HOUSTON, May 30, 2012 (GLOBE NEWSWIRE) -- A new study of the global oilfield services and equipment industry (OFSE) shows that while the industry has largely emerged from the sharp decline in 2008-09 to achieve record revenue in 2011, significant headwinds persist and considerable risks still exist. To compete in the current environment, the companies that populate this universe may need to look outside for best practices and talent to continue to improve productivity and profitability, manage capital spending, maximize return on capital employed and strengthen balance sheets. The study, AlixPartners Oilfield Services and Equipment Industry Outlook, was released today by AlixPartners, the global business advisory firm.
According to the study, OFSE's recent stellar performance is under threat by the impact of lower natural-gas prices in the U.S. (due in part to the rise in hydraulic fracturing, or "fracking"); a rapid escalation in cost of goods sold due to increases in everything from steel pipes to manufacturing and service labor in previously untapped areas like North Dakota, West Africa and Brazil; and profit-sapping capital-spending demands which drove capital spending to record highs last year.
"The OFSE industry is going through an unprecedented period of change requiring greater supply chain flexibility and sophistication, improvements in equipment reliability, better O &M [operation and maintenance] and project cost controls, and enhanced pricing efficiency to maintain companies' return on investments," said Bob Sullivan, managing director at AlixPartners and co-lead of the firm's Oil & Gas Industry Practice. "Many companies, however, lack the best practices long ago adopted in other industries to address similar issues. OFSE leaders need to reach beyond the oil and gas industry for both practices and talent."
Globally, the industry has weathered both the "Great Recession" and the impact of the Deepwater Horizon incident in the Gulf of Mexico in 2010, thanks in part to extremely robust onshore activity levels -- particularly in the United States. The large, diversified service players as well as the onshore-centric product and service providers have seen revenue grow in double digits, while offshore drillers and equipment and service providers are seeing improvements, but still remain nearly 10% below 2008 revenue levels.
Profitability, however, is a different story, with 2011 industry EBITDA mired at four percentage points below 2008 levels. In addition, the AlixPartners study reveals that the recovery is uneven, as profitability performance varies widely across companies that compete in generally the same industry sectors. For example, there is a 30-percentage-point range in EBITDA margins between the top and bottom performers in the onshore drilling, completion and well-servicing sector, and a nearly 20-point EBITDA range among major drilling and production-equipment providers.
Eric Hillenbrand, managing director at AlixPartners and co-lead of the firm's Oil & Gas Industry Practice, said: "Across the major OFSE sectors – onshore drilling and completion, offshore drilling, offshore equipment and offshore transportation and logistics – we see significant differentials in EBITDA between leaders and laggards. This is indicative of the differences in practices and tools employed across the industry, and of the opportunity for improving the profitability of underperformers through application of best practices."
According to the AlixPartners study, one reason for reduced profitability has been a rapid escalation in the cost of goods sold – accounting for almost 5 points as a percentage of revenue since 2008. While SG &A costs as a percent of revenue have largely remained in check the past several years, increases in raw-materials costs – including for steel, MRO (maintenance, repair and operations), pipes, valves and fittings, fuels and lubes, and manufacturing and service labor – have escalated. To exacerbate the issue, many companies lack visibility into the fully cost-loaded profitability of their products and services, leading to sub-optimal pricing decisions.
"After peaking at over 20% in 2006, the OFSE industry's return on capital employed has declined to only 11% in 2011. Companies across the spectrum of the industry are investing heavily to keep pace with the requirements for new equipment and services that operators today require to exploit resources in both onshore and offshore basins," said Bill Ebanks, director in AlixPartners' Oil & Gas Industry Practice. "Last year's record capital-spending levels actually exceeded cash flow from operations for the industry, which has helped lead to debt levels exceeding $100 billion for the first time and interest-coverage levels being roughly halved since 2008, to around eight times EBIT.
"Shareholder patience is not infinite," he continued. "OFSE companies must focus on optimizing asset utilization and profitability, and carefully scrutinize capital spending plans to improve returns -- or they risk becoming unwilling participants in what could be upcoming industry consolidation."
About the Study
The AlixPartners Oilfield Services and Equipment Industry Outlook analyzed 78 North American- and European-based public oilfield services and equipment companies that operate globally for major international oil companies, independent oil companies and NOCs (national oil companies). The companies serve the onshore and offshore global oil and gas industry across the major activities of: seismic acquisition and processing, drilling, completion, production equipment and services, transportation and logistics, and engineering and construction.
About AlixPartners
AlixPartners LLP is a global business advisory firm offering comprehensive services in four major areas: enterprise improvement, turnaround and restructuring services, financial advisory services and information management services. Founded in 1981, the firm has offices around the world, and can be found on the Web at www.alixpartners.com.
The AlixPartners LLP logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=12685