Oil and gas sector trends

Detailed oil and gas trends information for each sector across the industry

PwC shares new insights on trends within each segment in the energy sector. Highlights include lessons learned from past downturns, what takes priority on the agenda of oil companies and where each sector is putting its focus.

Companies look abroad for growth opportunities, and seek to restructure portfolios and fleets to respond to the shifts in demand.
Downstream companies are focusing on operational excellence, expanding and integrating midstream assets and building differentiating capabilities that help them compete in a dynamic market environment.
Cost reductions have taken a high priority on the agenda of every exploration and production (E&P) company. However, E&Ps must learn from the lessons of the past, and remember how costly talent and talent development can be. E&Ps now look to optimize the way talent is utilized and deployed, rather than directly reducing headcount.
The past couple of years have been defined by “chasing barrels,” with producers focusing on—and being rewarded for—adding new reserves and bringing online production volumes.

US segment trends:

Drillers

A wave of negative news for the industry

The drilling industry has been swept by a wave of negative news, with both the offshore and land drillers experiencing significant reductions in utilizations and day rates.

On the upside, the outlook for subsea equipment awards is more promising as drillers move forward on several large deepwater projects.

Midwater demand the softest; new offshore rig orders dormant

Midwater are likely to experience the most significant deterioration in demand, followed by deepwater, which is expecting less pronounced declines in the past few years. Despite the recent softness, ultra-deepwater demand is likely to remain flat. With depressed offshore rig rates and dwindling cash flow, offshore newbuild opportunities remain dormant.

Land drilling likely to see the recovery first

While the industry still has excess capacity of land rigs, the newer, high spec AC engine rigs as well as the pad-capable rigs (with moving systems) are likely to reach 90%+ utilization by late 2016. Given the expected tightness for the AC land rigs by late 2016, dayrates could begin to modestly recover in the near future.

Upstream/ E&Ps

Competition helps E&Ps gain an edge over NOCs and IOCs

While Saudi Arabia has maintained its production levels in an effort to protect its market share, the fragmented nature of the US oil producing industry has proven to be a major driver for improving the performance and efficiency of domestic companies. As a result, US E&Ps have become better equipped to weather the recent price volatility than their monopolistic/oligopolistic IOC peers.

Weathering the new reality: from chasing barrels to chasing efficiency

The past couple of years have been defined by “chasing barrels,” with producers focusing on—and being rewarded for—adding new reserves and bringing online production volumes. The velocity and magnitude of the recent oil price volatility has pushed E&Ps to shift focus towards “chasing efficiency,” not only from services, but internally through improving well economics.

Focus on portfolio rationalization and making the most out of deals

Cost savings in the current market environment need to begin at the portfolio level. And while some peers seek to divest non-core, underperforming assets, other are presented with an opportunity to gain access to new basins, further build their reserves and better prepare for growth when the current deflationary environment ends.

DUCs, not rigs, to predict production volumes fluctuations

Drilling wells but deferring completion may be a factor of oil price volatility in the next several months. This could potentially delay the industry’s recovery. Company backlogs of drilled but uncompleted wells, known as DUCs, have become common in recent months as oil prices have lingered around $50/bbl. The concern is that E&Ps could start to complete a large backlog of wells, resulting in further price volatility.

Learning from past downturns: the costly talent mistakes

Cost reductions have taken a high priority on the agenda; however, E&Ps must learn from the lessons of the past, and remember how costly talent and talent development can be. E&Ps now look to optimize the way talent is utilized and deployed, rather than directly reducing headcount.

Carbon bubble theory and the impacts of climate change

The idea that E&Ps are overvalued because their reserves are overvalued is gaining traction. Because of this, investors are pushing oil and gas companies to discuss the impact of climate change on their future financial positions in their Securities and Exchange Commission (SEC) documents. In this aspect, carbon regulation is increasingly becoming an issue, especially now that China and the United States parallel carbon emissions regulation.

Midstream

Limited signs of retrenchment

Even with the plunge in oil prices and cuts in E&Ps Capex, production remains steady and is expected to tick up. These massive new volumes of oil and gas are driving the continued need for investment in downstream links of the production value chain, and there is little indication that midstream companies are curtailing their investment. Some players have positioned themselves for growth by consolidating their holdings into a corporate structure. This would lower the cost of equity capital and make it easier and more profitable to proceed with facility expansions and targeted acquisitions. Others have formed tax advantaged MLPs, or taken advantage of the existing low interest rates to refinance their debt.

Location, location, location

With the increased Marcellus and Utica gas production servicing the northeast, the need for pipeline capacity from the southwest decreases. As a result, pipelines are investing in new capacity and system modifications to move the northeast gas supplies bi-directionally. This increase in gas production has also driven the need for more gas treatment and processing in the Marcellus region. Another issue this presents is the removal of large amounts of excess ethane, driving expansions to existing gas processing plants. While the timing of these projects may be affected by the current commodity prices, they appear to remain strong midstream investment opportunities.

Speed to market

Success in the midstream space depends on many factors, including commodity prices and continued overall US economic health. However, equally important is the ability of companies to understand the environmental, engineering and regulatory challenges inherent with these large capital investment opportunities and how to address them. The companies with the strongest skills in traversing a wetland, remediating existing brownfields, and employing the best sustainable development practices for the project, would have the ability to deliver these projects in the shortest time.

Refiners/Downstream

What drove margins up for refiners?

Downstream companies are focusing on operational excellence, expanding and integrating midstream assets and building differentiating capabilities that help them compete in a dynamic market environment.

US refining margins were up $3.4/bl on average, with the West Coast LA Basin complex margin showing the largest increase (up $6.7/bl). These increases were driven by low input prices and strong domestic and international demand, which widened the WTI-Brent spread and pushed up gasoline crack spreads up.

Why are exports not up if there’s a strong domestic and international demand?

Although international and domestic gasoline demand was strong, pushing up gasoline crack spreads, the exports remained mostly unchanged. Why? It’s the wrong product. There is no demand for the low octane blending component, given the lack of sufficient octane supplies in Mexico, the Caribbean and West Africa. As a result, despite the high overall gasoline inventories and the robust margins, we have not seen a noticeable pick-up in exports.

Should we be alarmed about the high gasoline inventories?

While inventory levels have been on the rise, it is unlikely that the industry will run out of storage capacity. In addition, if demand remains robust, and the export market continues to be strong, the impact of higher inventory levels on crack spreads are not likely to be severe.

Oilfield Services

E&Ps Capex reductions pressure OFS top line and margins

Companies look abroad for growth opportunities, and seek to restructure portfolios and fleets in order to respond to the shifts in demand.

Big cuts in E&P Capex budgets have a large negative impact on oilfield services (OFS) companies. Capex reductions have not only led to an increase in idle rigs (volume declines), but in price concessions as E&Ps seek cost reductions. The low number of contracts is bringing intense competition among peers. Not only are OFS companies competing for fewer available new contracts, but the available contracts are mostly for core functions and exclude the additional, higher margin OFS one-stop-shop solutions. This is resulting in significant margin and bottom line compression for OFS companies.

Cost control initiatives dominate the agenda

OFS companies have introduced critical cost control initiatives in multiple areas. Some companies have been proactive in pursuing operational improvement strategies, while others were caught reacting to the market downturn. In an effort to reduce the impact of revenue declines, companies have adopted copying mechanisms that include focusing on core areas, reducing capital spending and employee headcount, divesting assets and renegotiating vendor contracts. These strategies are also aimed at improving, or at least maintaining, current cash flow positions.

Collaboration between E&Ps and OFS companies

It is the nature of the OFS business that in a downturn, OFS companies are among the first to experience the negative effects of price deflation, and the last to see a recovery once the prices rebound. Therefore, E&Ps and OFS are being forced to seek new ways of working together to save costs and create more value. Large OFS companies are collaborating extensively with their upstream clients in an effort to align interest and salvage contracts. This is seen as a critical opportunity to develop technical solutions that will achieve these objectives. It is possible that in the future, this closer collaboration might make way for performance-based contracting models.

How PwC can help

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Insights

Energy deals: US oil and gas deals insights 4Q 2016

Despite a timid start in the first quarter, 2016 O&G M&A ended on a high note, mimicking increased optimism for the overall oil & gas sector. We expect this optimism, and corresponding increase in risk tolerance, to carry over into 2017 resulting in strong M&A activity as well an acceleration of IPO’s.

Oil field services: Applying a portfolio lens to competing in the new world of oil

With the oil prices seeming to recover, the E&P clientele are expected to start ramping up their investments. This should be music to the ears of Oil Field Services (OFS) providers who have been going through a very rough period of precarious cash flows and uncertainty of demand and therefore responding with deep cuts in structural and operating costs.

A Sea Change: Emerging from a Downturn

How will the oilfield service sector emerge from the crisis to position itself for future success? The past two years has been a torrid time for the sector. Now there appears to be light at the end of the tunnel.

Not your father's oil and gas business: Reshaping the future with upstream digitization

Digitization is the new lubricant for the future of the oil and gas industry’s upstream sector. With supply and demand mismatched, the need for new efficiencies is urgent. This report examines how digitization can benefit the upstream sector and what companies can do to get around the obstacles to change.

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