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Oil services 'ripe for revival'

Increasing field investments set to fuel recovery in battered sector after summer rout on stockmarket: Clarksons Platou

Oil service stocks have taken a battering of late on lower oil prices but a bounce is on the way for offshore rig and support vessel players on the back of rising field investments and improving market fundamentals, according to Clarksons Platou Securities.

Players including drillers Seadrill, Borr Drilling and Valaris, and OSV contractor Solstad Offshore have seen their market capitalisation slashed by between 40% and 53% following a “brutal” sell-off by investors over the past two months as an oil price drop has been exacerbated by fears over high debt leverage and lower earnings expectations, as well as macro-economic concerns such as the US-China trade war that have hit energy markets.

Analysts at the research firm stated in its latest quarterly report on the oil services sector that “sentiment for offshore appears to have reached rock bottom” as a long-awaited market recovery appears to be lagging for most segments.

While market caps have dropped by an average of 30% in the two months to the end of August, companies’ enterprise values including net debt have fallen by around 10% commensurate with the fall in the oil price over this period, according to the Oslo-based firm.

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However, it believes there is “room for a rally” as “investors are underestimating the momentum building for offshore activity in 2020-22 and thus demand for rigs and vessels”.

This is predicated on the fact that final investment decisions on field projects have been rising since 2017 as oil company cash flows have been swelled by cost-cutting and higher oil prices, and such projects have become commercial due to lower break-even prices, though such decisions have yet to translate into higher spending in the market.

The firm highlighted the fact that $86 billion had been committed in offshore spending worldwide through FIDs until the end of August - compared with a total of $91 billion last year - and this figure is expected to hit $134 billion by year-end as major projects are brought to fruition, which would be a near-50% hike on 2018.

“A strong pipeline of potential projects remains with drilling-intensive FIDs expected in Brazil, Africa and the Middle East,” the report stated.

Offshore spending commitments have been climbing in recent years since reaching a cyclical low of $38 billion in 2016, down from a high of $237 billion in 2013 before a late-2014 oil price slump that resulted in drastic expenditure cutbacks by oil companies.

The firm stated that around 50% of total capex for a typical field project is incurred within three years of FID and, consequently, it expects actual spending to bottom out this year based on the three-year interval since 2016.

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It forecast that offshore capex would rise to around $120 billion in 2020 and a similar level in 2021 from an estimated $110 billion this year even if the volume of FIDs was down 20% on this year, but could otherwise reach $135 billion and $157 billion in 2020 and 2021, respectively.

Clarksons Platou said spending is rebounding in both shallow and deep water, with FIDs for the latter contributing the most in dollar value terms over the past two years as break-even costs have come down.

An estimated $225 billion in field spending has been committed in the past two years, compared with $125 billion in 2016 and 2017, of which $138 billion is in the deep-water arena, with the biggest spending increases coming in Brazil, the Middle East and Africa.

This has been driven, for example, by FIDs earlier this year from Petrobras on the Mero 2 project off Brazil, Saudi Aramco on the Berri and Marjan schemes, and Anadarko Petroleum for its Area 1 development off Mozambique.

Further field projects in the pipeline for sanction by year-end include four schemes off Brazil - including Lula West and Jubarte - for a total value of $28.2 billion, a trio of projects off Africa worth a total of $16 billion, including BP’s Greater Tortue Ahmeyim off Mauritania and Senegal, and a pair of Middle East projects - Hail & Ghasha off the United Arab Emirates and Qatar’s North Field expansion - worth a total of $20.3 billion.

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In addition, Point Resources is set to reach FID on its $2.6 billion Balder X project off Norway this year while Clarksons Platou also sees field sanctioning activity picking up in the US Gulf of Mexico where Shell’s Whale and Chevron’s Anchor schemes are set to get the green light in early 2020 with a combined estimated spend of $13.6 billion.

Historically, rig demand has increased in line with field capex levels and, consequently, the firm predicts an increase in rig demand of 7% to 8% annually through 2021, boosting utilisation to around the 85% inflection mark for both floaters and jack-ups, and “lifting dayrates significantly beyond current levels”.

It believes the main drilling players set to benefit are Transocean, based on its existing strong backlog of $11 billion, as well as Maersk Drilling and Odfjell Drilling due to their exposure to the buoyant harsh-environment market - with the latter pair also touted by the firm for a possible merger.

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As well as higher rig demand, expectations for an improving market are underpinned by stabilisation on the supply side with limited fleet additions and continued scrapping of older units.

The firm also stated that investor concerns over debt levels among offshore drillers was "overdone" as most have no major financing needs until 2022.

Increased rig chartering is set to lead to higher offshore support vessel activity to support drilling work on field developments.

Clarksons Platou stated there is a growth in OSV activity but this is uneven across segments, with high-end platform supply vessels more in demand than low-end vessels.

Nonetheless, it said dayrates are “well above cyclical lows from 2017” in many markets globally, led by the North Sea and US Gulf, in line with improving utilisation as supply tightens for high-end tonnage.

This has been aided by the fact that fleet growth has largely ground to a halt amid increased scrapping, with many idle units unlikely to be reactivated.

In the seismic market, Clarksons Platou sees improving prospects predicated on consolidation into three main players - Shearwater, PGS and Polarcus - that has tightened supply, increased acreage availability and resurgent exploration by cash-rich oil companies that need to replace depleted reserves with new discoveries.

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