If beleaguered oilfield service (OFS) companies take strategic moves, pulling levers focused on portfolio strategy, pricing and digital models among others, their efforts could collectively lead to an additional $20 billion each year in revenue.

That’s according to a recently released report by Deloitte entitled “Down but not out: Transforming oilfield services.” Analysts with the firm studied data from 70 OFS companies, looking for ways that companies can restructure their businesses to better withstand volatile market conditions and meet the needs of oil and gas companies.

Among the key ways to improve earnings are ditching noncore business lines, while scaling up core capabilities; creating a flexible pricing structure; clearly connecting cost centers to revenue and enhancing existing capabilities with digital technology.

Some service companies have already taken steps on the path.

Several have teamed up with digital giants—such as Microsoft and Halliburton Co.—or automation specialists—Schlumberger Ltd. and Rockwell Automation’s Sensia joint venture—to leverage their combined digital expertise, elevating their technology portfolios.

Others have exited service lines, steering focus to other areas. Schlumberger and CGG SA, for example, left the offshore seismic acquisition fleet business.

Yet, a few have joined forces to better position themselves. Pressure pumpers C&J Energy Services Inc. and Keane Energy Group Inc. merged earlier this year to become NexTier Oilfield Solutions Inc.

But there is still room to improve in the services sector.

“OFS players still have a chance to build a financial structure that enables profitable growth. Increasing margins could be key,” according to the report authored by Deloitte’s Duane Dickson, Alex Fleming and Thomas Shattuck. “If these 70 companies could increase margins to 2014 levels (admittedly a big challenge), they would collectively earn an additional US$20 billion each year—and potentially more than US$30 billion per year across the entire OFS industry.”

Business models that worked at $100 per barrel oil aren’t working today, according to the analysts, which highlighted how the OFS sector has seen its market capitalization drop by between 50% and 90% since 2014. Oil prices dropped by 45% during the same time frame.

While E&P companies’ earnings are rebounding somewhat, thanks in part to the OFS offerings, the struggle continues for the latter. Service providers have seen operating margins squeezed with revenues falling faster than costs, the analysts said.

“Doing more with less—or perhaps more accurately in many cases, doing more for less—is negatively impacting balance sheets,” Deloitte said in the report. “Of the OFS companies analyzed, total shareholder return plummeted by more than 50% between first-quarter 2014 and first-quarter 2019. “Only five companies out of the 70 reported positive shareholder returns across the period.”

Considering the low-hanging fruit is “mostly gone” with U.S. oil and headcounts, for example, below 2009 levels, Deloitte said the sector should focus on five levers to improve its performance.

Portfolio strategy: A realistic assessment of whether to serve markets in the same capacity should be undertaken, according to the report. This could lead to divesting assets, consolidating operations or exiting service lines. The task, Deloitte said, shouldn’t be about “pruning” the portfolio but rather paying attention to whether resources are being spread too thin or whether projected financial performance reflects market potential.

“Companies also should break the instinct that they need to be good at everything they do; sometimes it is fine for a function to perform adequately at a lower cost,” Deloitte said.

Commercial approach and pricing: Knowing customers’ needs and behavior, being aware of costs to deliver such services as a bundle and then creating a pricing schedule are keys to improvement, the report said.

The method of operation for some OFS companies has been to charge different prices in different regions for the same services, lacking commercial logic, Deloitte said.

“Oilfield services commercial leaders should pivot from a decentralized to a more structured and sophisticated approach to pricing,” the report said.

Operating model design: With costs and revenue out of sync despite reduced spending, operating models is another area highlighted in the report. Complicating sound operating models are “overlapping functions, decentralized internal systems and a lack of connection between overall corporate strategy and the individual business units.”

Ways to improve include focusing more on what’s important and spending less time and money on “peripheral activities.” The goal is to “align outputs and inputs, with corporate structure supporting service delivery.”

Integrated business planning: Silos and communication still pose challenges for OFS companies, especially for large integrated companies. Better planning is the solution, according to Deloitte.

“The core idea is that each part of the organization adjusts [its] capabilities to meet demand according to the plan, even if it may often change. Managers can then make decisions that minimize the guesswork,” the report said. “This process should be intentionally designed based on the results of an operating model exercise; attempting to patchwork a paradigm using existing blocks could very likely result in relapse into sub-optimized, traditional execution.”

Digital solutions: Digital technologies can improve efficiencies for both OFS companies and their clients. Using data as an example, the analysts said service providers should aim to use data to enhance existing capabilities.

“The overall goal of a digital tool set is to lower the latency of decision velocity, process execution, information movement, and analysis, while improving reliability, predictability, cost, and transparency,” the report said. “There are a number of opportunities to use large and small digital solutions to improve internal performance. New operating models should be linked and grounded in the productivity that can flow from these solutions.”

Deloitte analysts believe cost-cutting measures and higher revenue could triple margins for the OFS sector, possibly adding more than $30 billion in additional annual earnings for the industry. “There is a lot of money on the line,” analysts said.

 

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