UK Oil Services Cos Braced for Steep But Short Decline

LONDON (Dow Jones Newswires), Apr. 8, 2009

The U.K.'s oil services sector is braced for a sharp downturn as low oil prices have raised fears of capital expenditure cuts, project delays and financing difficulties. However, the dip, though deep, should be brief, with signs of a rebound in 2010, analysts say.

"It is our belief that the downturn will be short and sharp, and that the recovery is likely to be equally rapid and certainly apparent in 12 months' time," Evolution securities said in a note.

While the long-term outlook may be encouraging, analysts remain skeptical of near-term industry prospects, with a Citigroup research note saying: "We are unlikely to see [short-term] demand for crude products rise dramatically, if at all." HSBC said in a research note it did not expect good news for the sector in the near term.

Even the recent slightly more supportive oil price, which broke the $50 level last month, should not been seen as a sign of recovery, according to Citigroup.

"So far this year, the oil price has been supportive... However, this move is still in its early days, and we see no reason to believe it can be sustainable on an ongoing basis over the medium-term," the research note said.

A number of London-listed oil services companies have recently either posted weak results or shown caution over expected results.

Lamprell PLC (LAM.LN), which provides specialist engineering services to the international oil and gas industry, was the first to give a profit warning. The company also cut its final dividend, citing tough trading conditions.

John Wood Group PLC (WG.LN) and Amec PLC (AMEC.LN) have both said market conditions would be challenging this year. According to Citigroup, Amec's "lack of guidance for 2009 was not taken well by the market"

Even companies which gave a stable outlook, such as Petrofac (PFC.LN), Hunting PLC (THG.LN) and Wellstream Holdings PLC (WSM.LN), are likely to see a slowdown, analysts said. Petrofac has already said it will not be able to maintain the same growth rate it had in previous years.

While the immediate outlook for the sector may be gloomy, analysts see potential for a recovery quite swiftly as they expect oil prices to rise again. A modest demand recovery combined with accelerated production decline rates are likely to put oil prices under pressure and the first signs of a rebound should be visible in 2010, analysts said.

"We believe that the recession in the oil services sector will be shorter than the market currently expects, driven by the continuation of capex spending by NOC (national oil companies)and IOC's (international oil companies)," said Evolution Securities, saying recovery is expected to be evident in 12 months' time.

HSBC also takes this stance. "We think a focus on near-term macro issues masks the potential for oil decline rates to accelerate and for prices to recover - we see this as the key trigger for a share price recovery in oil services, not earnings revisions," HSBC said in a note. The bank said the oilfield services sector should see signs of improvement in 12 months.  

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