Economic Report 2016 - Oil & Gas UK

ECONOMIC REPORT 2016

Wells

Tier 2: Main Contractors and Consultants

Tier 3: Products and Services, Components, Sub-Contractors and Sub-Suppliers

Well services contractors Drilling contractors Well engineering consultants

Drilling and well equipment design and manufacture Laboratory services

Companies operating within the wells segment are also among those most exposed to the lower oil price. The majority are focused on the drilling market and activity in this area has continued to fall through 2015 and into the first half of this year. It appears that revenue fell below £6 billion in 2015 with a further decline to below £4 billion (37 per cent) anticipated in 2016, leading to an expected overall market contraction of more than 50 per cent over the past two years.

Figure 37: UK Wells Segment Financial Results and Forecasts

Currency £ million Revenue % Change

2011

2012

2013

2014

2015E

2016E

2017E

6,360

7,298

7,776

8,020

5,937 (26%)

3,764 (37%)

4,389

15% 876

7%

3%

17% 436

EBITDA EBITDA margin

635

943

1,202

781

260

10%

12%

12%

15%

13%

7%

10%

Source: EY

Since 2015, significant cost-cutting measures have been under way to reduce the negative impact of falling activity on margins. Drilling contractors with heavy asset pools are increasingly looking at restructuring their businesses as covenants and cash-flow come under increasing scrutiny and the value of assets face further impairment. Such has been the decline in activity and oversupply of rigs to the market that many fourth, fifth and sixth generation rigs coming off contract are facing immediate stacking. There are limited prospects for their redeployment in a market that already has newer, higher specification rigs available at increasingly attractive long-term rates as companies struggle to find business. Contractors are cutting day-rates for rigs to break-even levels or below to keep them active. Break-even day rates for new build 7G floaters are expected to be in the region of $300,000 per day in 2018 compared with rates of $450,000 per day for high specification semi-submersible rigs in early 2014.

Wells contractors are cutting day-rates for rigs to break-even levels or below to keep them active.

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