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Industry Outlook
Financial Trends and Themes in the UK Oil Services Sector
a report by
Alex Dewar
Director of Corporate Finance, Brewin Dolphin Investment Management
2009 has seen the credit crunch taking its toll on businesses and sheet strength and recurring cash flows. There are, however, some
commodities alike, with the oil sector suffering two hits: first, capital positive signs for the small and mid-cap companies in the sector where
markets dried up as collapsing oil prices eroded operating cash flows, and investors may find good value in small but well-run businesses.
second, the volatility in the global markets has shaken the oil market and
the speed of change has caught many of the companies operating in this News flow from large oil producers and explorers indicates that capital
sector unawares. Many had not anticipated being so badly stung by a expenditure (CAPEX) will remain flat in the short term; however, some
plummeting oil price and treacherous market conditions. However, commentators and experts expect a gradual recovery to start in the
despite the credit crunch and collapsing oil prices, a number of oil services second half of 2010. A sustained recovery will not be achieved until
companies have reported continuing good progress and confidence in credit markets and the banks return to some level of normality. Market
their ability to address the challenges ahead. retraction has focused attention on the quality of order books and the
diversity of earning streams, so in the current economic climate there
Until recently, commodities had long been lauded in the UK financial are opportunities to exploit balance sheet strength – meaning those
markets as a pretty resilient sector. Oil had shown a consistent upward bigger and stronger companies may prevail, but some smaller
trend from 2003 onwards, and this was reflected in the considerable companies are likely to face greater uncertainty in the near term.
corporate finance activity in the oil services sector – there were four initial
public offerings (IPOs) in the oil services sector in 2008, before oil reached While with short-term recovery it is evident that those with strong balance
its peak price of US$147 per barrel in July 2008. All was well – until, that sheets will grow, there is opportunity for adequately funded technology
is, the global financial crisis burst the oil bubble. The general consensus innovators within the oil services sector to grow and develop their niche
from the business world was that oil companies probably did not factor in markets – and it is the hunger of developing nations for the world’s oil
how tough 2009 would be and how challenging the short-term market resources that will ultimately really kick-start the oil industry. According to
conditions would turn out – variables that would ultimately have a drastic Goldman Sachs Economic Research, by 2050 China and India will
impact on oil companies, both large and small. It was not just the oil dominate the oil industry, with their global bargaining power already
companies themselves: rapid expansion in 2007 and 2008 in the evident in their hunt for energy resources. China’s gross domestic product
oil exploration and production sector, on the back of relentless growth (GDP) will have increased by a factor of 22 between 2004 and 2050, its
in oil price, fuelled a bonanza for oil service companies. This meant that projected GDP standing just under US$45bn. The main catalysts seem to
when the bottom started to fall out of the oil market, the services be privatisation and the unwinding of family businesses, making way for
companies suffered too. When the market went into free-fall, much of the oil juniors to come in and explore smaller fields. By 2050, the
the financial activity in the sector was put on ice, with many companies – developing world will likely be the driving force for oil demand.
understandably – being reticent in face of the unknown. However, when
the oil price reached a market low of US$32 per barrel in December 2008, The outlook for oil services is proving positive. However, 2009 is likely to
this started to signal an upturn in activity. For example, smaller projects or have been tougher than companies originally anticipated. Size has not
projects that had previously been unfunded started to garner attention, been as great a differentiator as expected; rather, there has been a flight
with some re-tendering in evidence. On the corporate finance side, the to quality. Opportunities to invest in good businesses, both large and
current economic environment is allowing those companies with healthy small, will remain, but investors will be approaching the oil industry with
balance sheets and strong cash flows to exploit opportunities for growth a great deal of caginess for a long time to come. The fact that the oil
at the expense of their weaker peers. Larger quoted companies have and oil services sector will soar again is undisputed – but it remains to
pursued a bolt-on acquisition strategy, while there have been fewer deals be seen just how deeply variables such as technology and geopolitical
among the smaller players. That being said, conditions are currently well demand for oil will affect the market and when we will see those
suited to an increase in merger and acquisition (M&A) activity, with those changes take place. n
companies with strong balance sheets seeking to build their service
portfolio. It has become increasingly evident that uncertainty in the oil Disclaimer
services sector has not stalled growth. The opinions expressed in this article are not necessarily the views held
throughout Brewin Dolphin Ltd. No Director, representative or employee
Future Prospects of Brewin Dolphin Ltd accepts liability for any direct or consequential loss
Despite the upturn in interest and activity from a low in late winter, arising from the use of this document or its contents. The information has
reservations about the oil market and its future success still prevail. been taken from public sources and is believed to be reliable and accurate,
Lenders to the industry have revised their oil price assumptions, limiting but without further investigation cannot be warranted as to accuracy or
the amounts they are willing to lend. To date, equity funding has completeness. The value of your investment or any income from it may fall
principally focused on more stable, larger-scale producers with balance and you may get back less than you invested.
© TOUCH BRIEFINGS 2009
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