Douglas-Westwood: Risky returns?

Today’s oil and gas environment has been impacted by a myriad of issues including restrained capital spending, curtailed investment and employment cuts for struggling companies across the supply chain. Recovery from current market conditions is expected to be slow, with oil prices likely not to return to pre-crash levels in the near term. However, such conditions are likely to prove beneficial for those private equity firms and strategic investors prepared to take a long-term view of the current downturn.

Constricted capital expenditure is directing operator attention to maximising efficiencies of their existing assets. Field redevelopment and production optimisation of brownfield assets offers a comparatively low cost option to increase production. For example, Douglas-Westwood research shows that global offshore maintenance, modifications and operations (MMO) spend will decline by at least 12% in 2015 – driven by a combination of delayed projects and pricing. However, the underlying long-term trends remain favourable for brownfield developments – the need to ensure continued production levels holds strong and increased levels of spend are expected to return by 2017. This is recently illustrated by BP’s US$1 billion investment into the Eastern Trough Area Project (ETAP). Further brownfield investment will be essential if the industry is to create a competitive cost base and sustain production.

Whilst not subject to the same magnitude of orderbook reduction as Capex-focussed businesses, service firms that cater to ongoing operations have not been immune to implications stemming from low oil price. Virtually all have initiated cost reduction processes to cater for reduced activity and margin pressure. This includes the implementation of downsizing measures.

Our recent discussions with the investment community show an increased focus on brownfield-leveraged companies, for whom margin levels are typically lower, but are not subject to the same risk of backlog collapse. The growing trend towards improving efficiency in the current oil price environment will benefit brownfield focussed firms in the years ahead. Furthermore, long-term investment in the MMO sector may also provide an upside in transferable skills to a potential decommissioning market; should this occur before oil prices rebound to field-prolonging levels.

MMO providers offer an improved investment case, particularly as we settle in for what could be an extended period of low oil price.

Fay Bridges, Douglas-Westwood London


Adapted from a press release by David Bizley

Published on 17/08/2015


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