Economic Report 2016 - Oil & Gas UK

ECONOMIC REPORT 2016

The support and services part of the supply chain saw a slower rate of decline in their revenues than most sub-sectors as it is closely linked with production activity.

The majority of customers tend to use local companies to provide support services and so suppliers in this space are heavily reliant upon revenues generated from the UKCS with less opportunity to enter overseas markets.

In general, the support and services sub-sector is more closely linked with production activity rather than exploration or development. Therefore, companies in this part of the supply chain saw a slower rate of decline in their revenues than most sub-sectors, with a 14 per cent reduction between 2014 and 2015.

Figure 42: UK Support and Services Segment Financial Results and Forecasts

Currency £ million Revenue % Change

2011

2012

2013

2014

2015E

2016E

2017E

5,578

6,297

7,254

7,554

6,462 (14%)

5,609 (13%)

5,685

13% 523

15% 629

4%

1%

EBITDA EBITDA margin

466

632

415

262

251

8%

8%

9%

8%

6%

5%

4%

Source: EY

However, in what has traditionally been a lower margin segment of the supply chain, continued focus by operators on reducing costs and increasing efficiency has caused significant pressure on profitability, despite the relatively modest reduction in revenue. The annual results for the sample of listed companies indicate a 34 per cent reduction in EBITDA with a similar fall expected in 2016.

This is consistent with the challenges being experienced by specific disciplines within the segment:

• Helicopter operators are facing continued pricing pressure as customers seek to tie cost to flight time, rather than accepting high availability premiums even when the aircrafts are not in use.

• Recruitment companies are experiencing more revenue pressure than many other organisations in the support and services sector as revenues are closely linked with employment, which is significantly down (see section 7 on employment). However, relative fixed costs in these businesses will be limited and, for larger diversified companies, some form of natural hedge will have existed with an improved UK economy in 2015-16 prior to the referendum vote to leave the EU.

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