Economic Report 2016 - Oil & Gas UK

Despite this sector’s resilience in2015, facilities companies have experienced increasing challenges this year through industrial action, the delay of non-essential maintenance, the cancellation of capital projects, the renegotiation of existing contracts and price competition for new work intensifying. There is also evidence that, where possible, operators are conducting planned shutdowns and turnarounds of platforms less frequently as part of their drive towards more efficient operations 29 . Contracting models are also being changed as certain oil and gas operators are consolidating their work to fewer suppliers, while others are unbundling contracts and engaging directly with companies further down the supply chain rather than through the traditional tier one contractors. There is also a trend towards more performance-based contracts rather than traditional cost plus arrangements 30 . Positively, there have been limited business failures in this segment, with the majority of casualties heavily exposed to cancellations in capital projects, reliant on a limited pool of customers, or operating in particularly low margin markets. Enterprise Engineering, which went into administration earlier in the year, is an example of this.

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2

3

4

Marine and Subsea

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Tier 2: Main Contractors and Consultants

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

Marine/subsea contractors Heavy lift/pipelay contractors Floating production storage units

Subsea manifold/riser design and manufacture Marine/subsea equipment Subsea inspection services

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The falling commodity price did not impact the marine and subsea segment as quickly as reservoir or wells. Indeed, marine and subsea focused companies recorded revenue growth of 7 per cent in 2014, reflective of a number of large-scale subsea projects, such as Schiehallion, Greater Laggan and Kraken, incurring significant investment. Each of these projects is forecast to require ongoing expenditure to 2018. Although there remains a steady stream of long-standing business, companies in this sector are becoming increasingly exposed to the fall in the number of new development projects. Revenues are thought to have fallen by 14 per cent in 2015 with a further fall of 11 per cent expected in 2016 to £8.4 billion. Reduced activity has also led to an oversupply of vessels domestically and globally, placing downward pressure on day-rates.

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Figure 40: UK Marine and Subsea Segment Financial Results and Forecasts

Currency £ million Revenue % Change

10

2011

2012

2013

2014

2015E

2016E

2017E

8,420

8,993

10,275

10,991

9,500 (14%) 1,222

8,424 (11%)

7,125 (15%)

7%

14%

7%

EBITDA EBITDA margin

793

979

1,143

1,395

971

796

11

9%

11%

11%

13%

13%

12%

11%

Source: EY

29 Oil & Gas UK’s Guidance for the Efficient Execution of Planned Maintenance Shutdowns is available to download at http://bit.ly/plannedMS 30 A contracting model where the client pays the contractor an agreed mark-up based on the cost of the work.

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