Just because of healthy backlogs for 2009 and 2010, the subsea sector is not immune to the triple whammy of recession, the financial crisis and the current oil-price slump.
Colin Welsh, CEO of Simmons & Company International, warned Subsea 09 delegates that the full impact had yet to be felt throughout the offshore supply chain – and not just subsea as companies find themselves sandwiched between a reduction in forecast earnings and the unfolding liquidity crisis.
“From the largest contractor to the smallest equipment manufacturer, activity, utilisations and margins are heading down – the question is: how bad will it be and how long will it last?” said Welsh.
“So far, we have only seen the tip of the iceberg with, for example Oilexco’s demise, Talisman’s spending reductions and BP’s demands for a return to 2004 pricing.
“But there will be more small cap failures and more E&P companies who just don’t have the cash to follow through on their spending plans. That will result in project delays and cancellations.
“The ripple effect should not be understated as cancellations and bad debts work their way through the supply chain.
“Most of us will have endured downturns before, but the confluence of a downturn combined with the impact of the financial crisis is a new and altogether more sinister prospect.”
Welsh pointed out that, having spent the last decade over-leveraging their customers – allowing record levels of debt – the banks now find themselves having to unwind that leverage so that they can get their balance sheets into shape.
“From a practical perspective, that means that they look across their lending book and say, ‘Let’s get rid of all those customers who are struggling or who may have breached covenants. Let’s cut back on the amounts we are lending to our customers and, for sure, we can’t possibly lend them any more’.
“The problem with that is that, in previous downturns, the banks have provided a lot of extra liquidity to service companies to reflect the fact that working-capital requirements get stretched in a downturn, and they have historically been very good with companies that have struggled in those periods because they knew the market would eventually turn.
“This time, I suspect that the banks will not have the patience or the spare lending capacity, and that will inevitably lead to more corporate failures.”
Despite such gloom, Welsh said the long-term prognosis for the subsea sector was, in fact, “stunning”, with major opportunities “cooking” in locations such as Brazil, Venezuela and India. Moreover, future production growth prospects, of the independents especially, were predicated almost entirely on subsea and, in particular, on deepwater.
“That growth is not going to happen without a strong subsea services sector. Consequently, in the short term, it is incumbent on the oil companies, the large contractors and, indeed, the (UK) Government to take a responsible approach.
“The IOCs can help by continuing to execute on the projects they had planned – in this respect, BP are to be applauded because their 2009 spend in the North Sea will actually be up over 2008.”
That said, Welsh warned the petroleum companies to “leave their jackboots outside the room” when negotiating with subsea suppliers especially.
He added that large contractors could help the smaller companies out by being flexible with contract terms and sympathetic as far as cash flow was concerned, and that there could be value to be gained through strategic mergers.
“They might also think about actually doing some consolidation among themselves rather than just talking about it.
“I would also suggest that the Government can help by gaining a genuine appreciation that it is in the long-term interests of the UK to encourage the recovery of the reserves that remain in the North Sea by providing incentives and not disincentives in the form of further taxes on the E&P community.”
Welsh tossed in further encouragement by pointing to the need to urgently address growing global production declines; that there remains resilient demand in China, India and the Middle East, and that Opec’s resolve to manage the oil price upwards to a level that can sustain their economies should not be underestimated.