The oil field services sector encompasses a wide-ranging variety of businesses that provide the products and services necessary in the construction, exploration and production of oil and gas but don’t generally produce the product themselves. As a supplier to the energy industry, oil field services (OFS) companies are reliant on demand from the energy sector for their own success; performance of the OFS sector is intrinsically connected to the current and future market price of oil and gas.
What sort of businesses make up the oil field services sector?
Historically these companies might have been involved mainly in the manufacturing and maintenance of equipment used by the oil and gas producers. More recently, technological advances have seen a number of more niche innovators enter the field, focused on making field operations processes more efficient and maximizing returns for producers. Decades ago, producers relied on their internal resources for every part of their operation, however over time, investments in their own R&D weakened and they now look increasingly to specialized service providers to cover all technological and engineering requirements for operations, preferring to concentrate on strategy instead. OFS companies include but are not limited to;
Source: IBISWorld Oil & Gas Services in the US, 2018. Accessed 28.07.2021.
Market conditions borne out of COVID
An OFS business is largely cyclical, following the peaks and troughs in an economy – for a market so heavily susceptible to economic conditions, oil field services were hit hard by the sudden dip in economic activity caused by COVID. Demand for oil and gas tanked and as smaller players struggled for survival amidst slumping prices and mergers and acquisitions (M&A) started taking shape. Entering M&A activity offered some the chance to broaden service offering, be better placed to compete and ultimately save their businesses.
Now that we’re finally entering a period of upturn, oil and gas producers are anticipating a record year for positive cash flow as the price of a barrel has reached over $70 again, however, the recovery is not being felt so quickly by OFS providers. The expectation was that as economic activity gathered pace so would demand for oil field services, however no one really predicted that the producers would start tightening their belts just as things were getting back to ‘normal’. It seems that producers are limiting CAPEX spend, managing to do more with less rigs and get back into their investors’ good books once more; unwelcome news for struggling OFS companies.
Challenges old and new
Challenges which were common in the OFS industry predating the downturn continue to dominate and now there’s the further complication of a prolonged period of depressed revenue if producers delay investing again this year. Profits for an OFS business are typically sporadic during the early stages of an upturn so it’s likely to be a long road to recovery.
Some businesses will have already started on cost-cutting and downsizing equipment capacity and others may be looking for opportunities to expand and readying themselves to take on new contracts. Cash flow could be a major stumbling block to realizing hopes of merger or acquisition activity or simply meeting financial obligations through the rest of the year, as could inability to secure finance.
Because of the intricacies of the business and the number of external forces that can impact them, most OFS companies need to look outside of debt financing at some point or another. Given current economic circumstances, alternative finance providers are stepping up to the plate. Going into merger or acquisition activity can be problematic for an OFS manufacturing company in the middle of a decline because valuations only really extend to their current equipment and not expected future earnings as might be considered in peak trading conditions. Alternative finance solutions such as invoice factoring, don’t add debt to the balance sheet and are generally easier to secure with providers more interested in potential for success rather than looking at what should be a temporary decline in earnings.
What’s the way forward for oil field services?
Growth will continue to be dependent on the creative and innovative spirit of oil field service providers who create solutions to address the technological and sustainability challenges faced by oil and gas producers. The need for efficiency in production, meeting demand from a growing population plus ploughing forward with federal targets on emissions means there will come a point when producers are unable to grow without enlisting the help of more progressive OFS partners. Demand will return, drawing closer with each new rig constructed and once producers end their financial austerity, those that have developed and invested in proprietary knowledge and expertise will be able to implement their solutions across projects and clients.
Sallyport supports many OFS companies through challenging times, reach out to discuss your financing needs for growth, merger and acquisition or additional working capital. Whatever your requirements, we’re always happy to help with no obligation to use our services.
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