Global Oil Services Drilling and Equipment Houston Takeaways: Paradigm Shift in Oil Company Mindset

Transcription

1 Global Oil Services Drilling and Equipment Houston Takeaways: Paradigm Shift in Oil Company Mindset Industry undergoing paradigm shift, driven by: (i) a lack of new discoveries despite many years of high exploration capex; (ii) poor returns on offshore inventory of ~450 deepwater fields driven by ballooning costs; (iii) rapidly tightening global oil supply / demand. (p.2-5) Oil companies are rethinking their business models, attacking their rising costs and declining reserve bases in the face of oil price weakness. The increase in oil industry costs was driven largely by greater complexity and inefficiencies, and less so by price increases on like-for-like services. We are now seeing evidence that oil companies are changing their mindset by moving from complex custom solutions, to those that are more standardized and less prone to delays. This is driving a pickup in demand for subsea boosting and increased interest to reevaluate many on the bubble offshore opportunities. (p.6-8) Global services integration a key theme. Service integration among the largest players like SLB and HAL gives them increased ability to improve efficiencies, reduce costs, take on risk, and improve total recovery. Yet, given the merger between HAL and BHI, many NOCs are conflicted between desiring the full services and technology integrated providers offer, yet maintaining competition. We see increased opportunities for a smaller companies with high quality integrated offerings, as well as several niche service providers. (p.9) Other takeaways inside: (i) onshore E&Ps look for lasting efficiency gains, not cyclical service cost reductions (p.10-11); (ii) offshore will see big changes in contracting model and cost reductions. (p.12). M O R G A N S T A N L E Y R E S E A R C H Morgan Stanley & Co. LLC Ole Slorer Ole.Slorer@morganstanley.com Igor Levi, CFA Igor.Levi@morganstanley.com Jacob Ng Jacob.Ng@morganstanley.com Connor Lynagh Connor.Lynagh@morganstanley.com Morgan Stanley & Co. International PLC+ Robert Pulleyn Robert.Pulleyn@morganstanley.com Jessica Alderson Jessica.Alderson@morganstanley.com Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-u.s. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

2 Exploration capex near record high, while oil discoveries at a record low Exploration capex ($bn) Oil discoveries (Mbbl) Source: Rystad Energy, Morgan Stanley Research 2

3 Production flat outside of NAm since 2004, lower spending likely to send it down Crude & Condensate Production (Mbbl/d) '70 '75 '80 '85 '90 '95 '00 '05 '10 OPEC NAm Land Rest of world Source: Rystad Energy, Morgan Stanley Research 3

4 Meanwhile, the last 15 years saw increasing complexity and declining productivity Lack of standardization Source: Rystad Energy, Morgan Stanley Research 4

5 Service intensity and project complexity was the biggest cost driver, not pricing Service mix and increased complexity drove the lion s share of cost increases Source: Rystad Energy, Morgan Stanley Research 5

6 Paradigm shift in the way oil companies are developing offshore projects Standardization Conversations at OTC and our conference indicated oil companies are finally receptive to standardization. Currently, many projects are customized as E&Ps use various equipment designs, and along with sporadic timing of deliveries, add meaningfully to cost. Full scope of standardization includes: (i) single standard for subsea and topside equipment. (ii) consistent delivery schedule for follow up orders. (iii) mass production of raw components. (iv) maintenance agreement, using a set service plan. Facilitated by relationships: Operators & contractors: allow standardization across different projects for multiple customers. Cross-service partnerships: allow standardization across different project stages. Most difficult aspect of standardization: Our offshore infrastructure panelists agreed that standardization across operators is most difficult. However, 4-operator agreement to develop standardized HPHT equipment in GoM is a step in this direction, with increased interest from others. Project Management Strong push to reduce delays through better project management. Delays have been a key source of lower returns. Seeing a trend to bring all stakeholders to the table early to commit to a particular design: Contractors involved in various stages of the project, as well as various internal divisions. Agreeing on requirements, eliminating the unnecessary, and resisting requests for changes. Small tweaks could have major repercussions such as missing a weather window. Building flexibility also important up front, as some changes may inevitably happen, and flexible systems allow for tweaks without disruption. Very strong support for this trend: Various service and equipment providers at OTC agreed that this is happening. One engineering company is working towards shorter lead times, while increasing FEED intensity. Another saw y/y increase in pre-feed work. Panel at our conference saw this as a key change currently gaining traction. 6

7 Subsea boosting to regain the spotlight Subsea processing awards Oil price decline left operators evaluating economics of installing subsea boosting pumps vs. drilling new wells Conversations at OTC indicated great deal of brownfield opportunities across all major markets Boosting Separation Compression Two boosting projects currently being bid by FTI and OneSubsea: Eni 15/06 and Shell s BC10, which may be awarded before year-end. FTI has now qualified its pump with 5 operators and has formed an alliance with Hayward Tyler motor manufacturer Beyond 2015, we see many candidates, being evaluated such as Stones, Appomattox, Atlanta, Vigdis among others Source: Intecsea, Morgan Stanley Research estimates Morgan Stanley & Co. International plc ( Morgan Stanley ) is acting for BG Group plc ( BG Group ) in relation to the proposed acquisition by Royal Dutch Shell Plc as announced on 8 April BG Group may pay fees to Morgan Stanley for its financial services. Please refer to the notes at the end of the report. 7

8 Increased focus on brownfield activity Subsea tree awards ex Brazil E16E Brownfield Greenfield Conversations at OTC indicated a large focus on brownfields, which can benefit from existing infrastructure Brownfield inquiries for multi-phase pumps and reinjection pumps are actually up y/y, indicating increased focus on production enhancement vs. new wells These brownfield opportunities found across all major markets Looking at subsea tree awards (excluding lumpy Brazil orders), we could see that large greenfield awards have been relatively muted Brazil provides upside, as it had close to zero awards in 2014 We have defined brownfield projects as subsequent phases to an existing project, project extensions and satellite wells, while greenfields are large awards (at least 10 trees), requiring their own new infrastructure. Source: Quest Offshore, Morgan Stanley Research estimates 8

9 Global oil services: consolidation, integration and niche service providers Integration of services key theme at our conference SLB emphasized (i) reducing cost per barrel globally; (ii) increasing total recovery offshore, which provides increased upside offshore vs. onshore. Well over 25% of SLB s businesses are integrated, allowing it to work more efficiently and to take on risk in exchange for performance driven upside. Subsea alliances help improve subsea recovery, now at just 50% of onshore or topside projects. Land rigs beneficial to integrated services, reluctant to own dumb iron if it remains dumb, can tie sensors, automation and integrate the rig with the rest of BHA (bottom hole assembly). HAL indicated that it used to provide services on a well and is now more responsible for the entire field, which requires scope and scale. Credits superior US shale margins partly to its scale and infrastructure, while international shale can suffer with some large NOCs, believe increased scope can help win work with others. Significant interest from industrials, strategic buyers, and private equity for assets being divested. Divestitures to private equity buyers could be viewed by DOJ as sustainable competitors based on those buyers history; private equity can also team up with strategic buyers. FTI / Technip (Forsys) Seeks to be involved early in the design process. Intends to offer a sustainable & material way to take off ~30% of costs on ~30% offshore projects. Strong response from core client base of joint alliance partners. Ideal project in deepwater greenfields. Impact of consolidation on smaller players Large NOCs face a dilemma: they like the scope that integrators like SLB and HAL provide, but at the same time would like to encourage competition. As a result the most integrated of the smaller players are likely to see increasing share. WFT most advantaged, given its high quality offering of formation evaluation, well construction, and completion. CJES also sees increased potential to bid with NOCs in the ME, given its recent increase in scale offering stimulation, cementing, and well servicing. Operating in a niche is another viable strategy While vanilla single-service cos appear disadvantaged, there is room for high quality niche players. These include: (i) CLB s unbiased lab services, and a unique diagnostics offering that complement, rather than compete with offerings of SLB and HAL; (ii) FI s TRS offering, which requires a level of expertise that cannot easily be built organically; FI also has an opportunity to consolidate the market in US onshore. 9

10 On land, operators are focused on lasting long-term efficiency gains Operators continue to look for sustainable well cost savings to offset increasing service intensity, beyond just cyclical service price reductions: Well cost savings up to 20% realized this year: operators have realized material savings across multiple basins, attributable to both service pricing and material efficiency gains. How much is cyclical? More sustainable view: the less-frenetic pace of the current market has allowed better planning & ability to more widely adopt best practices. Cyclical view: a large amount of savings have been realized by extreme pricing pressure exerted on service providers, and much will come back as the cycle rebounds. Implications for service providers: efficiency wins: Land driller upgrade cycle to continue: operators continue to indicate a preference for ultra high-spec rigs, with NBR, PTEN and ICD particularly wellpositioned. Pressure pumpers must find sources of savings for operators: E&Ps continue to indicate that completions costs remain a target; pressure pumpers have yet to realize similar gains to match drillers. Operators have realized material Y/Y well cost savings Estimated Well D&C Costs % -20% -15% -15% -20% Eagle Ford Niobrara Bakken Permian Utica some, though not all, are sustainable efficiency gains Well Spud to TD (days) % -10% -15% -9% -20% Eagle Ford Niobrara Bakken Permian Utica Source: Land Rig Newsletter, Morgan Stanley Research estimates 10

11 Other onshore services takeaways Pressure pumpers Pumpers want scale: Virtually all of the companies at our conference indicated a belief that larger scale operations allow more efficient operations and better returns. PTEN, CJES and HAL have all targeted increased scale with acquisitions in the last year. Pricing has to rebound eventually: Data points continue to indicate pricing at or near cash breakeven and ~30-40% below peak pricing. This is clearly unsustainable and will force equipment out of the market as maintenance capex needs are unable to be met, though the pain could continue for the near-term. Frac cos are looking to increase scale to improve returns. US Hydraulic Horsepower ('000s) HAL/BHI SLB FTS WFT CJES PTEN RES CFW TCW SPN SSE Others 0 1,000 2,000 3,000 4,000 5,000 1Q14 Source: PacWest, Morgan Stanley Research estimates HAL, CJES and PTEN all adding meaningful scale via acquisitions & organic growth 4Q15 Land drillers Rig count trough coming into view as pure reduce spending mentality slows: Many drillers feel their rig counts are still in decline, although NBR indicated it has reached a point where it is starting to offset some rigs dropped with other rigs finding work. Some indications of a spot market for high-spec rigs in the high-teens/low-$20kpd range seems to be developing. Operators interested in high-grading: Several E&Ps expressed interest in taking advantage of the availability of premium equipment now in more abundant supply, and we may see further contracting traction for contractors premium offerings over the next several quarters. Other products & services Demand tracks necessity: Demand for optional product lines & services has dropped the most, with operators focusing on mission-critical services only. General pricing data points: Coiled tubing pricing down 20-40% from peak Surface equipment down ~30% generally, with certain rental equipment down over 50% Non-stimulation services pricing down ~30%, with some non-essential services down 40-50% 11

12 Offshore drilling takeaways Deepwater ready to respond to lower costs with ~450 fields in industry inventory: SLB sees a brighter light at the end of the tunnel for deepwater vs. pressure pumping: attrition, capital barriers to entry, and lower full cycle cost breakevens (effect of larger reserve bases) look to be key differentiators. Meanwhile, deepwater economics have more room for improvement vs shale. FTI and Technip are not seeing customers allocate capital away from deepwater into other plays. Deepwater projects have instead been put on the backburner (vs. outright cancellation) as customers figure out how to improve economics. Meanwhile, the industry is sitting on ~450 deepwater discoveries as it figures out how to generate higher returns. Persisting rig bifurcation theme: NOV believes that there will be a continued quest for efficiency with the "rig of the future" being expected to lift more and do more with limited tradeoff on the cost / safety. While oil companies are trying to reduce backlog, there is limited indication they are moving away from higher rig specifications even as the industry pares back on unnecessary requirements. There is still large uncertainty over BSEE's newly proposed BOP requirements and the industry will likely play for more time here. However, there will likely be a degree of incremental cost, particularly for older rigs. Weathering the storm: Despite recently delivering on cost savings, high base salaries have largely remained intact and could represent room for further cost reductions. Yards are actually receptive towards accommodating newbuild delays given limited yard capacity constraints. M&A could still be too early at this stage of the cycle as bid-ask spreads remain too wide, according to PACD. ATW nevertheless believes that a quick oil price recovery could actually work against the industry as it cuts short the supply purging process. 12

13 How to Play It Integrators SLB HAL Offshore Cost Reduction FTI / Technip (Forsys) CAM / SLB (OneSubsea) Key Themes Niche Service Players for US Response NBR / CJES SSE SLCA / FMSA Deep Value Quality Offshore Steel ATW / SDRL / PACD Subsea 7 PGS 13

14 Global Valuation Table MS Recent Mkt Cap P/E EV/EBITDA ROE Net Debt/EV Company Rating Price ($mm) 14A 15E 16E 14A 15E 16E 14A 16E 14A 16E Large-Cap Services Schlumberger O $92.51 $117, % 14.2% 5.9% 6.6% Halliburton O $47.29 $40, % 5.5% 14.2% 21.0% Baker Hughes O $66.50 $28, NM % 4.4% 11.0% 10.8% Weatherford O $14.35 $11, NM % 6.8% 44.1% 38.0% Average % 7.7% 18.8% 19.1% Small-Cap Services Core Laboratories O $ $5, % NM 5.9% 6.2% Superior Energy Services E $24.27 $3, NM % 2.0% 28.8% 22.9% RPC Inc. E $14.86 $3, NM % 8.7% 8.1% 6.8% Frank's International O $20.94 $3, % 11.2% (20.7%) (17.9%) C&J Energy Services O $15.19 $1, NM NM % 0.0% 30.7% 34.7% US Silica O $35.62 $1, % 25.4% 13.9% 16.3% FMSA Holdings O $9.07 $1, NM NM 50.0% 40.3% Carbo Ceramics U $43.66 $1, NM NM 5.8 NM % (1.5%) 0.1% 10.3% Calfrac Well Services E C$8.88 $ NM NM % 1.1% 40.6% 48.2% Trican Well Services E C$4.32 $ NM NM 5.9 NM % (4.8%) 45.6% 46.9% Seventy Seven Energy O $5.74 $323 NM NM NM % (45.5%) 85.2% 83.2% Archer O NKr3.09 $ NM % 3.7% 70.9% 75.3% Average % 0.0% 29.9% 31.1% Land Drillers: Helmerich & Payne E $75.81 $8, NM % 2.5% (5.0%) (1.5%) Nabors Industries O $15.98 $5, NM NM % (1.2%) 51.5% 50.1% Patterson-UTI E $21.35 $3, NM NM % (1.1%) 27.7% 25.3% Eurasia Drilling O $19.95 $2, % 9.1% 16.1% 6.7% Precision Drilling O $7.05 $2, NM NM % (2.8%) 39.3% 40.1% Independence Contract Drilling O $8.12 $200 NM NM NM (1.0%) 0.8% 8.5% 23.0% Average % 1.2% 23.0% 23.9% OCTG / Distributors Tenaris S.A. O $31.00 $18, % 7.0% 3.3% 3.5% Vallourec E $3,468 NM NM NM (20.1%) 0.8% 31.4% 34.1% Average (3.7%) 3.9% 17.4% 18.8% Seismic: TGS-NOPEC U NKr $2, % 10.5% (13.0%) (1.9%) Petroleum Geo-Services O NKr55.00 $1, NM % 2.9% 47.8% 47.8% CGG Veritas E 6.77 $1,360 NM NM NM (30.4%) (2.7%) 67.2% 60.9% Average (2.8%) 3.6% 34.0% 35.6% Source: Thomson Reuters, Morgan Stanley Research estimates Please note that all important disclosures including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at 14

15 Global Valuation Table MS Recent Mkt Cap P/E EV/EBITDA ROE Net Debt/EV Company Rating Price ($mm) 14A 15E 16E 14A 15E 16E 14A 16E 14A 16E Offshore Drillers: Transocean U $21.39 $7, NM % (2.6%) 51.7% 50.3% Seadrill Limited O $15.00 $7, % 11.2% 63.4% 58.5% ENSCO International U $27.35 $6, % 6.6% 39.0% 41.7% Diamond Offshore U $34.48 $4, NM % 0.7% 28.4% 32.5% Noble Corporation U $17.89 $4, % 4.2% 49.9% 47.9% Rowan Companies U $23.93 $3, % 5.0% 45.8% 40.5% Atwood Oceanics O $35.35 $2, % 11.4% 37.0% 36.0% Seadrill Partners LLC O $14.97 $1, % 17.7% 67.0% 57.7% Transocean Partners O $15.24 $1,051 NA NA % 8.4% (4.5%) 12.6% Pacific Drilling O $4.48 $ % 2.5% 76.0% 76.7% North Atlantic Drilling NA $1.65 $ NM % 3.3% 87.0% 87.6% Hercules Offshore NA $0.98 $157 NM NM NM 4.4 NM 14.4 (2.3%) (44.4%) 87.3% 91.0% Average % 2.0% 52.3% 52.7% Equipment / Subsea: National Oilwell Varco U $51.88 $20, % 5.0% (1.4%) 5.4% Cameron International O $52.92 $10, % 13.5% 12.0% 0.5% FMC Technologies O $41.45 $9, % 17.9% 7.7% 2.9% Weir Group U $6, % 12.2% 19.4% 14.1% Oceaneering International E $53.11 $5, % 19.6% 11.2% 16.5% Dril Quip E $77.39 $3, % 12.0% (11.0%) (23.3%) Forum Energy Technologies E $21.52 $1, % 6.1% 15.5% 8.0% Helix Energy Solutions E $16.93 $1, % 5.1% 3.2% 10.3% Aker Solutions O NKr49.16 $1, % 19.4% 9.1% 11.3% Chart Industries O $36.00 $1, % 7.6% 9.0% 4.0% Average % 11.8% 7.5% 5.0% Engineering & Construction: Technip O $8, % 11.8% (22.2%) (19.7%) Saipem E $6,400 NM (4.4%) 8.2% 56.2% 44.4% AMEC Foster Wheeler O 9.05 $5, % 18.5% 21.0% 17.6% Petrofac U 8.92 $4, % 26.4% 33.8% 32.1% Wood Group O 7.15 $4, % 11.6% 8.4% 0.3% Subsea 7 O NKr89.50 $4, % 4.6% 0.7% 4.7% SBM Offshore E $2, % 19.0% 59.9% 54.9% Tecnicas Reunidas U $2, % 29.6% (30.5%) (32.4%) GTT E $2, % 121.7% (4.4%) (7.4%) McDermott U $4.96 $1,183 NM NM NM (7.6%) (4.5%) 6.6% 25.0% Average % 24.7% 13.0% 12.0% Source: Thomson Reuters, Morgan Stanley Research estimates Please note that all important disclosures including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at 15

16 Global Valuation Table MS Recent Mkt Cap P/E EV/EBITDA ROE Net Debt/EV Company Rating Price ($mm) 14A 15E 16E 14A 15E 16E 14A 16E 14A 16E Offshore Logistics Tidewater U $28.78 $1, NM % (1.1%) 36.5% 54.4% Hornbeck U $24.04 $ NM % (1.5%) 49.7% 51.2% Gulfmark U $15.38 $ NM NM % (5.0%) 44.6% 57.9% Nordic American Offshore O $9.34 $ NM NM % (3.9%) (19.7%) 31.5% Average NM % (2.9%) 27.8% 48.7% China Services & Equipment (covered byandy.meng@morganstanley.com) COSL O HK$14.84 $15, % 11.0% 20.9% 16.2% Sinopec Kantons O HK$6.81 $2, % 9.5% (5.4%) 28.5% Hilong O HK$2.80 $ % 12.8% 41.7% 33.7% Honghua U HK$1.01 $ NM NM % 0.6% 56.7% 56.6% SPT Energy E HK$1.74 $ % 6.6% (4.2%) (19.4%) Average % 8.1% 21.9% 23.1% Offshore & Marine Shipyards Keppel Corp E S$8.81 $12, % 13.0% (1.7%) (7.4%) Hyundai (HHI) U 134,500 $9,295 NM NM (12.7%) 2.2% 33.1% 27.0% Sembcorp Marine U S$3.02 $4, % 17.5% 8.8% 6.8% Samsung (SHI) E 18,450 $3, % 8.0% 19.3% (2.9%) Daewoo (DSME) O 17,950 $3, % 9.2% 67.0% 56.6% Average % 10.0% 25.3% 16.0% Source: Thomson Reuters, Morgan Stanley Research estimates Please note that all important disclosures including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at 16

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In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index. 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20 Disclosure section (cont.) Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Baker Hughes, Cameron International, Chart Industries, Diamond Offshore, Dresser-Rand, ENSCO, FMC Technologies, Halliburton Co., Hercules Offshore, Independence Contract Drilling, Inc., National Oilwell Varco, Noble Corporation, Precision Drilling Corp, Schlumberger, Transocean. Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. 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