The first quarter of 2020 was a salutary lesson in how quickly long-term trends can be disrupted by current events.
At the beginning of February, EY published research showing that, in the UK at least, there was strong evidence the oilfield services (OFS) sector had returned to growth, with turnover up 2.3%.
This was seen as a welcome sign of better things to come for a sector that has successfully navigated its way through tough market conditions.
But in an industry which is always sensitive to wider economic and political uncertainties, this positive outlook soon came under pressure.
As the first reports of Covid-19 emerged, the impact was immediate.
The oil price quickly factored in that the virus would reduce economic activity and that demand for energy would fall as a consequence.
That alone may not have resulted in immediate project delays, but the need to protect staff and limit infection certainly did.
As a result, OFS forecasts were quickly adjusted downward and this has continued to be the case as the virus spreads globally.
So, what message should our sector take from unexpected events that knock plans and forecasts off course?
Some might say they illustrate the futility of long-term planning and investment – given you don’t know what’s around the corner, why should you invest precious capital in an uncertain future?
While sympathising with this view given the current picture, I would argue that certain long-term attributes remain key.
The first is resilience, a quality many OFS companies have clearly demonstrated over the last few years as they navigated difficult markets.
The current pandemic illustrates even more clearly the value of scenario planning and low leverage to ensure worst-case outcomes are modeled and planned for. But resilience must be accompanied by the ability to adapt.
Long-term success is also about making sure your organisation is agile, nimble and flexible enough to adapt to whatever is coming down the line. Below are four key ways to build these qualities into OFS companies.
Enabled by technology
We believe successful OFS companies will reshape their business models with technology at the centre.
In many cases, this can help them to transform from selling just products to selling the advisory and analytics services that come with them.
To do this effectively, OFS companies will increasingly need to seek technology partners, sharing costs through long-term alliances and joint-venture-based business models.
Companies will also continue to acquire small start-up technology companies, and then work to integrate and adapt technology into their operations.
Smarter workforces
We expect the OFS companies of the future to have more agile employment strategies and smaller workforces.
Some international operators may forego having end-to-end infrastructure outside their core regions, opting to leverage on-demand workforces instead.
The success of this new model will depend on finding the right balance between physical and digital labour and managing the associated implications.
Preparing for a low carbon future
Successful OFS companies will need to be on the right side of arguably the biggest challenge ever seen by our sector, namely the transition to a low carbon future.
The big positives here are that customer, lender and investor demand will support diversification into clean energy sources, renewables and related sectors.
However, many of these new segments are already extremely competitive and OFS companies will have limited capital resources to invest in risky new ventures. Hence they will need to manage risks carefully.
One example of successful skill transfer has been from contractors applying their maritime extreme weather experience to meet the maintenance needs of offshore wind farms.
Rather than risk capital on untried markets, contractors can follow existing customers as they pivot to other energy sectors.
At the same time, many of these are already extremely competitive and many OFS companies will have limited capital resources to invest in risky new ventures.
Instead they should be looking to transfer their existing skills to other sectors.
Creating long-term value
Companies that build resilience, leverage technologies and embrace new market opportunities will be the clear winners as the market continues to reshape toward lighter asset structures with a greater focus on returns, rather than the relentless pursuit of greater market share.
At the top end of the sector, we expect to see more consolidation driven by the need to offer customers an integrated bundle of products and services.
Company culture will be key to creating the right environment for adaptability and change. And clarity of purpose and the ability to satisfy the needs of all stakeholders may prove the ultimate drivers of long-term value.
For further insight on this subject and the research quoted in this article, please visit ey.com
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.
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