Oilfield Services and Equipment Sector Market Opportunity ... · Oilfield Services and Equipment...

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Oilfield Services and Equipment Sector Market Opportunity Update

May 2010

1© Oliver Wyman � www.oliverwyman.com

Contents

� Introduction and executive summary

� Global energy industry and oilfield services trends

� Value flows: Oilfield services sub-sectors

� Oilfield services and equipment mergers and acquisition activity

� Oilfield services customer needs and investment priorities


Executive summary

Oil service industry trends

� The global financial markets have stabilized and oil demand and prices and capital spending are recovering– Given that oilfield services activity and investment are highly correlated to commodity prices, the sector’s

revenues and profitability have begun to recover– Global E&P spending is forecasted to rebound by 11% in 2010, partly reversing a 15% slump in 2009– In the long term, oil demand will continue to expand and the oil & gas service sector will continue to grow

� The combination of NOCs restricting access to easier-to-reach reserves, elephant-sized field potential and technological improvement has made deepwater development a critical source of international and national oil company growth in some portions of the globe

� The push to more challenging reservoirs (deeper, higher pressure and temperature wells) is yielding more robust and expensive equipment and services. However, operators are frustrated with some of the quality assurance /quality control inadequacies existing in service providers creating opportunities for superior service providers.

� Oilfield services M&A activity has plunged to its lowest level since 2005 due to a lack of available debt capital and high volatility in valuations within the sector

– Both asset and corporate deal values have fallen year-over-year– As a result, oilfield service company valuations are at near record lows relative to replacement costs and Net

Asset Values (NAVs)

Investment considerations

� Value will be created where business designs are constructed that take advantage of industry trends and do a superior job of meeting customers’ (producers’) unmet and future needs

� According to operators, oilfield service company equipment is often fairly equivalent for many providers and this not a differentiator – the differences are personnel expertise, project management acumen, and having local expertise in the area

There are compelling opportunities today for private equity to consider in the

oilfield services industry


Contents







0

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1975 1980 1985 1990 1995 2000 2005 Q1

2010

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$60

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$100

$120

U.S. Middle East

Latin America Europe

Africa Far East

Canada Price of Barrel

Global E&P spending is forecasted to rebound in 2010

Sources: Baker Hughes, EIA, Barclays Capital, Oliver Wyman analysis.

• Global E&P spending is forecasted to rebound by 11% in 2010, partly reversing a 15% slump in 2009, according to Barclays Capital’s most recent semi-annual spending survey.

– A strong rebound is forecasted for North America, which saw the biggest budget cuts in the past year. US spending is seen up 12% , while Canadian budgets are seen climbing 23%

– Capex budgets outside of NA will be led by the national oil companies, who as a group are expected to increase spending by 10%

– Companies based in Asia, Africa, Russia and the Middle East are planning the biggest spending increases, while European companies are keeping their budgets relatively flat from 2009

� The increase in spending is attributed to recent increases in commodity prices and loosening credit markets

� On average, companies are basing their 2010 budgets on an oil price of $70.16 per barrel and gas prices of $5.21 per thousand cubic feet

� About 45% of the companies said they expect to spend a greater share of their budgets on exploration this year than they did in 2009, up from 16% in 2009. That is good news for the seismic and oil-service industries

� The companies listed horizontal wells and fracturing and stimulation as the most important technologies for 2010, both of which are important in shale gas production, with 3D and 4D seismic considered the third most important

Key observationsEvolution of worldwide drilling activity and oil prices(1975-2009)

Rig

co

un

t

US

D (1

975-0

9 in

flatio

n a

dju

ste

d o

n 2

009 U

SD

)

Oil p

rice


0

50

100

150

200

250

300

350

400

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

EIA forecasted oil prices suggest improving market values for oilfield service companies

Source: Compustat, Energy Information Administration, OW analysis.1 OSX Index: Baker Hughes, Inc., BJ Services Co., Cameron International Corporation, Global Industries, Ltd. , Halliburton Company, Nabors Industries, Inc., Noble Corp.,

National Oilwell Varco, Inc., Oceaneering International, Inc., Rowan Companies, Inc., Transocean, Inc., Smith International, Inc., Schlumberger Ltd., Tidewater, Inc., Weatherford Int’l Inc. All prices indexed at 100 starting in Jan 2002.

World crude prices versus OSX index1

Monthly, January 2002 – February 2010 ($USD)

Oil Service Sector Index (OSX)

World Crude Oil Price ($/barrel)

R2= 87%

% o

f Jan

uary

2002

EIA forecasted prices


Oilfield services revenue and EBIT marginsIncreasing oil prices have led to increased drilling activity, and oilfield services revenues and margins have begun to rebound as quickly as they collapsed

Oil Services Large-Cap: Revenue Growth

Note: Includes historical figures and MS vs. consensus projection of top line growth for the average of SLB, HAL, WFT and BHI.

-20%

-10%

0%

10%

20%

30%

40%

2005 2006 2007 2008 2009 2010E 2011E 2012E

Oil Services Large-Cap: EBIT Margins

0%

5%

10%

15%

20%

25%

30%

2005 2006 2007 2008 2009 2010E 2011E 2012E

2011eMS 19.5%

2011eConsensus

18.9%

2011e

MS 19.0%

2011eConsensus

16.5%

Note: Includes historical figures and MS vs. consensus projection of EBIT margins for the average of SLB, HAL, WFT and BHI.

2011eMiddle East/Asia

25.0%

2011eMiddle East/Asia

24.2%

2011eConsensus

16.5%

MS

Consensus

Middle East/Asia

2011eConsensus

16.5%

MS

Consensus

Middle East/Asia

Source: Morgan Stanley.

Middle East/Asia is projected to have relatively high revenue growth and

EBIT margins relative to other regions.


Exploration and production spending cycleIn large part, commodity prices determine the cash flow of producers which is followed by increasing cash flows to service and equipment providers

Current International cycle

E&P margins expand

E&P spending increases

Oil service pricing rises

Production increases

E&P margins contract

E&P spending decreases

Oil service pricing falls

Production declines

Commodity prices rise

Cyclical inflection points are driven by the expected returns from drilling.


0%

50%

100%

150%

200%

250%

300%

DO ESV NE PDE RIG RDC ATW

Price/NAV Range (since 2001)

Market values recovering but still at low end of trading rangesThe price-to-net asset value, price-to-book, and price-to-sales for oilfield services companies are at or near historic lows

Source: FactSet, Morgan Stanley Research.

P/NAV Range and Price Target (line)

Current P/NAV (2009A)

P/NAV Trading Range average for NE/ESV/RDC

Source: FactSet, Morgan Stanley Research, companies included: DO, ESV, NE, PDE,RDC, and RIG.

Standard Deviation Range

Average Offshore Drillers P/NAV

Oil Services and Equipment: Price/Sales

Source: FactSet, Morgan Stanley Research. Includes Services, Equipment and Land Drillers.

Oil Services and Equipment: Price/Book

Source: FactSet, Morgan Stanley Research, Includes Services, Equipment and Land Drillers.


Average P/S


Average P/B

40%

70%

100%

130%

160%

190%

220%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0x

8.0x

2001 2002 2003 2004 2005 2006 2007 2008 2009 201020001997 1998 19992001 2002 2003 2004 2005 2006 2007 2008 2009 201020001997 1998 1999

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

0x

4.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x


Contents







Business design value creation across upstream servicesOliver Wyman analysis has shown that each services segment has its own value creation characteristics and outcomes

Upstream Oil Field Service Value Creation trendsMV/Sales 2003, 2005, 2007 and 2009

Source: Compustat, Oliver Wyman analysisNotes: Market values are as of December 31. Sales are for full year, except for 2009 which is annualized Q1-Q3

Within any

segment, there are

market and value

creation

opportunities driven

by both the

segment and the

specific business

designs competing

in the segment

1,4

0,6

0,9

1,1

0,7

1,6

3,1

1,7

1,2

1,7

1,41,3

2,5

4,6

0,91,0

2,22,0

1,3

3,1

3,4

0,81,0

1,9

1,3

2,1

2,3

U.S. Regional

Low-Tech

Services

Engineering &

Construction

Equipment U.S. Regional

High-Tech

Specialty

Reservoir Info &

Seismic

Services

Integrated

Global Oil

Services

Drillers

2003200520072009


Contents







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160

Asset Corp. Deal Count

Oilfield services and equipment mergers and acquisition activityBoth asset and corporate deal value falling year-over-year

Tra

nsacti

on

valu

e

US

$ b

illio

ns

Transaction value and deal count

Deal c

ou

nt

0

10,000

20,000

30,000

40,000

50,000

2005 2006 2007 2008 2009

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120

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Baker Hughes Global Rig Count Deal countG

lob

al ri

g c

ou

nt

Glo

bal d

eal c

ou

nt

With financial operating margins under pressure and important North American land rig

counts at recent historic lows, total dollar transaction value plunged to its lowest level since 2005

Source: Thomson Datastream, Baker Hughes, Oliver Wyman analysis.Note: Figures represent all acquisition, merger and swap reserve transactions >US$10MM.


Oilfield services and equipment mergers and acquisition activity: Geographies Deal values for exclusively U.S. companies make up a relatively small, and declining portion of global oilfield services M&A

2005-2008 % of deal value by global region

Canada,

5.0%

Globally

diversified,

69.2%

Europe,

9.9%

United

States,

9.5%

Africa &

Middle East,

1.2%

Asia Pacific,

2.0%

Latin

America,

3.0%

Former

Soviet

Union, 0.2%

2009 % of deal value by global region

Globally

diversified,

73.8%

Canada,

0.5%

Former

Soviet

Union, 4.5%

Asia Pacific,

7.1%

Africa &

Middle East,

3.0%

United

States,

6.1%

Europe,

5.0%

Source: Thomson Datastream, Oliver Wyman analysis.Note: Figures represent all acquisition, merger and swap reserve transactions >US$10MM.


Contents







Oil and Gas Customers (Operators): Representative needs

Future / Unmet NeedsCurrent Needs

� Reliability

� Advanced technology

� Responsible commitment

� Scale

� Customer-aligned organization

� Good safety record

� Lower cost and time for well completions

� Reduced risk, cost, & complexity of exploration and development drilling

� Improvements to conserve rig time

� Higher reliability downhole systems requiring less frequent intervention

� Better HP/HT designs to enable drilling and production in more severe environments

� Integrated solutions that are flexible for different applications

� Enhanced seismic imaging in sand dune areas and for more effective production management

� Improved formation evaluation capabilities, especially in carbonates

� Enhanced recovery methods

� Enhanced water management

� Enhanced sand management

� Enhanced well testing and multi-stage completion/stimulation

� Enhanced reservoir characterization and asset management

� More IWS applications

� Better flow assurance capabilities

The extent to which equipment and service providers are successful in the future

depends on how well their future business designs address customers’ unmet needs.

Source: Oliver Wyman interviews.


E&P environment drivers for oilfield services demand It is also critical to understand the oil and gas resource map and potential to identify E&P hot spots for services and trends that will impact current and future oilfield service markets

Difference between proven gas reserves 1998 - 2008 in 1012 m3

Gas reserves in 1012 m3

1988 1998 2008

109.72 148.01 185.02

+35% +25%

+ Net increase

- Net decrease

USA: 2.08

Canada: -0.12

Russia: -0.21

Norway: -0.88

Venezuela: 0.69 Nigeria: 1.71

China: 1.09Iran: 5.51

Qatar: 14.56

UAE: 0.43

KSA: 1.5

Egypt: 1.15

Iraq: -0.02Algeria: 0.42Turkmenistan: 5.43

Kazakhstan: 0.01

Kuwait: 0.3

Australia: 0.86

Indonesia: 1

Malaysia: -0.02

Source: BP Statistical Review 2008, Oliver Wyman analysis.Note: Top 20 countries displayed.


Attractiveness for E&P investment

Legend

Potential for hydrocarbon discoveries

Fiscal attractiveness

Political stability

High

Low

Medium

Canada GoM

Trin. & Tob

Colombia Venezuela

Brasil

Argentina Angola

Algeria

Libya

Nigeria

Eq. Guinea

Norway Russia

IraqAzerbaijan/Kazakhstan

EgyptIran

India

Australia

East Timor

Indonesia

Malaysia

China

E&P environment drivers for oilfield services demand Investment in E&P worldwide will continue to focus on prospectivity, terms and stability; shortage of new unexplored frontiers is shifting attention to mature assets

Source: EIA, IFP, PEPS, Oliver Wyman analysis.


Discussion: Opportunity assessment preferences

Market segment

� Equipment vs service?

� Hi-tech vs. low-tech?

� Drilling related vs production related?

Business model and financial

� Asset intensive vs people intensive?

� Preferred size?

� Controlling interest vs. minority interest?

Geography

� US only?

� ME & North Africa?

� Europe?

� Global operations?

1

2

3

Most investment firms need to set their preferences to ensure focus and alignment of firm

capabilities to manage any investment ultimately made


Oliver Wyman Oil and Gas Oliver Wyman’s oil & gas practice works with companies in all elements of the value chain.

� Strategic planning

� Network and portfolio optimization

� Growth strategy

� Business design

� Customer experience and site operations

� Post -transaction integration

� Acquisition due diligence

� Cost improvement

� Operations effectiveness

� Operational and financial planning

� Industry investment opportunity scans

� Asset value maximization

� Optimization of capital deployment

� Pricing strategies

� Risk reduction

Practice Capabilities and Focus Areas

Industries / Clients Served

Oil Field Services and Equipment

Upstream Midstream Transport and Logistics

Downstream InvestorsNatural Gas Marketing and Supply

� Rig, drilling, and seismic

� Engineering, procurement and construction

� General oil field and well servicing

� Independent E&P’s

� Major integrated oil

� National oil

� Pipelines

� Terminals / storage

� Trucking and distribution

� Fuels marketing

� Lubricants marketing

� Refiners

� Convenience retailers

� Marketers / jobbers

� PE/VC firms

� Strategics

� Investment banks

� Gas marketing

� Liquefaction and regasification

� Other LNG infrastructure providers

Bob Orr, Partner+1.713.276.2187

[email protected]

Ryan Isherwood, Partner+1.713.276.2245

[email protected]

For more information, please contact:

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