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Review of the UK oilfield services industryJanuary 2017

Contents

29

47

1 Introduction 1

2 Overview 5

The UK oilfield services sector by supply chain category

3 Reservoirs 23

4 Wells 29

5 Facilities 35

6 Marine and Subsea 41

7 Support and Services 47

8 Comparison with the Norwegian and the Dutch oilfield services sectors 52

9 Methodology and key assumptions 58

51

23

41

35

Review of the UK oilfield services industry January 2017

A Appendix A: Reservoirs supply chain segment subsectors 59

B Appendix B: Wells supply chain segment subsectors 64

C Appendix C: Facilities supply chain segment subsectors 70

D Appendix D: Marine and Subsea supply chain segment subsectors 78

E Appendix E: Support and Services supply chain segment subsectors 84


Welcome to EY’s sixth annual review of the UK oilfield services (OFS) industry. In this report, we review the 2015 trading performance of UK registered companies in this hugely diverse oilfield services marketplace and discuss the impact the changing oil market has had, and is expected to have, on their performance in both the UK and internationally.

Top five themes

1

The oilfield services industry is one of the UK’s export success stories. However, in 2015 the total value of exports decreased for the first time since our review commenced in 2008 and as a proportion of total activity had decreased to 40%, from a high of 47% in 2010.

Internationalisation

Given the maturity of the United Kingdom Continental Shelf (UKCS); what more can be done to target higher growth regions and build international businesses of scale?

3

Recent years have been very challenging for people working in the oilfield services industry, with many businesses going through several cost cutting exercises and now operating with the leanest workforces they have had for many years.

People

When activity increases, how will the sector address potential skill shortages and ensure there is not a return to a ‘war for talent’? What can be done to maintain the attractiveness of the sector to young people entering the workforce?

2

The oil and gas industry has traditionally been regarded as one of the world’s most advanced users of technology. With ever-increasing volumes of data able to be handled, data analytics and digital technology has the potential to transform operating models.

Technology

With the pressure on costs; how does the UK maintain investment and continue to ensure it is at the forefront of innovation?

4

Globally, the oilfield services industry is adapting to the new price environment and is starting to consolidate in response to the fundamental changes in its customer base and the impact of technology.

Consolidation

How will UK companies respond? Will they join the early movers or will many investors see this as an opportunity to exit?

5

Decommissioning has long presented specialist late-life operations and decommissioning companies and the UK oilfield services industry with an excellent opportunity to grow a significant UK line of business and develop an international centre of excellence. Yet progress has been slow.

Decommissioning

What more can be done to deliver an optimum decommissioning solution for the UKCS and unlock the potential to develop world-leading expertise?

Introduction 1

1Review of the UK oilfield services industry January 2017

Despite a tumultuous couple of years for the North Sea’s oil and gas sector, companies have entered 2017 with optimism that the worst is behind them, and with more self-confidence as a result of having ridden the storm of a sub $30 oil price. Nevertheless, the sector will remain cautious in the face of continuing uncertainty.

The plunging oil price created an environment forcing companies to strive for greater efficiencies and compelling them to search for more innovative approaches. It is essential that these hard-won benefits are sustained and not abandoned as the oil price starts to recover.

Recent challengesUndoubtedly, the last two years has seen the sector experience one of the most dramatic periods of change in decades. The unexpected slump in oil price, the duration of that slump, and the realisation high prices are unlikely to return in the medium term have forced oil and gas companies, and their suppliers, to find ways to reduce costs, whilst maintaining profits, in this ‘new price environment’.

Lower revenues have forced companies to pay closer attention to their balance sheets, whether to manage high levels of debt or maintain dividends. Lower-capital projects are being pursued, with companies targeting expansions of existing fields over greenfield developments to allow existing infrastructure and supply chains to be leveraged.

Pricing pressures experienced by OFS companies across the supply chain has resulted in a fundamental shift in focus from growth to managing profitability. OFS projects in the North Sea have been particularly impacted, given the cost of developing increasingly complex

Derek Leith Managing Partner EY Aberdeen

oilfields has put huge pressure on operating margins.

Backlogs of work have been relied on by companies facing liquidity issues. Healthy order books at the end of 2014 carried many of them through 2015 and into 2016, but those backlog levels are now significantly depleted, with a paucity of new projects in the pipeline. As confidence in the sector returns so will investment, but it won’t be immediate. Consequently, reducing operating costs and improving efficiencies will continue to be a priority for exploration and production companies, with any significant capital expenditure likely to be limited to mandatory needs.

Turning a corner2016 marked the beginning of the return of confidence in the oil and gas sector. The oil price recovered from below US$30/bbl in January, the lowest price in a decade, to above US$50/bbl in December following OPEC and non-OPEC countries agreeing to cut production.

2016 saw encouraging signs of investment in the form of new sources of capital being introduced in relation to infrastructure and the eventual arrival of much anticipated private equity investment in the upstream sector in the second half of 2016. Such investment shows faith in the long-term prospects for profitable exploitation of oil and gas in the North Sea and should also bring new approaches to improve productivity and reduce the operating costs of assets.

During 2016, the UKCS also started to see the benefit of a step-change in performance management. Operating costs per barrel in the UKCS have been significantly reduced by 45% in just two years (estimated at c$16/boe in 2016 compared with $29.30/bbl in 2014[1]) and we have seen the first growth in production continued overleaf

2 Review of the UK oilfield services industry January 2017

from the UKCS this century. Yet, it remains to be seen how much of the savings are cycle-dependent rather than embedded and whether much of the focus has been overly short term and tactical.

Long-term visionWhile turnover declined in 2015 and a further decline is expected in 2016, the UK OFS sector is still a major contributor to the UK economy.

The ongoing strategic challenges represent an opportunity to secure a successful long-term future by increasing exports, leading innovation, attracting and retaining talent, driving consolidation and maximising the opportunity from decommissioning, amongst others. Already in 2017 there are continuing signs of upstream investment, evidenced by increased deal activity in the oil and gas sector, and the portion of the

investment that comes to the UKCS will be driven in large part by the actions of the UK OFS industry.

There remains many discovered but as yet undeveloped fields in the UKCS and the potential for significant discoveries particularly in frontier areas of the UKCS. Sustaining production from existing fields is vital to maintain infrastructure and ensure future investment opportunities are attractive.

That level of domestic demand is fundamental to the continuance of the supply chain in the UK in the medium term. The development of the Oil and Gas Technology Centre provides the opportunity to build a lasting and sustainable centre of excellence for OFS technology and innovation in the UK with the prize of significant export growth.

The partial funding of the OGTC by both Scottish and UK Governments; the focus on maximising economic recovery by the Oil and Gas Authority; and the fiscal commitments made by the coalition government in December 2014 in the Driving Investment document and reiterated by the current government in 2016, all offer external support for the sector in the UK. However, it remains the responsibility of individual companies to be the architects of their own success and to embed the efficiency improvements and cost reductions achieved over the past two years.

This report provides a robust analysis of the current state of the industry and its development in recent years, offering valuable data for the industry to consider as it forges a successful future.

1 Oil & Gas UK’s Economic Report 2016

Introductioncontinued


1

Viewpoint: Oil & Gas Authority

The UK’s technologically advanced and diverse oilfield services sector has a successful record of accomplishment over the past 50 years for pioneering new solutions in the UKCS and exporting globally.

While there is no doubt the sustained decline in global oil and gas prices has brought into sharp focus the significant risks facing the sector, there remains a significant prize ahead. There is a real opportunity to grow the UK service sector’s share of both the domestic and global market. 2016 projections indicate a turnover of £350 billion over the next 20 years. If the service sector builds on its global competitiveness and attracts the necessary investment, additional turnover of £150 billion can be generated.

Collaboration is critical to this; the OGA does not regulate the service sector but works closely with industry through the MER UK Supply Chain Exports and Skills Board. Last year we published our Supply Chain Strategy which: recognised that a strong UK service sector is key to maximising the economic potential of the UKCS; articulated the need to anchor the service sector in the UK; and saw the potential to double the share of the international export markets by 2035. To support the achievement of these strategic ambitions, clear practical steps are required, including new technologies, capitalising on multi-operator work campaigns and emerging decommissioning work. Increasing the share of UK domestic work can lead to the skills and expertise in areas such as technology and late life being anchored in the UK; reinforcing the UK as a go-to hub globally.

I believe that industry is increasingly getting after the right actions in order to maximise economic recovery and build competitive advantage and investment for the UK economy.

Andy Samuel Chief Executive Oil & Gas Authority

Viewpoint: Oil & Gas UK

The scale of the contribution that the UK’s oil and gas industry continues to make to the economy is amply demonstrated by this report. Over the last two years the industry has faced one of the most challenging business environments in its history with the collapse in oil and gas prices after a decade of strong revenue growth. This has tested the capability of the whole sector to the full. Yet despite revenues from the North Sea falling by almost half since 2014, production has grown by 15 percent and the sector’s competitiveness has been transformed through a combination of efficiency improvements and cost reduction. Oilfield service companies have had to take hard decisions to secure their future, but they have had the courage to address their challenges and are riding the storm; few other industries could have adapted so rapidly or so effectively in such a difficult market.

Despite the downturn, the UK continues to be a global leader in oilfield services. In 2015 the industry exported £14 billion in goods and services, representing 40% of its turnover. At a time when the UK Government is rebuilding its Industrial Strategy, the achievements of the whole sector should be celebrated. High technology industries exporting globally will continue to be vital to the UK economy as we leave the European Union.

Sustaining the success of the whole sector will be critical. The export capability of the UK’s oilfield services industry will rely on a strong domestic market and we are working closely with the UK and Scottish Governments and the Oil & Gas Authority to attract the investment the UK Continental Shelf now needs. It is exciting to see new business models are emerging across the sector which will ensure the industry’s hard-won competitiveness is secured for years to come.

Michael Tholen Upstream Policy Director Oil & Gas UK


7

Global ► Brent crude oil prices averaged around US$43/bbl in 2016,

increasing from a low of $26/bbl in January 2016, following the oil price decline that started in the second half of 2014. Although price volatility is expected to continue, the pace of the volatility should continue to reduce. Higher oil prices, which are expected to hover around US$55/bbl in 2017, could start to reinvigorate investment in the sector.

► In December 2016, the oil price jumped to its highest level since July 2015 after Saudi Arabia signalled it was ready to cut output to a greater extent than earlier agreed, while non-OPEC countries including Russia pledged to pump less in 2017. This strengthened the coordinated commitment by the world’s largest producers to tighten supply, with a normalisation of crude inventories being the goal of the announced output cuts, rather than higher prices that could lead to a sharp production increase from global suppliers, including the US.

► The global market will be impacted by whether OPEC limits production beyond mid-2017, as well as crude storage and global economic uncertainties. The worries Iranian production could add pressure to prices have been belied by falling non-OPEC production, unplanned outages in Nigeria and Canada, as well as rising demand.

► Initially, global Exploration and Production (E&P) companies responded to the oil price decline with budget cuts and/or project delays, with an overall 40% decline in capex spend in the sector. This has now given way to a more long-term appraisal of business models to maximise operational excellence, given the new price environment. Due to the mix of the new price environment, the cost reduction programmes that the industry has implemented and the continued focus on generating shareholder value and balance sheet health, it may be several years before investment returns to pre-2014 levels. It is also likely that E&P companies will look to focus on projects that are more flexible and less capital intensive, e.g., projects that can leverage existing infrastructure such as field expansions or phased developments. Following the budget cuts and project delays in 2015 and 2016, there are signs that investment is starting to return to the sector with two major final investment decisions (FIDs) in 2016 – a US$8 billion project in Indonesia and a US$37 billion expansion project in Kazakhstan.

► During 2016, OFS companies have worked to improve flexibility by increasing their operational repertoire with technical improvements. In 2017, companies will need to use new strategies to compete given the oil price is not expected to increase significantly in the near-term. Changes sought include structural, technological and strategic alliances to lower service costs and ensure new developments and projects are economic. For example, Packers Plus (PP) and Schlumberger announced in April 2016 they had entered into a global alliance, which will see them become channel partners in key markets around the world. The alliance aims to combine PP’s technologies in multi-stage completions with Schlumberger’s substantial customer footprint to enable rapid delivery of best-in-class solutions to a wide variety of operators around the globe. As part of the alliance, Schlumberger will sell PP technology internationally, with PP selling complimentary Schlumberger technology in Canada.

Digital ► Over the last 15 years, rising oil prices meant that the industry

saw production maximisation as its priority and the traditional industry response to market downturns has been to halt exploration investments, decrease development activity and put pressure on OFS pricing/rates. However, these are short-term solutions and many OFS companies are looking to focus more on digital initiatives in 2017.

► Digital has the potential to disrupt the oil and gas industry on a scale equivalent to the US shale phenomenon, by leveraging the power of digital technology to transform business operations to deliver real, sustained value to the bottom line — it is now cheaper to make a piece of equipment smart through digital means than it is to maintain the equipment with minimal functionality. In addition, historically the internet could not handle the volume of data that oil and gas companies needed; technological advances and major advances in wireless connectivity mean this is no longer a barrier.

► Digital does not only have the means to drive down operational cost but also to give competitor advantage to any early adopters in the future. In October 2016, General Electric Co. (GE) announced it would merge its oil and gas business with Baker Hughes Inc., thereby creating the second-largest oilfield services provider. The deal provides a clear example of the desire to develop and utilise a synergistic technology portfolio to achieve competitive advantage over competitors.

Overview 2


continued

Overview

Listed OFS companies Figure 1: Top 100 listed OFS companies actual and forecast results 2011–17

Currency: US$ billion 2011 2012 2013 2014 2015 2016E 2017E

Turnover 414 468 487 489 396 293 328

Turnover growth/(decline) trends n/a 12.9% 4.2% 0.3% (19.1%) (25.9%) 11.8%

EBITDA 78 85 86 93 65 47 50

EBITDA margin 18.9% 18.3% 17.6% 18.9% 16.5% 15.9% 15.1%

progressed or were announced, including GE and Baker Hughes, as well as:

► In April 2016, Schlumberger Limited announced its merger with Cameron International Corporation. The merger will create technology-driven growth by integrating Schlumberger’s reservoir and well technology with Cameron wellhead and surface equipment, flow control and processing technology that the companies believe will result in the industry’s first complete drilling and production system.

► In May 2016, Technip and FMC Technologies Inc. announced they will merge to become TechnipFMC, with the aim of creating a global leader that will drive change by redefining the production and transformation of oil and gas. TechnipFMC’s flexible commercial model is expected to provide both integrated and discrete solutions to customers across the value chain through the provision of a broader portfolio of solutions that will increase innovation, improve execution, reduce costs and enhance customer success. In December 2016, antitrust clearance was received from the Brazilian authorities, following approval from antitrust authorities in the EU, the US, India, Turkey, Mexico and Russia and the deal is expected to complete early in 2017.

► For the top 100 listed OFS companies, we analysed the reported results from 2011 to 2015 and the forecast results (based on analyst’s expectations) for 2016 and 2017. As can be seen, turnover is forecast to decline by over 25% in 2016, with EBITDA margins also being impacted. A recovery is forecast in 2017, with turnover growth of over 11% estimated.

► These trends support our view that UK OFS companies will experience further revenue declines in 2016 and, although the global market is forecast to have revenue growth in 2017, it may take longer for this to filter down to the UK, given the maturity of the basin and the global competition for capital.

► Consolidations and strategic alliances continued in 2016, following a number of large scale announcements in 2015, as companies looked to accelerate the rate of technological innovation in the sector. Although Halliburton and Baker Hughes announced the termination of the proposed $28bn merger in May 2016, citing opposition from US and European antitrust regulators, a number of large-scale mergers


2

Viewpoint: Current global market

The oil market remains subject to a significant stock overhang but substantial participants have now announced actions which, if followed through, will bring some more balance back into the market. While this does not yet involve the fundamental structural changes to the market that would signal a high oil price environment, and LNG pricing remains depressed, it does appear that 2016 marked the bottom of this particular cycle. However, few participants are predicting a rapid upswing and that means both demand and pricing are going to remain challenging for the OFS industry.

The ongoing roll out of the various forms of digital technology are also now beginning to make their presence felt seriously. Having lagged behind other parts of the economy in the adoption of digital, the oil industry has now accepted the tremendous potential for improved safety, productivity and reduced costs that this can deliver.

In order to thrive in this challenging and fast developing environment, many OFS companies are reviewing their strategic options and are going to have to decide whether they want to be a high value-add integrated service provider and scale across the value chain or move to concentrate more on niche areas where they have and can protect a competitive advantage.

This implies that the M&A activity, which has now begun in the sector, still has some way to go as the industry consolidates and restructures to stay relevant. In this challenging and drawn out transition from bottom of cycle to mid-cycle, current state is unlikely to be an attractive option.

Andy Brogan EY Global Oil & Gas Leader Transaction Advisory Services

Viewpoint: Near-term outlook of global markets

As we move away from a ‘low price’ environment, industry participators are now adapting to the ‘new price’ environment. It will take time for this mindset change to embed itself, and the positive price momentum didn’t really flow to service businesses in 2016. Nonetheless, expectations are for a gradual improvement for the OFS sector in 2017, strengthening into the second half of the year.

Company focus is shifting a little more toward positioning themselves for this recovery:

► Financially — we expect continuing activity around balance sheet stability to enable businesses to survive then thrive.

► Strategically — pending mega-mergers seek to position the largest players to deliver an integrated global solution to their customers, while many smaller players seek to exploit their unique capabilities in products and technologies.

► Geographically — companies have seen the relative speed of recovery in North America and are questioning portfolio balance and where to focus.

► Transactionally — activity levels are on the rise, with some targeting assets coming loose following merger activity, others developing expansion plans and pools of private capital seeing an opportunity to return to a sector on the rise.

While the coming months will still be challenging for many, the storm clouds are dissipating and 2017 holds the promise of opportunities.

Jon Clark EY EMEIA Oil & Gas Leader Transaction Advisory Services


continued

Overview

UK ► The United Kingdom Continental Shelf (UKCS) has a 50-year

pedigree in extracting oil and gas, making it one of the most experienced regions in the world, with around 43 billion barrels of oil equivalent (boe) recovered since production commenced in the early 1960s. It is a proven hydrocarbon basin and is well supported by an established offshore service industry. Aberdeen is recognised as a centre of excellence in the OFS supply chain, with world-leading capability in areas such as subsea technology and services, and many large global players have headquarters or regional head offices there. During 2015, as a result of the lower oil price, it suffered a 12% turnover decline as well as margin erosion.

UKCS production ► 2015 was a momentous year for the UK’s oil industry as

production increased for the first time since 2001 and reversed a downward trend that had been in place since 1999. However, long-term challenges remain that threaten its future production potential, amongst which is the small size of the remaining opportunities. While earlier production came from large fields, much of the remaining resources and new discoveries are small in size and, increasingly, the small size of these discoveries does not justify a standalone development.

► Development projects will be critical to slowing production decline over the medium-term and, as a result, the more technically challenging and marginal fields have become increasingly important. In particular, West of Shetland has the greatest potential to expand production, with over one billion boe reserves in development. In addition, Central North Sea (CNS) remains an active area for exploration, not least with high pressure, high temperature prospects, and the Hebridean basin remains relatively underexplored and this may develop if the right exploration incentives can be developed.

► It is also imperative that returns on production are maximised, to realise the full potential of existing resources. During 2016, there was welcome news, with an Oil & Gas Authority (OGA) study on production efficiency indicating sustained production performance improvement in the UKCS, with efficiency increasing to 71% in 2015, an increase of 6 percentage points on 2014, and of 11 percentage points compared to its 2012 low. However, it looks increasingly unlikely that the shared industry and OGA target of 80% production efficiency by the end of 2016 will be achieved.

► There have been a number of new fields that have come on-stream in 2016 including:

► The Alder field, which is around 100 miles from the Scottish coast and was discovered 40 years ago, commenced production in November 2016. Chevron advised more than 70% of the budget was invested with UK-based businesses in the north-east of Scotland, as well as in Leeds and Newcastle, and the UK’s expertise in subsea work was key to unlocking the field — specifically the availability of new technology allowing the field to be developed.

► The Scolty/Crathes development achieved first oil in November 2016 — the only pure oil offshore project approved by the OGA in 2015. The operator and its field partner expect unit operating costs to be below $15 a barrel in the peak volume years, while production should continue through to 2025. The development was achieved through cost efficiency, technology application and successful project execution, and it sustains the wider Greater Kittiwake Area and infrastructure.

► The Cygnus field, which was sanctioned in 2012, delivered first gas in December 2016. The field is expected to deliver 5% of the UK gas production and supported c.5,000 jobs during its five-year development period, with over 80% of the contract work being secured by UK companies due to the world-class capabilities of the UK OFS supply chain.

Shale ► The UK is estimated to have substantial amounts of shale gas

trapped in underground rocks and the Government wants to develop it to help offset declining North Sea oil and gas output. The successful development of shale oil and shale gas reserves is dependent on two critical issues, namely economic viability and public buy-in. The Government approved its second shale gas fracking permit last October, overruling a local authority decision and boosting the country’s position as Europe’s most promising shale gas exploration ground. With security of energy supply remaining a key concern and with declining North Sea production, the Government is likely to continue to seek opportunities to promote the development of a domestic shale industry.


2

long-term production can be proven. This is important as the outcome of the well could pave the way for future prospects in the Southern North Sea (SNS), as well as potentially extending the life of existing infrastructure. BP plans to drill 5 exploration wells in 2017 and 50 new development wells over the next 3 years.

► Siccar Point Energy Limited’s announcement in November 2016 of its acquisition of OMV (U.K.) Limited, with closing subject to a number of conditions, including regulatory approval. The asset portfolio acquired is concentrated in the West of Shetland and the key assets include an 11.8 % interest in the Schiehallion oilfield and a 20.0% interest in the Rosebank field.

► Ancala Midstream Acquisitions acquisition of Apache’s 30.28% share in the Scottish Area Gas Evacuation (SAGE) system and a 60.56% interest in the Beryl pipeline. The deal, which is expected to complete during the first half of 2017, becomes part of a growing trend of infrastructure sales to private-equity and specialist funds.

► On sanctioned developments, firms still continue to target cost savings and Maersk Oil announced in December 2016 it had reduced the costs of its Culzean project by US$500 million as a result of improved drilling efficiency and project planning, through close collaboration with its suppliers. The costs for the Culzean project are now expected to be around US$4 billion and the project remains on schedule to deliver first production in 2019. Demonstrating that it is possible to lower the breakeven cost per barrel for large scale developments to sub-US$35/bbl could result in other major developments proceeding, even in the new price environment.

Technology ► The UK Government’s pledge to fund research and

development, confirmed in the Autumn statement, was welcomed as a boost to the North Sea’s hopes of becoming a leader in global innovation. An additional £2 billion a year has been committed in research and development by 2020-21.

► In Aberdeen, the Oil & Gas Technology Centre, expected to open in 2017, aims to be the ‘go to’ global centre for solving offshore mature basin, subsea and decommissioning technology challenges and to make the north-east a focal point for oil and gas technology by helping companies develop and deploy new products and processes that can reduce costs. It is setting up a number of ‘solution centres’ to tackle challenges facing the industry, including asset integrity, well construction, exploiting small pools and decommissioning.

UKCS operating costs ► The UK industry has traditionally faced numerous cost

challenges, such as a shortage of critical equipment, infrastructure in need of repairs, insufficient skilled oil and gas engineers and cost escalation in the supply chain, which led to the average operating and capital cost per barrel increasing by 62% between 2011 and 2013 alone, significantly more than in comparable basins.

► However, the cost of operating in the UKCS is expected to decline to around £7.5 billion in 2016, a decrease of over 8% on £8.2 billion in 2015, which demonstrates the efforts by operators and the supply chain to reduce costs across the board. Reduced operating costs of new North Sea developments also provide hope over the future production potential of the basin.

► These lower operating costs will be welcome news to operators considering investment in the North Sea; however, falling operating costs is very much a global phenomenon, leaving the North Sea still a relatively high-cost environment compared to its global peers.

Investment ► Even though capital investment is expected to decrease to

around £10 billion in 2016, down from record levels of £14.8 billion in 2014, there is still appetite to invest in the UKCS in the new price environment including:

► 29th licensing round, which closed in November 2016, in which a number of new entrants were among the 24 companies who applied for licences. 29 applications were received, covering 113 blocks, which was the first in two decades to focus on frontier areas. Licences were available in areas such as the Rockall Trough and mid-North Sea High, which were the focus of a £20 million programme of seismic data gathering surveys in 2015. This appears to confirm the high remaining potential in the UKCS’ frontier areas. An extra offshore North Sea bidding round was also launched in December 2016, over and above the 29th licensing round that allows companies to apply for new licenses to drill for offshore oil and gas in a number of blocks outside the 29th round area offer. The acreage up for offer varies across the UKCS, from the Southern North Sea to East of Shetland, and there are 14 blocks on offer.

► BP’s announcement on a gas prospect it has started drilling in the Southern North Sea, which could herald a new phase of development in the region if it is determined that good

continued


Overview

Fiscal regime ► In the March 2016 Budget, a series of tax cuts benefiting the

UK oil and gas sector were announced in an attempt to assist an industry impacted by low oil prices. The Supplementary Charge Rate was halved to 10%, following a 12% reduction in 2015, and the Petroleum Revenue Tax (PRT) rate was reduced to 0% with an undertaking that it would not be increased in the future — see Figure 2. (Whilst for some this may equate to a complete abolition of PRT, for those companies whose decommissioning liabilities on PRT fields are greater than their projected post 2015 profits from these fields, there is still an effective PRT rate of 50% applied to these future profits). The effect of this is the headline tax rate paid on all UK oil and gas production will now be 40% across all fields. The reduction of the PRT rate to zero is recognition that the North Sea is a mature basin and requires incentives to maximise production in the older fields. Companies holding older assets will have greater incentive to reapply capital to producing wells, increasing their longevity and productivity through a range of enhanced oil recovery techniques.

Figure 2: UK headline tax rates

UK

hea

dlin

e ta

x ra

te %

0

10

20

30

40

50

60

70

2014 2015 2016

► In the Autumn Statement in November 2016, no further tax cuts were announced. However, there is ongoing informal consultation on decommissioning tax relief and its interaction with late-life asset transfers, which implies that Government would be willing to make further tweaks to the tax regime if there is evidence the current rules are impacting the achievement of Maximising Economic Recovery (MER). Although fiscal support for exploration would be welcomed, it is difficult to see that, absent a tax credit regime for exploration akin to Norway, any changes could have a material impact. Even a tax credit, which the Government has always been against, would be of much less benefit in the UK regime where the tax rate is almost half of the Norwegian tax rate.


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Viewpoint: Decommissioning

Decommissioning presents the UK OFS industry and specialist late life operations and decommissioning companies with an excellent opportunity to grow a significant UK line of business with huge export potential.

However, helping operators address the challenges they are facing requires progress on a number of fronts in parallel:

► Technological innovation and new approaches are required to reduce costs and uncertainty. This needs to be stimulated by a pipeline of ideally aggregated demand to give the supply chain confidence against which they can make investment decisions in R&D and in commercial propositions.

► New commercial models, with mechanisms to drive more cost certainty, commercial innovation, a degree of risk transfer and insurance, coupled with considering potential alternative approaches to long-term operator liability will all help to encourage operators to make decisions.

► Decommissioning services should be specified in terms of outputs required to avoid over-management and encourage supply chain innovation, with the supply chain engaged early to work alongside operators before cessation of production (COP).

► Supply chain partnerships and specialist late life and decommissioning companies able to offer operators a ‘one-stop shop’ for decommissioning to give operators a choice in how they approach decommissioning, to leverage economies of scale and maximise the efficiency of contracting and contractor management.

Significant co-ordination and support will be needed to progress each of the points above, and the OGA, Oil & Gas UK, Decom North Sea and other industry bodies have a vital role to play in influencing, promoting and encouraging innovation, sponsoring pilots to prove new technology, commercial models and risk sharing to help deliver an optimum decommissioning solution for the UKCS.

Andrew Deane Advisory

Decommissioning ► There are more than 600 offshore oil and gas installations

in the North Sea, 470 of which are in UK waters. Decommissioning will be a key focus within the new oil price environment, but there have been no indicators of extensive decommissioning activity seen as yet. Many companies are delaying activity due to cash-flow constraints and others are deferring cessation of production as sustained efforts to improve efficiency result in extended field life. While the current oil price (even taking into account the recent OPEC-driven increases) would appear to point to an acceleration in decommissioning activity, the reality is somewhat different. Although some of the cost of decommissioning can be offset against previous tax paid, many operators with end-of-life assets either do not currently have the financial capacity to undertake decommissioning activity or are simply choosing not to spend on decommissioning activity and instead focus on running as leanly as possible, even if this is at a loss.

► Consequently, the volume of decommissioning activity has been significantly less than might otherwise have been envisaged. However, there will be a constant rise in offshore oil and gas decommissioning in the UKCS over the next 10 years and future spend will be close to US$20 billion over the next 5 years.

► The UK has clear regulations that define removal requirements and the level of compliance in terms of obligations. It is estimated that the UK Government will meet US$30 billion, or 45% of the total decommissioning cost. Given the oil price downturn, by 2016, the UK Government’s expected future net income from North Sea taxes has been significantly reduced, highlighting that burden further.

► There is a mutual benefit for the Government and the sector to achieve cost savings in decommissioning projects and extend the productive life of assets, but in many instances the maturity of the basin is working against them. There will be a constant challenge around sustaining costly infrastructure and hubs. Whole areas, including larger platforms and smaller tie-back fields, are under threat and there is a clear risk of a domino-effect as fields and hubs begin to shut in.

► Forecast activity on the UKCS is significantly higher than on the Norwegian Continental Shelf over the next 10 years, reflecting the relative maturity level, with more fields reaching the end of their field life in the UK. On a positive note, indications are that the unit costs of decommissioning are falling, particularly for well plugging and abandonment, due to the downturn as associated costs such as rig-rates have decreased. This is a great opportunity for those companies in the value chain that offer decommissioning. To make the most of this opportunity, the UK’s supply chain will need to position itself by offering high-quality, cost-efficient goods and services if they are to win business in a fiercely competitive global market.


continued

Overview

Summary of resultsFigure 3: Summary of results 2009–2015

Currency: £ million 2009 2010 2011 2012 2013 2014 2015

Number of companies 1,294 1,347 1,398 1,441 1,443 1,443 1,461

Reservoirs 812 817 1,047 1,142 1,274 1,207 989

Wells 5,684 5,705 6,394 7,369 7,777 8,062 6,912

Facilities 8,679 8,608 9,927 11,269 12,944 13,013 11,507

Marine and Subsea 5,876 6,706 8,218 8,780 9,983 11,005 9,616

Support and Services 4,059 4,585 5,446 6,173 7,157 7,310 6,630

Turnover 25,110 26,421 31,031 34,733 39,135 40,597 35,655

Growth trends — turnover n/a 5.2% 17.4% 11.9% 12.7% 3.7% (12.2%)

EBITDA 2,705 2,567 2,823 3,531 4,039 4,254 3,345

Reservoirs 15.9% 12.0% 14.6% 14.0% 18.0% 9.0% 5.1%

Wells 14.0% 13.1% 10.2% 12.3% 12.5% 15.7% 16.8%

Facilities 7.2% 7.9% 7.9% 8.7% 8.4% 6.0% 5.6%

Marine and Subsea 12.2% 9.8% 9.4% 11.0% 11.2% 13.2% 9.7%

Support and Services 10.7% 8.4% 8.4% 8.4% 8.8% 8.8% 8.5%

EBITDA margin 10.8% 9.7% 9.1% 10.2% 10.3% 10.5% 9.4%

Tax on profits 512 454 476 685 595 663 400

Number of employees 105,579 105,576 112,492 121,157 132,238 138,947 139,917

Wages 4,688 4,791 5,195 5,766 6,629 7,132 7,212

The completeness of our data depends on the financial information disclosed in companies’ annual accounts submitted at Companies House. Consequently, our analysis is likely to be understated as opposed to overstated. For example, not all companies disclose headcount information and companies that file abbreviated accounts (those typically with less than £6.5 million turnover) do not disclose the financial information included in the above table.

Figure 4: 2015 revenue bandings

< £20mn

Num

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£50mn to£250mn

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285069160

1,154

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2

Key highlights ► During 2015, the UK OFS sector experienced revenue decline

across all the supply chain categories as E&P companies targeted cost savings across the supply chain, reduced capital budgets and cancelled or delayed projects. Although turnover increased by £10.5 billion between 2009 and 2015 (compound annual growth rate (CAGR) 6%)), 2015 was the first year the sector has experienced an annual decline since our analysis started in 2008.

► There are over 1,450 companies in our sample; however, the 307 companies that generated turnover in excess of £20 million in 2015 accounted for 90% of total 2015 revenue. The largest UK OFS companies typically operate across the whole supply chain and offer integrated solutions to their customers, whilst the smaller companies typically specialise in a specific subsector.

► Based on Oil & Gas UK’s supply chain categorisation, we have classified each of the companies into one of the five supply chain categories based on its main activity; Reservoirs, Wells, Facilities, Marine and Subsea and Support and Services. In terms of revenue, the Facilities and the Marine and Subsea supply chain categories dominate, which reflects the mature state of the UKCS. UK companies have developed their expertise over the last 40 years or so and have world-leading skills and products which they use the service projects worldwide.

► There had been year-on-year growth in turnover between 2009 and 2015. However, the growth of over 10% in each of 2011, 2012 and 2013, which was driven both by activity in the UKCS and overseas, was not repeated in 2014. This was a result of the Reservoirs segment experiencing an 5% turnover decline in 2014 due to E&P companies significantly reducing investment in exploration activity, with the other segments experiencing either flat or lower turnover growth rates compared to prior years. In 2015, all segments experienced turnover declines as demand, both in the UKCS and globally, weakened and companies experienced intense pricing competition.

► EBITDA margin varies across the supply chain segments, with Wells achieving the highest margin in 2015. EBITDA margin declined in both 2010 and 2011 mainly as a result of pricing pressure from customers, salary increases due to the shortage of skilled personnel in the sector and unrealised supply chain savings. During 2012 and 2013, this decline was somewhat reversed as costs were recovered from customers.

► EBITDA margin was flat in 2014 as, in order to address the impact of the decline in the oil price, companies had started to implement cost saving strategies to reduce their cost base. However, there was a 1.1 percentage points (ppt) decline in 2015 as the cost saving initiatives undertaken, both in relation to headcount and fleet reductions, were not sufficient to offset the margin impact of the lower demand for services and equipment and day rate reductions.

► The key trends by supply chain category are as follows:

► Reservoirs has seen a 18% turnover decline in 2015 and a 4 ppt EBITDA margin reduction as a result of continuing pricing pressures following the decline in investment in exploration activity. We would expect further turnover and EBITDA declines in 2016 as the divisional results for the nine months to September 2016 for the listed parents of the top five companies in this segment show a reduction of 32% in turnover and 49% in EBITDA. Backlogs for these listed companies have reduced by over 35%, which creates further uncertainty for 2017 and, although the current level of seismic investment is not sufficient to ensure sustainable reserves replacement over time, any recovery is likely to be modest given the current oil price.

► The Wells segment experienced its first revenue decline since our analysis commenced in 2008, with a turnover reduction of 14% between 2014 and 2015, due to contract extensions being renegotiated at lower rates, day rates reductions and rigs being cold-stacked. However, EBITDA margin was not impacted as certain subsectors were successful in implementing extensive cost saving initiatives in response to the change in market conditions. The listed parents of the top five companies for the nine months to September 2016 show a further decline of 42% in turnover and 62% in EBITDA, mainly due to persistent pressure on activity and rates due to global oversupply. In addition, backlogs have shown a 38% reduction for these listed companies, which suggests a further decline in 2017.


continued

Overview

► Turnover for Facilities declined by 12% between 2014 and 2015, primarily due to the completion of a large construction project in the West of Shetland and a decline in activity due to a reduction in non-essential spend. EBITDA margin was flat in 2015 as significant loss provisions were recorded in both 2014 and 2015 in relation to a major gas plant construction project in Shetland. The decline in turnover of the listed parents of the top five companies for the six months to June 2016 was not as severe as for other segments of the supply chain (c.6%) as these companies have a level of protection from the long-term operations and maintenance contracts they operate under, as well as being diversified across geographies. We would expect UK companies in the Facilities segment to experience further declines as a result of a reduction in capital projects and non-essential maintenance work but the long-term contracts should also offer partial protection in 2016 and 2017.

► Marine and Subsea turnover decreased by 13% in 2015 and EBITDA margin declined by 3 ppt due to lower vessel utilisation and increased pressure on rates due to a reduction in capital expenditure. We would expect to see this trend continue in 2016 as the results from the listed parents of the top five companies for the nine months to September 2016 show a decline of 22% in turnover due to oversupply in the global market, although UK companies will have some protection due to a number of large capital projects in the UKCS that are set to continue in 2016. Despite a decrease of 19% in EBITDA for the listed parents, EBITDA margin for UK Marine and Subsea companies was flat due to the effective implementation of cost reductions, improved cost disciplines and successful project execution. However, they will have to proactively address the impact of activity decline on their cost base to ensure there is no erosion of margins in 2016 and 2017.

► Support and Services turnover declined by 9% in 2015 as there were a number of companies in this segment that were severely impacted by the reduction of discretionary spend and delaying of non-essential spend. As the majority of the top five customers do not have listed parents, there is no financial information available in relation to 2016 trends. However, we expect these companies to follow the overall global listed trends and see further turnover decreases in both 2016 and 2017.

► UK OFS fiscal regime — the headline corporation tax rate for UK OFS companies has been steadily declining in recent years from 30% in 2007 to the current rate of 20%, with this reducing to 19% from 1 April 2017 and expected to reduce to 17% from 1 April 2020. Although the rate reductions are welcome for UK OFS companies, the fiscal regime has also been recently impacted by the OECD multi-point action plan on base erosion profit shifting (BEPS).The UK is an active participant of the OECD’s BEPS agenda and is at the forefront of implementing changes, as evidenced by the UK’s diverted profits tax and the bareboat charter restrictions. In addition, further changes are expected to be introduced including new rules that, in certain circumstances, may restrict the deductibility of interest for tax purposes. As such, UK OFS companies are currently experiencing a period of change as these rules become effective and are better understood.


2

Geographic analysis of turnover

Figure 5: Analysis of turnover between UK and exports


UK 13,550 13,929 16,930 19,860 23,625 24,711 21,449

Exports 11,560 12,492 14,102 14,872 15,510 15,886 14,206

Turnover 25,110 26,421 31,031 34,733 39,135 40,597 35,655

Exports as a percentage of turnover 46% 47% 45% 43% 40% 39% 40%

► There was a significant increase in UK turnover in each of 2011, 2012 and 2013, reflecting the increase in spend in the UKCS in this period (there was an increase in capital expenditure of some £2.5 billion in 2011, £3.4 billion in 2012 and £3 billion in 2013 as per Oil & Gas UK’s 2014 Activity Survey). Growth slowed in 2014 and there was a decline of 13% in 2015 as a result of the impact of the lower oil price on activity and day rates in the UKCS, which impacted all of the supply chain categories.

► Export turnover grew year-on-year between 2010 and 2014 and represents around 40% of total turnover, reflecting the internationalisation of the UK OFS sector and the demand for the specialist skills the companies in our analysis provide in the global arena. With the ramp up in activity in the UKCS in 2011 to 2013, exports as a percentage of turnover has reduced slightly in recent years and this trend continued in 2014 and 2015 as a number of the overseas markets which UK OFS companies operate in were also affected by the impact of the lower oil price.

► Turnover growth between 2009 and 2015 in companies with annual turnover of less than £50 million has been driven from exports. Typically, this is because the smaller companies tend to be niche players in a particular subsector and the export growth reflects the global demand for such specialist skills. Large players often also have a local subsidiary presence in key overseas locations, which are excluded from our analysis as they do not submit annual accounts at Companies House, and, as such, turnover growth for companies with annual turnover over £250 million has been derived from the UK.

► Although the impact of the lower oil price has been felt on a global basis, there are a number of regions which are still experiencing growth. There is fierce competition for scare capital and UK companies will need to increase their focus on generating revenues from export activity to these regions, given the maturity of UKCS and its comparatively high operating costs.

Figure 6: UK and export turnover 2009-15

0

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2009 2010 2011 2012 2013 2014 2015

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Figure 7: UK and export turnover CAGR 2009-15

0%2%4%6%8%

10%12%14%

Under£50mn

£50mn to£100mn

£100mn to£250mn

Over£250mn

UK Exports


continued

Viewpoint: UK OFS sector

After two of the most challenging years in its history, some positive signs have started to emerge for the global OFS industry, especially those exposed to US onshore. In the UK, although the rate of decline has reduced, due to its offshore focus, longer lead times and the forecast decrease in UKCS capex, the industry is unlikely to experience a significant upturn in activity in the near term, with the focus in 2017 on replenishing order books, positioning for growth and managing liquidity.

In the medium-term, even a substantial price recovery is unlikely to see activity levels in the UKCS return to those experienced between 2012 and 2014, highlighting the importance of continuing to diversify internationally, develop technology and maximise the opportunity from decommissioning.

Aside from mega-mergers, we expect consolidation to be an increasing trend in 2017, driven either by:

► Larger players, with balance sheet strength, looking for strategic acquisitions, whether to enhance integrated offerings through new technology, increase internationalisation or reduce earnings volatility by diversifying into other markets, such as the renewables, nuclear and power industries

► Financial stress, with participants looking to drive synergies, retire assets and remodel capital structures.

Success, as always, will depend on responding flexibly to an ever-changing marketplace, whether it be volatile activity levels, customers’ changing operating models and contract structures or the march of digital and other technologies. The challenge for the industry in the UK is to remain relevant and continue to innovate, whilst maintaining rigorous cost control.

Stuart White Transaction Advisory Services

Overview

17

Viewpoint: Managing OFS talent

2016 has been a tough and challenging year from the People Agenda perspective. The continuing low oil price has seen most UK OFS businesses go through not one but several cost cutting exercises, with reduction in headcount being at the forefront and many businesses are now operating with the leanest global workforce they have had for many years.

However, as we look forward to 2017, we are seeing signs of (an albeit slow) recovery and companies will need to re-assess their talent and resourcing requirements to ensure they have the necessary skills to respond to increased activity. This will test not only the people strategies employed during 2016 — were the cuts too deep? — but also the continued attractiveness of the businesses and sector to young people entering the workforce. History has shown that following previous downturns in the sector there can quickly become a skills shortage leading to a war for talent and driving up costs. The introduction in April of the new Apprenticeship Levy will provide an added incentive for many businesses to invest in training new talent, but there will also need to be a focus on reward strategies and employee value proposition for attracting and retaining key talent.

And let’s not forget that overlaying all of this is Brexit and the uncertainty this will bring over the next 12-24 months. As businesses put more emphasis on their diversity and inclusiveness policies, what impact will Brexit have on immigration policy? And will there be another Independence referendum in Scotland? One thing that is certain is OFS businesses will need to be agile and ready to swiftly adapt to the changing environment.

Heather Smallwood People Advisory Services

2


UK OFS workforce Figure 8: 2015 UK OFS workforce by segment

Number of employees Average salary (£)

Reservoirs 5,232 50,243

Wells 21,496 59,443

Facilities 62,667 49,920

Marine & Subsea 26,930 51,876

Support & Services 23,592 48,556

Total 139,917 51,541

► Our analysis of the number of employees is based on employee headcount disclosed within individual company’s annual accounts filed at Companies House. The total number of employees in our analysis will be understated as a consequence of:

► Not all companies disclose employee numbers.

► A number of offshore employees are employed by overseas entities and, as such, are excluded from our analysis as they do not submit annual accounts at Companies House.

► Individual contractors involved in the UK upstream oil and gas industry are excluded.

► Based on our analysis from annual accounts, the number of employees increased by 34,321 to 139,900 between 2009 and 2015 and the average salary increased from £44,000 in 2009 to £51,000 in 2015 (CAGR 3%), However, average salaries were flat between 2014 and 2015, following year-on-year increases between 2009 and 2014, as a result of pay freezes and pay cuts that started in the latter half of 2014 and continued in 2015. Similarly, employee numbers only increased by 1% in 2015, after average annual workforce additions of 7% from 2009 to 2014, as a result of recruitment freezes and redundancy programmes. These programmes are likely to have had an even greater impact on contractor numbers but as noted above, these are not included in the employee headcount disclosed in annual accounts.

► EY’s Fuelling the next generation — A study of the UK upstream oil and gas workforce published in December 2014 identified the OFS workforce (based on information provided directly by the OFS companies either through interview or questionnaire) to be approximately 250,000, including around 50,000 contract staff. Oil & Gas UK’s Economic Report 2016 identified approximately 186,000 of direct and indirect employees, a decrease of 26% from the peak employment levels seen in 2014.


continued

► Consequently, in relation to total group debt, our analysis is likely to understate the absolute quantum of leverage of UK OFS companies. However, it nevertheless demonstrates a worsening trend in the gross debt/EBITDA ratio between 2013 and 2015, driven by declining EBITDA, and also gross external debt at its highest level since 2009. At a company level, there are a number of entities that are highly leveraged and, therefore, likely to be at risk of breaching their debt covenants; whilst declining profits may lead to an inability to service their debts.

► There is a similar trend in short-term debt/EBITDA ratios, most likely driven by companies increasing their utilisation of overdraft facilities due to cash flow constraints. In addition, when market conditions started to deteriorate in 2014, companies and banks typically reacted by extending debt maturities, which may now be falling due to mature in 2016/2017, negatively impacting the ratio.

► We have analysed the companies that report external debt (e.g., bank term loan, overdraft facilities and invoicing discounting facilities) to determine total gross external debt, as well as short-term external debt (i.e., debt that is repayable within the next 12 months). We have excluded intercompany debt from our analysis as sufficiently detailed information is not disclosed in companies’ annual accounts to determine if the intercompany debt relates to trading or financing facilities.

► Over 70% of the companies in our analysis that report external debt are subsidiaries of either UK or overseas parents. For a large number of these companies, bank debt (excluding overdraft facilities) is likely to be reflected in the balance sheet of their parent company rather than the UK subsidiary. As a result, the levels of debt reported by these companies is likely to understate the overall group’s debt position.

Overview

Debt trends

Figure 9: Analysis of external debt


Gross external debt (2,062) (2,082) (2,436) (2,449) (2,198) (2,197) (2,458)

Short-term external debt (660) (786) (1,010) (1,047) (815) (837) (884)

EBITDA 2,568 2,438 2,678 3,407 3,830 3,785 2,629

Gross debt/EBITDA 0.8 0.9 0.9 0.7 0.6 0.6 0.9

Short-term debt/EBITDA 0.3 0.3 0.4 0.3 0.2 0.2 0.3

Interest cover 5.2 4.4 4.9 6.2 7.5 7.1 5.5


2

Viewpoint: Financing

There have been a number of administrations over the last year and it has been well documented that many of the UK’s leading banks are closely scrutinising their lending to the oilfield services sector. Some companies facing financial challenges will have found that their lending relationship has been transferred to their bank’s customer support teams. Such scrutiny is, clearly, unwelcome for OFS companies — but is not necessarily something such companies should be unduly concerned about. EY’s experience shows that, despite frequent press comment, the banks’ customer support teams want to help their customers succeed — they want to support and can be creative in how that is achieved.

However, OFS companies should recognise the challenges facing banks in such situations and that they will be required to demonstrate four key attributes to their lender:

► Good overall sector position — which clearly remains difficult for many OFS companies.

► The trading and cash flow viability of the business — which can be difficult to demonstrate when forecasting remains challenging.

► Asset backing for their lending — but the service and people-oriented nature of many OFS companies mean such asset backing may be lacking and business values remain depressed.

► A strong management team capable of ‘steering the ship’ through troubled waters.

Securing incremental funding from lenders in such situations will be challenging and will leave owner-managed businesses, without the backing of a sponsor with ‘deep-pockets’, in a disadvantaged position.

All of which means that having strong visibility on trading and cash flow, early planning and rigorous analysis of options remains critical for OFS companies.

Even for those businesses less impacted by the downturn, obtaining funding remains difficult and there appears to be an increasing appetite amongst both lenders and businesses to turn to asset financing to meet their funding needs.

Gavin Yuill Transaction Advisory Services


3–7The UK oilfield services sector by supply chain category

21


3Reservoirs


Reservoirs

Figure 10: UK upstream oil and gas supply chain subsectors*

Supply chain categories: Reservoirs Wells Facilities Marine and Subsea Support and

Services

Tier 2:

Main contractors and consultants

► Seismic data acquisition and processing contractors

► ►Well services contractors

► ►Drilling contractors ► Well engineering consultancies

► ►Engineering, operation, maintenance and decommissioning contractors

► Engineering consultants

► ►Structure and topside design and fabrication

► ►Marine/subsea contractors

► Heavy lift/pipe lay contractors

► Floating production storage units

► ►Catering/facility management

► ►Sea/air transport ► ►Warehousing/logistics

► ►Communications ► ►Recruitment ► ►Training ► ►Health, safety and environmental services

► ►Energy consultancies

► ►IT hardware/software

Tier 3:

Products and services suppliers

Components

Subcontractors and subsuppliers

► ►Geosciences consultancies

► Data interpretation consultancies

► ►Seismic instrumentation

► ►Drilling and well equipment design and manufacture

► ►Laboratory services

► ► ►Machinery/plant design and manufacture

► ►Engineering support contractors

► ►Specialist engineering services

► Specialist steels and tubulars

► ►Inspection services

► ►Subsea manifold/riser design and manufacture

► ►Marine/subsea equipment

► ►Subsea inspection services

* The 32 subsectors were derived from Oil & Gas UK’s supply chain categorisation. Tier 1 relates to the end user (e.g., E&P companies, energy utility companies, IOCs) which does not form part of our analysis.

Figure 11: Analysis of Reservoirs turnover and EBITDA margin by subsector


Seismic data acquisition and processing contractors

514 489 643 683 734 584 536

Geosciences consultancies 111 138 168 200 191 211 160

Data interpretation consultancies 111 120 131 154 217 266 167

Seismic instrumentation 77 70 104 104 132 146 127

Turnover 812 817 1,047 1,142 1,274 1,207 989

Seismic data acquisition and processing contractors

16.3% 8.5% 13.1% 12.5% 19.4% 3.5% 2.8%

Geosciences consultancies 14.2% 13.9% 11.8% 12.7% 10.8% 12.3% 4.9%

Data interpretation consultancies 14.3% 24.0% 22.4% 22.7% 21.9% 16.4% 13.7%

Seismic instrumentation 17.9% 12.2% 19.3% 13.3% 14.1% 12.2% 3.8%

EBITDA margin 15.9% 12.0% 14.6% 14.0% 18.0% 9.0% 5.1%


3

Summary of resultsIn 2015, the Reservoirs supply chain comprised 3% of the total UK upstream oil and gas supply chain turnover.

Figure 12: Summary of results 2009–2015


Number of companies 74 78 78 78 78 77 81

Turnover 812 817 1,047 1,142 1,274 1,207 989

Growth trends — turnover n/a 0.5% 28.2% 9.1% 11.5% (5.3%) (18.0%)

EBITDA 129 98 153 160 229 108 50

EBITDA margin 15.9% 12.0% 14.6% 14.0% 18.0% 9.0% 5.1%

Tax on profits 19 19 27 29 38 18 (1)


Wages 154 173 194 231 258 286 263

Key highlights of the Reservoirs supply chain category results

► The large seismic acquisition vessel owning companies are typically based in the US or Europe (e.g., Norway, Netherlands). The UK companies in our analysis are not typically vessel owners and will lease vessels from their international parents when required and are more involved in either data processing, data interpretation, mulit-client library data, other consultancy services or providing specialised seismic equipment.

► Turnover increased by £0.2 billion between 2009 and 2015 (CAGR 3%). We have identified 81 companies in this segment of the supply chain and in 2015, 68 companies generated turnover of less than £20 million. The largest 6 companies generated over 50% of the total 2015 Reservoirs turnover.

► There was a significant upturn in turnover in each of 2011, 2012 and 2013 as the industry continued its search for new hydrocarbon resources in regions featuring deeper waters, harsher environments, extreme reservoir depths and complex geologies. This increased the need for better seismic analysis and companies were also reappraising many existing fields using 3D seismic, resulting in better quality information.

► There was a 5% decline in turnover in 2014 and a further 18% decline in 2015 as a result of oil companies significantly reducing investment in exploration activity. This has led to intense competition for work among seismic companies, which has had a detrimental impact on pricing. However, the decrease in turnover of 22% between 2013 and 2015 for UK

Reservoir companies is less than the c.50% decline in global seismic spending (see Figure 16), demonstrating both their resilience in an increasingly competitive international market and being more weighted toward consultancies, processing, interpretation and instrumentation than vessel ownership.

► Between 2010 and 2013, EBITDA margins had been growing and, in 2013, Reservoirs generated the highest EBITDA margin of our five supply chain categories, primarily as a result of the skilled nature of the work and the increase in 3D seismic.

► However, this trend was reversed in 2014 and EBITDA margin declined by 9 ppt in 2014 and a further 6 ppt in 2015. This was primarily a result of decreasing gross margin due to pricing pressures faced by Reservoir companies, which a number of companies were only able to partially offset by cost saving initiatives.

► The number of employees increased by over 1,500 between 2009 and 2015. However, there was a reduction in the number of employees for the first time in 2015 due to redundancy programmes undertaken by a number of the companies in response to the turnover decline. The average salary increased from £42,000 in 2009 to £50,000 in 2015 (CAGR 3%), reflecting the skilled nature of the work. There was no increase in average salary in 2015 as compared to 2014, as a number of companies introduced wage freezes as part of the cost saving initiatives.


continued

Reservoirs

Geographic analysis of Reservoirs turnover


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► UK turnover grew significantly between 2010 and 2013, driven by the increase in seismic analysis in the UKCS and reappraisal of existing fields. However, this trend was reversed in 2014, and the decline continued in 2015, in response to the significantly reduced exploration activity in the UKCS, although turnover remains higher than pre-2012 levels.

► Reservoirs export turnover as a percentage of turnover is the highest amongst all the supply chain categories. This is driven by the specialist nature of the services and the ease to which they can be transferred and utilised on a global basis.

► In 2012 and 2013, the reduction in exports as a percentage of turnover was driven by two of the largest companies in this segment significantly increasing the level of seismic work undertaken in the UKCS. Although export turnover has decreased in 2014 and 2015, the reduction in international activity has been relatively less than in the UKCS and, consequently, exports as a percentage of turnover has increased for UK reservoir companies in recent years.

► Export growth was highest for companies with turnover under £100 million due to a number of companies within this revenue banding, which operated solely in the UKCS in 2008, expanding their activities overseas from 2009 onward. In 2015, more than 60% of the turnover for a number of these entities was generated from exports, which demonstrates the extent of the expansion.

► However, for companies with turnover ranging between £100 million and £250 million, there has been a decline in exports between 2009 and 2015. This is primarily due to a reduction in the level of revenues from activities in Brazil that commenced late in 2008 and continued throughout 2009.



UK 262 296 369 531 559 502 414

Exports 550 521 677 612 715 705 576

Turnover 812 817 1,047 1,142 1,274 1,207 989

Exports as percentage of turnover 68% 64% 65% 54% 56% 58% 58%


3

Key trends in Reservoirs

► Where available, we have analysed the divisional results of the listed parents of the top five companies in the Reservoir supply chain category. As can be seen from the table above, there has been a steep decline in both turnover and EBITDA for 9m2016 against 9m2015. Turnover levels continue to be affected as the Reservoirs segment is still experiencing severe price deflation due to reduced activity levels. EBITDA margin has reduced by 6.7 ppt primarily due to higher costs in the first quarter of 2016 such as restructuring, as companies reduce costs, resize their fleets and implement efficiency measures in response to the turnover decline. As backlog has declined by nearly 35%, it is likely the revenue decline will continue into 2017.

► Since 2013, active global streamer capacity has reduced by 40% due to operators retiring or cold stacking vessels. In addition, the segment is becoming more consolidated with one significant operator exiting the market, leaving only four principal international seismic vessel operators.

► The messages from Reservoir companies is the current level of seismic investment is not sufficient to ensure sustainable reserve replacement over time and oil discoveries in 2015 stood at a 70 year low.1 Although there are no indications of visible recovery for the listed companies at September 2016, there are signs that the bottom has been reached. Multi-client sales, which are typically the first to recover, showed significant improvement in the second and third quarters of 2016 compared to the low levels in the first quarter of 2016. In addition, market rates, for example for streamers, appear to have started to show signs of stabilisation after a period of continued decline. However, any recovery is likely to be modest initially given the continued low oil price.

UK ► Exploration and appraisal in the UKCS continues to decline as

companies choose to focus on development activities rather than invest in exploration, or to move out of the North Sea altogether. The number of exploration and appraisal wells drilled in the UKCS has decreased from 105 in 2008 to 16 for the 9 months to 30 September 2016. There are a number of key challenges that are affecting the UKCS including:

► The high-cost environment, which de-incentivises new exploration in the UKCS

Global ► The new oil price environment has driven reductions in capital

programmes, with non-essential investments, such as frontier exploration, being particularly impacted. Reservoirs has been one of the most affected segments due to the level of delays or cancellations of exploration programmes. As can be seen from Figure 16, global seismic spending has decreased from a peak of c.US$8 billion to an estimated sub US$2.7 billion in 2016.

Figure 16: Global seismic spending

0.0%

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mn

Estimated seismic spent % of total O&G spent (rhs)

Source: CGG, PGS, TGS, Polarcus, Dolphin, Schlumberger, Barclays Research

Figure 17: Listed Reservoir companies results for the period from January 2016 to September 2016 (9m2016) vs. the period from January 2015 to September 2015 (9m2015)

Currency: US$ million

9m2016 9m2015 Variance Variance %

Turnover 7,044 10,283 (3,239) (31.5%)

EBITDA 1,390 2,719 (1,328) (48.9%)

EBITDA margin 19.7% 26.4% (6.7) n/a

Backlog* 1,049 1,612 (562) (34.9%)

*Where disclosed

1 Oil Discoveries at 70 year low signal supply shortfall, Bloomberg 30 August 2016


continued

3Reservoirs

Viewpoint: Reservoirs

Reservoirs continues to be one of the segments most severely impacted by the new price environment, with global seismic spending at record lows in 2016 and fleet capacities continuing to be reduced to better reflect market demand. While the market may have bottomed out in 1Q16, with some signs of stabilisation in 2H2016, demand is expected to remain weak and volatile in 2017. As the downturn in seismic acquisition started before the oil price drop of 2014, many seismic companies are experiencing significant stress and going through major operational and financial restructuring programmes that are resulting, for some of them, in changes in ownership structures.

In the UK, the Reservoirs segment has historically been one of the industry’s export success stories. As it is uncertain whether activity in the UK will ever return to the levels experienced in 2012/13, it will become ever more important to build on this international exposure.

Celine Delacroix Transaction Advisory Services

28

► The small size of many remaining opportunities — the UKCS is a mature basin, with a few notable exceptions, most of the remaining resources and new discoveries are small in size and cannot justify a standalone development.

► The UK Government has invested c.£40 million in 2015 and 2016 to try to address falling exploration activity. The first seismic campaign acquired new high-quality broadband 2D data from the Rockall Trough and Mid-North Sea High area and, in November 2016, the OGA awarded four contracts worth c.£1 million for the supply of reprocessed offshore seismic data. This will focus on the Anglo-Paris basin offshore, the Wessex and Weald Basins onshore, the South West Approaches, the Solway Firth, the Unst Basin and the East Shetland Platform. This data is to be released to the industry in 2017 to try to stimulate exploration activity as the OGA believes the data has the potential to unlock areas that have not been explored for a number of years and will also support the evaluation of acreage that will be made available in future OGA licensing rounds.

► Even with this, we would expect the 2016 results for the companies in the Reservoir supply chain category to follow the listed company turnover and EBITDA margin trends, assuming these companies have been proactive to address the decline in activity in 2016 by reducing their cost base. If not, the EBITDA margin decline could be more extensive.


Wells 4

Viewpoint: Reservoirs

Reservoirs continues to be one of the segments most severely impacted by the new price environment, with global seismic spending at record lows in 2016 and fleet capacities continuing to be reduced to better reflect market demand. While the market may have bottomed out in 1Q16, with some signs of stabilisation in 2H2016, demand is expected to remain weak and volatile in 2017. As the downturn in seismic acquisition started before the oil price drop of 2014, many seismic companies are experiencing significant stress and going through major operational and financial restructuring programmes that are resulting, for some of them, in changes in ownership structures.

In the UK, the Reservoirs segment has historically been one of the industry’s export success stories. As it is uncertain whether activity in the UK will ever return to the levels experienced in 2012/13, it will become ever more important to build on this international exposure.

Celine Delacroix Transaction Advisory Services


Wells

Figure 18: UK upstream oil and gas supply chain subsectors


Services

Tier 2:


► ►Seismic data acquisition and processing contractors













► ►IT Hardware/software

Tier 3:


Components


► ►►Geosciences consultancies

► ►Data interpretation consultancies












Figure 19: Analysis of Wells turnover and EBITDA margin by subsector


Well services contractors 2,306 2,464 2,394 2,598 2,694 2,873 2,369

Drilling contractors 1,816 1,572 1,946 2,363 2,462 2,739 2,404

Well engineering consultancies 49 65 214 191 171 204 184

Drilling and well equipment design and manufacture

1,360 1,451 1,676 1,997 2,277 2,074 1,775

Laboratory services 153 154 164 219 173 171 179

Turnover 5,684 5,705 6,394 7,369 7,777 8,062 6,912

Well services contractors 13.6% 12.5% 10.5% 11.8% 10.3% 12.3% 11.3%

Drilling contractors 12.6% 9.6% 5.4% 8.2% 10.2% 15.2% 22.8%

Well engineering consultancies 5.6% 1.7% 6.7% 8.2% 10.2% 16.0% 15.9%

Drilling and well equipment design and manufacture

16.1% 18.2% 15.4% 17.8% 18.1% 20.9% 16.4%

Laboratory services 21.7% 16.9% 13.4% 15.6% 10.6% 18.5% 13.4%

EBITDA margin 14.0% 13.1% 10.2% 12.3% 12.5% 15.7% 16.8%


4

Summary of resultsIn 2015, the Wells supply chain comprised 19% of the total UK upstream oil and gas supply chain turnover.




Turnover 5,684 5,705 6,394 7,369 7,777 8,062 6,912


EBITDA 798 749 651 905 975 1,266 1,161

EBITDA margin 14.0% 13.1% 10.2% 12.3% 12.5% 15.7% 16.8%

Tax on profits 147 127 120 170 117 193 127


Wages 913 947 1,007 1,092 1,220 1,303 1,278

Key highlights of the Wells supply chain category results

► Turnover increased by £1.2 billion between 2009 and 2015 (CAGR 3%). We have identified 208 companies in this segment of the supply chain and in 2015, 156 companies generated turnover of less than £20 million. The largest 4 companies generated nearly 50% of the total 2015 Wells turnover.

► The increased complexity of the type of field that is now being developed (e.g., brownfield work on older depleting fields or wells under deep water, some with high temperature and high pressure) had driven growth in this segment up to 2014, but this trend was reversed in 2015.

► Turnover increased in 2011, 2012 and 2013 primarily due to an increase in the number of drilling rigs and ships operating in the UKCS; an increase in contract day rates; higher vessel utilisation; an increase in personnel levels and an increase in the level of export activity from drilling and well equipment design and manufacture companies.

► Turnover growth continued in 2014, albeit at a slower rate, due to a number of new vessels operating in the UKCS (e.g., semi-submersible rigs, ultra-premium harsh environment jack up rigs), as well as an increase in product sales and provision of services.

► However, there was a 14% turnover decline in 2015 as contract extensions were being renegotiated at lower rates, day rates reduced due to oversupply, a number of rigs ceasing operations and being cold stacked as no new contracts were awarded and contraction in the overall volume of business.

► EBITDA margin has fluctuated throughout the period due to:

► Decline in 2011 due to pricing pressure from customers and cost increases in the UKCS.

► 3 ppt EBITDA margin recovery in 2012, which was sustained in 2013, due to increased rig rates in the North Sea (Oil & Gas UK 2013 Activity Survey cited a 40% increase in semi-submersible and 66% increase in jack-up rig rates).

► Further 3 ppt EBITDA margin increase in 2014 primarily due to an increase in rig activity (which generates very high EBITDA margins), reduced vessel downtime and lower repair costs incurred by the drilling contractors.

► Although there was a revenue decline in 2015, EBITDA margin increased by 1 ppt as a result of extensive cost saving initiatives implemented by the drilling contractors in response to the market changes, which more than offset the revenue decline in the subsector. All other subsectors experienced varying levels of EBITDA declines.

► The number of employees increased by over 1,900 between 2009 and 2015; however between 2014 and 2015 there was a reduction of over 1,400 employees as companies reduced the size of their workforces in response to market conditions. Average salary increased from £46,000 in 2009 to £59,000 in 2014 (CAGR 4%), reflecting the skilled nature of the workforce.


continued

Wells

Geographic analysis of Wells turnover

► As the UKCS is a mature basin, many of the companies in this segment (excluding drilling contractors) have focused on expanding overseas for their growth strategies. This is particularly evident in companies with less than £50 million turnover, which have experienced CAGR export growth as compared to CAGR UK decline, as they typically have the more specialised niche offerings.


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Over£250mn

UK Exports

► UK turnover decreased in 2010 due to a reduction in the number of drilling units operating in the UKCS. UK turnover increased in 2011 through to 2014, primarily due to an upturn in UK activity by well services and drilling contractors. The increase in spend was reinforced by Oil & Gas UK’s 2012, 2013, 2014 and 2015 Activity Surveys that state that for the UKCS:

► Exploration and appraisal well spending was £1.4 billion, £1.7 billion, £1.6 billion and £1.1 billion in 2011, 2012, 2013 and 2014 respectively.

► There was an increase in capital spend of some £2.5 billion in 2011 (up to £8.5 billion), £3.4 billion in 2012 (up to £11.4 billion), £3.0 billion in 2013 (up to £14.4 billion) and £0.4 billion in 2014 (up to £14.8 billion).

► However, this trend was reversed in 2015 due to day rate reductions, a number of rigs being cold stacked due to lack of contracts and a decline in capital spend of £3.2 billion. The reduction in capital spend resulted from a reduced level of development capital in relation to current projects, which was not replaced by the level of spend on new projects.

► Export turnover had increased year-on-year from 2010 to 2012, driven primarily by the drilling and well equipment design and manufacture subsector and the well services contractors. However, exports as a percentage of turnover declined in 2014 as the overall growth was primarily a result of new vessels operating in the UKCS and overseas activity for well services contractors reduced. There was a further decline in export turnover in 2015 due to a continued reduction in overseas activity for well services contractors, as well as a reduction in export activity for the drilling and well equipment design and manufacture subsector. In addition, the transfer out of overseas branches operating in Asia from one of the companies detrimentally impacted export revenue.

► Whereas drilling contractors generate a large portion of turnover from the UK (c.70%) as they tend to use the UK entities primarily to lease units in the UKCS, the remaining Wells companies also typically service the global market, with c.50% of the turnover for the other subsectors in 2015 being exports.



UK 2,919 2,581 2,975 3,344 3,768 4,157 3,681

Exports 2,765 3,124 3,418 4,025 4,009 3,906 3,232

Turnover 5,684 5,705 6,394 7,369 7,777 8,062 6,912



4

Key trends in Wells

► EBITDA margin has reduced by 5.8 ppt as although companies have been reducing their cost base through restructuring operations to meet the lower demands and improving drilling efficiency in this period of lower activity, this was only sufficient to partially offset the turnover decline.

► Where available, we have analysed backlog and this has shown a decline of over 37% for 9m2016 against 9m2015, suggesting the revenue decline will continue at least into 2017 given the oil price is not predicted to increase significantly over the next 12 months and capital constraints will continue.

UK ► In 2015, capital expenditure in the UKCS was £11.6 billion,

down from £14.8 billion in 2014, which was the highest on record. Less than £1 billion was expected to be sanctioned in 2016 in relation to new projects, resulting in investment being expected to decline to less than £10 billion in 2016.2

► Drilling activity has been declining in the UKCS (see chart below), particularly in relation to exploration and appraisal wells, which have decreased from 105 in 2008 to 26 in 2014 and for the 9 months to September 2016, only 16 have been drilled. Although development wells had remained at a constant level from 2009 to 2015 at c.130 wells, in the 9 months to September 2016, only 61 have been drilled.

Figure 26: Drilling activity on UKCS from 2008 to September 2016

050

100150200250300

2008 2009 2010 2011 2012 2013 2014 2015 Q1–Q32016

Num

ber o

f wel

ls

Exploration, appraisal and development wells

Source: OGA

► We would expect 2016 results for the companies in the Wells supply chain segment to decline due to the reduction in rig activity, with UK companies at greater risk due to the reduced competitiveness of the UKCS at lower oil prices compared to some other basins.

Global ► The Wells supply chain category is reactive to oil price

volatility, which has a direct impact on drilling activity. Any reduction in drilling activity has a knock-on effect on the day rates companies can charge for rigs and also results in excess supply sitting idle or being warm or cold stacked. As can be seen from Figure 24, the worldwide rig count decreased steadily from January 2015 to June 2016 as a result of the decline in oil prices and the related reduction in activity. However, there has been a modest recovery since June 2016, primarily in the US and Canada, albeit not to 2015 levels.

Figure 24: Worldwide rig count for January 2015 to November 2016

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Num

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s

Source: Baker Hughes Incorporated

Figure 25: Listed Wells companies results for the period from January 2016 to September 2016 vs. the period from January 2015 to September 2015


9m2016 9m2015 Variance Variance %

Turnover 21,403 37,230 (15,827) (42.5%)

EBITDA 2,387 6,307 (3,920) (62.2%)

EBITDA margin 11.2% 16.9% (5.8) n/a

Backlog* 15,494 24,957 (9,463) (37.9%)

*Where disclosed

► We have analysed the divisional results of the listed parents of the top five companies in the Wells supply chain category. As can be seen from the table above, there has been a steep decline in both turnover and EBITDA for 9m2016 against 9m2015. This is a result of a combination of persistent pricing pressure due to oversupply in the global markets, additional discounting on existing contracts and continuing decline in rig activity.

2 Oil & Gas UK’s 2016 Activity Survey


continued

Wells 4

► However, there are signs UK companies are addressing the high costs of drilling wells in the UKCS. Although the decrease in rig day rates would not be sustainable if there was a global increase in demand, there are examples where drilling efficiencies have been realised, primarily through collaboration or innovative solutions. For example, the Maersk Culzean project where the costs have been reduced by $500 million due to higher drilling efficiency and project planning, through close collaboration with suppliers.

Viewpoint: Digital

The Industrial Internet, predictive analytics, machine learning, robotics and data warehousing offer potential benefits to the oil and gas industry that could have significant impacts across the entire supply chain. Major oil companies have already started adopting these new operating models with high degrees of success in improving reliability, reducing costs, mitigating risk and improving profitability. For example, topside technology and asset performance management deliver direct financial benefits by reducing breakdowns, improving oil production and increasing asset life.

For the OFS industry, particularly the Wells segment, this presents significant opportunities to unlock value through innovation and change as well as reducing costs through internal process compression. With this comes complexity and risk and the demand to have a digital strategy and enablement program to deliver the transformational shift. The impact on all of the organisation should to be examined, including how the new operations affect safety, security, staff patterns, mobility, inventory levels, supply chain and regulatory stakeholders.

OFS companies will need to rapidly evolve to keep pace with their clients’ requirements by developing end-to-end digital solutions, repositioning service offerings and digitalising their own organisations.

Digital is integral to the capital agenda and when considering transactions. Understanding future value opportunities available from an acquisition and how to create these by deploying digital to areas that will return results in the short term is a critical advantage in the deal rationale and transaction life cycle. Disruptive transactions and industry convergence are themes that the industry can expect to experience.

David Rees Operational Transaction Services

Viewpoint: Wells

Not unexpectedly, Well companies have had a very difficult year as capex spending has reduced and discretionary expenditure deferred. Those focused on international markets such as the Middle East and the US unconventional market have done better than their peers. This trend should continue as the attractiveness of cheap sources of supply increases.

With the current focus on cost reductions and operational improvements, companies with a strong technology focus should be well placed to win market share, on a stand-alone basis or within large companies who are looking to build a technology portfolio and grow their product/service offering.

Chris Durling Corporate Finance


5Facilities


Facilities



Services

Tier 2:
















Tier 3:


Components







► ►Machinery/plant design and manufacture








Figure 28: Analysis of Facilities turnover and EBITDA margin by subsector


Engineering, operation, maintenance and decommissioning contractors

4,042 3,976 4,696 5,202 5,719 5,417 4,700

Engineering consultants 234 259 288 350 394 482 406

Structure and topside design and fabrication 378 324 469 665 679 855 771

Machinery/plant design and manufacture 1,775 1,734 1,897 2,175 2,339 2,395 2,129

Engineering support contractors 927 918 1,007 1,200 1,405 1,469 1,482

Specialist engineering services 529 610 641 797 1,068 1,258 1,044

Specialist steels and tubulars 414 416 536 403 787 579 513

Inspection services 379 370 393 475 553 558 462

Turnover 8,679 8,608 9,927 11,269 12,944 13,013 11,507

Engineering, operation, maintenance and decommissioning contractors

3.8% 6.3% 6.4% 7.0% 6.5% 0.4% 1.9%

Engineering consultants 6.8% 3.9% 3.9% 4.2% 2.9% 3.8% 0.6%

Structure and topside design and fabrication 9.9% 2.0% 7.2% 6.7% 7.3% 6.9% 3.4%

Machinery/plant design and manufacture 12.6% 13.0% 12.0% 13.4% 13.3% 12.3% 9.7%

Engineering support contractors 7.2% 6.2% 6.4% 7.3% 7.7% 8.2% 6.7%

Specialist engineering services 6.6% 7.8% 8.1% 10.3% 10.3% 11.2% 12.3%

Specialist steels and tubulars 5.4% 5.1% 5.7% 5.7% 5.1% 4.8% 3.7%

Inspection services 19.2% 16.2% 17.3% 16.9% 15.5% 17.7% 14.8%

EBITDA margin 7.2% 7.9% 7.9% 8.7% 8.4% 6.0% 5.6%


5

Summary of resultsIn 2015, the Facilities supply chain comprised 32% of the total UK upstream oil and gas supply chain turnover.




Turnover 8,679 8,608 9,927 11,269 12,944 13,013 11,507

Growth trends — turnover n/a (0.8%) 15.3% 13.5% 14.9% 0.5% (11.6%)

EBITDA 628 679 789 985 1,089 781 641

EBITDA margin 7.2% 7.9% 7.9% 8.7% 8.4% 6.0% 5.6%

Tax on profits 137 131 162 201 134 136 77


Wages 2,219 2,210 2,335 2,571 2,889 3,091 3,128

Key highlights of the Facilities supply chain category results ► Large construction works are typically carried out overseas,

usually in lower cost geographies. The UK companies in our analysis are typically involved in either an engineering role, construction of topside equipment including modules, or the operations and maintenance of the facilities.

► Turnover increased by £2.8 billion between 2009 and 2015 (CAGR 5%). However, there was a 12% decline between 2014 and 2015. We have identified 513 companies in this segment of the supply chain and in 2015, 408 companies generated turnover of less than £20 million. Companies with turnover in excess of £100 million, 24 in total, generated nearly 60% of the total 2015 Facilities turnover.

► There was a significant upturn in turnover in each of 2011, 2012 and 2013 due to an increase in activity in all subsectors in the Facilities supply chain but in particular from engineering, operation, maintenance and decommissioning contractors (EOMD), driven by increased investment in the UKCS and an increase in UKCS brownfield activity in 2011 to 2013.

► Turnover growth in 2014 was minimal, primarily due to: ► A reduction in activity in EOMD contractors as 2013

included a number of significant projects that moved offshore and achieved first oil/gas in the second half of 2013, which were not repeated in 2014, and large construction projects coming to an end; and

► A reduction in activity in Specialist steels and tubulars due to Oil Country Tubular Goods (OCTG) demand declining in the UKCS and overseas due to the political situation in certain locations (e.g., Algeria and Egypt) offset by

► A large increase in activity levels for a number of specialist engineering services companies.

► Turnover declined in 2015 by over 11% and this impacted all of the subsectors, excluding the engineering support contractor subsector, which experienced minimal growth.

The largest decline was in EOMD contractors primarily due to the completion of a large construction project in the West of Shetland and a number of the larger companies experienced declines in activity levels due to reductions in non-essential spend.

► EBITDA margin did not fluctuate significantly between 2009 and 2013 because a large number of the major players operate under multi-year contracts, which allows companies to manage their cost base in line with forecast activity levels. Wage increases were typically being passed on to the end customer in line with contractual terms.

► EBITDA margin declined by 2 ppt in 2014, and remained at this level in 2015, primarily as a result of:

► EOMD contractors subsector EBITDA margin remaining below 2% as a result of significant loss provisions recorded in both years in relation to a gas plant project in Shetland — construction was completed in 2015; and

► 3 ppt EBITDA margin decline in 2015 in machinery/plant design and manufacture subsector due to restructuring costs in response to the decrease in activity and reductions in administration costs only partially offsetting the impact of the turnover decline.

► The number of employees increased by over 12,000 between 2009 and 2015 and the average salary increased from £44,000 in 2009 to £63,000 in 2015 (CAGR 3%). There is a significant fluctuation between average salaries across the subsectors within Facilities, with employees involved in the more specialised niche subsectors typically receiving higher salaries. Although there have been redundancies publicised in relation to a number of the Facilities companies, a large portion of these relate to contractors that are not included in employee numbers disclosed in company annual accounts.


continued

Facilities

Geographic analysis of Facilities turnover


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► There was a significant upturn in UK turnover in 2011, 2012 and 2013 that resulted primarily from the EOMD contractors subsector due to the increase in brownfield activity in the UKCS and the structure and topside design and fabrication subsector due to a number of large EPC contracts in the UKCS. There was minimal growth in 2014 and a decline in 2015 due to large projects in 2013 not repeating.

► Export turnover increased year-on-year from 2010 to 2014, driven primarily by the machinery/plant design and manufacture and specialist engineering services subsectors as a result of targeted growth from overseas markets. Both of these experienced export turnover declines in 2015 due to the impact of the low oil price on the global markets, with projects in overseas locations, such as Asia, declining significantly.

► Whereas EOMD contractors (and related Tier 3 supporting subsectors) generate a large portion of turnover from both UKCS capital projects and long-term operations and maintenance contracts, machinery/plant design and manufacture companies service the global market, with nearly 70% of 2015 turnover in this subsector being from exports.

► As can be seen in Figure 32, there was significant export growth for companies with less than £50 million turnover. These companies (primarily in machinery/plant design and manufacture, specialist engineering services and specialist steels and tubulars subsectors) tend to have specialised equipment or services and use this technical expertise to grow and expand by exporting into the global market. For companies with turnover between £50 million and £100 million in 2015, these also had significant export growth primarily driven by the growth and expansion within the engineering consultants subsector.



UK 5,635 5,599 6,561 7,450 8,747 8,740 7,591

Exports 3,044 3,009 3,366 3,818 4,197 4,273 3,916

Turnover 8,679 8,608 9,927 11,269 12,944 13,013 11,507



5

Key trends in Facilities

UK ► Given the UKCS is a mature basin, Facilities spend is mainly

operating cost driven, with a focus on production and the maintenance required on the ageing infrastructure. As a result of the large cuts to capital expenditure budgets, this will become even more prevalent in 2016 and 2017 as the UKCS faces intense competition for the available capital expenditure budgets.

Figure 34: UKCS operating expenditure by region

0

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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

US$

mn

Northern North SeaCentral North Sea

Southern Gas Basin West of Britain

Source: Wood Mackenzie

► Unit operating costs (UOC) rose to a record high of $29.30/boe in 2014 but as a result of cost reduction and efficiency initiatives implemented, UOCs are expected to decrease to $16/boe in 2016. The question is how much of this relates to efficiency improvements rather than cost deflation.

► In addition, in July 2016 and August 2016, around 400 workers took part in strike action across seven North Sea assets, which was the first of its kind in 28 years. The strike was in relation to further proposed cuts and changes in pay and conditions as companies tried to reduce costs in this new lower oil price environment. Additional industrial action scheduled for August 2016 was postponed to allow further negotiations and a proposal to end the dispute was agreed early September 2016. This impacted the EOMD contractors subsector and given the relatively low margins under which these companies operate, looking to achieve further cost savings from employee costs in future may be difficult to achieve.

GlobalFigure 33: Listed Facilities companies results for the period from January 2016 to June 2016 (1H2016) vs. the period from January 2015 to June 2015 (1H2015)


1H16A 1H15A Variance Variance (%)

Turnover 14,003 14,967 (963) (6.4%)

EBITDA 676 453 222 49.0%

EBITDA margin 4.8% 3.0% 1.8 n/a

Backlog* 16,800 20,400 (3,600) (17.6%)

*Where disclosed

► We have analysed the divisional results for the listed parents of the top five companies in the Facilities supply chain category — as a number of the companies do not publish results for 9m2016, we have compared the results for the first six months for each of 2015 and 2016.

► There has been a 6% decline in turnover as a consequence of lower levels of activity on capital projects, cancellation of a number of engineering projects and reduced project and non-essential maintenance work. However, this is not as severe as experienced by the other categories of the supply chain, as these companies tend to operate under long-term operations and maintenance contracts. As such, they have a level of protection against the reduction in activity, as well as being diversified across geographies (e.g., UK decline offset by activity increases in Middle East), other parts of the supply chain (e.g., downstream) and other complimentary industries.

► There has been a 1.8 ppt improvement in EBITDA margin resulting from a reduction of overheads and focus on cost efficiencies by these companies, as well as profit being recognised on a number of large contracts due to milestones being reached.

► Where available, we have analysed backlog and this has shown a decline of around 17% for 1H2016 against 1H2015, whereas in the same period in the prior year, the backlog decline was only 6%. This is a result of one company ending 2015 with record backlog and delivering on the existing portfolio during 1H16A. Although there is a decline, the long-term nature of a large number of the contracts that these companies operate under means they should not be impacted as severely in 2017 as companies in the other segments.


continued

5Facilities

► We would expect 2016 results for the companies in the Facilities supply chain segment to decline as a result of a reduction in capital projects and non-essential maintenance work, although again there will be a level of protection from the number of long-term contracts that are in place. EBITDA margins will also be impacted by the lower level of activity and pricing reductions in an already lower margin segment of the supply chain. The extent to which companies have been successful in implementing cost savings and efficiencies will be a critical factor in whether the impact of these factors can be offset, either fully or in part. In addition, a large project that has been loss making in 2014 and 2015 has completed, so this should provide some upside in 2016.


Viewpoint: Facilities

The overall Facilities segment has been somewhat protected against oil price movements for the last few years through its opex exposure and backlog of long-term contracts. We are now starting to see these contracts finish and less new work is being commissioned. We expect to see continued pricing pressure over the next year, alongside increasing competition for new contracts. In this environment, the winners will be companies that are for radical, not incremental, change.

They need to

► Take advantage of scale to further reduce back office and support structures costs

► Automate and digitise ways of working, both internally and with clients

► Better understand risk exposure, capacity and appetitive to enable more aggressive commercial offerings and pricing

► Adapt front office structures and ways of working, including deployment of offshore talent, to significantly reduce costs

► Consider adjacent industries to grow revenue and manage earnings volatility

The prize for the winners will be significant. We expect that a combination of OPEC’s steps to improve oil prices and a need for reserves replacement at supermajors will start to regrow the pipeline for large greenfield facilities from 2019/2020 onward. Companies that have taken action now to prepare themselves will benefit from significant increases in profitability and major growth opportunities.

Ray MacSweeney Advisory


6Marine and Subsea


Marine and Subsea


Supply chain categories: Reservoirs Wells Facilities Marine and subsea Support and

Services

Tier 2:








► ►Marine/Subsea contractors








Tier 3:


Components







► ►►Machinery/plant design and manufacture








Figure 36: Analysis of Marine and Subsea turnover and EBITDA margin by subsector


Marine/subsea contractors 3,085 3,924 4,678 4,963 5,467 5,927 5,025

Pipe lay/heavy lift contractors 3 35 132 91 94 56 25

Floating production storage units 234 342 331 278 455 391 408

Subsea manifold/riser design and manufacture

78 58 78 99 113 146 117

Marine/subsea equipment 2,352 2,202 2,795 3,179 3,687 4,263 3,818

Subsea inspection services 123 145 204 169 168 222 222

Turnover 5,876 6,706 8,218 8,780 9,983 11,005 9,616

Marine/subsea contractors 11.7% 9.6% 10.0% 13.1% 11.4% 15.0% 11.2%

Pipe lay/heavy lift contractors 64.2% 13.1% 4.8% 4.9% 5.1% 5.8% 7.8%

Floating production storage units (3.5%) 4.0% 0.1% (31.1%) (5.7%) (8.9%) (5.2%)

Subsea manifold/riser design and manufacture

19.2% 22.1% 23.1% 20.5% 22.1% 16.2% 4.4%

Marine/subsea equipment 14.7% 10.8% 9.3% 11.5% 12.8% 12.9% 9.6%

Subsea inspection services 1.2% 8.1% 8.2% 5.4% 9.8% 11.1% 6.0%

EBITDA margin 12.2% 9.8% 9.4% 11.0% 11.2% 13.2% 9.7%


6

Summary of resultsIn 2015, the Marine and Subsea supply chain comprised 27% of the total UK upstream oil and gas supply chain turnover.




Turnover 5,876 6,706 8,218 8,780 9,983 11,005 9,616


EBITDA 717 657 772 962 1,116 1,458 928

EBITDA margin 12.2% 9.8% 9.4% 11.0% 11.2% 13.2% 9.7%

Tax on profits 138 114 121 210 207 215 127


Wages 763 789 910 1,019 1,301 1,372 1,397

Key highlights of the Marine and Subsea supply chain category results

► Turnover increased by £3.7 billion between 2009 and 2015 (CAGR 9%); however there was a decline of £1.4 billion from 2014 to 2015. We have identified 221 companies in this segment of the supply chain and in 2015, 153 companies generated turnover of less than £20 million. Companies with turnover in excess of £250 million, 8 in total, generated over 50% of the total 2015 Marine and Subsea turnover.

► Turnover increased in each of the years from 2009 to 2014, with significant growth in particular in 2010, 2011 and 2013 (in excess of 12%). This was primarily driven by increased capital spend levels, which led to an upturn in activity and strong order backlogs, resulting in higher number of vessel days and increased personnel levels, particularly in the UKCS.

► Turnover declined in 2015 by over 12% primarily driven by the following subsectors:

► Marine/subsea contractors — reduction in capital budgets has led to a decrease in customer spend, lower vessel utilisation and increased pressure on rates.

► Marine/subsea equipment — as noted above, companies in this subsector support the marine/subsea contractors and have been impacted by the decline in their activity. There have also been a number of maintenance projects delayed, which has reduced demand for equipment. This has been partially offset by an increase in activity from overseas markets, primarily West Africa and Brazil.

► EBITDA margin declined in 2010 and 2011, arising from difficult economic and trading conditions, project issues impacting margins (mainly in South America), project delivery delays resulting in minimal margin being recognised and a higher proportion of lower margin products.

► There was an EBITDA margin recovery of 1.6 ppt in 2012 (which was maintained in 2013) and a further EBITDA margin recovery of 2.0 ppt in 2014 primarily as a result of higher vessel utilisation due to improved market conditions and successful onshore and offshore project execution in the UKCS and overseas, including a significant number of subsea umbilicals, risers and flowlines (SURF) projects.

► As a result of the turnover decline in 2015, EBITDA margin reduced by 3.5 ppt as the impact of lower utilisation and reduced rates on margins were only partially offset by cost saving initiatives given the level of fixed costs (e.g., administrative support and operating lease costs).

► The number of employees increased by over 9,000 to 26,930 between 2009 and 2015 and average salary increased from £44,000 to £52,000 in the same period. This is one of the highest paying segments within the supply chain, with average salary in 2015 for the majority of the subsectors being in excess of £50,000.


continued

Marine and Subsea

Geographic analysis of Marine and Subsea turnover

► The large marine/subsea contractors increased their level of activity in the UKCS in 2011 through to 2014 and although there was a decline in 2015, there has still been significant UK CAGR growth between 2009 and 2015 for the companies with turnover in excess of £250 million. The decrease in overseas activity by marine/subsea contractors in the £50 million to £100 million turnover range has been more pronounced, which can be seen in Figure 40 in the export CAGR decline.


0

2,000

4,000

6,000

8,000

2009 2010 2011 2012 2013 2014 2015

£mn

UK Exports


(10%)

0%

10%

20%

30%

UK Exports

Under£50mn

£50mnto £100mn

£100mnto £250mn

Over £250mn

► UK turnover had grown year-on-year between 2010 to 2014, with significant upturn in 2011, 2012 and 2013 due to:

► The increased UKCS activity levels in the marine/subsea contractors and marine/subsea equipment subsectors

► A number of large contracts awards in 2011 within pipe lay/heavy lift contractor subsector

► Higher utilisation in 2013 within the floating production storage units subsector.

► UK turnover declined in 2015, primarily driven by the marine/subsea contractors subsector as UKCS activity reduced due to customers continuing to delay new projects awards and limiting discretionary work.

► Export turnover grew in 2010 and 2011, primarily driven by the marine/subsea contractors (particularly contracts in West Africa) and marine/subsea equipment subsectors. It declined in 2012 and 2013 as a result of a decline in overseas activity (particularly in Africa) by a number of the companies in the marine/subsea contractors subsector with turnover in excess of £250 million.

► Export turnover increased again in 2014, primarily driven by the marine/subsea equipment subsector due to global demand for the specialist tools. It declined in 2015 as the global market also contracted due to project delays and reductions in discretionary spend.

► The majority of subsectors within the marine/subsea supply chain segment (excluding the floating production storage units and heavy lift/pipe lay contracts subsectors that are exclusively based in the UK) have high levels of exports due to the highly technical and specialised nature of the products and services supplied. However, exports as a percentage of turnover experienced year-on-year decline between 2009 and 2014 as the companies focused on the increased activity in the UKCS and also due to global demand declines.



UK 2,037 2,590 3,442 4,401 5,773 6,432 5,191

Exports 3,839 4,116 4,776 4,379 4,210 4,573 4,425

Turnover 5,876 6,706 8,218 8,780 9,983 11,005 9,616



6

Key trends in Marine and Subsea

there are pockets of growing demand, such as greenfield developments in the North Sea. In addition, strategic alliances formed in 2015 are bearing fruit — at least one fast track development has commenced due to the alliance being able to demonstrate the new and innovative solutions would lower the cost base. It seems likely further consolidation or strategic alliances will ensue in this segment given the high cost of subsea developments.

UK ► The UK offshore oil and gas industry has been utilising

subsea technology for more than 30 years, as it offers significant advantages over fixed production platforms and allows hydrocarbons to be extracted more cost effectively, particularly from more challenging environments.

Figure 42: UKCS subsea capital expenditure 2009-2020

0500

1,0001,5002,0002,5003,0003,500

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

US$

mn

Commercial Technical


► Over 60% of 2015 subsea capital expenditure was incurred by five projects: Kraken Area, Greater Laggan Area, MonArb Area, Schiehallion and Greater Catcher Area. All of these projects are forecast, to incur significant capital expenditure in 2016, albeit to a lesser extent, but this reduces dramatically by 2020 by which time only Schiehallion has subsea capex forecast, as the other projects are all forecast to be complete. Although there are a number of new projects forecast, such as Culzean and Beryl Area, the expenditure is of a much smaller scale and there are no large developments currently in the pipeline that would result in subsea spending returning to 2014 levels.

Global ► The oil price decline delayed many subsea projects or led to

the cancellation of those projects deemed to be uneconomical in 2015. This impacted the offshore vessel market, as the global market experienced an oversupply of vessels, leading to significantly reduced day rates. These trends continued in 2016 as clients looked for structural cost reductions for their offshore developments.

Figure 41: Listed Marine and Subsea companies results for the period from January 2016 to September 2016 vs. the period from January 2015 to September 2015


9m2016 9m2015 Variance Variance (%)

Turnover 26,300 33,685 (7,385) (21.9%)

EBITDA 4,005 4,960 (955) (19.3%)

EBITDA margin 15.2% 14.7% 0.5 n/a

Backlog* 44,565 48,126 (3,562) (7.4%)

*Where disclosed

► We have analysed the divisional results of the listed parents of the top five companies in the Marine and Subsea supply chain category. Between 9m2015 and 9m2016, there has been a decline in turnover as continued decreases in market activity resulted in reduced vessel utilisation.

► However, EBITDA margin has increased by 0.5 ppt, despite the sharp decline in turnover. This is a result of a combination of the positive impact of cost reductions and resizing exercises (both headcount and fleet) carried out in 2015, improved cost discipline, enhanced operational performance and successful project execution. As companies did not foresee market conditions improving in 2016, their focus was on improving performance on existing contracts and this has flowed through to the EBITDA margin.

► We have also analysed backlog and this has shown a decline of around 7% for 9m2016 against 9m2015. However, due to consolidation in the segment, this is understated as backlog is not available at September 2015 for one of the companies — the real decline is probably closer to 18%. Although backlog has fallen due to budget restrictions from E&P companies,

46

continued

Marine and Subsea

Viewpoint: Marine and Subsea

Although in the short-term current projects should offer protection to some of the companies in the Marine and Subsea supply chain category, we expect there will still be a turnover decline in 2016. This is due to reduced levels of vessel utilisation (either in the UK or from international projects) and a reduction in capital expenditure levels where the project has either not been sanctioned or can be delayed. Given the EBITDA margins decline in 2015, companies will have to proactively address the impact of activity decline on their cost base to ensure there is no further erosion of margins.

The UK has built a worldwide reputation as a subsea centre of excellence, which is evident, for example, in the export success of the marine/subsea equipment subsector. As UK subsea capex declines, it is critical that UK companies continue to invest in innovation and geographic expansion to remain at the forefront of global developments.

Susan Moseley Transaction Advisory Services


6

Figure 43: Global subsea capital expenditure 2009-2020

05,000

10,00015.00020,00025.00030.000

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

US$

mn

Commercial Technical


► Although subsea capital expenditure in the UKCS is forecast to decrease significantly by 2020, following two years of decreased spend in 2015 and 2016, the global subsea market is forecasting a modest recovery from 2017 onward. As such, the export market will become increasingly important for UK marine and subsea companies.


7Support and Services

Viewpoint: Marine and Subsea

Although in the short-term current projects should offer protection to some of the companies in the Marine and Subsea supply chain category, we expect there will still be a turnover decline in 2016. This is due to reduced levels of vessel utilisation (either in the UK or from international projects) and a reduction in capital expenditure levels where the project has either not been sanctioned or can be delayed. Given the EBITDA margins decline in 2015, companies will have to proactively address the impact of activity decline on their cost base to ensure there is no further erosion of margins.

The UK has built a worldwide reputation as a subsea centre of excellence, which is evident, for example, in the export success of the marine/subsea equipment subsector. As UK subsea capex declines, it is critical that UK companies continue to invest in innovation and geographic expansion to remain at the forefront of global developments.



Support and Services



Services

Tier 2:
















Tier 3:


Components















Figure 45: Analysis of Support and Services turnover and EBITDA margin by subsector


Catering/facility management 119 127 143 184 199 242 251

Sea/air transport 736 746 835 946 992 939 1,069

Warehousing/logistics 640 761 865 912 964 947 764

Communications 107 90 118 192 162 168 138

Recruitment 1,399 1,674 2,146 2,411 3,105 3,146 2,701

Training 57 65 74 81 82 102 84

Health, safety and environmental services 486 553 576 637 706 782 820

Energy consultancies 333 381 459 540 602 622 462

IT hardware/software 182 188 230 271 344 361 340

Turnover 4,059 4,585 5,446 6,173 7,157 7,310 6,630

Catering/facility management 3.7% 5.0% 6.9% 7.9% 6.7% 6.1% 8.3%

Sea/air transport 15.3% 7.7% 9.0% 9.0% 8.9% 8.8% 7.1%

Warehousing/logistics 5.0% 4.4% 3.4% 4.2% 4.4% 4.2% 4.5%

Communications 11.3% 12.0% 11.3% 8.8% 15.9% 19.1% 15.5%

Recruitment 3.6% 3.3% 3.5% 3.4% 3.3% 2.9% 2.9%

Training 10.0% 11.3% 11.6% 14.6% 16.6% 16.9% 7.0%

Health, safety and environmental services 12.6% 11.9% 12.5% 13.6% 15.3% 14.7% 18.3%

Energy consultancies 27.2% 24.8% 24.6% 23.9% 25.5% 25.4% 24.6%

IT Hardware/Software 35.8% 28.8% 26.4% 20.9% 23.7% 24.5% 18.9%

EBITDA margin 10.7% 8.4% 8.4% 8.4% 8.8% 8.8% 8.5%


7

Summary of resultsIn 2015, the Support and Services supply chain comprised 19% of the total UK upstream oil and gas supply chain turnover.




Turnover 4,059 4,585 5,446 6,173 7,157 7,310 6,630


EBITDA 433 384 458 520 630 641 565

EBITDA margin 10.7% 8.4% 8.4% 8.4% 8.8% 8.8% 8.5%

Tax on profits 71 63 46 75 99 102 70


Wages 640 672 750 853 960 1,080 1,146

Key highlights of the Support and Services supply chain category results ► The Support and Services supply chain segment excludes

companies involved indirectly in the UK upstream oil and gas supply chain (e.g., hospitality and infrastructure) and those that do not specifically disclose financial performance from oil and gas (e.g., legal, insurance, accountancy and banking organisations).

► Due to the nature of the services supplied, a large number of the subsectors within this segment are more reliant on activity in the UKCS than export markets, with customers typically tending to use local companies to provide a large majority of their support services. The top five companies do not have listed parent companies but, in general, these companies will follow the trends of the global listed OFS companies.

► Turnover increased by £2.6 billion between 2009 and 2015 (CAGR 9%); however, there was a decline of £0.7 billion from 2014 to 2015. We have identified 438 companies in this segment of the supply chain, with 369 companies generating turnover of less than £20 million in 2015. Companies with turnover in excess of £100 million, 15 in total, generated 56% of the total 2015 Support and Services turnover.

► Support and Services had year-on-year double digit growth in turnover from 2010 to 2013, as a result of:

► The recruitment subsector having double-digit growth from 2010 to 2013. There was minimal growth in 2014 as a result of a decrease in activity in the latter half of 2014 following cost saving initiatives implemented by customers

► The sea/air transport subsector experiencing growth in excess of 10% in 2011 and 2012, due to an increase in activity in the UKCS from both new projects and brownfield and general pricing improvements

► The energy consultancies subsector having over 11% growth in each of 2010 to 2013 primarily through overseas expansion. There was minimal growth in 2014 as a result of the impact of the oil price decline.

► There was a turnover decline of 9% in 2015 primarily due to clients severely restricting the volume of new business and reducing contractor rates in the recruitment subsector and large activity declines, particularly in warehousing/logistics subsector.

► EBITDA margin declined in 2010 and has remained around 8% in each of 2011 to 2015. There are a large number of subsectors within the Support and Services supply chain segment that are low margin, as many services tend not to be of a specialised nature, restricting the premium that can be applied.

► Although the overall EBITDA margin was flat in 2015, certain of the subsectors were successful in reducing their cost bases to either match or exceed the turnover decline, such as the recruitment subsector and health, safety and environmental services subsector. However, for the majority of the subsectors, the reduction in activity negatively impacted EBITDA margins.

► The number of employees increased by over 8,800 to 23,592 between 2009 and 2015. The average salary increased from £43,000 in 2009 to £48,000 in 2015 (CAGR 2%); however, there has been a decline in the average salary of £2,000 between 2014 and 2015 reflecting the pay freezes in the sector. There is a wide variation in average salaries within Support and Services subsectors, with employees typically receiving lower salaries in the catering and warehousing/logistics subsectors, compared to the highest average salaries received in the sea/air transport and energy consultancies subsectors.


Support and Servicescontinued

7

Geographic analysis of Support and Services turnover


01,0002,0003,0004,0005,0006,000

2009 2010 2011 2012 2013 2014

£mn

UK Exports


0%

5%

10%

15%

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£50mnto £100mn

£100mnto £250mn

Over£250mn

UK Exports

► UK turnover has followed trends similar to the overall UK upstream oil and gas supply chain trends, with significant upturn in 2011, 2012 and 2013. This is primarily a result of increased in activity in the recruitment and sea/air transport subsectors, reflecting the rise in the number of projects in the UKCS and high headcount demand. There was lower growth in 2014 and a decline in 2015 due to the impact of the cost saving initiatives implemented in response to the lower oil price.

► A large number of the subsectors within this segment primarily service the UK market as the products and services are not of a specialist nature and, as such, are typically provided by local companies in overseas locations.

► Export turnover has increased from 2009 to 2014 with significant growth in 2010 and 2013. This is primarily as a result of:

► The energy consultancies subsector, which generates around 80% of its turnover from export markets due to the global nature of the services, having 12% turnover growth between 2012 and 2013

► The IT hardware/software subsector, which generated c.60% of its turnover from 2009 to 2014 from exports. This is due to the specialist nature of the products and services and the ease with which they can be utilised on projects globally

► The recruitment subsector where export turnover growth from 2012 to 2013 was 25%, primarily due to an increase in global activity from companies providing manpower solutions.

► There has been a 15% decline in export turnover between 2014 and 2015 as a number of the subsectors that are active in overseas locations, such as recruitment and energy consultancies, have experienced a contraction in activity levels in 2015.



UK 2,697 2,863 3,582 4,134 4,778 4,881 4,573

Exports 1,362 1,722 1,864 2,039 2,379 2,429 2,058

Turnover 4,059 4,585 5,446 6,173 7,157 7,310 6,630


51Review of the UK oilfield services industry January 2017 51Review of the UK oilfield services industry January 2017

52

Support and Services 7Comparison with the Norwegian and Dutch oilfield services sectors



8


Comparison with the Norwegian and Dutch oilfield services sectors

Figure 50: Summary of results

(All data for 2015 and in £ billion unless stated otherwise) UK Norway* The Netherlands**

Number of companies*** 565 630 305

Number of employees 134,575 92,999 95,907

Turnover 35 32 19

Turnover decline 2014 to 2015 (12%) (13%) n/a

Exports as a percentage of turnover (estimated) 40% 35% n/a

EBITDA 3.2 3.4 Not disclosed

EBITDA margin 9% 11% Not disclosed

* The exchange rate used to convert the Norwegian data is NOK 12.3 per £** As data for The Netherlands for 2015 is not yet available, we have shown 2014 data for comparison purposes. The exchange rate used to convert the Dutch data is EURO 1.38 per £*** Only companies with turnovers greater than £10 million in any year from 2010 to 2015 are included.

Figure 51: Turnover by basin

22%

41%

37%

UK

Norway

The Netherlands

Figure 52: 2010–2015 revenue trends

UK

£mn

Norway The Netherlands

45.040.035.030.025.020.015.010.0

5.0—

2010 2011 2012 2013 2014 2015


8

► As the UKCS is a mature basin, production had been declining annually between 2005 to 2013, at average annual rate of 10%. As a result of significant development investment in recent years, this trend was reversed in 2014 and growth of 14% was achieved in 2015 and further growth is forecast in 2016 and 2017, before plateauing in 2018 and declining again from 2019 onward. The growth in 2015 was a result of increased activity in Elgin Franklin following the shut down in 2012 and new fields coming on stream (e.g., Golden Eagle and Kinnoull). The growth forecast in 2016 and 2017 is from further new fields which are expected to come on stream (e.g., Greater Laggan Area, Cygnus and Kraken Area) and Schiehallion production being expected to recommence in 2017, following completion of the Quad 204 redevelopment project.

► Norwegian production increased by 5% in 2015, reaching 1,450 mmboe. Oil production increased by 3.5%, driven in equally by new development wells on existing fields and new fields, with four fields coming on stream in 2015, contributing 27 mmboe of additional production. Gas sales grew by 8% driven by increased export demand. Looking ahead, the outlook for NCS production is positive as although the large mature fields such as Ekofisk, Troll and Åsgard have passed their peak production, they still have many years of production left. In addition, several promising development projects and discoveries are expected to contribute additional resources the coming years. At the end of 2015, there were four approved development projects on the NCS, including the giant Johan Sverdrup field that is forecast to commence production in 2019.

Figure 53: Historical and forecast production

0

500

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2024

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2027

2028

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Mill

ions

of b

arre

ls (m

mbo

e)

Netherlands Norway UK


► Dutch onshore and offshore reserves and resources are still large, but characterised by a declining long-term production outlook. Over recent years, a number of producers have sold part of their upstream production assets in the North Sea. Chevron sold its oil and gas fields to Petrogas; Wintershall North Sea sold 50% of its shares to Gazprom in return for a stake in the gas reserves of Siberia. Another trend in the upstream segment is the increased number of production platforms being out of service in the Dutch North Sea, driven by the maturity of the production platforms. Around 33% of the 180 production platforms in the Dutch part of the North Sea are out of service, compared with 20% in 2015 and 5% to 10% three years ago. A total of 142 fields are expected to cease production in the next five years, compared with c.130 fields that ceased during the last 10 years.


continued

Comparison with the Norwegian and the Dutch oilfield services sectors

► Investment in the UK Continental Shelf (UKCS) has more than doubled since 2010 due to a number of large projects being sanctioned and new field allowances encouraging investment in projects that would otherwise have been unattractive. 2014 was the highest in over 30 years at US$22 billion (including fields under development e.g., Kraken, Greater Laggan Area, Mariner and Golden Eagle and upgrades to existing fields). However, capex declined in 2015 as the expenditure on a number of these projects halved as they reached the latter stages of development and there were no significant new projects sanctioned to compensate. It is forecast to decline from 2016 onward (with the exception of 2022 due to the Rosebank development) as operators continue to manage their capex budgets in response to the new lower oil price and the competition that the UKCS faces for capital from other geographies intensifies.

► After reaching record high levels in 2013, investment in the Norwegian Continental Shelf (NCS) declined in 2014 and 2015. The investment spike in 2013 was the result of stable field development activity, combined with several large simultaneous upgrades to current fields, primarily Troll and Åsgard. During the next few years, the most significant project on the NCS will be the development of Johan Sverdrup, with the total value of the first stage of construction estimated to be around NOK 100 billion (US$12 billion). The completion of topsides such as Martin Linge and Ivar Åasen will also require additional investment for a number of years. However, beyond 2020, the majority of existing or planned developments are lower cost subsea and FPSO solutions and as a result, investment levels are expected to decrease after 2021.

► The increased focus on capital expenditure reductions, mainly driven by the significant decrease in oil prices, has led to significant reductions in to capital expenditure levels in the Dutch Continental Shelf (DCS) in 2015 and this is expected to continue in 2016. Capital expenditure in the DCS decreased by 40% in 2015 to US$611 million and is expected to decline to US$283 million in 2016. As well as the impact of the decrease in oil prices, there have been an increased number of production platform closures in the DCS that has also contributed to the decline in capital expenditure. More than 100 out of 180 production sites on the DCS are more than 20 years old, and a number have reached the end of their expected lives. Consequently, future expenditure may be more heavily weighted toward decommissioning activity rather than new developments.

Figure 54: Historical and forecast capital expenditure

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2005

2006

2007

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2018

2019

2020

2021

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$mn

Netherlands Norway UK


Viewpoint from The Netherlands

The significance of the OFS industry to the Dutch economy is underpinned by the £19.1 billion revenue it achieved in 2014 and the 95,000 people it employed during that year. Based on the further decrease in the oil price during 2015 and continued capex cuts during 2016, we expect declining revenues across the entire Dutch OFS industry in 2015 and 2016 as compared to 2014.

The new price environment has emphasised the importance of agility across the OFS industry. During 2016 Dutch OFS companies increased their focus on alternative uses of their assets in offshore wind and decommissioning activities. With the outlook for 2017 still uncertain, we expect companies to focus on gaining efficiencies through adopting new technologies, creating growth through innovative business models and driving down operating costs through restructuring efforts.

Although job cuts are necessary from a cash preserving perspective, downsizing the workforce across the industry could potentially have severe consequences on the long term, as availability of highly qualified oil and gas experts could be scarce in the event of a recovery in the oil price.

Given its strong heritage, leading knowledge position, and innovative and flexible character, we expect the Dutch OFS industry will continue to play an important role in the oil and gas industry. The OFS industry could leverage this position by joining forces within the supply chain and to act, where needed, as a cluster in order to enhance the integrated service offering toward clients.

René Coenradie Partner Transaction Advisory Service The Netherlands

8


Viewpoint from Norway

Although revenues for the Norwegian OFS industry decreased by 12.6% in 2015 and continued to decline in 2016, the industry is still Norway’s largest and the outlook is more positive now than it was a year ago. We expect Norwegian OFS activity to hit bottom in 2017, before increasing gradually toward 2020.

The reduced OFS activity level affected all segments of the OFS industry. Cost saving programmes gained momentum in 2014 and continued into 2015/16 as we observed a net jobs reduction of 18,000 employees in 2015 alone. Restructuring activity remained high, especially within asset heavy segments.

However, the challenges OFS companies have experienced have also brought positive side effects, as the industry has been able to come up with innovative solutions to reduce cost levels. A critical challenge for OFS companies going forward will be to maintain cost levels at the new, lower rate.

As we go into 2017, we remind ourselves that previous downturns for the OFS sector have resulted in a stronger Norwegian OFS industry and the emergence of break-through innovations and technology. While we expect restructurings and layoffs to continue into 2017, we strongly believe that the Norwegian OFS companies and technology will be attractive and crucial to secure global energy supply in the future.

Espen Norheim Partner Transaction Advisory Services Norway

9Methodology and key assumptions


► The purpose of our analysis of the UK OFS sector has been to define, qualify and quantify a sector of significant importance for the UK North Sea and the UK economy and to provide insight both to the industry itself, as well as to other relevant parties.

► The financial data in this report is based on UK registered companies’ annual accounts filed at Companies House, which has been categorised into 2009, 2010, 2011, 2012, 2013, 2014 and 2015 for financial year ends within each of these calendar years. Where a company has not yet filed its 2015 annual accounts and it had turnover in excess of £30 million in 2014, we have included its results based on the following assumptions:

► For turnover, we have applied the relevant subsector turnover growth or decline rate to the company’s 2014 revenue.

► For EBITDA, we have applied the 2014 EBITDA margin to 2015 turnover.

► For wages and employees, we have included 2014 values.

► We applied the following criteria to each company to determine whether it should be included in the analysis:

► It is a UK-registered company.

► At least 50% of its turnover is generated in the upstream oil and gas sector.

► It has filed 2015 accounts with Companies House (apart from the exception noted above).

► As it is not possible to accurately extract the portion of financial information relating to the upstream oil and gas sector from each company’s annual financial statements, we include the full results for any company included in the analysis. Although this will overstate the financial information for companies that are not 100% engaged in the sector, it excludes those companies that do not have the majority of their business in the sector. Overall, we believe this results in a fair reflection of the UK OFS sector.

58

► We have assigned each company to a subsector based on its main activity. Many companies do have activities across the supply chain but this is not accounted for in this analysis.

► For export analysis, we analysed the geographic disclosure within the annual accounts of the largest 300 companies (by 2015 turnover). Where this did not result in at least 80% coverage of the turnover in each of the 32 supply chain subsectors, additional companies were also analysed.

► The export information based on annual accounts averaged approximately 70% of turnover in each of the financial years, with the remainder being extrapolated as noted below:

► Where a company only disclosed revenue at Europe level rather than at a UK level, the average split of UK and Europe revenue for the specific subsector was applied to calculate the UK only portion.

► If a company did not disclose geographic information or was excluded from the export analysis, the average split of UK and export revenue for the subsector, based on the information extracted from the annual accounts, was applied.

► Tax on profits represents tax charged in the accounts filed at Companies House and does not represent tax paid. There are a number of differences between the effective tax rate and tax paid, including:

► Tax allowance

► Utilisation of tax losses from prior years

► Group relief

► Deferred tax

Appendices


A–E

Reservoirs supply chain segment subsectors


Seismic data acquisition and processing contractorsSeismic data acquisition and processing contractors subsector includes companies providing seismic and reservoir services including data acquisition, processing, reservoir analysis/interpretation and field evaluation. In 2015, this subsector comprised 2% of total UK upstream oil and gas supply chain turnover.




Turnover 514 489 643 683 734 584 536

Growth trends — turnover n/a (4.7%) 31.5% 6.1% 7.5% (20.5%) (8.2%)

EBITDA 84 41 84 85 142 21 15

EBITDA margin 16.3% 8.5% 13.1% 12.5% 19.4% 3.5% 2.8%

Tax on profits 10 7 13 15 22 (3) (8)


Wages 85 108 116 139 152 167 150


7

< £20mn £50mn to £100mn

2

£100mn to £250mn

0

1

2

3

4

5

6

7

8

0%

10%

20%

30%

40%

50%

60%

Num

ber o

f com

pani

es

% re

venu

e sh

are


—

£20mn to £50mn

3



UK 160 190 235 324 333 272 236

Exports 354 299 408 359 401 312 300

Turnover 514 489 643 683 734 584 536


Appendix A


Geosciences consultanciesGeosciences consultancies subsector includes companies providing collection, interpretation, development and management of the geophysical, geological, geotechnical and other geoscientific data for offshore development projects. In 2015, this subsector comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 111 138 168 200 191 211 160

Growth trends — turnover n/a 24.4% 21.9% 19.2% (4.6%) 10.4% (24.3%)

EBITDA 16 19 20 26 21 26 8

EBITDA margin 14.2% 13.9% 11.8% 12.7% 10.8% 12.3% 4.9%

Tax on profits 3 4 4 5 4 6 2

Number of employees 598 622 725 880 836 771 652

Wages 22 25 31 38 38 39 32



3

0

5

10

15

20

25

30

35

0%

10%

20%

30%

40%

50%

60%

70%

< £20mn £20mn to £50mn

Num

ber o

f com

pani

es

% re

venu

e sh

are

31



UK 33 44 51 82 70 87 75

Exports 78 94 117 119 122 124 84

Turnover 111 138 168 200 191 211 160



Data interpretation consultancies Data interpretation consultancies subsector includes companies providing reservoir description analysis and seismic interpretation to identify map and assess geological and environmental constraints to offshore development. In 2015, this subsector comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 111 120 131 154 217 266 167


EBITDA 16 29 29 35 47 44 23

EBITDA margin 14.3% 24.0% 22.4% 22.7% 21.9% 16.4% 13.7%



Wages 29 26 25 30 35 43 43


2

18

1

< £20mn £20mn to £50mn £50mn to £100mn

Num

ber o

f com

pani

es

% re

venu

e sh

are

0246810121416

2018

0%5%

10%15%20%25%30%35%40%45%




UK 19 15 27 65 77 54 28

Exports 92 105 104 90 139 212 139

Turnover 111 120 131 154 217 266 167


continued

Reservoirs supply chain segment subsectors

Appendix A


Seismic instrumentation Seismic instrumentation subsector includes companies providing products and systems for surveying seabeds. In 2015, it comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 77 70 104 104 132 146 127


EBITDA 14 8 20 14 19 18 5

EBITDA margin 17.9% 12.2% 19.3% 13.3% 14.1% 12.2% 3.8%



Wages 17 14 22 25 32 36 37


12

2

< £20mn £20mn to £50mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

2

4

6

8

10

12

14

0%

10%

20%

30%

40%

50%

60%

70%

80%



UK 49 46 56 59 78 89 75

Exports 27 24 48 45 54 58 52

Turnover 77 70 104 104 132 146 127


Reservoirs supply chain segment sub-sectorsWells supply chain segment subsectors


Well services contractorsWell services contractors subsector includes companies providing design, manufacture and sale of drilling and completion equipment and services related to the installation and operation of this equipment. The services include logging and coring, wellbore construction, wellbore interventions, well completions and pressure pumping services consisting of cementing, well stimulation, sand control and coiled tubing, commissioning, pre-commissioning and leak detection. In 2015, this subsector comprised 7% of total UK upstream oil and gas supply chain turnover.




Turnover 2,306 2,464 2,394 2,598 2,694 2,873 2,369

Growth trends — turnover n/a 6.9% (2.8%) 8.5% 3.7% 6.7% (17.5%)

EBITDA 313 308 253 307 277 353 267

EBITDA margin 13.6% 12.5% 10.5% 11.8% 10.3% 12.3% 11.3%

Tax on profits 71 64 43 41 6 36 22


Wages 564 577 562 604 659 700 689


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

1

2

3

4

5

6

0%

10%

20%

30%

40%

50%

60%

70%

80%

£20mn to£50mn

£50mn to£100mn

£100mn to£250mn

Over £250mn

5

4

3 3

-



UK 986 994 937 947 1,051 1,309 1,078

Exports 1,320 1,469 1,457 1,651 1,642 1,564 1,291

Turnover 2,306 2,464 2,394 2,598 2,694 2,873 2,369


Appendix BAppendix


Drilling contractorsDrilling contractors subsector includes companies who are drilling rig or ship owners and lessors (includes semi-submersibles, ultra deepwater, jack up drilling rigs) and companies who provide drilling personnel and services. In 2015, this subsector comprised 7% of total UK upstream oil and gas supply chain turnover.




Turnover 1,816 1,572 1,946 2,363 2,462 2,739 2,404


EBITDA 230 151 104 193 250 415 549

EBITDA margin 12.6% 9.6% 5.4% 8.2% 10.2% 15.2% 22.8%

Tax on profits 23 10 16 54 34 105 38

Number of employees 1,109 868 1,211 1,366 1,672 1,985 1,819

Wages 79 73 95 107 141 165 150


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

1

2

3

4

5

6

7

0%5%

10%15%20%25%30%35%40%45%50%

£20mn to£50mn

£50mn to£100mn

£100mn to£250mn

Over £250mn

6 6

3

4 4



UK 1,222 975 1,253 1,575 1,773 1,920 1,642

Exports 594 597 693 787 689 819 763

Turnover 1,816 1,572 1,946 2,363 2,462 2,739 2,404



Well engineering consultanciesWell engineering consultancies subsector includes companies providing specialist well and production engineering services from exploration and appraisal drilling to well abandonment. In 2015, this subsector comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 49 65 214 191 171 204 184

Growth trends — turnover n/a 33.2% 229.0% (10.4%) (10.6%) 19.4% (9.8%)

EBITDA 3 1 14 16 18 33 29

EBITDA margin 5.6% 1.7% 6.7% 8.2% 10.2% 16.0% 15.9%

Tax on profits - - 4 2 2 5 6


Wages 19 20 18 27 28 45 43


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0%

10%

20%

30%

40%

50%

60%

70%

£20mn to £50mn £50mn to £100mn £100mn to £250mn

14

1 —

0

2

4

6

8

10

12

16

14

1 1



UK 10 15 16 45 61 93 86

Exports 39 50 197 146 110 112 99

Turnover 49 65 214 191 171 204 184


continued

Wells supply chain segment subsectors

Appendix B


Drilling and well equipment design and manufactureDrilling and well equipment design and manufacture subsector includes companies providing equipment used below the wellhead, including companies providing drill heads and drill logging equipment. In 2015, this subsector comprised 5% of total UK upstream oil and gas supply chain turnover.




Turnover 1,360 1,451 1,676 1,997 2,277 2,074 1,775


EBITDA 219 263 258 355 412 433 291

EBITDA margin 16.1% 18.2% 15.4% 17.8% 18.1% 20.9% 16.4%

Tax on profits 47 52 55 71 71 47 60


Wages 218 242 290 304 354 356 357

Figure 77: 2015 revenue bandings N

umbe

r of c

ompa

nies

% re

venu

e sh

are


106

3 1

0

20

40

60

80

100

120

0%

5%

10%

15%

20%

25%

30%

< £20mn £20mn to£50mn

£50mn to£100mn

£100mn to£250mn

Over£250mn

2 14



UK 626 528 705 692 791 732 782

Exports 734 922 971 1,306 1,486 1,342 994

Turnover 1,360 1,451 1,676 1,997 2,277 2,074 1,775


continued


Laboratory services Laboratory services subsector includes companies providing reservoir laboratory services and the provision of offshore cylinder gases, liquids and chemicals. In 2015, it comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 153 154 164 219 173 171 179

Growth trends — turnover n/a 0.2% 6.9% 33.3% (20.9%) (1.4%) 5.0%

EBITDA 33 26 22 34 18 32 24

EBITDA margin 21.7% 16.9% 13.4% 15.6% 10.6% 18.5% 13.4%



Wages 33 34 41 50 38 37 39


Num

ber o

f com

pani

es

% re

venu

e sh

are

< £20mn £50mn to £100mn£20mn to £50mn

25

12


0%5%

10%15%20%25%30%35%

45%40%

0

5

10

15

20

25

30



UK 75 69 65 85 92 102 94

Exports 78 85 100 134 82 69 86

Turnover 153 154 164 219 173 171 179


BWells supply chain segment subsectors

Facilities supply chain segment subsectors


Engineering, operation, maintenance and decommissioning contractorsEngineering, operation, maintenance and decommissioning contractors subsector includes engineering, procurement and construction (EPC) contractors and operations and maintenance (O&M) contractors undertaking major contracts. In 2015, this subsector comprised 13% of total UK upstream oil and gas supply chain turnover.




Turnover 4,042 3,976 4,696 5,202 5,719 5,417 4,700

Growth trends — turnover n/a (1.6%) 18.1% 10.8% 9.9% (5.3%) (13.2%)

EBITDA 156 250 301 362 373 23 90

EBITDA margin 3.8% 6.3% 6.4% 7.0% 6.5% 0.4% 1.9%

Tax on profits 52 56 52 86 8 22 2


Wages 1,173 1,147 1,161 1,190 1,355 1,455 1,535


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to£50mn

£50mn to£100mn

£100mn to£250mn

Over £250mn

11

7

4 4 4

0%10%20%30%

40%50%

60%70%80%

0

2

4

6

8

10

12

7



UK 3,107 3,030 3,490 3,912 4,461 4,380 3,857

Exports 935 946 1,206 1,291 1,258 1,037 843

Turnover 4,042 3,976 4,696 5,202 5,719 5,417 4,700


Appendix CAppendix


Engineering consultantsEngineering consultants subsector includes companies providing engineering and technical services, including field development planning, front end engineering and design, and detailed engineering. In 2015, this subsector comprised 1% of total UK upstream oil and gas supply chain turnover.




Turnover 234 259 288 350 394 482 406


EBITDA 16 10 11 15 11 18 2

EBITDA margin 6.8% 3.9% 3.9% 4.2% 2.9% 3.8% 0.6%

Tax on profits 5 3 2 3 - 1 -

Number of employees 881 915 979 1,003 1,195 1,432 1,538

Wages 49 57 61 69 87 122 117


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are

2015 revenue share Number of companies£20mn to £50mn £50mn to £100mn

3

0%

10%

20%

30%

40%

60%

50%

0

1

2

3

4

5

6

76

4



UK 137 144 194 223 210 267 158

Exports 97 114 94 127 184 215 248

Turnover 234 259 288 350 394 482 406


continued



Structure and topside design and fabricationStructure and topside design and fabrication subsector includes companies providing design and manufacture of platforms, structures and topside modules, accommodation modules and subsea structures. In 2015, this subsector comprised 2% of total UK upstream oil and gas supply chain turnover.




Turnover 378 324 469 665 679 855 771


EBITDA 37 7 34 45 50 59 26

EBITDA margin 9.9% 2.0% 7.2% 6.7% 7.3% 6.9% 3.4%



Wages 79 73 84 117 121 125 136

Figure 89: 2015 revenue bandings N

umbe

r of c

ompa

nies

% re

venu

e sh

are


< £20mn £20mn to £50mn £50mn to £100mn £100mn to £250mn

6 6

4

2

0

1

2

3

4

5

6

7

0%5%

10%

20%25%

35%

45%40%

30%

15%



UK 325 265 391 581 591 712 657

Exports 53 60 77 84 89 143 114

Turnover 378 324 469 665 679 855 771


Appendix C


Machinery/plant design and manufactureMachinery/plant design and manufacture subsector includes companies providing equipment primarily used in facilities category, such as electrical heating and control equipment, lifting equipment, valves and pumps. It excludes well and subsea/marine equipment. In 2015, this subsector comprised 6% of total UK upstream oil and gas supply chain turnover.




Turnover 1,775 1,734 1,897 2,175 2,339 2,395 2,129


EBITDA 223 225 228 291 312 294 208

EBITDA margin 12.6% 13.0% 12.0% 13.4% 13.3% 12.3% 9.7%

Tax on profits 32 31 50 48 55 42 16


Wages 337 347 373 428 447 472 467


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



127

0%

5%

10%

15%

20%

25%

35%

0

20

40

60

80

100

120

140

219 2

30%



UK 628 619 713 825 931 909 674

Exports 1,147 1,116 1,184 1,350 1,408 1,486 1,456

Turnover 1,775 1,734 1,897 2,175 2,339 2,395 2,129


continued



Engineering support contractorsEngineering support contractor subsector includes companies supporting the Tier 2 Facilities contractors and consultants and In 2015, it comprised 4% of total UK upstream oil and gas supply chain turnover.




Turnover 927 918 1,007 1,200 1,405 1,469 1,482

Growth trends — turnover n/a (0.9%) 9.7% 19.2% 17.0% 4.6% 0.9%

EBITDA 67 57 64 87 108 120 99

EBITDA margin 7.2% 6.2% 6.4% 7.3% 7.7% 8.2% 6.7%

Tax on profits 14 13 14 19 20 13 12


Wages 321 321 361 438 492 498 468


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to£50mn

£50mn to£100mn

£100mn to£250mn

Over £250mn

103

1 4 1 5

0

20

40

60

80

100

120

0%

10%

20%

30%

40%

50%

5%

15%

25%

35%

45%



UK 740 752 851 990 1,216 1,238 1,202

Exports 187 167 156 211 189 232 281

Turnover 927 918 1,007 1,200 1,405 1,469 1,482


Appendix C


Specialist engineering servicesSpecialist engineering services subsector includes companies providing complex engineered solutions and precision machined products. In 2015, it comprised 3% of total UK upstream oil and gas supply chain turnover.




Turnover 529 610 641 797 1,068 1,258 1,044


EBITDA 35 48 52 82 110 140 128

EBITDA margin 6.6% 7.8% 8.1% 10.3% 10.3% 11.2% 12.3%

Tax on profits 8 10 9 15 17 25 24


Wages 126 128 153 168 194 220 227


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



84

2 6 4

0102030405060708090

0%5%

10%15%20%25%

45%

30%35%40%



UK 254 296 363 460 628 692 556

Exports 276 314 278 337 440 567 488

Turnover 529 610 641 797 1,068 1,258 1,044


continued



Specialist steels and tubularsSpecialist steels and tubulars subsector includes companies providing steel pipe and piping products, downhole casing, tubulars and accessories. In 2015, it comprised 1% of total UK upstream oil and gas supply chain turnover.




Turnover 414 416 536 403 787 579 513

Growth trends — turnover n/a 0.5% 28.8% (24.8%) 95.3% (26.5%) (11.3%)

EBITDA 22 21 31 23 40 28 19

EBITDA margin 5.4% 5.1% 5.7% 5.7% 5.1% 4.8% 3.7%


Number of employees 545 495 752 795 1,015 972 1,040

Wages 25 23 34 33 44 44 42


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



30

1 1 3

0

5

10

15

20

25

30

35

0%5%

10%15%20%25%

35%

45%40%

30%



UK 244 289 328 220 416 277 243

Exports 170 128 208 183 371 302 271

Turnover 414 416 536 403 787 579 513


Appendix C


Inspection servicesInspection services subsector includes companies providing inspection, verification, testing and certification services. In 2015, it comprised 1% of total UK upstream oil and gas supply chain turnover.




Turnover 379 370 393 475 553 558 462


EBITDA 73 60 68 80 86 99 69

EBITDA margin 19.2% 16.2% 17.3% 16.9% 15.5% 17.7% 14.8%

Tax on profits 15 14 20 17 15 21 18


Wages 108 114 108 128 150 154 136


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



41

1 1 5

0%

5%

10%

15%

20%

25%

30%

35%

051015202530354045



UK 201 206 230 241 294 266 245

Exports 178 165 163 235 258 292 217

Turnover 379 370 393 475 553 558 462


Marine and Subsea supply chain segment subsectors


Marine/subsea contractorsMarine/subsea contractors subsector includes companies providing project management, subsea construction, subsea installation services and offshore operational and maintenance support services. In 2015, this subsector comprised 14% of total UK upstream oil and gas supply chain turnover.




Turnover 3,085 3,924 4,678 4,963 5,467 5,927 5,025


EBITDA 362 377 469 650 622 890 563

EBITDA margin 11.7% 9.6% 10.0% 13.1% 11.4% 15.0% 11.2%

Tax on profits 68 56 44 134 122 122 83


Wages 329 362 420 415 606 592 585


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to £50mn

£50mn to£100mn

£100mn to£250mn

Over £250mn

6

5

4

1

5

0%10%20%30%

40%50%

60%70%80%

0

1

2

3

4

5

6

7



UK 933 1,295 1,841 2,753 3,861 4,447 3,556

Exports 2,152 2,630 2,837 2,210 1,605 1,480 1,468

Turnover 3,085 3,924 4,678 4,963 5,467 5,927 5,025


DAppendix


Pipe lay/heavy lift contractorsPipe lay/heavy lift contractors subsector includes companies providing cranes designed for offshore applications and provision of marine trenching, installation and protection services of subsea products (pipelines and flexible cables). In 2015, this subsector comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 3 35 132 91 94 56 25

Growth trends — turnover n/a 1097.0% 280.5% (30.8%) 3.5% (41.1%) (54.3%)

EBITDA 2 5 6 4 5 3 2

EBITDA margin 64.2% 13.1% 4.8% 4.9% 5.1% 5.8% 7.8%

Tax on profits 1 3 1 1 1 ()


Wages 2 2 2 3 4 4 4


< £20mn £20mn to £50mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

1

2

0%

20%

40%

60%

80%

120%

100%

1 1



UK 3 35 132 91 94 56 25

Exports - - - - - - -

Turnover 3 35 132 91 94 56 25


continued



Floating production storage unitsFloating production storage units (FPSO) subsector is primarily the operating companies for the FPSOs and in 2015, it comprised 1% of total UK upstream oil and gas supply chain turnover.




Turnover 234 342 331 278 455 391 408

Growth trends — turnover n/a 46.2% (3.1%) (16.1%) 63.6% (14.1%) 4.5%

EBITDA (8) 14 — (86) (26) (35) (21)

EBITDA margin (3.5%) 4.0% 0.1% (31.1%) (5.7%) (8.9%) (5.2%)

Tax on profits - 15 (1) 1 — — —


Wages 3 3 3 4 3 4 3


5

3

2

< £20mn £20mn to £50mn £50mn to £100mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

1

2

3

4

5

6

0%10%20%30%40%50%60%70%80%90%



UK 234 342 331 278 455 391 408

Exports — — — — — — —

Turnover 234 342 331 278 455 391 408


Appendix D


Subsea manifold/riser design and manufactureSubsea manifold/riser design and manufacture includes companies designing and manufacturing equipment including subsea manifolds, flexible risers, steel catenary risers, hybrid steel-flexible risers, and top tensioned risers. In 2015, it comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 78 58 78 99 113 146 117


EBITDA 15 13 18 20 25 24 5

EBITDA margin 19.2% 22.1% 23.1% 20.5% 22.1% 16.2% 4.4%

Tax on profits 3 3 4 3 3 1 -


Wages 19 15 17 22 24 36 38


11

2

< £20mn £20mn to £50mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

2

6

12

49%

49%

50%

50%

51%

51%

10

8

4



UK 11 21 18 20 23 69 27

Exports 67 37 60 79 90 77 90

Turnover 78 58 78 99 113 146 117


continued



Marine/subsea equipmentMarine/subsea equipment subsector includes companies providing specialised subsea equipment, pipeline products, underwater connectors, umbilical systems and remotely operated vehicles (ROVs). In 2015, this subsector comprised 11% of total UK upstream oil and gas supply chain turnover.




Turnover 2,352 2,202 2,795 3,179 3,687 4,263 3,818


EBITDA 345 237 261 364 473 551 366

EBITDA margin 14.7% 10.8% 9.3% 11.5% 12.8% 12.9% 9.6%

Tax on profits 64 36 71 71 79 88 46


Wages 375 371 422 530 619 686 714


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to£50mn

£50mn to£100mn

£100mn to£250mn

Over £250mn

267

23

121

0%

5%

10%

15%

20%

25%

40%

0

20

40

60

80

100

120

140

30%

35%



UK 809 807 989 1,152 1,245 1,336 1,088

Exports 1,544 1,396 1,806 2,027 2,441 2,927 2,730

Turnover 2,352 2,202 2,795 3,179 3,687 4,263 3,818


Appendix D


Subsea inspection servicesSubsea inspection services includes companies providing pipeline testing, repair and integrity, maintenance and refurbishment services and in 2015, it comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 123 145 204 169 168 222 222

Growth trends — turnover n/a 18.3% 40.3% (17.0%) (0.6%) 32.3% (0.2%)

EBITDA 1 12 17 9 17 25 13

EBITDA margin 1.2% 8.1% 8.2% 5.4% 9.8% 11.1% 6.0%

Tax on profits 1 1 3 1 1 3 (2)


Wages 35 36 46 45 45 50 52


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to £50mn £50mn to £100mn

2 2

0

2

4

6

8

10

14

0%

10%

30%

50%

70%12

60%

40%

20%

12



UK 47 91 130 107 95 133 95

Exports 76 54 73 62 73 89 127

Turnover 123 145 204 169 168 222 222


Support and Services supply chain segment subsectors


Catering/facility managementCatering/facility management subsector includes companies servicing both onshore and offshore oil and gas facilities and in 2015, it comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 119 127 143 184 199 242 251

Growth trends — turnover n/a 6.8% 12.1% 28.8% 8.3% 21.4% 4.0%

EBITDA 4 6 10 14 13 15 21

EBITDA margin 3.7% 5.0% 6.9% 7.9% 6.7% 6.1% 8.3%


Number of employees 503 460 511 603 790 1,444 2,478

Wages 15 14 13 18 21 39 93


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to £50mn £50mn to £100mn £100mn to £250mn0

1

2

3

4

5

6

0%

10%

20%

30%

40%

50%

60%

1 1 1

5



UK 86 96 129 147 175 230 241

Exports 33 31 14 37 24 11 11

Turnover 119 127 143 184 199 242 251


EAppendix


Sea/air transportSea/air transport subsector includes helicopter, platform support vessel, anchor handling tower support vessel, support vessel and emergency response and rescue vessel operators. In 2015, this subsector comprised 3% of total UK upstream oil and gas supply chain turnover.




Turnover 736 746 835 946 992 939 1,069

Growth trends — turnover n/a 1.3% 12.1% 13.3% 4.8% (5.3%) 13.9%

EBITDA 112 57 75 85 88 83 76

EBITDA margin 15.3% 7.7% 9.0% 9.0% 8.9% 8.8% 7.1%

Tax on profits 14 5 (21) 4 7 16 8


Wages 109 113 113 124 135 113 166


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to£50mn

£50mn to£100mn

£100mn to£250mn

Over £250mn

2 3

5

11

1

0%

5%

10%

15%

20%

25%

35%

0

2

4

6

8

10

1230%



UK 533 489 589 739 769 725 895

Exports 203 256 247 207 222 215 175

Turnover 736 746 835 946 992 939 1,069


continued



Warehousing/logisticsWarehousing/logistics subsector includes companies providing logistics and freight services for the oil and gas sector and in 2015, it comprised 2% of total UK upstream oil and gas supply chain turnover.




Turnover 640 761 865 912 964 947 764


EBITDA 32 33 30 39 43 40 34

EBITDA margin 5.0% 4.4% 3.4% 4.2% 4.4% 4.2% 4.5%



Wages 69 66 75 83 89 98 99


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to£50mn

£50mn to£100mn

£100mn to£250mn

Over £250mn

29

2 1 1 3

0

5

10

15

20

25

35

0%5%

10%15%20%25%

45%

30%35%40% 30



UK 616 729 833 877 921 898 721

Exports 24 32 32 35 43 49 43

Turnover 640 761 865 912 964 947 764


EAppendix


CommunicationsCommunications subsector includes companies providing telecoms solutions including satellite, wireless and fibre optic for both offshore and onshore and in 2015, it comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 107 90 118 192 162 168 138

Growth trends — turnover n/a (16.2%) 31.3% 62.9% (15.8%) 3.9% (17.7%)

EBITDA 12 11 13 17 26 32 21

EBITDA margin 11.3% 12.0% 11.3% 8.8% 15.9% 19.1% 15.5%



Wages 21 19 23 35 28 31 27


24

3

< £20mn £20mn to £50mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0

5

10

15

20

25

30

0%

10%

20%

30%

40%

50%

60%

70%

80%



UK 72 54 66 87 81 79 62

Exports 35 36 52 105 81 89 76

Turnover 107 90 118 192 162 168 138


continued



RecruitmentRecruitment subsector includes companies specifically focused on oil and gas recruitment and the provision of manpower, including both technical and support services. In 2015, this subsector comprised 8% of total UK upstream oil and gas supply chain turnover.




Turnover 1,399 1,674 2,146 2,411 3,105 3,146 2,701


EBITDA 50 55 76 81 104 93 77

EBITDA margin 3.6% 3.3% 3.5% 3.4% 3.3% 2.9% 2.9%

Tax on profits 10 12 20 17 26 23 24


Wages 159 171 193 214 257 302 294


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


£20mn to£50mn

£50mn to£100mn

£100mn to£250mn

Over £250mn

37

3 23

12

0

5

10

15

20

25

30

40

0%

10%

20%

30%

40%

50%

70%

60% 35



UK 848 896 1,266 1,515 1,986 1,978 1,858

Exports 551 778 880 896 1,119 1,168 843

Turnover 1,399 1,674 2,146 2,411 3,105 3,146 2,701


EAppendix


TrainingTraining subsector includes companies providing onsite and e-learning solutions covering training in survival, firefighting, emergency management and skills, learning and workforce development for the oil and gas industry. In 2015, this subsector comprised less than 1% of total UK upstream oil and gas supply chain turnover.




Turnover 57 65 74 81 82 102 84


EBITDA 6 7 9 12 14 17 6

EBITDA margin 10.0% 11.3% 11.6% 14.6% 16.6% 16.9% 7.0%

Tax on profits 1 1 2 2 3 3 -


Wages 14 15 18 22 25 30 30


35

1

< £20mn £20mn to £50mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


0%

10%

20%

30%

40%

60%

80%

0

5

10

15

20

25

30

35

40

70%

50%



UK 46 54 61 70 72 91 76

Exports 12 11 13 11 10 11 8

Turnover 57 65 74 81 82 102 84


continued



Health, safety and environmental services Health, safety and environmental services subsector includes companies providing emergency response and rescue vessels, medical support services, hazardous waste management and protective clothing. In 2015, this subsector comprised 2% of total UK upstream oil and gas supply chain turnover.




Turnover 486 553 576 637 706 782 820

Growth trends — turnover n/a 13.9% 4.2% 10.6% 10.8% 10.9% 4.8%

EBITDA 61 66 72 86 108 115 150

EBITDA margin 12.6% 11.9% 12.5% 13.6% 15.3% 14.7% 18.3%

Tax on profits 10 9 11 11 14 15 5


Wages 125 121 131 146 162 188 201


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are


103

14

0

20

40

60

80

100

120

0%

10%

30%

40%

50%

60%

-

20%


1



UK 368 395 442 475 512 595 472

Exports 118 158 134 163 194 187 348

Turnover 486 553 576 637 706 782 820


EAppendix


Energy consultanciesEnergy consultancies subsector includes companies providing consulting expertise incorporating strategy development, market analysis, corporate and competitor analysis. In 2015, this subsector comprised 1% of total UK upstream oil and gas supply chain turnover.




Turnover 333 381 459 540 602 622 462


EBITDA 90 95 113 129 154 158 114

EBITDA margin 27.2% 24.8% 24.6% 23.9% 25.5% 25.4% 24.6%

Tax on profits 11 14 10 12 18 16 11


Wages 87 104 124 141 149 182 131


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



73

2 1

0

10

20

30

40

50

60

70

80

0%

5%

10%

15%

20%

25%

30%

35%

40%

2



UK 62 68 96 109 122 132 90

Exports 270 313 363 431 481 490 372

Turnover 333 381 459 540 602 622 462


E

continued



IT hardware/softwareIT hardware/software subsector includes companies providing business technology and software solutions, supply of IT personnel and computer consultancy services. In 2015, this subsector comprised 1% of total UK upstream oil and gas supply chain turnover.




Turnover 182 188 230 271 344 361 340


EBITDA 65 54 61 57 81 88 64

EBITDA margin 35.8% 28.8% 26.4% 20.9% 23.7% 24.5% 18.9%

Tax on profits 16 13 14 14 18 17 12


Wages 42 50 59 69 94 97 104


< £20mn

Num

ber o

f com

pani

es

% re

venu

e sh

are



52

1 1 2

0

10

20

30

40

50

60

0%5%

10%15%20%25%30%35%40%45%



UK 66 81 100 116 141 152 159

Exports 116 107 130 155 204 209 181

Turnover 182 188 230 271 344 361 340


Singapore

BrisbanePerth

Calgary

Satellite Offices

Rio de Janeiro

Cape Town

Johannesburg

Lagos

Beijing

Stavanger

Americas 3,600 professionals

Asia-Pacific and Japan 1,500 professionals

Europe, Middle East, India and Africa 5,200 professionals

HoustonGlobal Oil & Gas Offices

Aberdeen MoscowLondon

Bahrain


EY Oil & Gas network

Our global commitment to oil and gasAs an organisation, we are highly committed to the oil and gas sector and have created a network of more than 10,000 focused professionals that can provide a global platform from which to offer services to companies operating in all sectors of the oil and gas industry.

Your EY contacts

Transaction Advisory Services Assurance Tax Advisory

Andy Brogan Stuart White Moira Lawrence Derek Leith Andrew Deane

Direct

Email

+44 20 7951 7009

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Brisbane


EY oil and gas insights

Why it’s time to invest in digital oil

Leveraging the power of digital technology to transform business operations can help deliver real, sustained value to the bottom line.

Capitalizing on opportunities: private equity investment in oil and gas

As companies struggle with dropping oil prices, private equity firms look at the oil and gas sector with renewed interest as the industry continues to transform.

Developing a culture of employee development and on-the-job coaching

As millennials remake the workforce, oil and gas companies may have to develop a new approach to the traditional performance management process.

Driving operational performance in oil and gas

As boom and bust cycles rattle the oil and gas industry, operational excellence programs can help companies capitalize in a more profitable way.

Oil & Gas Capital Confidence Barometer

Our 15th Capital Confidence Barometer characterizes the oil and gas M&A market as one where executives continue to remain positive about acquisitions, but are equally aware of challenges in concluding a deal.

Follow us on Twitter @EY_OilGas

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Authors


Stuart White Transaction Advisory Services

https://twitter.com/MarkGregoryEY

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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How EY’s Global Oil & Gas Sector can help your businessThe oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively.

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