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Review of the UK oilfield services industryJanuary 2016

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Contents

Review of the UK oilfield services industry January 2016

01 Introduction 1

02 Overview 5

The UK oilfield services sector by supply chain category

03 Reservoirs 17

04 Wells 23

05 Facilities 29

06 Marine and Subsea 35

07 Support and Services 41

08 Comparison with the Norwegian oilfield services sector 45

09 Methodology and key assumptions 50

A

Appendix A: Reservoirs supply chain segment sub-sectors 52

B Appendix B: Wells supply chain segment sub-sectors 56

C Appendix C: Facilities supply chain segment sub-sectors 62

D Appendix D: Marine and Subsea supply chain segment sub-sectors 70

E Appendix E: Support and Services supply chain segment sub-sectors 76

32 subsectors

>1500 companies

Wells

Support and Services M

arine and Subsea

FacilitiesReservoirs


Welcome to EY’s fifth annual review of the UK oilfield services (OFS) industry. In this report, we review the 2014 trading performance of UK registered companies in this hugely diverse oilfield services marketplace and discuss the impact the oil price decline has had, and is expected to have, on their performance in both the UK and global markets.

UK upstream oil and gas supply chain2014 2015 and 2016 trends

Generating £41bn turnover

3% turnover growth from 2013 to 2014

EBITDA margin flat at 10%

38% of 2014 turnover is generated from export activity

Balance sheet restructuring

Consolidation

Cost reductions

Improving liquidity

Internatonalisation

Production efficiencies

Standardisation

Technological solutions and innovation

Introduction 01

1Review of the UK oilfield services industry January 2016

UK OFS: Fit for the future?

The current oil and gas market is one of the most challenging ever. The oil price has fallen from a high of around US$115/bbl in 2014 to below US$30/bbl for the first time in over a decade with exploration and production (E&P) companies having significantly reduced capital expenditure budgets in response. Alongside any rise in the oil price, price volatility will also need to reduce before the sector can make informed investment decisions and gain confidence that any price recovery is sustainable. In the meantime, UK OFS companies need to take action to survive in this new market. Although there was 3% turnover growth in 2014, the slowest growth rate for five years, turnover is expected to decline significantly in both 2015 and 2016, putting pressure on cash flows and capital structures.

The oil price decline has resulted in many projects being delayed or cancelled; margin pressure on both capital projects and operation and maintenance contracts; and a lack of visibility over future orders, creating stress across the UK upstream supply chain. The companies most severely affected to date have been those with asset heavy businesses and those exposed to capital projects (e.g., seismic, drilling and vessel owners). A number of companies have been partially protected in 2014 and 2015 as they have been focused on either more robust production activities (as opposed to capital projects) or working through pre-existing backlog. However, there are major uncertainties around replenishment of backlog and general activity levels in 2016.

As around 40% of the turnover generated by UK OFS companies is from overseas markets, those companies with specialist products and services that can be exported

Barry Fraser

Executive Director Transaction Advisory Services

are seeing lower UK demand being partly compensated by activity in international markets. Although overall exports were flat in 2014, certain markets such as the Middle East have been less impacted, while others such as North America have been harder hit.

The UK OFS sector is responding to the low oil price environment by making itself more resilient through implementing cost reductions; driving efficiencies in project delivery; changing how it engages with customers and targeting sectors out with upstream oil and gas. Although the actions taken to date have made many companies stronger, further action is required. Companies are also focused on working capital, cash management and are examining capital structures. Stakeholders need to take a medium rather than short term view on market recovery in order to support these businesses.

Consolidation is inevitable and many of the best value-generating deals have been done during previous downturns. This is a great opportunity to add both technological solutions and geographical presence as well as delivering a step change in cost reduction through effective integration and economies of scale. Companies need to act now to avoid being left behind.

It is a challenging period for the oil and gas market, however there are world leading capabilities within the UK supply chain providing hope for the future. Companies that proactively look for opportunities to improve their resilience, engage with their stakeholders and make targeted, strategic acquisitions could find themselves emerging from the current downturn leaner, stronger and well placed to capitalise on the recovery.

2 Review of the UK oilfield services industry January 2016

Introduction continued


01

Viewpoint: Oil and Gas Authority

When the Oil and Gas Authority was in its earliest stages of formation, few predicted the scale and duration of the current downturn. Our focus is to maximise economic recovery (MER) from the basin, and whilst we don’t regulate the service sector, we are one of its strong supporters. A successful supply chain is essential to MER UK and to the continued significant value of the OFS industry domestically and internationally. The service sector can also play a vital role in helping identify and deliver sustainable, cost-effective and efficient solutions for the longer term.

The prospect of prolonged tough market conditions and the resultant impact on the sector is a cause for concern. Strong leadership and collaboration, in the spirit of the Wood Review, are vital to effect rejuvenation of the basin. We’ve been working very closely with industry (operators and the service sector) and governments with good collaboration in industry boards, such as the Supply Chain and Exports Board. By working together we will see a transformation in the way operators and contractors interact, fostering greater trust and co-operation. Despite this downturn, I hope the industry will rally and fully recognise the value and importance of the OFS sector to the basin’s future.

Andy Samuel Chief Executive Oil and Gas Authority

Viewpoint: Oil & Gas UK

This report highlights the importance of the UK’s oilfield services sector to our economy, in applying its world-leading expertise serving the North Sea and through its growing export business.

Whilst the UK offshore oil and gas sector is adapting rapidly to the low oil price, driving greater efficiencies throughout its operations, it is imperative the supply chain — as the heart of the industry — continues to be promoted and be nurtured through this cycle and beyond.

While times are undoubtedly tough, we are confident that the industry can survive this downturn. In 2015, we welcomed the first rise in oil and gas production for over 15 years, and, with 20 billion barrels of oil and gas estimated to potentially still be available in UK waters and global demand for the products and services developed at the cutting edge of the North Sea showing no sign of waning, there is still plenty to play for.

That is why coherent action is being taken to make companies stronger and more efficient. Oil & Gas UK’s industry-lead Efficiency Task Force will lead the drive for greater co-operation across the sector with the objective of transforming the UK continental Shelf into the most efficient basin in the world, supported by a yet stronger and growing oilfield services sector.

Michael Tholen Economics and Commercial Director Oil & Gas UK


OverviewGlobal

► The oil price decline, which started in the second half of 2014, has continued in 2015, with prices averaging around US$50/bbl. The oil market is still being affected by concerns over reduced growth in Chinese demand and the expectations regarding the timing and magnitude of additional Iranian supply. If, as expected, there is a return of Iranian oil in the first half of 2016, this will add to the pressure on prices.

► At the OPEC meeting in December 2015, there was no action taken to either cut production or raise the production ceiling in anticipation of Iranian supply. OPEC is to revisit this at the next meeting in June 2016 (unless an emergency meeting is held before then), by which time there will likely be more clarity on the timing of Iran export resumption and the scale of additional potential volumes entering the market. As such, it is likely there will be at least another six months of the market determining prices.

► The oil production of major producers is currently strong and the high level of global crude stocks will act as a substantial barrier to any sustained increase in prices over the next 12 months. Although there are four civil wars or major conflicts underway across the Middle East and North Africa regions (Iraq, Yemen, Syria and Libya), these are unlikely to pose a major threat to oil supplies as global crude stocks should act as a buffer to any temporary supply disruptions.

► The decline in the oil price has led to a number of actions by operators including maximising revenue from existing operations, reducing operating costs where possible (e.g., headcount reductions) and deferring capital expenditure on new projects, especially those that are not close to completion.

► Although operational cost savings and asset sales should assist company finances whilst oil prices are weaker, lower capital expenditure will impact production in future years. The lack of available cash flow is likely to limit capital spending for a number of operators in 2016, even if there were to be a gradual improvement in oil price. In the majority of cases, the large cuts in upstream oil and gas capital expenditure in 2015 have not yet fed through to supply. However, when this does happen, it will play a major role in rebalancing the market.

► Even with the decline in the oil price, the long-term global demand for oil and gas remains. The International Energy Agency1 anticipates global energy demand to increase by 14% from 2014 to 2040. The impact of the large cuts in capital expenditure will influence the ability to meet annual production replacement needs in future years if the trend is not reversed in the near term.

02

1 World Energy Outlook, 2015


Overview continued

Figure 1: Top 100 listed OFS companies actual and forecast results 2011–16

Currency: US$ billion 2011 2012 2013 2014 2015E 2016E

Turnover 424 479 500 507 413 391

Turnover growth/(decline) trends n/a 12.9% 4.5% 1.3% (18.6%) (5.3%)

EBITDA 80 87 88 95 70 66

EBITDA margin 18.8% 18.3% 17.6% 18.8% 17.1% 16.8%

► For the top 100 listed OFS companies, we analysed the reported results from 2011 to 2014 and the forecast results (based on analyst’s expectations) for 2015 and 2016 and these are shown in Figure 1. As can be seen, turnover is forecast to decline by over 18% in 2015 and a further 5% in 2016, with EBITDA margins also being impacted. Given the rate reductions, project deferrals and cancellations, the EBITDA margin decline may be even more pronounced in 2015 and 2016.

► These trends support our view that the market outlook for OFS companies for the coming year looks increasingly challenging. E&P companies will continue to target service costs and try to renegotiate contracts, resulting in a further reduction in activity levels and additional margin erosion.

► Consolidation and strategic alliances were inevitable given market conditions as companies seek to offer innovative lower cost solutions to customers or to reduce their cost base by streamlining supply chains, lowering operating costs and implementing manufacturing processes improvements. Following on from the acquisition of Baker Hughes by Halliburton, which was announced in November 2014 (Australian and EU antitrust regulators decisions still to be announced, US antitrust regulators to assess further proposals provided by the companies as remedies offered to date are not sufficient to address its concerns — the time period for closing has been extended to no later than 30 April 2016 as a result of this), there have been a number of significant announcements during 2015 including:

► In March 2015, FMC Technologies and Technip signed an agreement to form an exclusive alliance and to launch a 50/50 joint venture to unite their skills and capabilities. The alliance aims to redefine the way subsea fields are designed, delivered and maintained to significantly reduce the cost of subsea field development and provide the technology to maximise well performance over the life of the field.

► In August 2015, Schlumberger and Cameron jointly announced they had entered into a definitive merger agreement. The merger is expected to bring significant cost synergies and is expected to close in the first quarter of 2016.

Viewpoint: Global market

The oil market remains oversupplied and indications are that this situation will continue for some time, with prices likely to be lower for longer. Together with the improving costs position of unconventionals, this is putting huge pressure on the owners of assets in higher cost basins to cut costs and improve performance to protect returns. The initial response of the industry was to cut or defer projects and force price reductions on to its supply chain. Whilst these are going to remain core responses, operators are now looking to standardise processes to further reduce costs. Given the relatively fragmented nature of the supply chain, we believe further consolidations are essential if OFS companies are to deliver both the costs savings required by customers and sustainable returns for their investors.

Within the overall market for OFS, the pressure will be highest on those assets which are inherently more expensive such as some deepwater and LNG projects. However, in every market the key to success will be the proven ability to deliver efficiencies and support the operators performance agenda in an extremely challenging environment.

Andy Brogan Global Oil & Gas Transaction Leader Transaction Advisory Services


02

UK ► The United Kingdom Continental Shelf (UKCS) has a 50 year

pedigree in extracting oil and gas making it one of the most experienced regions in the world. It is a proven hydrocarbon basin and is well supported by an established offshore service industry. Aberdeen is recognised as a centre of excellence in the UK OFS supply chain, with world leading capability in areas such as subsea technology and services and many large global players have headquarters or regional head offices there. During 2014, despite a decline in the oil price, the UK OFS industry still achieved turnover growth of 3% from 2013, whilst maintaining EBITDA margins.

► The UK government published a new Energy Bill on 10 July 2015, which saw the establishment of the new Oil and Gas Authority (OGA) and the implementation of other recommendations from Sir Ian Wood’s strategic review of the UK North Sea published in 2014. The OGA has been given regulatory powers that aims to drive greater collaboration and productivity within the oil and gas industry, as well as attracting investment and creating jobs.

UKCS production ► Oil and gas production in the UKCS increased in 2015 for the

first time in 15 years, after years of production decline rates at maturing North Sea fields. There are several key fields which will commence production in 2015 to 2018, including Greater Laggan Area, Cygnus and Mariner (assuming no further delays) and the start-up of these fields, in addition to field redevelopments such as the Montrose Area Redevelopment, will support an increase in production from 2015 to 2018. BP also announced in August 2015 that it will spend US$1bn to increase output from oil fields off the eastern coast of Scotland (Eastern Trough Area Project (ETAP)), with the aim of securing the future of the field until 2030 and beyond.

► There have been a number of significant investments from new entrants in 2015 which shows there is still appetite to invest in the UKCS, even with the low oil price, including:

► Antin Infrastructure Partners acquisition of further equity in CATS, taking its total share to 99%

► Energy firm SSE’s acquisition of a minority stake in the Greater Laggan Area development

► North Sea Midstream Partners acquisition of FUKA and SIRGE gas pipelines and the St Fergus gas terminal

► Acquisition of the UK North Sea gas fields owned by DEA Group by Ineos.

► There are also still a number of significant developments in the UKCS, including the Laggan-Tormore development off the Shetland Islands noted above (one of the largest offshore oil

and gas projects in Europe, which involves the development of two gas and condensate fields) and the Culzean oil field development in the UK Central North Sea, which was approved by the OGA in September 2015. Culzean is a high pressure high temperature gas condensate field and is of immense importance to UK gas production as it is the largest single gas field sanctioned since East Brae in 1990, with production expected to start up in 2019.

► A number of other UK projects (e.g., small field or brownfield developments and expansions) have breakeven prices lower than the current oil prices due to the presence of existing infrastructure, reflecting the well-developed oil industry in the UKCS. However, falling prices could impact project economics for small to mid-scale developments and this could make the realisation of projects which have not reached final investment decision (FID) more difficult, as companies cut capital budgets and prioritise higher value-added projects elsewhere. A large portion of the remaining development projects in the UKCS could be delayed until either the costs are materially reduced or oil prices rise.

► In addition, reduced exploration activity is a worrying trend for the UKCS as new reserves fail to fully replenish produced reserves. Whilst there is high investment in terms of new developments (Oil & Gas UK’s Economic Report 2015 noted capital expenditure was £14.8 billion in 2014, the highest for the fourth consecutive year), there is a risk this won’t be sustained without further exploration activity and success. The OGA has identified this as a high priority area and the UK government has provided funding of £20 million for seismic surveys in untapped regions of the UKCS to try to stimulate exploration (data expected to be made freely available early in 2016). This in itself is unlikely to be sufficient and further incentives targeting exploration, such as the Norwegian regime where companies can claim an 80% rebate on exploration spending, are being called for but it is unlikely the UK Government would introduce a similar regime.

Shale ► In August 2015, the OGA announced the list of companies

which were to be awarded licences for 27 onshore blocks from the 14th Onshore Oil and Gas licensing round, which was the first for shale gas licensing. There are a number of challenges these companies will face including environmental, local and social opposition, as well as lack of technical knowledge. Uncertain geology and the time-consuming application process for hydraulic fracturing permits could temper shale gas efforts in the medium term and first commercial shale gas production will probably only occur in early 2020s and then only in minimal volumes.


UKCS operating costs ► In 2014, OFS companies started to address the rising costs

of operating in the UKCS, including cuts to contractor’s rates and redundancies. This has continued in 2015 due to the continued low oil price and a large number of companies have implemented pay freezes, further rounds of redundancies and warm or cold stacking equipment to address the decline in activity. A number of companies are proactively tackling the high cost base in the UKCS and a number of industry initiatives have been launched to try to improve efficiency and address the rising costs. This includes Wood Group which announced in September 2015 it is leading five new joint industry projects using the company’s extensive subsea experience to solve industry-wide challenges. These international projects, which will run between 2015 and 2018, will see Wood Group work with several oil and gas operators, contractors and regulators to improve quality, safety and competence across the sector and achieve significant savings in design and unplanned intervention costs.

► The OGA is also addressing rising costs in the UKCS and has a focused technology strategy to support a targeted 30%-40% efficiency improvement, with its priority technology themes being:

► Small pool development (technology to enable the development of more than 1 billion barrels of oil and gas from pools smaller than 50 million barrels of oil equivalent in place)

► Integrity and inspection (generate more than £1 billion additional revenue through the radical reduction of time dedicated to vessel inspection and managing corrosion under insulation)

► Well construction (reduce well construction costs by 50% to allow an extra c.50 wells to be drilled each year).

Fiscal regime ► UK North Sea tax receipts dropped to their lowest in 20

years in the 2014-2015 tax year, highlighting the challenges being faced by companies operating in the region in a lower commodity price environment. Low oil prices have led to a reduction in investing in sustaining production in the higher cost mature areas of the UKCS (e.g., planned shutdown of the Janice field).

► From January 2016, Petroleum Revenue Tax (PRT) will be reduced from 50% to 35% to support investment in maturing fields. This reduction in PRT aims to help to stimulate

brownfield investments on these fields, to help to maintain production at mature fields and by extension, helping to extend the life of infrastructure. The maintenance of this infrastructure for a longer period before decommissioning is critical, as this could incentivise the development and tie-ins of marginal nearby fields, whose smaller reserve size do not warrant a standalone development.

Viewpoint: UK OFS sector

The outlook for the UK sector continues to be extremely challenging, with expectations of an oil price recovery in the short term receding. Backlogs are being worked through, non-essential maintenance projects deferred, contract terms shortened and rates reducing. Companies have responded by implementing cost savings and have already cut discretionary spend, reduced headcount and re-engineered processes. The next step would be to consider longer term transformation projects such as operating model changes, standardising systems, business process outsourcing and the opportunities for consolidation and strategic acquisitions.

A particular challenge for management is how best to balance managing short-term cash flows through a period of volatility and change against the long-term health of their organisations, by continuing to invest in areas such as maintaining the skills base and technological innovation. Short term survival must always take precedence but history also suggests future leaders will recognise the importance of investing through the cycle and looking for opportunities to expand and develop.

There is evidence already of turnaround in certain operational indicators. Following the record investment levels of recent years and increased focus on production efficiency, the long term decline in UK production has begun to reverse. Similarly, unit operating expenditure per barrel has started to reduce after many years of increases. If these trends can be maintained into the medium-term, together with an upturn in exploration, the industry could yet emerge leaner and, with its long established international pedigree, well placed to capitalise on any recovery in the oil price.

Stuart White Director Transaction Advisory Services

Overview continued


02

Viewpoint: Decommissioning

Decommissioning is a significant cost to the UK oil and gas industry and potentially the UK taxpayer, as the costs are tax deductible, which ought to result in a real focus on achieving cost-effective solutions. These cost efficiencies will only be delivered through integrated planning, tightly managed operating and capital expenditure and innovative engineering solutions. Industry will have to overcome a steep learning curve and adapt and implement lessons learned as quickly as possible; it will also need to co-operate to drive economies of scale, reduce risk and smooth demand over time.

The UK Government has long seen the need to encourage smaller, more agile operators into the sector to drive Maximising Economic Recovery (MER) and extend the life of fields. This M&A activity has experienced a decline in recent years, partly driven by uncertainty in decommissioning liabilities. The tax regime is also proving to be an obstacle with tax relief for retained decommissioning liabilities being uncertain, and there being no current mechanism to transfer an asset’s tax history. Industry is working with government to try and address these issues.

Derek Leith Partner EY UK Tax

Decommissioning ► There are over 600 offshore oil and gas installations in the

North Sea, 470 of which are in UK waters. These include sub-sea equipment fixed to the ocean floor, platforms, more than 10,000km of pipelines and around 5,000 wells. Many of these structures have been producing oil and gas for almost forty years and are now beyond the end of the lifespan for which they were designed. Under current regulatory requirements, over 90% of offshore structures will need to be completely removed from their marine sites and brought to shore for re-use, recycling or other means of disposal.

► Forecast spend on decommissioning continues to rise, and is currently estimated at $67bn by 2045 for the UKCS, which is a 13% increase in costs since August 20152. The UKCS actual spend on decommissioning passed £1 billion for the first time in 2014 and is likely to rise to around £1.5 billion in 2015 and to over £2 billion per annum by 20183 by which time over 50 fields will be either approaching or undergoing decommissioning.

► Decommissioning experience on the UKCS is currently limited to around ten large projects. As this is a new phase of activity for the OFS sector, initial solutions remain expensive and there is a need to significantly reduce costs and manage activity more effectively. Managing spend on decommissioning is one of the OGA’s priorities and its strategy is to reduce costs, increase efficiency, facilitate cooperation and technology innovation. The aim is that by integrating efforts, this will help reduce operating, equipment and service costs, downtime and overruns and limit non-productive activities.

► The scale of a number of the decommissioning projects to be undertaken on the UKCS over the next decade is unprecedented globally. The experience gained and any pioneering breakthroughs over the next decade could offer a competitive advantage to the UK OFS supply chain, as long as companies are able to adapt their business to offer support on decommissioning projects. This could create significant short term opportunities in the UK and export potential for these companies as demand for expertise will only continue to grow both domestically and globally.

2 Wood Mackenzie data3 Oil & Gas UK’s Economic Report, 2015


Overview continued

Summary of resultsFigure 2: Summary of results

Currency: £ million 2008 2009 2010 2011 2012 2013 2014

Number of companies 1,252 1,357 1,408 1,463 1,508 1,510 1,520

Reservoirs 712 851 848 1,092 1,219 1,355 1,244

Wells 5,752 5,605 5,652 6,360 7,298 7,776 8,020

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

Marine and Subsea 5,708 6,011 6,856 8,420 8,993 10,275 10,991

Support and Services 3,904 4,201 4,711 5,578 6,297 7,254 7,554

Turnover 24,865 25,580 26,922 31,539 35,281 39,786 40,943

Growth trends — turnover n/a 2.9% 5.2% 17.2% 11.9% 12.8% 2.9%

EBITDA 2,785 2,727 2,605 2,870 3,535 4,066 4,195

Reservoirs 21.6% 16.0% 11.9% 14.8% 14.0% 18.1% 11.6%

Wells 13.2% 13.4% 12.7% 10.0% 12.0% 12.1% 15.0%

Facilities 7.0% 7.5% 8.2% 8.1% 8.6% 8.4% 6.3%

Marine and Subsea 14.8% 12.1% 9.8% 9.4% 10.9% 11.1% 12.7%

Support and Services 10.5% 10.5% 8.2% 8.4% 8.3% 8.7% 8.4%

EBITDA margin 11.2% 10.7% 9.7% 9.1% 10.0% 10.2% 10.3%

Tax on profits 620 527 465 486 677 608 674

Number of employees 108,284 106,504 106,666 113,652 122,903 133,701 140,965

Wages 4,594 4,761 4,864 5,275 5,873 6,737 7,234

The completeness of our data depends on the financial information disclosed in companies’ annual accounts submitted at Companies House. Consequently, our analysis is likely to be understated as opposed to overstated. For example, not all companies disclose headcount information and companies that file abbreviated accounts (those typically with less than £6.5 million turnover) do not disclose the financial information included in the above table.

Figure 3: 2014 revenue bandings

< £20mn

Num

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f com

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2014 revenue share Number of companies

£20mn to£50mn

£50mn to£250mn

£100mn to£250mn

Over £250mn

297066173

1,182

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600

800

1,000

1,200

1,400

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10%15%20%25%30%35%40%45%


02

Key highlights ► During 2014, the UK OFS sector delivered another year

of growth across all the supply chain categories, except Reservoirs, albeit at a lower rate than the trend of recent years, primarily due to the decline in the oil price in the second half of 2014. Turnover increased by £16.1 billion between 2008 and 2014 (compound annual growth rate (CAGR) 9%)). Although there are over 1,500 companies in our sample, the 338 companies that generated turnover in excess of £20 million in 2014 accounted for over 90% of total 2014 revenue. The largest UK OFS companies typically operate across the whole supply chain and offer integrated solutions to their customers, whilst the smaller companies typically specialise in a specific sub-sector.

► In terms of revenue, Facilities and the Marine and Subsea supply chain categories dominate, which reflects the mature state of the UKCS. The expertise developed over the last 40 years or so has allowed UK entities to become world-leading and export their services and products on a global basis.

► There has been year-on-year growth in turnover between 2008 and 2014. However, the growth of over 10% in each of 2011, 2012 and 2013, driven both by activity in the UKCS and overseas, was not repeated in 2014. The decline in the oil price has affected growth rates in all supply chain segments, with the Reservoirs segment being first hit and worst affected with a 8% revenue decline in 2014 as a result of the E&P companies significantly reducing investment in exploration activity. In addition, given the mature nature of the UK market and the challenges it faces in areas such as cost competitiveness, it is worrying that, after delivering year on year growth in exports from 2008, export sales were flat in 2014.

► EBITDA margin varies across the supply chain segments, with Wells achieving the highest margin in 2014. EBITDA margin declined from 2009 to 2011 mainly as a result of pricing pressure from customers, salary increases due to the shortage of skilled personnel in the sector and unrealised supply chain savings. During 2012 and 2013, this decline was somewhat reversed as costs were recovered from customers. EBITDA margin was flat in 2014 but in order to address the impact of the decline in the oil price, companies had started to implement cost saving strategies to reduce their cost base. This continued in 2015 as companies faced lower activity levels and a reduction in contract rates.

► The key trends by supply chain category are as follows:

► Reservoirs has seen a 8% turnover decline in 2014 and a 6 percentage points (ppt) EBITDA margin reduction as a result of pricing pressures following the decline in investment in exploration activity. We would expect further turnover and EBITDA declines in 2015 as the divisional results for the nine months to September 2015 for the listed parents of the top five companies in this segment show a reduction of 22% in turnover and 27% in EBITDA. Backlogs for these listed companies have reduced by over 32%, which creates further uncertainty for 2016.

► Wells turnover growth has continued in 2014, with a 3% improvement, due to a number of new assets operating in the UKCS and a higher level of product sales and provision of services. EBITDA margin also improved due to high margin rig activity and lower levels of vessel downtime. However, we would not expect to see this trend continue in 2015 as the results from the listed parents of the top five companies for the nine months to September 2015 show a decline of over 20% in turnover and 28% in EBITDA, mainly due to additional discounting on existing contracts and a decline in rig activity. In addition, backlogs have shown a 44% reduction for these listed companies, which suggest a further decline in 2016.

► Turnover for Facilities was flat in 2014 due to a reduction in the number of major projects and a sharp decline in sales of certain products, offset by an increase in activity levels for a number of specialist services. EBITDA margin declined by 2 ppt in 2014 primarily as a result of additional costs on a major construction project in Shetland. The decline in turnover of the listed parents of the top five companies for the six months to June 2015 was not as severe as for other segments of the supply chain (c 10%) as these companies are partially protected by the long term operations and maintenance contracts they operate under and this should also offer some protection for these companies in 2015 and 2016.


► Our analysis of the number of employees is based on employee headcount disclosed within individual company’s annual accounts filed at Companies House. The total number of employees in our analysis will be understated as a consequence of:

► Not all companies disclose employee numbers

► A number of offshore employees are employed by overseas entities and, as such, are excluded from our analysis as they do not submit annual accounts at Companies House

► Individual contractors involved in the UK upstream oil and gas industry are excluded

► EY’s Fuelling the next generation — A study of the UK upstream oil and gas workforce published in December 2014 identified the OFS workforce (based on information provided directly by the OFS companies either through interview or questionnaire) to be approximately 250,000, including around 50,000 contract staff.

► Based on our analysis from annual accounts, the number of employees increased by 32,681 to 140,965 between 2008 and 2014 and the average salary increased from £42,000 in 2008 to £51,000 in 2014 (CAGR 3%), whereas average salaries in the UK across all industries over the same period increased by less than CAGR 2% (ONS Labour Market Statistics). This partly reflects the skilled nature of the work in the OFS sector and the many organisations globally competing for the same talent pool but also indicates an inflated cost base. However, given the pay freezes, pay cuts and redundancies which started in the latter half of 2014 and continued in 2015, these actions are likely to impact on 2015 average salaries and numbers of employees.

Overview continued

► Marine and Subsea turnover increased by 7% in 2014 and EBITDA margin improved by 2 ppt due to higher vessel utilisation, successful project execution and change of product mix. However, due to a decrease in activity and reduced vessel utilisation globally, there has been a 15% reduction in turnover for the listed parents of the top five companies for the nine months to September 2015, although EBITDA margins are flat as there has been a focus on cost reduction and fleet management. Although UK companies will have some protection due to a number of large capital projects in the UKCS which are set to continue in 2015, reduced vessel utilisation and reduction in capital projects globally will impact UK companies. In addition, the backlog reduction of 18% from the listed parents is likely to result in additional turnover declines in 2016.

► Support and Services turnover only increased by 4% in 2014, following double digit growth in each of the preceding four years. There were a number of companies in this segment which were severely impacted by the cost savings initiatives implemented as a result of the low oil price as customers cut discretionary spend and delayed non-essential spend. As the majority of the top five customers do not have listed parents, there is no financial information available in relation to 2015 trends. However, these companies are expected to follow the overall global listed trends and see further turnover decline in both 2015 and 2016.


02

Geographic analysis of turnover

Figure 4: Analysis of turnover between UK and exports


UK 14,170 13,806 14,221 17,274 20,218 24,089 25, 276

Exports 10,695 11,774 12,701 14,265 15,064 15,697 15,668

Turnover 24,865 25,580 26,922 31,539 35,281 39,786 40,943

Exports as a percentage of turnover 43% 46% 47% 45% 43% 39% 38%

Figure 5: UK and export turnover 2008-14

0

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10,000

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Figure 6: UK and export turnover CAGR 2008-14

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► There was a significant increase in UK turnover in each of 2011, 2012 and 2013, reflecting the increase in spend in the UKCS in this period (there was an increase in capital expenditure of some £2.5 billion in 2011, £3.4 billion in 2012 and £3 billion in 20134. Growth slowed in 2014 as a result of the impact of oil price decline which particularly affected the reservoirs and facilities supply chain categories.

► Export turnover increased year-on-year between 2008 and 2013 and represents around 40% of total turnover, reflecting the internationalisation of the UK OFS sector and the demand for the specialist skills the companies in our analysis provide in the global arena. With the ramp up in activity in the UKCS in 2011 to 2013, exports as a percentage of turnover has reduced slightly in recent years and this trend continued in 2014 as some of the overseas markets which UK OFS companies operate in were also impacted by the declining oil price.

► Export growth from 2008 to 2014 was highest in companies with annual turnover of less than £50 million. Typically, this is because the smaller companies tend to be niche players in a particular sub-sector and the higher export growth reflects the global demand for such specialist skills. Large players often also have a local subsidiary presence in key overseas locations, which are excluded from our analysis as they do not submit annual accounts at Companies House. Given the maturity of UKCS, the cuts to capital expenditure programmes and the emphasis on reducing operating costs by E&P companies, there will be an increased focus on generating revenues from export activity for a number of UK companies in locations which are still experiencing growth, such as the Middle East.

4 Oil & Gas UK’s 2014 Activity Survey


03–07

15

The UK oilfield services sector by supply chain category


03Reservoirs


Reservoirs

Figure 7: 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 and 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 8: Analysis of Reservoirs turnover and EBITDA margin by sub-sector


Seismic data acquisition and processing contractors

415 528 498 668 720 779 599

Geosciences consultancies 91 115 146 170 217 206 223

Data interpretation consultancies 132 132 134 150 177 238 275

Seismic instrumentation 74 77 70 104 104 132 146

Turnover 712 851 848 1,092 1,219 1,355 1,244

Seismic data acquisition and processing contractors

22.1% 16.3% 8.4% 13.1% 12.4% 19.2% 9.1%

Geosciences consultancies 21.1% 13.5% 13.4% 11.7% 12.0% 12.0% 12.9%

Data interpretation consultancies 20.7% 16.2% 23.0% 22.7% 23.5% 22.1% 15.9%

Seismic instrumentation 21.2% 17.9% 12.2% 19.3% 13.3% 14.1% 12.2%

EBITDA margin 21.6% 16.0% 11.9% 14.8% 14.0% 18.1% 11.6%


Summary of resultsIn 2014, the Reservoirs supply chain comprised 3% of the total UK upstream oil and gas supply chain turnover.

Figure 9: Summary of results 2008–2014


Number of companies 74 80 84 84 84 84 84

Turnover 712 851 848 1,092 1,219 1,355 1,244

Growth trends — turnover n/a 19.5% (0.4%) 28.8% 11.6% 11.2% (8.2%)

EBITDA 154 136 100 162 171 245 145

EBITDA margin 21.6% 16.0% 11.9% 14.8% 14.0% 18.1% 11.6%

Tax on profits 46 21 18 28 30 43 23


Wages 141 165 182 205 242 271 287

Key highlights of the Reservoirs supply chain category results

► Turnover increased by £0.5 billion between 2008 and 2014 (CAGR 10%). We have identified 84 companies in this segment of the supply chain and in 2014, 67 companies generated turnover of less than £20 million. The largest 7 companies generated over 50% of the total 2014 Reservoirs turnover.

► There was a significant upturn in turnover in each of 2011, 2012 and 2013 as the industry continued its search for new hydrocarbon resources in regions featuring deeper waters, harsher environments, extreme reservoir depths and complex geologies. This had increased the need for better seismic analysis and companies were also reappraising many existing fields using 3D seismic, resulting in better quality information.

► However, there was a 8% decline in turnover in 2014 as a result of the fall in the oil price and oil companies significantly reducing investment in exploration activity. This has led to intense competition for work among seismic companies, which has had a detrimental impact on pricing.

► EBITDA margin was negatively impacted in 2010 by the cessation of exploration activity in the Gulf of Mexico following the Macondo incident in April 2010. This resulted in the number of vessels working in the Gulf of Mexico reducing significantly, with the majority of the excess capacity being absorbed by West Africa and Europe at lower margins.

► Since 2010, EBITDA margins have started to recover and in 2013, Reservoirs generated the highest EBITDA margin as compared to the other supply chain categories, primarily as a result of the skilled nature of the work and the increase in 3D seismic. However, this trend was reversed in 2014 and EBITDA margin declined by 6 ppt. This was a result of the pricing pressures faced by Reservoir companies as a result of the decline in investment in exploration activity, partly offset by cost saving initiatives implemented by a number of the companies.

► The number of employees increased by over 2,500 between 2008 and 2014 and the average salary increased from £42,000 in 2008 to £49,000 in 2014 (CAGR 3%), reflecting the skilled nature of the work.

03


Reservoirs continued

Geographic analysis of Reservoirs turnover


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UK Exports


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► UK turnover increased year-on-year from 2008 to 2013, driven by the increase in seismic analysis in the UKCS and reappraisal of existing fields. However, this trend was reversed in 2014 due to the impact of the decline in the oil price, which has resulted in a significant reduction in investment in exploration activity in the UKCS.

► Reservoirs exports as a percentage of turnover is the highest amongst all the supply chain categories. This is driven by the specialist nature of the services and the ease to which they can be transferred and utilised on a global basis.

► In 2012 and 2013, the reduction in exports as a percentage of turnover was driven by two of the largest companies in this segment significantly increasing the level of seismic work undertaken in the UKCS. In 2014, exports as a percentage of turnover has increased as, although global exploration activity has reduced in response to the oil price, it has done so at a slower rate than in the UKCS.

► As can be seen in Figure 12, export growth was highest for companies with turnover under £50 million due to a number of companies within this revenue banding, which operated solely in the UKCS in 2008, expanding their activities overseas from 2009 onwards. In 2014, more than 50% of the turnover for a number of these entities was generated from exports, which demonstrates the extent of the expansion.



UK 244 279 310 384 547 580 497

Exports 468 573 538 708 671 775 747

Turnover 712 851 848 1,092 1,219 1,355 1,244

Exports as percentage of turnover 66% 67% 63% 65% 55% 57% 60%


Key trends in Reservoirs

► Where available, we have analysed the divisional results of the listed parents of the top five companies in the Reservoir supply chain category. As can be seen from Figure 14, there has been a steep decline in both turnover and EBITDA for 9m2015 against 9m2014. However, EBITDA margin has only reduced by 1.6 ppt as companies have been reducing costs, resizing their fleets and implementing efficiency measures. As backlog has declined by nearly 33%, it would appear the revenue decline will continue into 2016.

► As noted above, in the global Reservoir supply chain category, there has been falling backlogs, intense pricing pressure (including decreases in contract rates for already signed exploration commitments) and oversupply of vessels. Although there has been a reduction in streamer vessels from 2013 to 2015 of around 20% (including those which are cold-stacked), the decrease in demand over the same period was around 30%, resulting in a continued oversupply. This suggests further capacity reductions are required.

UK ► Oil and gas exploration and appraisal in the UKCS is declining

as companies choose to focus on development activities rather than invest in exploration, or to move out of the mature North Sea altogether. The number of exploration and appraisal wells drilled in the UKCS has decreased from 105 in 2008 to 24 for the nine months to 30 September 2015, and exploration success for 2010 to 2014 was only 27%. There are a number of key challenges which are affecting the UKCS including:

► The high cost environment which de-incentivises new exploration in the UKCS

► The small size of many remaining opportunities — the UKCS is a mature basin and with a few notable exceptions, most of the remaining resources and new discoveries are small in size and cannot justify a standalone development.

► We would expect the 2015 results for the companies in the Reservoir supply chain category to follow the listed company turnover and EBITDA margin trends, assuming these companies have been proactive to address the decline in activity in 2015 by reducing their cost base. If not, the EBITDA margin decline could be more extensive.

► To try and address falling exploration activity, the OGA is supporting a £20 million UK government funded seismic project to acquire new high-quality broadband 2D data from

► The oil price decline is driving reductions in capital programmes and cost control by E&P companies, which has already led to delays or cancellations of exploration programmes. As can be seen from Figure 13, global seismic spending has historically correlated directly to oil price fluctuations.

Figure 13: Seismic spending versus average oil price

—

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120

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Figure 14: Listed Reservoir companies results for the period from January 2015 to September 2015 (9m2015) versus the period from January 2014 to September 2014 (9m2014)

Currency: US$ million

9m2015 9m2014 Variance Variance %

Turnover 10,263 13,201 (2,938) (22.3%)

EBITDA 2,748 3,746 (998) (26.6%)

EBITDA margin 26.8% 28.4% (1.6) n/a

Backlog* 2,561 3,806 (1,245) (32.7%)

03

*where disclosed

03

Viewpoint: Reservoirs

Reservoirs is the segment most severely affected by the decline in the oil price since 2014; the results of the listed companies in this segment in 2015 suggest this will continue into 2016. Asset heavy companies reliant on acquisition are likely to be more affected than those focused on processing and data interpretation.

The decline in the number of exploration and appraisal wells drilled in the UKCS, together with the low success rate, was already a worrying trend for the UKCS and the reduced investment in exploration activity by E&P companies will only exacerbate this. The OGA, with financial support from the UK Government, is taking steps to try to address this; however, by itself, this is unlikely to be sufficient and further incentives to stimulate exploration may be required.

Celine Delacroix Executive Director Transaction Advisory Services


the Rockall Trough and Mid-North Sea High area. Operations began in mid-July 2015, with three vessels in the field acquiring data over an area of 220,000km (roughly the land mass of the UK). We understand survey operations are progressing to schedule and the data will be made freely available to the industry early in 2016.

► There are a number of other actions the OGA is planning to try to revitalise exploration activity (and related success) in the UKCS including:

► Management of geophysical data from operators to make sure high-quality data is made available to industry in a timely manner

► Providing industry with an in-depth evaluation of regional prospectivity and yet-to-find resources.

Reservoirs continued


04Wells


Wells



Services

Tier 2:


► ►Seismic data acquisition and processing contractors














Tier 3:

Products & services suppliers

Components


► ►►Geosciences consultancies

► ►Data interpretation consultancies












Figure 16: Analysis of Wells turnover and EBITDA margin by sub-sector


Well services contractors 2,309 2,321 2,477 2,409 2,617 2,719 2,884

Drilling contractors 1,858 1,708 1,513 1,912 2,317 2,418 2,534

Well engineering consultancies 96 49 65 213 167 154 187

Drilling and well equipment design and manufacture

1,375 1,374 1,444 1,660 1,976 2,312 2,243

Laboratory services 113 154 154 164 219 173 171

Turnover 5,752 5,605 5,652 6,360 7,298 7,776 8,020

Well services contractors 15.0% 13.7% 12.6% 10.7% 12.0% 10.5% 11.7%

Drilling contractors 5.0% 10.5% 8.2% 4.9% 7.4% 9.3% 9.6%

Well engineering consultancies 6.8% 5.6% 3.1% 7.5% 5.4% 5.9% 11.5%

Drilling and well equipment design and manufacture

20.6% 15.9% 17.5% 14.8% 17.5% 17.5% 25.3%

Laboratory services 26.6% 21.8% 16.9% 13.4% 15.6% 10.6% 18.3%

EBITDA margin 13.2% 13.4% 12.7% 10.0% 12.0% 12.1% 15.0%

04


Summary of resultsIn 2014, the Wells supply chain comprised 20% of the total UK upstream oil and gas supply chain turnover.




Turnover 5,752 5,605 5,652 6,360 7,298 7,776 8,020

Growth trends — turnover n/a (2.6%) 0.9% 12.5% 14.7% 6.6% 3.1%

EBITDA 761 752 717 635 876 943 1,202

EBITDA margin 13.2% 13.4% 12.7% 10.0% 12.0% 12.1% 15.0%

Tax on profits 176 148 128 120 159 123 189


Wages 865 909 942 1,000 1,089 1,217 1,307

Key highlights of the Wells supply chain category results

► Turnover increased by £2.3 billion between 2008 and 2014 (CAGR 6%). We have identified 211 companies in this segment of the supply chain and in 2014, 155 companies generated turnover of less than £20 million. The largest 7 companies generated 50% of the total 2014 Wells turnover.

► The increased complexity of the type of field which is now being developed (e.g., brownfield work on older depleting fields or wells under deep water, some with high temperature and high pressure) has driven growth in this segment.

► Turnover increased in 2011, 2012 and 2013 primarily due to an increase in the number of drilling rigs and ships operating in the UKCS, an increase in contract day rates, higher vessel utilisation, an increase in personnel levels and an increase in the level of export activity from drilling and well equipment design and manufacture companies.

► Turnover growth continued in 2014 due to a number of new vessels operating in the UKCS (e.g., semi-submersible rigs, ultra-premium harsh environment jack up rigs), as well as an increase in product sales and provision of services. However, there were a number of companies that felt the impact of the oil price decline and had a reduction in turnover as a result of having to renegotiate contract extensions at lower rates or had a contraction in the overall volume of business.

► EBITDA margin declined in 2011 due to pricing pressure from customers and cost increases in the UKCS. There was a 2ppt EBITDA margin recovery in 2012 due to increased rig rates in the North Sea (Oil & Gas UK 2013 Activity Survey cited a 40% increase in semi-submersible and 66% increase in jack-up rig rates) and this was sustained in 2013. There was a further 3ppt EBITDA increase in 2014 primarily due to increase in rig activity (which generates very high EBITDA margins), reduced vessel downtime and lower repair costs incurred by the drilling contractors.

► The number of employees increased by nearly 3,000 between 2008 and 2014 and the average salary increased from £43,000 in 2008 to £57,000 in 2014 (CAGR 5%), reflecting the lack of available skilled and experienced workers, particularly in Drilling5.

5 EY’s Fuelling the next generation — A study of the UK upstream oil and gas workforce


Wells continued

Geographic analysis of Wells turnover


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Figure 20: UK and export turnover CAGR 2008–14

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► UK turnover decreased in 2010 due to a reduction in the number of drilling units operating in the UKCS. UK turnover increased in each of 2011, 2012, 2013 and 2014, primarily due to an upturn in UK activity by well services and drilling contractors. The increase in spend was reinforced by Oil & Gas UK’s 2012, 2013, 2014 and 2015 Activity Surveys which state that for the UKCS:

► Exploration and appraisal well spending was £1.4 billion, £1.7 billion, £1.6 billion and £1.1 billion in 2011, 2012, 2013 and 2014 respectively

► There was an increase in capital spend of some £2.5 billion in 2011 (up to £8.5 billion), £3.4 billion in 2012 (up to £11.4 billion), £3.0 billion in 2013 (up to £14.4 billion) and £0.4 billion in 2014 (up to £14.8 billion).

► Export turnover has increased year-on-year from 2008 to 2013, driven primarily by the drilling and well equipment design and manufacture sub-sector and the well services contractors. However, exports as a percentage of turnover declined in 2014 as the overall growth was primarily a result of new vessels operating in the UKCS and overseas activity for well services contractors reduced.

► Whereas drilling contractors generate a large portion of turnover from the UK (c.70%) as they tend to use the UK entities primarily to lease units in the UKCS, drilling and well equipment design and manufacture companies typically service the global market, with 69% of the turnover in this sub-sector in 2014 being exports.

► As the UKCS is a mature basin, many of the companies in this segment (excluding drilling contractors which typically use local entities for overseas activity) have focused on expanding overseas for their growth strategies. This is highlighted as CAGR export growth exceeds CAGR UK growth across most of the revenue bandings (see Figure 20, and is particularly evident in companies with less than £50 million turnover which typically have the more specialised niche offerings.



UK 3,110 2,840 2,538 2,951 3,320 3,739 4,078

Exports 2,642 2,765 3,115 3,408 3,977 4,037 3,942

Turnover 5,752 5,605 5,652 6,360 7,298 7,776 8,020


*where disclosed


Key trends in Wells

► However, EBITDA margin has only reduced by 1.8 ppt as companies have been managing their cost base and improving drilling efficiency in this period of lower activity. In addition, despite companies focusing on controlling their cost base, they are also still developing technologies to improve customers’ returns in a lower oil price world to ensure they remain competitive.

► Where available, we have analysed backlog and this has shown a decline of over 44% for 9m2015 against 9m2014, suggesting the revenue decline will continue at least into 2016, given the oil price is not predicted to increase significantly, if at all, over the next twelve months.

UK ► In 2014, capital expenditure in the UKCS was £14.8 billion, the

highest on record, but this was partially due to cost over-runs and project slippage on some of the large developments. It is expected to fall sharply in 2015 and very little new investment is expected to be sanctioned whilst the oil price is low (Oil & Gas UK’s 2015 Activity Survey).

► Drilling activity has been declining in the UKCS (see Figure 23), particularly in relation to exploration and appraisal wells due to the poor exploration results over the last four years.

Figure 23: Drilling activity on UKCS from 2008 to 2015

050

100150200250300

2008 2009 2010 2011 2012 2013 2014 Q1–Q32015

Num

ber o

f wel

ls

Exploration, appraisal and development wells

Source: OGA

► We would expect 2015 results for the companies in the Wells supply chain segment to decline due to the reduction in rig activity, with UK companies at greater risk due to the reduced competitiveness of the UKCS at lower oil prices as compared to some other basins.

► The Wells supply chain category is very reactive to oil price volatility, which has a direct impact on drilling activity. Any reduction in drilling activity has a knock-on effect on day rates that companies can charge for rigs and also results in excess supply sitting idle or being warm or cold stacked. As can be seen from Figure 21, the worldwide rig count has decreased steadily from December 2014 to November 2015 as a result of the decline in oil prices and the related reduction in activity.

Figure 21: Worldwide rig count for January 2014 to November 2015

0500

1,0001,5002,0002,5003,0003,5004,000

Jan

14Fe

b 14

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14

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14

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14Ju

l 14

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14O

ct 1

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ov 1

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ec 1

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ay 1

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ug 1

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Worldwide rig count

Num

ber o

f rig

s

Source: Baker Hughes Incorporated

Figure 22: Listed Wells companies results for the period from January 2015 to September 2015 versus the period from January 2014 to September 2014



Turnover 32,630 41,070 (8,440) (20.6%)

EBITDA 5,640 7,843 (2,204) (28.1%)

EBITDA margin 17.3% 19.1% (1.8) n/a

Backlog* 8,020 14,341 (6,321) (44.1%)

► We have analysed the divisional results of the listed parents of the top five companies in the Wells supply chain category. As can be seen from Figure 22, there has been a steep decline in both turnover and EBITDA for 9m2015 against 9m2014. This is a result of a combination of persistent pricing pressure due to oversupply in the global markets, additional discounting on existing contracts and continuing decline in rig activity.

04

04

Viewpoint: Wells

At present, the well construction phase typically involves a number of OFS companies and there is a significant amount of time lost due to either waiting on another supplier or slippages resulting in scheduling issues. This needs to be addressed to optimise end-to-end well construction, which could be achieved by:

► establishing an overall co-ordinator to effectively manage the project schedule

► collaboration and joint venture agreements (which we are already seeing in the sector

► standardisation of design to reduce the number of bespoke elements and associated manufacturing costs.

Together, this could reduce construction time and cost, which is imperative given the current oil price and to increase the attractiveness of the UKCS. Furthermore, production efficiencies have to be found and technologies to increase the lifespan of wells must be an area of focus for companies in this part of the supply chain.

Andrew Deane Director Advisory


► The OGA also recognises the issues facing this part of the supply chain and has actions to take accountability for the management of well data from operators to make sure high-quality data is made available to industry in a timely manner. It has already completed a rigorous analysis of failed wells in the Moray Firth and Central North Sea between 2003 and 2013, and presented its results at the Oil &Gas UK conference. Its findings highlighted the opportunity for significant improvement in fundamental technical work to avoid drilling poor quality prospects and it aims to implement a rigorous pre- and post-drill evaluation quality assurance process with operators as one measure to address this.

Wells continued


05Facilities


Facilities



Services

Tier 2:
















Tier 3:


Components















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


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


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




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


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.


Facilities continued

Geographic analysis of Facilities turnover


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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.



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


*where disclosed


Key trends in Facilities

Figure 31: UKCS operating expenditure by region

0

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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)


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


Facilities continued


06Marine and Subsea


Marine and Subsea



Services

Tier 2:
















Tier 3:


Components















Figure 33: Analysis of Marine and Subsea turnover and EBITDA margin by sub-sector


Marine/subsea contractors 2,980 3,167 3,986 4,752 5,053 5,635 6,068

Pipe lay/heavy lift contractors 12 17 47 151 104 103 63

Floating production storage units 220 265 372 359 320 499 435

Subsea manifold/riser design and manufacture

254 256 115 225 303 321 295

Marine/subsea equipment 2,108 2,184 2,190 2,729 3,027 3,502 3,908

Subsea inspection services 133 123 145 204 187 215 222

Turnover 5,708 6,011 6,856 8,420 8,993 10,275 10,991

Marine/subsea contractors 15.6% 11.5% 9.6% 10.0% 13.1% 11.3% 14.2%

Pipe lay/heavy lift contractors 5.8% 27.0% 14.1% 6.4% 4.7% 5.9% 6.0%

Floating production storage units (19.7%) (0.9%) 4.9% 0.6% (23.6%) (3.3%) (5.7%)

Subsea manifold/riser design and manufacture

25.0% 11.7% (7.5%) 15.6% 22.8% 12.0% 16.1%

Marine/subsea equipment 16.2% 15.3% 12.1% 9.3% 10.2% 12.9% 12.3%

Subsea inspection services 15.4% 1.2% 8.1% 8.2% 6.8% 11.4% 10.3%

EBITDA margin 14.8% 12.1% 9.8% 9.4% 10.9% 11.1% 12.7%

06


Summary of resultsIn 2014, the Marine and Subsea supply chain comprised 27% of the total UK upstream oil and gas supply chain turnover.




Turnover 5,708 6,011 6,856 8,420 8,993 10,275 10,991


EBITDA 847 730 675 793 979 1,143 1,395

EBITDA margin 14.8% 12.1% 9.8% 9.4% 10.9% 11.1% 12.7%

Tax on profits 184 140 117 126 216 212 219


Wages 759 772 800 929 1,034 1,331 1,386

Key highlights of the Marine and Subsea supply chain category results

► Turnover increased by £5.3 billion between 2008 and 2014 (CAGR 12%). We have identified 225 companies in this segment of the supply chain and in 2014, 154 companies generated turnover of less than £20 million. Companies with turnover in excess of £250 million, 9 in total, generated over 50% of the total 2014 Marine and Subsea turnover.

► Turnover has increased in each of the years from 2008 to 2014, with significant growth in particular in 2010, 2011 and 2013 (in excess of 12%). This was primarily driven by growth in the following sub-sectors:

► Marine/subsea contractors — increased capital spend levels led to an upturn in activity and strong order backlogs, resulting in higher number of vessel days and increased personnel levels, particularly in the UKCS

► Marine/subsea equipment — companies in this sub-sector support the marine/subsea contractors

► Pipe lay/heavy lift contractors —a number of large contracts awards in the UKCS in 2011 and several other key projects resulted in the upturn in activity in 2011 and 2012.

► EBITDA margin declined in each of 2009, 2010 and 2011, arising from difficult economic and trading conditions, project issues impacting margins (mainly in South America), project delivery delays resulting in minimal margin being recognised and a higher proportion of lower margin products.

► There was an EBITDA margin recovery of 1.5 ppt in 2012 (which was maintained in 2013) and a further EBITDA margin recovery of 1.6ppt in 2014 as a result of:

► Higher vessel utilisation due to improved market conditions

► Successful onshore and offshore project execution in the UKCS and overseas, including a significant number of SURF projects

► Increase in pipe lay/heavy lift contracts both in the UKCS and overseas

► Change of product mix to more specialised products, which typically generate higher margins.

► The number of employees increased by over 9,000 to 26,419 between 2008 and 2014. The average salary increased from £44,000 in 2008 to £53,000 in 2014. This is one of the highest paying segments within the supply chain, with average salary in 2014 for all sub-sectors being slightly in excess of £45,000.


Marine and Subsea continued

Geographic analysis of Marine and Subsea turnover


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► UK turnover has grown year-on-year, with significant upturn in 2011, 2012 and 2013 due to:

► The increased UKCS activity levels in the marine/subsea contractors and marine/subsea equipment sub-sectors

► A number of large contracts awards in 2011 within Pipe lay/heavy lift contractor sub-sector

► Higher utilisation in 2013 within the Floating production storage units sub-sector.

► Export turnover grew in each of 2009, 2010 and 2011 which was primarily driven by the marine/subsea contractors (particularly contracts in West Africa) and marine/subsea equipment sub-sectors. It declined in 2012 and 2013, with minimal change in 2014, as a result of a decline in overseas activity (particularly in Africa) by a number of the companies in the marine/subsea contractors sub-sector with turnover in excess of £250 million.

► The majority of sub-sectors within the marine/subsea supply chain segment (excluding the floating production storage units and heavy lift/pipe lay contracts sub-sectors, whose UK entities typically report activity exclusively based in the UK) have high levels of exports due to the highly technical and specialised nature of the products and services supplied.

► The large marine/subsea contractors increased their level of activity in the UKCS in 2011 through to 2014, which can be seen in Figure 37 in the UK CAGR growth for the companies with turnover in excess of £250 million. The decrease in overseas activity by these companies noted above is also seen in Figure 37 in the export CAGR decline.



UK 2,153 2,171 2,698 3,616 4,561 5,981 6,650

Exports 3,555 3,840 4,158 4,805 4,432 4,295 4,341

Turnover 5,708 6,011 6,856 8,420 8,993 10,275 10,991


*where disclosed


Key trends in Marine and Subsea

UK ► The UK offshore oil and gas industry has been utilising

subsea technology for more than 30 years as it offers significant advantages over fixed production platforms and allows hydrocarbons to be extracted more cost effectively, particularly from more challenging environments.

Figure 39: UKCS subsea capital expenditure 2008-20

0500

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2008

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2015

2016

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2018

2019

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$mn

Subsea capital expenditure

Source: Wood Mackenzie

► Over 70% of 2014 subsea capital expenditure was incurred by eight projects, including Schiehallion, Greater Laggan Area and Kraken Area. These projects are all forecast to incur significant expenditure in each of 2015 to 2018 as they are large enough to avoid being delayed or cancelled in the current low price oil environment.

► Although this should offer protection to some of the companies in the Marine and Subsea supply chain category, we expect there will still be a revenue decline in 2015. This is due to reduced levels of vessel utilisation (either in the UK or from international projects these companies are involved in) and a reduction in capital expenditure levels where the project has either not been sanctioned or can be delayed. We have already seen a number of subsea companies enter administration due to the difficult trading conditions in 2015 and this is a trend we expect to see continue in 2016. To maintain EBITDA margins, companies will have to proactively address the impact of activity decline on their cost base.

► The oil price decline has delayed many subsea projects or has led to the cancellation of those projects now deemed uneconomical. This in turn has affected the offshore vessel market, with the global market experiencing an oversupply of vessels, which has significantly reduced day rates.

Figure 38: Listed Marine and Subsea companies results for the period from January 2015 to September 2015 versus the period from January 2014 to September 2014



Turnover 28,301 33,267 (4,966) (14.9%)

EBITDA 4,073 4,540 (468) (10.3%)

EBITDA margin 14.4% 13.6% 0.7 n/a

Backlog* 51,011 62,370 (11,359) (18.2%)

► We have analysed the divisional results of the listed parents of the top five companies in the Marine and Subsea supply chain category. As can be seen from Figure 38, there has been a decline in turnover for 9m2015 against 9m2014. This is a result of a combination a decrease in market activity and reduced vessel utilisation levels.

► However, EBITDA margin has only reduced by 0.7 ppt as companies have been focused on cost reduction and resizing (e.g., headcount reductions) and managing fleets through retirements, stacking or returning leased vessels. It appears these companies do not foresee an easing of market pressures in the near term and are focusing on improving project execution and continuing with cost reductions where appropriate.

► We have also analysed backlog and this has shown a decline of around 18% for 9m2015 against 9m2014, as companies are seeing a reduction in order intake. They are taking active steps to address this through strategic alliances, implementing initiatives such as driving optimisation and standardisation into project designs and focusing on technology to deliver new and innovative solutions to lower the cost base and enable projects to become viable in the current low oil price environment.

06

40

Marine and Subsea continued 06

Viewpoint: Marine and Subsea

The Marine and Subsea sector is generally asset intensive and the combination of excess supply with falling day rates and high leverage has already been terminal for some companies. Consequently, it is particularly important that UK OFS companies in this part of the supply chain take action now to build their resilience by improving the efficiency and effectiveness of their operational delivery, reducing their cost bases, driving improvement in working capital management, and looking for opportunities to strengthen their balance sheets and amend capital structures.

Gavin Yuill Director Transaction Advisory Services



07Support and ServicesViewpoint: Marine and Subsea

The Marine and Subsea sector is generally asset intensive and the combination of excess supply with falling day rates and high leverage has already been terminal for some companies. Consequently, it is particularly important that UK OFS companies in this part of the supply chain take action now to build their resilience by improving the efficiency and effectiveness of their operational delivery, reducing their cost bases, driving improvement in working capital management, and looking for opportunities to strengthen their balance sheets and amend capital structures.

Gavin Yuill Director Transaction Advisory Services


Support and Services



Services

Tier 2:
















Tier 3:


Components















Figure 41: Analysis of Support and Services turnover and EBITDA margin by sub-sector


Catering/facility management 98 119 127 143 184 199 242

Sea/air transport 794 834 833 922 1,026 1,042 1,154

Warehousing/logistics 703 638 760 862 908 961 945

Communications 87 107 90 118 192 162 153

Recruitment 1,192 1,399 1,674 2,146 2,411 3,105 3,146

Training 60 57 67 77 84 87 106

Health, safety and environmental services 539 531 584 616 689 750 834

Energy consultancies 296 332 387 466 533 604 601

IT hardware/software 135 182 189 230 271 344 373

Turnover 3,904 4,201 4,711 5,578 6,297 7,254 7,554

Catering/facility management 3.1% 3.7% 5.0% 6.9% 7.9% 6.7% 6.1%

Sea/air transport 17.2% 14.2% 7.1% 8.4% 8.3% 7.7% 7.2%

Warehousing/logistics 3.6% 5.0% 4.4% 3.4% 4.2% 4.4% 4.3%

Communications 10.3% 11.3% 12.0% 11.3% 8.8% 15.9% 18.5%

Recruitment 4.5% 3.6% 3.3% 3.5% 3.4% 3.3% 2.9%

Training 13.2% 10.0% 11.1% 11.8% 14.4% 16.5% 16.9%

Health, safety and environmental services 11.0% 12.1% 11.3% 12.5% 13.3% 15.2% 14.5%

Energy consultancies 24.1% 27.3% 24.5% 24.3% 23.9% 25.5% 24.1%

IT Hardware/Software 32.1% 35.7% 28.6% 26.4% 20.9% 23.4% 23.8%

EBITDA margin 10.5% 10.5% 8.2% 8.4% 8.3% 8.7% 8.4%

07


Summary of resultsIn 2014, the Support and Services supply chain comprised 18% of the total UK upstream oil and gas supply chain turnover.




Turnover 3,904 4,201 4,711 5,578 6,297 7,254 7,554


EBITDA 410 443 387 466 523 629 632

EBITDA margin 10.5% 10.5% 8.2% 8.4% 8.3% 8.7% 8.4%

Tax on profits 54 71 62 46 75 99 99


Wages 599 669 701 783 891 996 1,143

Key highlights of the Support and Services supply chain category results ► The Support and Services supply chain segment excludes

companies involved indirectly in the UK upstream oil and gas supply chain (e.g., hospitality and infrastructure) and those who do not specifically disclose financial performance from oil and gas (e.g., legal, insurance, accountancy and banking organisations).

► Due to the nature of the services supplied, a large number of the sub-sectors within this segment are more reliant on activity in the UKCS than export markets, with customers typically tending to use local companies to provide a large majority of their support services. The top five companies do not have listed parent companies but, in general, these companies will follow the trends of the global listed OFS companies.

► Turnover increased by £3.6 billion between 2008 and 2014 (CAGR 12%). We have identified 457 companies in this segment of the supply chain, with 381 companies generating turnover of less than £20 million in 2014. Companies with turnover in excess of £100 million, 17 in total, generated 58% of the total 2014 Support and Services turnover.

► Support and Services has had year-on-year growth in turnover as a result of:

► The recruitment sub-sector having double-digit growth from 2009 to 2013, primarily through overseas growth in 2009 and 2010 and UK growth in 2011, 2012 and 2013, the latter reflecting the ramp-up in activity in the UKCS. There was minimal growth in 2014 as a result of a decrease in activity in the latter half of 2014 following cost saving initiatives implemented by customers.

► The Sea/air transport sub-sector experiencing growth in excess of 10% in 2011, 2012 and 2014, due to an increase in activity in the UKCS from both new projects

and brownfield and general pricing improvements. During 2013, the negative impact of the flight restrictions on EC225 aircraft from October 2012 to March 2013 was offset by a number of new contract awards for provision of helicopter services.

► The energy consultancies sub-sector having over 13% growth from 2010 to 2013 primarily through overseas expansion. There was minimal growth in 2014 as a result of the impact of the oil price decline.

► EBITDA margin declined in 2010 and has remained around 8% in 2011 to 2014. There are a large number of sub-sectors within the Support and Services supply chain segment which are low margin, as many services tend not to be of a specialised nature, restricting the premium that can be applied. The reduction in EBITDA margin in 2010 was primarily a result of:

► Reduction in higher margin activity in the exploration market in the sea/air transport sub-sector

► Substantial competition in a number of sub-sectors, in particular within helicopter operators

► Increase in offshore support vessel supply availability impacting charter rates.

► The number of employees increased by over 9,000 to 23,661 between 2008 and 2014 and the average salary increased from £41,000 in 2008 to £48,000 in 2013 (CAGR 3%). There is a wide variation in average salaries within Support and Services subsectors, with employees typically receiving lower salaries in the catering and warehousing/logistics sub-sectors, compared to the highest average salaries received in the sea/air transport and energy consultancies sub-sectors.


07Support and Services continued

Geographic analysis of Support and Services turnover


01,0002,0003,0004,0005,0006,000

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► UK turnover has followed trends similar to the overall UK upstream oil and gas supply chain trends, with significant upturn in 2011, 2012 and 2013. This is primarily a result of increased in activity in the recruitment and sea/air transport sub-sectors, reflecting the rise in the number of projects in the UKCS and high head count demand. There was lower growth in 2014 as the impact of the cost saving initiatives implemented in response to the oil price decline started to impact companies in the Support and Services supply chain category.

► A large number of the sub-sectors within this segment primarily service the UK market as the products and services are not of a specialist nature and, as such, are typically provided by local companies in overseas locations.

► Export turnover has increased from 2008 to 2014 with significant growth in 2009, 2010 and 2013. This is primarily as a result of:

► The energy consultancies sub-sector, which generates around 80% of its turnover from export markets due to the global nature of the services, having 13% turnover growth between 2012 and 2013

► The IT Hardware/Software sub-sector, which generated around 60% of its turnover from 2008 to 2014 from exports. This is due to the specialist nature of the products and services and the ease with which they can be utilised on projects globally

► The recruitment sub-sector where export turnover growth from 2012 to 2013 was 25%, primarily due to an increase in global activity from companies providing manpower solutions.

► There has only been a 2% increase in export turnover from 2013 to 2014 as the majority of sub-sectors which are active in overseas locations have seen minimal growth in 2014 due to the oil price decline.



UK 2,794 2,804 2,984 3,720 4,262 4,880 5,125

Exports 1,110 1,397 1,727 1,858 2,035 2,375 2,428

Turnover 3,904 4,201 4,711 5,578 6,297 7,254 7,554


Comparison with the Norwegian oilfield services sector

08



Comparison with the Norwegian oilfield services sector

Figure 46: Summary of results

(All data for 2014 and in £ billion unless stated otherwise) UK Norway*

Number of companies 582 618

Number of employees 136,167 120,440

Turnover 40.1 47.3

Turnover growth 2008 to 2013 (CAGR) 9% 6%

Exports as a percentage of turnover (estimated) 38% 35%

EBITDA 4.1 5.4

EBITDA margin 10% 11%

* The exchange rate used to convert the Norwegian data is NOK 10.3 per £.

To allow a comparison across the UKCS and the NCS, we have classified each of the UK companies included in this analysis into one of the four value chain segments (Reservoir/Seismic, Exploration and Production Drilling, Engineering, fabrication and installation and Operations) in line with the classifications used by our colleagues in their review of the Norwegian oilfield services sector. Only companies with turnovers greater than £10 million in any year from 2008 to 2014 are included.

UK Continental Shelf (UKCS)

Figure 47: Turnover by value chain segment 2008–14

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Figure 48: Turnover and EBITDA margin 2008–14

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Figure 49: Turnover by value chain segment 2008–14

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Figure 50: Turnover and EBITDA margin 2008–14

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08


Key highlights ► Activity in oilfield services in the UK and Norway increased

across all segments of the value chain between 2008 and 2014. The UK has experienced turnover growth of £16.1 billion (CAGR 9%), whilst Norway has grown by £14.2 billion (CAGR 6%). The different levels of maturity in the UKCS and the NCS are reflected in the turnover generated by the different value chain segments.

► UK turnover growth has predominately been in the Engineering, fabrication and installation and Operations segments, reflecting the more mature status of the UKCS. There has been increased investment with 2014 capital spend the highest for more than three decades at £14.8 billion. The combination of ageing infrastructure and the need to extend the productive life of fields has resulted in substantial modifications and upgrades of installations. However, UK turnover is expected to decline in 2015 as a result of the low oil price driving reduced activity levels, reductions in operator capital expenditure budgets and deferral of non-essential maintenance.

► Norway turnover has experienced stable growth in all segments, driven primarily by increased capital expenditure in relation to exploration and development activities. In 2014, the turnover growth was primarily driven by the Exploration and production drilling and Engineering, fabrication and installation segments, due to continued high exploration activity in the NCS. Looking forward to 2015 and 2016, NCS investments and costs are expected to decline from 2014 to 2016. primarily due to lower investments and exploration spend. Several of the ongoing field developments that have fueled the investment growth in recent years are approaching end of construction and are coming onstream, e.g., Edvard Grieg, Ivar Aasen and Goliat, and the field development investments going forward are mainly related to Johan Sverdrup and smaller projects. The lower oil price has forced oil companies to evaluate their portfolios, and several potential projects, most notably Johan Castberg, have been postponed.

► For both the UKCS and NCS, although there is a small number of major decommissioning projects underway, this part of the supply chain is still in its initial stages. However, with an estimated total decommissioning spend of around £17 billion over the next ten years in the UKCS alone, the segment is expected to see significant growth in the medium to long term.

► Margins in the UKCS declined from 2009 to 2011 as result of pricing pressures and salary increases due to a shortage of skilled personnel. There was an EBITDA margin improvement in 2012, which was maintained in 2013 and 2014, but given the current low oil price and focus on cost reduction and pressures on rates in the UKCS, maintaining margins in 2015 and 2016 will be challenging.

► On the NCS, margins have been relatively stable between 2008 and 2012, albeit with a slow decline from the peak of 14% in 2010 to 13% in 2012, primarily a result of increased labour costs in E&P drilling. There was a further decline to 11% in 2014 due to cost pressures reducing the underlying profitability of operations. Similar to the UKCS, a continued low oil price could negatively impact margins in the NCS in 2015 and 2016.

► Export turnover from the UKCS increased year-on-year between 2008 and 2014 from £10.4 billion to £15.3 billion (38% of total turnover), reflecting the internationalisation of the UK oilfield services sector and world-leading capabilities it has.

► Exports from the Norwegian oilfield service industry have steadily increased from 2011 to 2014, and are currently estimated to be around 35% of total turnover. Norwegian exports are related to rig equipment, product suppliers, offshore and seismic vessels and subsea equipment and services, which are segments where the industry has gained a global competitive edge.


in overall production. Although the large mature fields such as Troll, Ekofisk and Åsgard have passed their peak production, they still have many years of production left. In addition, several small and medium size discoveries have come on stream during recent years, such as Skarv, Gjoa and Vega, to compensate for reduction in production from some of the more mature fields. From 2015 onwards, there are several new developments coming on stream, including Aasta Hansteen, Edward Grieg and Goliat. In addition, the Johan Sverdrup field is forecast to commence production in 2019 and this is expected to contribute an additional 600 boe/day during peak production. The combined impact of all these developments is expected to ensure stable production levels in the NCS for the next ten years.

Comparison with the Norwegian oilfield services sector continued

► As the UKCS is a mature basin, production had been declining annually between 2003 to 2013, at average annual rate of 10%. As a result of significant development investment in recent years, this trend was reversed in 2014 and growth is forecast in each of 2015 to 2017, before plateauing in 2018 and declining again from 2019 onwards. The growth in 2014 and forecast from 2015 onwards is a result of new fields coming on stream (e.g., Golden Eagle, Kinnoull, Laggan, Cygnus and Mariner), a forecast ramp up in activity in Elgin Franklin following the shut down in 2012 and Schiehallion production being expected to recommence in 2017 after the new FPSO is commissioned.

► Whilst oil production on the NCS has almost halved since its peak in 2001, the decrease in oil volumes has gradually been replaced with gas production, offsetting some of the decline

Figure 51: Historical and forecast production

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NCS UKCS


Viewpoint: EY Norway


resulted in a number of projects which were due to commence in 2015 onwards being delayed or cancelled.

► Investment in the NCS reached a record high in 2013 at US$29.8 billion and remained high in 2014. This was driven by major development projects and upgrades in current fields, primarily Troll and Åsgard. For 2015 onwards, capital expenditure is expected to see a sharp decline as there will be fewer new field developments and the low oil price has resulted in E&P companies cancelling or postponing modifications to current infrastructure and drilling of development wells on producing fields. However, there will still be significant investment in Johan Sverdrup, with the total value of the first stage of construction estimated to be around US$13 billion.

08

Figure 52: Historical and forecast capital expenditure

NCS UKCS

0

5,000

10,000

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$mn

2003

2004

2005

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2007

2008

2009

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2011

2012

2013

2014

2015

2016

2017

2018

2019

2020


► Investment in the UKCS has more than doubled since 2010 due to a number of large projects being sanctioned and new field allowances encouraging investment in projects that would otherwise have been unattractive. Investment in 2014 was the highest in over 30 years at US$21 billion (comprised of fields under development, e.g., Kraken, Greater Laggan Area, Mariner and Golden Eagle and upgrades to existing fields). However, capital expenditure is forecast to decline from 2015 onwards as operators significantly reduce their capital expenditure budgets in response to the low oil price. Although the large development projects which are underway will continue, the reduction in capital expenditure budgets has

Espen Norheim Partner — EY Norway Transaction Advisory Services

The oilfield service industry is one of Norway’s largest industries with total revenues of around NOK 500 billion and employing an approximate 5% of the overall Norwegian workforce. The industry has experienced high growth for several years, driven by increased domestic investments and spending on E&P, as well as exports to global markets where Norwegian OFS companies are key suppliers.

Towards the end of 2013, we observed a shift in the E&P companies’ emphasis, from volume growth to profitability, as cost inflation had caused increasing pressure on maintaining positive cash flows. The fall in the oil price which began mid 2014 has forced E&P companies to take a second look at their asset portfolios, resulting in stricter project prioritisation

and comprehensive improvement programs to realize capex and operating cost savings.

In 2014 and 2015 we have observed an OFS industry dealing with cost pressure and overcapacity. Several OFS companies announced job cuts and cost saving initiatives throughout 2014 and 2015. It remains to be seen if further layoffs will follow, or if the majority of layoffs already made are sufficient to establish sustainable operational cost levels.

As a consequence of cost reduction programs and reduced investment activity on the NCS, we expect total OFS revenues to remain considerable, but with a 20% drop from the 2014 peak of around NOK 500 billion back to the NOK 400 billion level observed around 2011–12.

Methodology and key assumptions

► The purpose of our analysis of the UK OFS sector has been to define, qualify and quantify a sector of significant importance for the UK North Sea and the UK economy and to provide insight both to the industry itself as well as to other relevant parties.

► The financial data in this report is based on UK registered company’s annual accounts filed at Companies House, which has been categorised into 2008, 2009, 2010, 2011, 2012, 2013 and 2014 for financial year ends within each of these calendar years. Where a company has not yet filed its 2014 annual accounts and it had turnover in excess of £20 million in 2013, we have included its results based on the following assumptions:

► For turnover, we have applied the relevant sub-sector turnover growth or decline rate to the company’s 2013 revenue

► For EBITDA, we have applied the 2013 EBITDA margin to 2014 turnover

► For wages and employees, we have included 2013 values.

► We applied the following criteria to each company to determine whether it should be included in the analysis:

► It is a UK registered company

► At least 50% of its turnover is generated in the upstream oil and gas sector

► It has filed 2014 accounts with Companies House (apart from the exception noted above).

► As it is not possible to accurately extract the portion of financial information relating to the upstream oil and gas sector from each company’s annual financial statements, we include the full results for any company included in the analysis. Although this will overstate the financial information for companies which are not 100% engaged in the sector, it excludes

09


those companies that do not have the majority of their business in the sector. Overall, we believe this results in a fair reflection of the UK OFS sector.

► We have assigned each company to a sub-sector based on its main activity. Many companies do have activities across the supply chain but this is not accounted for in this analysis.

► For export analysis, we analysed the geographic disclosure within the annual accounts of the largest 300 companies (by 2014 turnover). Where this did not result in at least 80% coverage of the turnover in each of the 32 supply chain sub-sectors, additional companies were also analysed.

► The export information based on annual accounts averaged approximately 70% of turnover in each of the financial years, with the remainder being extrapolated as noted below:

► Where a company only disclosed revenue at Europe level rather than at a UK level, the average split of UK and Europe revenue for the specific sub-sector was applied to calculate the UK only portion

► If a company did not disclose geographic information or was excluded from the export analysis, the average split of UK and export revenue for the sub-sector, based on the information extracted from the annual accounts, was applied.

► Tax on profits represents tax charged in the accounts filed at Companies House and does not represent tax paid. There are a number of differences between the effective tax rate and tax paid, including:

► Tax allowance

► Utilisation of tax losses from prior years

► Group relief

► Deferred tax


A–EAppendices


Reservoirs supply chain segment sub-sectors

Seismic data acquisition and processing contractorsSeismic data acquisition and processing contractors sub-sector includes companies providing seismic and reservoir services including data acquisition, processing, reservoir analysis/interpretation and field evaluation. In 2014, this sub-sector comprised 2% of total UK upstream oil and gas supply chain turnover.




Turnover 415 528 498 668 720 779 599


EBITDA 92 86 42 88 89 150 54

EBITDA margin 22.1% 16.3% 8.4% 13.1% 12.4% 19.2% 9.1%

Tax on profits 30 10 5 13 14 25 2


Wages 73 89 112 120 142 156 162


6

< £20mn

1

£50mn to £100mn

4

£100mn to £250mn

0

1

2

3

4

5

6

7

0%10%20%30%40%50%60%70%80%90%

Num

ber o

f com

pani

es

% re

venu

e sh

are


—

£20mn to £50mn



UK 137 171 199 246 337 343 264

Exports 279 357 299 422 384 436 335

Turnover 415 528 498 668 720 779 599



A

Geosciences consultanciesGeosciences consultancies sub-sector includes companies providing collection, interpretation, development and management of the geophysical, geological, geotechnical and other geoscientific data for offshore development projects. In 2014, this sub-sector comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 91 115 146 170 217 206 223

Growth trends — turnover n/a 25.7% 27.4% 16.4% 27.6% (5.1%) 8.6%

EBITDA 19 15 20 20 26 25 29

EBITDA margin 21.1% 13.5% 13.4% 11.7% 12.0% 12.0% 12.9%

Tax on profits 5 3 4 5 5 5 7

Number of employees 592 627 647 750 899 908 838

Wages 24 24 26 32 38 42 41



32

3 1

0

5

10

15

20

25

30

35

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

< £20mn £20mn to £50mn £50mn to £100mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



UK 24 33 47 52 82 72 89

Exports 67 81 99 118 135 134 134

Turnover 91 115 146 170 217 206 223



Reservoirs supply chain segment sub-sectors continued

Data interpretation consultancies Data interpretation consultancies sub-sector includes companies providing reservoir description analysis and seismic interpretation to identify map and assess geological and environmental constraints to offshore development. In 2014, this sub-sector comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 132 132 134 150 177 238 275


EBITDA 27 21 31 34 42 53 44

EBITDA margin 20.7% 16.2% 23.0% 22.7% 23.5% 22.1% 15.9%


Number of employees 921 1,002 843 797 834 909 1,015

Wages 32 35 31 31 36 42 47


18

4

1

< £20mn £20mn to £50mn £50mn to £100mn

Num

ber o

f com

pani

es

% re

venu

e sh

are

02468101214161820

0%

10%

20%

30%

40%

50%

60%




UK 38 25 18 30 69 87 56

Exports 94 107 116 120 108 151 220

Turnover 132 132 134 150 177 238 275



A

Seismic instrumentation Seismic instrumentation sub-sector includes companies providing products and systems for surveying seabeds. In 2014, it comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 74 77 70 104 104 132 146


EBITDA 16 14 8 20 14 19 18

EBITDA margin 21.2% 17.9% 12.2% 19.3% 13.3% 14.1% 12.2%



Wages 13 17 14 22 25 32 36


11

3

< £20mn £20mn to £50mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

2

4

6

8

10

12

0%10%20%30%40%50%60%70%80%90%



UK 45 49 46 56 59 78 89

Exports 29 27 24 48 45 54 58

Turnover 74 77 70 104 104 132 146



Wells supply chain segment sub-sectors

Well services contractorsWell services contractors sub-sector includes companies providing design, manufacture and sale of drilling and completion equipment and services related to the installation and operation of this equipment. The services include logging and coring, wellbore construction, wellbore interventions, well completions and pressure pumping services consisting of cementing, well stimulation, sand control and coiled tubing, commissioning, pre-commissioning and leak detection. In 2014, this sub-sector comprised 7% of total UK upstream oil and gas supply chain turnover.




Turnover 2,309 2,321 2,477 2,409 2,617 2,719 2,884

Growth trends — turnover n/a 0.5% 6.7% (2.7%) 8.6% 3.9% 6.1%

EBITDA 347 318 312 258 314 285 339

EBITDA margin 15.0% 13.7% 12.6% 10.7% 12.0% 10.5% 11.7%

Tax on profits 74 72 64 43 41 7 26


Wages 564 567 581 566 610 667 709


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

1

2

3

4

5

6

0%

10%

20%

30%

40%

50%

60%

70%

80%

£20mn to£50mn

£50mn to£250mn

£100mn to£250mn

Over £250mn

5

4

1

3 3



UK 1,018 990 993 945 958 1,061 1,310

Exports 1,291 1,330 1,484 1,465 1,660 1,658 1,574

Turnover 2,309 2,321 2,477 2,409 2,617 2,719 2,884



B

Drilling contractorsDrilling contractors sub-sector includes companies who are drilling rig or ship owners and lessors (includes semi-submersibles, ultra deepwater, jack up drilling rigs) and companies who provide drilling personnel and services. In 2014, this sub-sector comprised 6% of total UK upstream oil and gas supply chain turnover.




Turnover 1,858 1,708 1,513 1,912 2,317 2,418 2,534

Growth trends — turnover n/a (8.1%) (11.4%) 26.4% 21.2% 4.3% 4.8%

EBITDA 93 180 124 94 172 225 242

EBITDA margin 5.0% 10.5% 8.2% 4.9% 7.4% 9.3% 9.6%

Tax on profits 17 23 12 18 42 35 103

Number of employees 601 1,109 868 1,211 1,366 1,672 1,985

Wages 51 79 73 95 107 141 165


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

1

2

3

4

5

0%

10%

20%

30%

40%

50%

60%

£20mn to£50mn

£50mn to£250mn

£100mn to£250mn

Over £250mn

4 4 4 4

3



UK 1,412 1,128 923 1,220 1,533 1,738 1,887

Exports 446 580 590 692 784 680 647

Turnover 1,858 1,708 1,513 1,912 2,317 2,418 2,534



Wells supply chain segment sub-sectors continued

Well engineering consultanciesWell engineering consultancies sub-sector includes companies providing specialist well and production engineering services from exploration and appraisal drilling to well abandonment. In 2014, this sub-sector comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 96 49 65 213 167 154 187

Growth trends — turnover n/a (49.3%) 33.1% 228.7% (21.6%) (8.0%) 21.9%

EBITDA 7 3 2 16 9 9 22

EBITDA margin 6.8% 5.6% 3.1% 7.5% 5.4% 5.9% 11.5%

Tax on profits 1 — — 4 2 2 5


Wages 16 19 20 17 26 27 44


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0%

10%

20%

30%

40%

50%

60%

70%

£20mn to £50mn £50mn to £100mn £100mn to £250mn

12

1 —

0

2

4

6

8

10

12

14

2



UK 7 10 15 16 39 55 86

Exports 89 39 50 197 128 99 101

Turnover 96 49 65 213 167 154 187



B

Drilling and well equipment design and manufactureDrilling and well equipment design and manufacture sub-sector includes companies providing equipment used below the wellhead, including companies providing drill heads and drill logging equipment. In 2014, this sub-sector comprised 6% of total UK upstream oil and gas supply chain turnover.




Turnover 1,375 1,374 1,444 1,660 1,976 2,312 2,243

Growth trends — turnover n/a (0.1%) 5.1% 15.0% 19.1% 17.0% (3.0%)

EBITDA 284 218 253 245 347 406 568

EBITDA margin 20.6% 15.9% 17.5% 14.8% 17.5% 17.5% 25.3%

Tax on profits 78 48 51 52 71 76 53


Wages 210 210 233 280 295 345 350

Figure 75: 2014 revenue bandings N

umbe

r of c

ompa

nies

% re

venu

e sh

are


109

16 2 4 1

0

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40

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100

120

0%

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20%

25%

30%

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< £20mn £20mn to£50mn

£50mn to£100mn

£100mn to£250mn

Over£250mn



UK 615 636 539 705 705 793 692

Exports 760 738 905 955 1,271 1,518 1,551

Turnover 1,375 1,374 1,444 1,660 1,976 2,312 2,243



BWells supply chain segment sub-sectors continued

Laboratory services Laboratory services sub-sector includes companies providing reservoir laboratory services and the provision of offshore cylinder gases, liquids and chemicals. In 2014, it comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 113 154 154 164 219 173 171

Growth trends — turnover n/a 35.4% 0.2% 6.8% 33.3% (20.9%) (1.4%)

EBITDA 30 33 26 22 34 18 31

EBITDA margin 26.6% 21.8% 16.9% 13.4% 15.6% 10.6% 18.3%



Wages 24 33 34 41 50 38 38


< £20mn £20mn to £50mn

Num

ber o

f com

pani

es

% re

venu

e sh

are

25

4


0%

10%

20%

30%

40%

50%

60%

70%

80%

0

5

10

15

20

25

30



UK 59 75 69 65 85 92 102

Exports 55 78 85 100 134 82 69

Turnover 113 154 154 164 219 173 171



Facilities supply chain segment sub-sectors

Engineering, operation, maintenance and decommissioning contractorsEngineering, operation, maintenance and decommissioning contractors sub-sector includes engineering, procurement and construction (EPC) contractors and operations and maintenance (O&M) contractors undertaking major contracts. In 2014, this sub-sector comprised 13% of total UK upstream oil and gas supply chain turnover.




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

Growth trends — turnover n/a (4.8%) (1.8%) 17.8% 10.7% 10.3% (5.6%)

EBITDA 157 156 250 298 343 366 38

EBITDA margin 3.7% 3.9% 6.3% 6.4% 6.6% 6.4% 0.7%

Tax on profits 59 52 56 51 81 7 26


Wages 1,179 1,173 1,147 1,160 1,188 1,353 1,441


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to£50mn

£50mn to£250mn

£100mn to£250mn

Over £250mn

10

7 7

3 4

0%10%20%30%

40%50%

60%70%80%

0

2

4

6

8

10

12



UK 3,325 3,107 3,024 3,474 3,912 4,461 4,368

Exports 920 935 944 1,201 1,264 1,247 1,022

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



C

Engineering consultantsEngineering consultants sub-sector includes companies providing engineering and technical services including field development planning, front end engineering and design, and detailed engineering. In 2014, this sub-sector comprised 1% of total UK upstream oil and gas supply chain turnover.




Turnover 195 234 259 288 350 394 482


EBITDA 19 16 10 11 15 11 18

EBITDA margin 9.6% 6.8% 3.9% 3.9% 4.2% 2.9% 3.8%

Tax on profits 6 5 3 2 3 — 1

Number of employees 743 881 915 979 1,003 1,195 1,432

Wages 42 49 57 61 69 87 122


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



4

1

2

6

0%5%

10%15%20%25%30%35%40%45%50%

0

1

2

3

4

5

6

7



UK 107 137 144 194 223 210 267

Exports 88 97 114 94 127 184 215

Turnover 195 234 259 288 350 394 482



Facilities supply chain segment sub-sectors continued

Structure and topside design and fabricationStructure and topside design and fabrication sub-sector includes companies providing design and manufacture of platforms, structures and topside modules, accommodation modules and subsea structures. In 2014, this sub-sector comprised 2% of total UK upstream oil and gas supply chain turnover.




Turnover 251 383 351 455 650 646 857

Growth trends — turnover n/a 52.6% (8.5%) 29.7% 42.9% (0.5%) 32.6%

EBITDA 25 34 19 33 41 52 72

EBITDA margin 10.0% 8.8% 5.4% 7.3% 6.2% 8.0% 8.5%



Wages 58 81 76 82 123 110 122


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



3

8

2 3

0123456789

0%

10%

20%

30%

40%

50%

60%



UK 201 330 289 381 566 564 738

Exports 50 53 62 74 84 82 119

Turnover 251 383 351 455 650 646 857



C

Machinery/plant design and manufactureMachinery/plant design and manufacture sub-sector includes companies providing equipment primarily used in facilities category, such as electrical heating and control equipment, lifting equipment, valves and pumps. It excludes well and subsea/marine equipment. In 2014, this sub-sector comprised 7% of total UK upstream oil and gas supply chain turnover.




Turnover 1,972 2,140 2,067 2,210 2,533 2,709 2,797


EBITDA 225 283 275 267 325 345 341

EBITDA margin 11.4% 13.2% 13.3% 12.1% 12.8% 12.7% 12.2%

Tax on profits 46 44 40 57 53 59 49


Wages 359 374 384 411 473 488 523


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



135

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

140

160

20 11 5



UK 800 796 787 900 1,030 1,248 1,253

Exports 1,172 1,345 1,280 1,310 1,503 1,461 1,545

Turnover 1,972 2,140 2,067 2,210 2,533 2,709 2,797




Engineering support contractorsEngineering support contractor sub-sector includes companies supporting the Tier 2 Facilities contractors and consultants and in 2014, it comprised 3% of total UK upstream oil and gas supply chain turnover.




Turnover 778 767 792 875 1,030 1,206 1,180


EBITDA 59 49 45 56 71 91 85

EBITDA margin 7.6% 6.3% 5.7% 6.4% 6.9% 7.6% 7.2%

Tax on profits 15 10 11 12 16 15 9


Wages 338 301 301 342 417 474 465


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to£50mn

£50mn to£250mn

£100mn to£250mn

Over £250mn

110

1 2 2 4

0

20

40

60

80

100

120

0%

5%

10%

15%

20%

25%

30%



UK 664 614 637 718 836 1,028 1,030

Exports 114 153 155 158 194 178 151

Turnover 778 767 792 875 1,030 1,206 1,180



C

Specialist engineering servicesSpecialist engineering services sub-sector includes companies providing complex engineered solutions and precision machined products. In 2014, it comprised 3% of total UK upstream oil and gas supply chain turnover.




Turnover 508 533 610 650 829 1,107 1,303


EBITDA 40 32 47 50 84 114 144

EBITDA margin 7.9% 6.1% 7.7% 7.7% 10.2% 10.3% 11.1%

Tax on profits 8 8 10 9 15 17 26


Wages 115 128 128 157 176 207 234


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



92

4 4 6

0102030405060708090100

0%

10%

20%

30%

40%

50%

60%



UK 235 255 296 368 483 660 728

Exports 272 278 314 282 346 447 574

Turnover 508 533 610 650 829 1,107 1,303




Specialist steels and tubularsSpecialist steels and tubulars sub-sector includes companies providing steel pipe and piping products, downhole casing, tubulars and accessories. In 2014, it comprised 2% of total UK upstream oil and gas supply chain turnover.




Turnover 487 441 435 545 435 813 609

Growth trends — turnover n/a (9.3%) (1.5%) 25.4% (20.3%) 87.2% (25.2%)

EBITDA 29 25 23 33 28 45 33

EBITDA margin 6.1% 5.6% 5.2% 6.0% 6.5% 5.6% 5.4%


Number of employees 936 868 738 824 1,034 1,260 1,427

Wages 44 35 30 37 42 53 56


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



31

1 2 4

0

5

10

15

20

25

30

35

0%

5%

10%

15%

20%

25%

30%

35%



UK 356 281 305 344 244 452 282

Exports 131 160 129 201 191 361 326

Turnover 487 441 435 545 435 813 609



C

Inspection servicesInspection services sub-sector includes companies providing inspection, verification, testing and certification services. In 2014, it comprised 1% of total UK upstream oil and gas supply chain turnover.




Turnover 355 372 374 391 472 541 517

Growth trends — turnover n/a 4.7% 0.6% 4.6% 20.7% 14.6% (4.4%)

EBITDA 58 72 58 66 78 81 90

EBITDA margin 16.4% 19.3% 15.6% 16.9% 16.5% 14.9% 17.3%

Tax on profits 14 15 13 19 17 15 17


Wages 96 105 115 108 128 150 148


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



40

1 2 6

0%

5%

10%

15%

20%

25%

30%

35%

051015202530354045



UK 182 193 209 225 233 286 260

Exports 173 179 165 166 239 255 257

Turnover 355 372 374 391 472 541 517



Marine and Subsea supply chain segment sub-sectors

Marine/subsea contractorsMarine/subsea contractors sub-sector includes companies providing project management, subsea construction, subsea installation services and offshore operational and maintenance support services. In 2014, this sub-sector comprised 15% of total UK upstream oil and gas supply chain turnover.




Turnover 2,980 3,167 3,986 4,752 5,053 5,635 6,068


EBITDA 464 364 382 476 660 637 864

EBITDA margin 15.6% 11.5% 9.6% 10.0% 13.1% 11.3% 14.2%

Tax on profits 87 67 56 45 135 124 122


Wages 330 337 370 430 425 623 606


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to £50mn £50mn to£250mn

£100mn to£250mn

Over £250mn

7

9

11

4

0%10%20%30%

40%50%

60%70%80%

012345678910



UK 1,041 1,018 1,368 1,950 2,858 4,037 4,576

Exports 1,939 2,148 2,618 2,803 2,195 1,598 1,492

Turnover 2,980 3,167 3,986 4,752 5,053 5,635 6,068



D

Pipe lay/heavy lift contractorsPipe lay/heavy lift contractors sub-sector includes companies providing cranes designed for offshore applications and provision of marine trenching, installation and protection services of subsea products (pipelines and flexible cables). In 2014, this sub-sector comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 12 17 47 151 104 103 63

Growth trends — turnover n/a 38.6% 176.5% 219.5% (31.5%) (0.2%) (38.6%)

EBITDA 1 5 7 10 5 6 4

EBITDA margin 5.8% 27.0% 14.1% 6.4% 4.7% 5.9% 6.0%

Tax on profits — 1 3 1 1 1 —


Wages 7 8 7 9 8 6 7


1

2

< £20mn £20mn to £50mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

1

2

3

0%

20%

40%

60%

80%

100%



UK 12 17 34 142 100 103 63

Exports — — 13 9 3 — —

Turnover 12 17 47 151 104 103 63



Marine and Subsea supply chain segment sub-sectors continued

Floating production storage unitsFloating production storage units (FPSO) sub-sector is primarily the operating companies for the FPSOs and in 2014, it comprised 1% of total UK upstream oil and gas supply chain turnover.




Turnover 220 265 372 359 320 499 435

Growth trends — turnover n/a 20.0% 40.8% (3.5%) (11.0%) 56.0% (12.9%)

EBITDA (43) (2) 18 2 (75) (16) (25)

EBITDA margin (19.7%) (0.9%) 4.9% 0.6% (23.6%) (3.3%) (5.7%)

Tax on profits (8) 2 16 (1) 3 2 —


Wages 3 3 3 3 4 3 4


45

2

< £20mn £20mn to £50mn £50mn to £100mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

1

2

3

4

5

6

0%10%20%30%40%50%60%70%80%90%



UK 220 265 372 359 320 499 435

Exports — — — — — — —

Turnover 220 265 372 359 320 499 435



D

Subsea manifold/riser design and manufactureSubsea manifold/riser design and manufacture includes companies designing and manufacturing equipment including subsea manifolds, flexible risers, steel catenary risers, hybrid steel-flexible risers, and top tensioned risers. In 2014, it comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 254 256 115 225 303 321 295


EBITDA 64 30 (9) 35 69 39 48

EBITDA margin 25.0% 11.7% (7.5%) 15.6% 22.8% 12.0% 16.1%

Tax on profits 22 5 (2) 9 6 (1) 3

Number of employees 1,057 1,083 834 903 1,042 1,149 1,185

Wages 45 53 38 44 55 58 59


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



11

1 —

3

0

2

4

6

8

10

12

0%

10%

20%

30%

40%

50%

60%



UK 9 31 26 52 61 64 140

Exports 245 225 89 173 242 256 155

Turnover 254 256 115 225 303 321 295



Marine and Subsea supply chain segment sub-sectors continued

Marine/subsea equipmentMarine/subsea equipment sub-sector includes companies providing specialised subsea equipment, pipeline products, underwater connectors, umbilical systems and remotely operated vehicles (ROVs). In 2014, this sub-sector comprised 10% of total UK upstream oil and gas supply chain turnover.




Turnover 2,108 2,184 2,190 2,729 3,027 3,502 3,908


EBITDA 342 333 264 254 308 453 482

EBITDA margin 16.2% 15.3% 12.1% 9.3% 10.2% 12.9% 12.3%

Tax on profits 79 64 44 70 70 83 91


Wages 338 336 346 397 493 586 655


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to£50mn

£50mn to£250mn

£100mn to£250mn

Over £250mn

281116

123

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

140



UK 835 787 807 986 1,112 1,168 1,307

Exports 1,274 1,397 1,384 1,743 1,915 2,334 2,601

Turnover 2,108 2,184 2,190 2,729 3,027 3,502 3,908



D

Subsea inspection servicesSubsea inspection services includes companies providing pipeline testing, repair and integrity, maintenance and refurbishment services and in 2014, it comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 133 123 145 204 187 215 222

Growth trends — turnover n/a (7.4%) 18.3% 40.3% (8.0%) 14.8% 3.2%

EBITDA 20 1 12 17 13 25 23

EBITDA margin 15.4% 1.2% 8.1% 8.2% 6.8% 11.4% 10.3%


Number of employees 642 656 606 730 856 935 1,031

Wages 37 35 36 46 49 55 54


11

2 1

< £20mn £20mn to £50mn £50mn to £100mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

2

4

6

8

10

12

0%5%

10%15%20%25%30%35%40%45%



UK 35 53 91 126 111 109 130

Exports 97 70 54 77 77 106 92

Turnover 133 123 145 204 187 215 222



Support and Services supply chain segment sub-sectors

Catering/facility managementCatering/facility management sub-sector includes companies servicing both onshore and offshore oil and gas facilities and in 2014, it comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 98 119 127 143 184 199 242


EBITDA 3 4 6 10 14 13 15

EBITDA margin 3.1% 3.7% 5.0% 6.9% 7.9% 6.7% 6.1%


Number of employees 563 503 460 511 603 790 2,571

Wages 14 15 14 13 18 21 39


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



1 1 1

0

1

2

3

4

5

6

7

0%

10%

20%

30%

40%

50%

60%6



UK 87 86 96 129 147 175 230

Exports 12 33 31 14 37 24 11

Turnover 98 119 127 143 184 199 242



E

Sea/air transportSea/air transport sub-sector includes helicopter, platform support vessel, anchor handling tower support vessel, support vessel and emergency response and rescue vessel operators. In 2014, this sub-sector comprised 3% of total UK upstream oil and gas supply chain turnover.




Turnover 794 834 833 922 1,026 1,042 1,154


EBITDA 136 119 59 78 85 80 83

EBITDA margin 17.2% 14.2% 7.1% 8.4% 8.3% 7.7% 7.2%

Tax on profits 4 14 5 (21) 3 5 17


Wages 103 123 128 129 141 152 156


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to£50mn

£50mn to£250mn

£100mn to£250mn

Over £250mn

2 3

7

13

1

0%

5%

10%

15%

20%

25%

30%

0

2

4

6

8

10

12

14



UK 598 594 572 683 826 826 936

Exports 196 240 261 238 200 216 218

Turnover 794 834 833 922 1,026 1,042 1,154



Support and Services supply chain segment sub-sectors continued

Warehousing/logisticsWarehousing/Logistics sub-sector includes companies providing logistics and freight services for the oil and gas sector and in 2014, it comprised 2% of total UK upstream oil and gas supply chain turnover.




Turnover 694 630 751 862 908 961 945


EBITDA 25 31 33 30 38 43 40

EBITDA margin 3.6% 4.9% 4.4% 3.4% 4.2% 4.4% 4.3%



Wages 58 69 66 75 82 89 97


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to£50mn

£50mn to£250mn

£100mn to£250mn

Over £250mn

28

2 1 1 2

0

5

10

15

20

25

30

0%

10%

20%

30%

40%

50%

60%



UK 671 606 719 830 872 918 896

Exports 23 23 32 32 35 43 49

Turnover 694 630 751 862 908 961 945



E

CommunicationsCommunications sub-sector includes companies providing telecoms solutions including satellite, wireless and fibre optic for both offshore and onshore and in 2014, it comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 87 107 90 118 192 162 153

Growth trends — turnover n/a 22.5% (16.2%) 31.3% 62.9% (15.8%) (5.2%)

EBITDA 9 12 11 13 17 26 28

EBITDA margin 10.3% 11.3% 12.0% 11.3% 8.8% 15.9% 18.5%



Wages 19 21 19 23 35 28 28


25

3

< £20mn £20mn to £50mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

5

10

15

20

25

30

0%

10%

20%

30%

40%

50%

60%

70%

80%



UK 61 72 54 66 87 81 76

Exports 27 35 36 52 105 81 77

Turnover 87 107 90 118 192 162 153




RecruitmentRecruitment sub-sector includes companies specifically focused on oil and gas recruitment and the provision of manpower including both technical and support services. In 2014, this sub-sector comprised 8% of total UK upstream oil and gas supply chain turnover.




Turnover 1,192 1,399 1,674 2,146 2,411 3,105 3,146


EBITDA 54 50 55 76 81 104 93

EBITDA margin 4.5% 3.6% 3.3% 3.5% 3.4% 3.3% 2.9%

Tax on profits 13 10 12 20 17 26 23


Wages 139 159 171 193 214 257 302


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to£50mn

£50mn to£250mn

£100mn to£250mn

Over £250mn

31

3 3 3

16

0

5

10

15

20

25

30

35

0%

10%

20%

30%

40%

50%

60%



UK 764 848 896 1,266 1,515 1,986 1,976

Exports 428 551 778 880 896 1,119 1,171

Turnover 1,192 1,399 1,674 2,146 2,411 3,105 3,146



E

TrainingTraining sub-sector includes companies providing onsite and e-learning solutions covering training in survival, firefighting, emergency management and skills, learning and workforce development for the oil and gas industry. In 2014, this sub-sector comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 60 57 67 77 84 87 106


EBITDA 8 6 7 9 12 14 18

EBITDA margin 13.2% 10.0% 11.1% 11.8% 14.4% 16.5% 16.9%



Wages 13 14 15 19 23 26 31


36

2

< £20mn £20mn to £50mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0%

10%

20%

30%

40%

50%

60%

0

5

10

15

20

25

30

35

40



UK 44 46 56 64 73 76 96

Exports 15 12 11 13 12 11 10

Turnover 60 57 67 77 84 87 106




Health, safety and environmental services Health, safety and environmental services sub-sector includes companies providing emergency response and rescue vessels, medical support services, hazardous waste management and protective clothing. In 2014, this sub-sector comprised 2% of total UK upstream oil and gas supply chain turnover.




Turnover 539 531 584 616 689 750 834


EBITDA 59 64 66 77 92 114 121

EBITDA margin 11.0% 12.1% 11.3% 12.5% 13.3% 15.2% 14.5%

Tax on profits 8 10 9 11 12 15 16


Wages 142 137 132 143 161 177 202


107

151

< £20mn £20mn to £50mn £50mn to £100mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

20

40

60

80

100

120

0%

10%

20%

30%

40%

50%

60%



UK 454 411 427 478 519 557 642

Exports 85 120 158 138 170 194 192

Turnover 539 531 584 616 689 750 834



E

Energy consultanciesEnergy consultancies sub-sector includes companies providing consulting expertise incorporating strategy development, market analysis, corporate and competitor analysis. In 2014, this sub-sector comprised 2% of total UK upstream oil and gas supply chain turnover.




Turnover 296 332 387 466 533 604 601

Growth trends — turnover n/a 12.3% 16.6% 20.3% 14.4% 13.4% (0.5%)

EBITDA 71 91 95 113 127 154 145

EBITDA margin 24.1% 27.3% 24.5% 24.3% 23.9% 25.5% 24.1%

Tax on profits 12 11 14 10 12 18 14


Wages 79 90 107 127 144 150 186


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



76

-2 3

0

10

20

30

40

50

60

70

80

0%

10%

20%

30%

40%

50%

60%

70%

80%



UK 67 67 74 102 106 122 116

Exports 228 266 313 364 427 483 486

Turnover 296 332 387 466 533 604 601



Support and Services supply chain segment sub-sectors continued E

IT hardware/softwareIT Hardware/Software sub-sector includes companies providing business technology and software solutions, supply of IT personnel and computer consultancy services. In 2014, this sub-sector comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 135 182 189 230 271 344 373


EBITDA 43 65 54 61 57 80 89

EBITDA margin 32.1% 35.7% 28.6% 26.4% 20.9% 23.4% 23.8%

Tax on profits 11 16 13 13 14 18 16

Number of employees 743 1,062 1,112 1,272 1,504 2,033 2,125

Wages 32 43 51 61 71 97 102


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



57

1 1 1

0

10

20

30

40

50

60

0%5%

10%15%20%25%30%35%40%45%50%



UK 39 66 82 102 117 140 158

Exports 96 116 107 127 154 203 215

Turnover 135 182 189 230 271 344 373


Singapore

BrisbanePerth

Calgary

Satellite Centers

Rio de Janeiro

Cape Town

Johannesburg

Lagos

Beijing

Stavanger

Americas 3,600 professionals

Asia-Pacific and Japan 1,500 professionals

Europe, Middle East, India and Africa 5,200 professionals

HoustonGlobal Oil & Gas Centers

Aberdeen MoscowLondon

Bahrain


EY’s Oil & Gas network

Our global commitment to oil and gasAs an organisation we are highly committed to the oil and gas sector and have created a network of more than 10,000 focused professionals that provide a global platform from which to offer services to companies operating in all sectors of the oil and gas industry.

Your EY UK contactsTransaction Advisory Services Assurance Tax Advisory

Andy Brogan Barry Fraser Moira Lawrence Derek Leith Andrew Deane

Direct

Email

+44 20 7951 7009

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+44 1224 653 255

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+44 1224 653 246

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Céline Delacroix Stuart White Kevin Weston Colin Pearson Alex Milward

Direct

Email

+44 20 7806 9204

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+44 1224 653 199

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Brisbane


EY oil and gas insightsOil and Gas Capital Confidence Barometer

The 13th edition finds companies pursuing deals at a rate not seen this decade. As 2015 global M&A value approaches record highs, executives’ long-term growth considerations outweigh short-term concerns about market volatility.

Oil pressure

Whilst the oilfield services sector has benefitted from strong oil prices, companies are seeing major change, and must address the consolidation opportunities this presents.

Driving operational performance in oil and gas

Operational excellence is not a new concept, but current conditions create a unique opportunity for the industry to realize its full promise. External economic factors are putting pressure on the industry to be more efficient and cost effective without giving any ground on HSEQ.

Joint ventures for oil and gas megaprojects

The challenge of delivering capital intensive projects on schedule or budget, combined with a drive to diversify and strengthen portfolio resilience in increasingly volatile global markets, has led to a growing preference for cooperative sharing of risk and capabilities between organisations.

Resilience in a time of volatility: oil prices and the energy industry

The oil and gas industry was riding high, with unprecedented growth in US production and three straight years of US$100- plus prices. But the drop came quickly and surprised many. Looking ahead, industry executives are asking, “Is this the new normal?”

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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.

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