Economic Report 2016 - Oil & Gas UK

ECONOMIC REPORT 2016

also affecting margins. Although some parts of the supply chain are more challenged than others, the average profit margin has proved relatively resilient, falling at a slower rate than absolute earnings. This reflects the success that supply chain companies are having in reducing their own cost base and improving efficiencies in line with their operator clients. 6.2 Market Observations Companies have increasingly adopted strategies to improve their resilience and ultimately survive. These strategies have included cost reductions, innovative and new contracting models, diversification into new geographies and adjacent markets, as well as increased collaboration between companies to expand product offerings and overall solutions for customers. Those organisations with a more flexible cost base were able to react to falling demand across the sector by readjusting quickly to new client expectations. Similarly, sub-sectors such as facilities and support and services, which derive the majority of their income from production-related activities, have had more time to adjust their operations than those immediately exposed by project delays and cancellations. Despite the overall downturn in performance, the market has not yet experienced widespread business failures, with some notable exceptions. This is indicative of the success that management teams have had in cost cutting programmes and in realigning business strategies, as well as of the support that funders have shown to the sector to date (read more about industry finance in section 4).

It has been critical that, in general, businesses have been able to successfully renegotiate debt packages and terms with lenders that are more aligned to survival than the growth strategies many packages were initially put

in place to support. In some cases, equity funders have injected more capital to secure refinancing, demonstrating overall support for the sector through this period rather than resorting to accelerated mergers and acquisitions or more formal restructuring proceedings. However, there are still significant challenges ahead with capital investment set to continue to fall. Industrial action by offshore workers (see section 7 on employment) and the UK’s decision to leave the EU also present hurdles in an already difficult market. Currency movements as a result of the UK's decision to leave the EU are affecting companies in the supply chain in different ways. Those who pay most of their costs in sterling yet have dollar-denominated sales benefit from the devaluation of the pound versus the dollar, whereas other companies with significant imported costs are experiencing a negative impact.

There still remains a fundamental belief that a rebalanced and more efficient UKCS will bring a strong commercial outlook for service companies in the medium term.

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