Cost-cutting measures, dwindling backlogs of work and pricing pressures are increasingly taking their toll on the offshore oil and gas industry particularly the supply chain, according to a report commissioned by Subsea UK.
In the second of its business confidence studies, supported by Scottish Enterprise and compiled by Douglas Westwood, Subsea UK said the latest findings proved the reality of concerns raised in the initial report but the findings still reflect an element of optimism and determination to succeed in some quarters.
Alistair Birnie, Subsea UK's CEO, said, "The short-term outlook remains tough for many businesses, with very limited visibility of new orders and enquiries.
"Reductions in activity are persisting, backlog build is lessening and price pressure and cost reduction are the norm, within the 21 companies reviewed for the studies in 2009. The impact of these measures will be felt across the Subsea UK membership through the supply chain as cost reduction initiatives are maintained.
"We are to an extent sheltered from the worst of the downturn by operations overseas, particularly in West Africa and Brazil. However, we are now seeing some indications of a slowdown in construction within these areas. These effects are expected be more apparent toward the end of this year into 2010, so businesses need to be vigilant when considering cash flow and working capital requirements."
"Many suppliers are pointing to the last quarter of 2009 into 2010, concerned that the backlog will have dried up appreciably by then and with little indication of where the new order book is coming from. This concern has been fuelled by a lack of front end activity on the ground that would normally be visible and which suggests that there may be further delays in new projects coming through."
But the longer-term outlook is more positive with deepwater exploration drilling continuing, with high rig utilization being reported.
Birnie added, "There have also been some surprising results on the ground, particularly in the area of IRM (inspection, repair and maintenance) where, although not a panacea, demand has been held up better than had been expected. Furthermore, companies in specialist niche markets are reported to have performed well with some reporting better results in 2009 than that of the previous year."
Brazil, West Africa and deepwater Gulf of Mexico regions continue to be active with a number of complicated, multi-year drilling and construction programmes, while developing areas such as India and the Black Sea are experiencing increased customer interest in any spare capacity available.
The wider drilling contractor market, however, is still showing signs of weakness especially within the jackup and mid-water floater market. More resilient to market uncertainty is the deepwater capable fleet though a more challenging pricing environment is anticipated.
Cost-reduction measures combined with a slowing down of backlog orders are expected to start affecting equipment manufacturers and performance in 2010 with pricing pressure and rumours of mergers and acquisitions adding to the uncertainly.
Birnie said, "A further indication of the slowing of business is the improving availability of equipment. Where previously there would have been a lead time of several months for equipment, such as survey sensors, we are now seeing equipment being made available ex stock. A more opportunistic market is evolving where buyers are anticipating availability of equipment, delaying their purchasing patterns.
"There are two aspects to this -- the backlog is visibly drying up but against that, the ability to respond quickly to enquiries is helping these businesses secure sales in the short term -- providing, of course, that the suppliers are able to finance the stock holding."
The weakening of the UK and North America markets, combined with uncertainty and deferment of projects means prices in these regions are being eroded and margins coming under increased pressure.
This is further impacted by diminishing backlogs and cost-reducing measures across the sector.
It is a similar outlook for integrated oilfield companies. A contraction in customer spending, reduced activity and pricing is having a significant detrimental effect on onshore North America activity as are reduced activity in weak regions including the UK, Saudi Arabia, Russia and the Capsian. Whilst this does not directly affect the subsea market, cash-flow is increasingly less favourable overall, and cost reductions are in play, affecting all their business areas to an extent.
Stronger markets are however prevalent in Latin America, Norway and Africa with stronger pricing margins being retained.
Access to capital remains a significant issue for companies with smaller E&P companies struggling to access capital for development and well programs, while the strength of the US dollar is impacting on revenues.
The deepwater sector within integrated oil companies is managing to avoid cost-cutting measures at this time, and the indications are that any spare capacity is quickly absorbed, keeping rig day rates high.
The Subsea UK study shows that the outlook for 2010 is more optimistic with a growth in exploration and production expenditure expected by more than half of companies surveyed. 32% indicated that spending would be up by 20% or more with 13% saying that they would rise appending by 10-20% and 8% expecting more modest increases of 1-10%.