's simply too little. Downward pressure on spot gas will remain due to emerging supply, economic uncertainty, and a lack of duration in weather-based increases in gas demand relative to a comfortable storage situation and relatively strong accessibility to gas imports.

Mild February Weather Forecasts Sustain Bearish Concerns

While Thursday’s pull from storage was the highest thus far this heating seating, it did fall below expectations in the mid-to-high 180s leading to an initial ~10¢ pullback of the nearby month NYMEX contract. Yet, the ~$2.14 settlement price (up ~2¢ D/D) underscored the resiliency of gas futures since the last week’s striking downturn. The explanation appears to reflect the market already pricing in prospects for mild February weather, the strength of HH daily cash prices, and growing expectations for tighter post-winter gas balances.

The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

This week, we look at some of the key takeaways from an event held last Thursday in London, hosted by the Society of Underwater Technology. Douglas-Westwood (DW) presented its outlook for the offshore energy sector, including outputs from its latest, soon to be published studies, in the context of a highly-turbulent start to the year that saw oil prices on the day of $27/bbl.

Research Director Steve Robertson opened the event with an introduction that examined the current outlook for offshore expenditure in comparison to that of a year ago, highlighting the movement in overall number of projects expected and subsequent expenditure (look out for more on this in the coming weeks…).

Economist Matt Adams followed with a review of the macro-economic factors impacting the sector presently, examining key drivers for energy supply and demand and highlighting recent DW analysis concerning supply additions vs the demand outlook for 2016. Matt explained that whilst there were limited positive drivers for oil price in the near term (other than unpredictable geopolitical events), towards the end of the year we should see excess supply eroded by some 1 million bpd. Matt also highlighted the relative stock performance between firms in different sectors of the oil industry (land drilling, offshore drilling, subsea equipment, oilfield services, etc.) with subsea hardware providers faring the best (down 15%) and offshore drillers the worse (-64%).

Steve followed with a run-through of DW’s latest market forecasts in a number of key sectors including offshore drilling, oilfield services (OFS), oilfield equipment, floating production and offshore wind. He highlighted the underlying reason for the poor performance of offshore drillers is excess supply, with low levels of utilization for the fleet and dayrates for high-spec rigs falling from over $600,000/d at peak to less than $250,000/d for new fixtures in the last six months. The fragility of the subsea equipment providers was also highlighted, with most original equipment manufacturers (OEMs) having been somewhat insulated during 2015 as a function of high backlogs which are now rapidly declining. Order levels in the last 12 months have been very low and DW anticipates that the sector will see heightened competitive intensity and firms will need to position themselves accordingly for lower levels of activity in the coming years. The FLNG and Offshore Wind markets were presented as a positive growth story and a highlight amongst the more negative outlook in other sectors.

Geologist Matt Cook presented some highlights from his recent work with DW’s Drilling and Production offering, including in-depth country analysis for Egypt, Mozambique, Angola, and the USA, followed by analysis of anticipated subsea activity by operator type. ENI was highlighted as a company that stands out in terms of the volume of subsea development activity compared to previous years, with Matt highlighting projects such as Zohr, Coral, Mamba and Sankofa.

The session was wrapped-up with a summary proposing that 2016 would likely be a very difficult year for the offshore sector – for many firms the focus would be survival. However, for those in position to invest, it was suggested that this was an opportune moment to secure equipment, services and skilled labour at historically low prices and historically short lead times.