Oil&Gas Financial Journal
This article originally appeared on the Oil & Gas Financial Journal.
Until oil prices began to drop in 2014, North America's oilfield services and equipment companies enjoyed a relatively smooth ride. Over the previous decade, upstream E&P operators outsourced much of the work across a growing industry, paying a premium for availability when activity surpassed capacity. Prices for equipment and services soared, and OFSE returns, though cyclical, were above normal.
Despite this, many OFSE providers left themselves poorly positioned for a downturn by allowing costs to rise along with pricing, and by orienting themselves to higher-cost, technically challenging applications-profit pools that have all but disappeared in today's low-price environment.
When prices fell, OFSE executives followed their downturn playbook, cutting capacity, reducing overhead, and delaying capital spending. Even so, their revenues fell significantly as E&P customers slashed activity and pressured suppliers to cut pricing. As a result, the leading OFSE companies saw a collective 25% drop in revenue from Q214 to Q215 and the sector lost more than $130 billion in market capitalization.
Now many OFSE executives are coming to grips with the fact that we may be at a once-in-a-generation strategic crossroads that demands conscious and careful decisions about the future. The current downturn could rival that of the 1980s in duration, and oil prices are likely to remain low for some time.
Peter Jackson is a partner in Bain & Company's London office and Ethan Phillips is a partner in Houston. Both work with Bain's Global Oil & Gas practice.