Jakarta Post

Long-Term Survival for Oilfield Service Providers

Oil prices are likely to remain low for some time. By finding efficiencies, executives can create a tremendous growth platform.

Par Ethan Phillips and Marco Cioffi

First published on septembre 07, 2016
min


This article originally appeared in the Jakarta Post. 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 Oil Field Services & Equipment (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 percent drop in revenue from second quarter, 2014 (Q214) to second quarter, 2015 (Q215) and the sector lost more than US$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. Ethan Phillips is a partner in Bain & Company’s Houston office and Marco Cioffi is a principal in Jakarta. Both work with Bain’s Oil & Gas practice.

This article originally appeared in the Jakarta Post.

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 Oil Field Services & Equipment (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 percent drop in revenue from second quarter, 2014 (Q214) to second quarter, 2015 (Q215) and the sector lost more than US$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.

Ethan Phillips is a partner in Bain & Company’s Houston office and Marco Cioffi is a principal in Jakarta. Both work with Bain’s Oil & Gas practice.