Oilfield services companies are in bullish mode. They are now able to raise prices for their products and services, after several years of gloom.
“Oil and gas investments are on the rise, and so too is the pricing power of service companies. After losing pricing power in 2015 and 2016, oilfield service companies have since regained some of the lost ground, thanks first and foremost to industry consolidation among players that has concentrated the market over the past couple of years,” said Audun Martinsen, head of oilfield service research at Rystad Energy.
“Pricing power is likely to be further strengthened within the service industry, as orders are anticipated to rise across the supply chain, coupled with capacity adjustments intend to avoid oversupply in 2019 and 2020,” Martinsen added.
Across the board, oil and gas companies cut back on investments in 2015 as oil prices plummeted. But the larger and financially stronger exploration and production (E&P) companies were able to buck the trend and make counter-cyclical investments when opportunities arose, whereas smaller players simply had to batten down the hatches and wait for storm to pass. As a result, service companies’ client universe shrank.
“This trend continued in 2016, but in 2017 and 2018 more E&Ps could finally finance their ambitious operations growth through improved operational cash flow, leaving market concentration levels in 2018 on par with those seen back in 2014,” Martinsen remarked.
Service companies became more fragmented in 2015 and 2016, an insight that becomes apparent when indexing various service company size-classes to examine their evolution since the first quarter of 2014.
Analysis shows that both the Big Four companies – Schlumberger, Halliburton, BHGE, and TechnipFMC – and the next 10 largest service companies out-grew the other service companies until the fourth quarter of 2015, at which point they began to lose market share to smaller players.
In 2017 and 2018, market concentration was lifted by several major merger and acquisition (M&A) deals in the industry. Just as importantly, the Big Four service companies were able to win back market share from the top five to 15 service companies, which lost market share as a result.
“Even though the oilfield service market has become more concentrated at the same time as the buyer side has become more fragmented, there are also other factors which impact pricing power. Some segments, despite being more concentrated, are still heavily challenged by oversupply, forcing companies to adjust their capacity before prices improves,” Martinsen said.
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