Oilfield Equipment and Services Winners
A tough year for the oil and gas industry, 2016 started with prices dipping to sub-30 USD/bbl levels and ended with meek optimism regarding an upcoming recovery. In 2016, virtually no companies returned their cost of capital, industry revenues dropped by 26%, industry EBITDA margins slipped from 20% to 16%, invested capital fell by 10%, and many players broke debt covenants, with the number of bankruptcies doubling from 2015. Despite bleak industry performance, the oil & gas equipment and services industry's stock performance markedly improved in the second half of the year driven by increased investor confidence in an emerging oil and gas recovery and the ability for the equipment and services industry to profitably grow from it. Shareholder value in the sector increased 36% in 2016 compared to 12% for the S&P 500 index.
North America onshore became the hotbed of activity recovery in the second half of 2016 with rig count increasing by 70% between May and December. Equipment and services suppliers with high North America land exposure saw their revenues rise by 21% in the second half of the year. However, this growth was profitless. EBITDA margins hovered around 10% – half of their pre-downturn levels, despite clear improvements in SG&A spending. North American onshore suppliers were unable to materially increase prices, and faced higher incremental costs as they quickly re-commissioned plants, equipment and other assets that had been idling during the downturn. Going forward, North American onshore suppliers have a difficult task: continue to grow while improving margins to achieve acceptable returns, in a low oil price environment.
While the North American oil industry outlook is promising, oil & gas equipment and services companies in this space have a lot to live up to. Falling into old habits will not create winners.