Subsea UK's Report Reveals Impact of Downturn on Subsea Supply Chain

A new report reveals that offshore oil and gas activity in mature provinces such as the North Sea is more at risk than deepwater areas like West Africa in the current economic downturn.

The Subsea UK study, supported by Scottish Enterprise, and unveiled at OTC paints a picture of continued uncertainty in the oil and gas sector through 2009 and 2010, the impact of which cannot be underestimated, said the industry body.

"The outlook for 2009 has become more uncertain as announcements of capital expenditure decreases filter through from exploration and production companies globally. Expectations are that offshore activity will be adversely affected particularly in regions where production is mature and investment costs are high. The deepwater markets however seem to be more insulated from what may be a short to medium term reduction in upstream investment as projects in these areas are often larger and planned on longer term, more conservative oil price assumptions," said Alistair Birnie, chief executive of Subsea UK.

The report states that the price of raw materials is expected to fall and as that forms a large part of upstream expenditure, there should be reductions in the price of manufactured goods. However in tighter credit markets, there is evidence that oil and gas companies around the world are beginning to delay the launch of new projects and reschedule the start of existing ones.

Binie added, "This report confirms what we have been hearing anecdotally. While the outlook in the long-term remains positive for oil and gas and subsea in particular, current events are adversely affecting the market. There is growing uncertainty among subsea companies which is knocking confidence and therefore investment and activity levels. This volatile market is compounded by the banks' lack of appetite for investing."

Commissioned by Subsea UK, with support from Scottish Enterprise, the report has been compiled by Douglas Westwood using publicly available company reports and broker reports to assess the earnings per share for oil and gas companies projected for the following quarter compared with that for 2008.

"There is increasing anxiety among Subsea UK members as to what extent the sector will be challenged in the current climate and when we should expect to see the impact on the supply chain," said Birnie. "In response we have commissioned a series of reports into trends in the subsea oil and gas sector to establish the level of confidence and what this will mean for the industry in the long-term.

"Financial planning has been and will continue to be influenced by the confidence levels. Overall the sector seems to be handling the early stages of the downturn well with very few lay-offs or business failures. The current order backlog levels are cushioning many in the short term. But with the banks behaving erratically, it remains uncertain as to whether businesses can rely on any level of normal overdraft facilities which is a potential threat to otherwise healthy businesses of all sizes.

"It is important that businesses understand what is happening in the market and that they adopt a strategy that will avoid over-reacting and reliance on banks while not missing out on business that would still be viable," said Birnie.

The report shows that the analyst group has forecast an overall decline in earnings per share across all subsea exposed sector groups in the period from December 2008 to March 2009.

Within drilling there was a marginal drop of 0.6% for the first quarter of 2009 but an overall 3.6% rise in the annual earnings per share from 2008 to 2009. The companies involved have significant deepwater exposure and a varied international presence.

With high barriers to market entry and the recent trend towards long-term contract awards, the overall sentiment in the rig market is that the outlook remains positive. The revenue backlog remains strong for the deepwater fleet, jack-up markets are poised for reduced activity and day rates, geographic weakness is expected in West Africa and the Middle-east and the shallow markets, including the North Sea.

Estimated earnings for oilfield services companies illustrate a 3% decrease from December 2008 to March 2009 and a 14% decrease in earnings per share expected from 2008 to 2009. These companies expect reduction in expenditure from their primary clients, pricing pressures, geographic weakness in North America and Russia and negative impacts of currency conversion.

In offshore construction, earnings estimates show a 34% decrease from December 2008 to March 2009 and a 15.6% decrease in earnings per share expected from 2008 to 2009. Earnings announcements are being impacted by short-term volatility and reduced visibility, potential delays on larger projects, reduction in the high backlog and the implementation of cost savings measures.

Equipment manufacturers are facing a 22.2% decrease in earnings per share from December 2008 to March 2009 but a 3.5% increase in earnings per share from 2008 to 2009. Negative earnings outlook during the first quarter of 2009 was driven by the short-term outlook which remains uncertain, pricing pressure and increased competition, cost-cutting and capacity. However, their order backlog remains strong.

The report also contains commentary on the likely impact of this on the supply chain by company category.

Birnie concludes, "The analyst estimates provide insightful indications as to what may occur in the sector.

"The drilling markets seem to be holding up well and provide a strong indicator of future market buoyancy, activity and eventual recovery. While activity levels have yet to actually contract -- the expectation is that they will in quarters three and four of 2009.

"As activity lessens, pricing will come under increased pressure and cost reduction and efficiency initiatives will be implemented which will impact the entire supply chain.

"It is good news for our 200 members though as the most attractive sector within the upstream industry remains the highly prospective deepwater sector which is increasingly reliant on the use of subsea infrastructure, hardware and service provision."