Report: Downturn will fundamentally reshape services industry

Oil field services companies slogging through the worst downturn in decades can no longer rely on their traditional oil bust playbook of cutting costs, laying off people and offering deep discounts.

Instead, the industry will have to reshape the way it does business to meet the evolving needs of oil companies clamoring for cheaper and more efficient tools and services, rather than the expensive, custom-fit solutions that the services providers had been pursuing before prices collapsed, according to a new analysis by management consulting firm Bain & Co.

“It’s a pivotal moment,” said Ethan Phillips, a partner at Bain & Co. who co-authored the report examining the services industry’s response to the oil slump. “The industry that comes back is going to look quite different than it did a few years ago. The services and equipment providers that use this opportunity to remake their cost base, rethink how they interact with customers, and reorient their portfolios to the part of the industry that’s going to see the biggest activity bounce-back, those are the ones that are going to win.”

That’s a dramatically different approach from the past decade, in which the services industry expanded at a rapid clip and fetched a premium for their products and services as producers electrified by $100-a-barrel crude rushed to yank as much oil and gas from the ground as possible, the report found.

As prices soared, so did costs as services providers chased the most expensive and complex projects, such as tailor-made hardware for oil and gas extraction in extreme environments like the Arctic and ultradeep-water, the Bain analysis said.

Since prices have tumbled and stayed low for longer than originally expected, many operators have announced plans to curtail spending on such massively expensive developments, a trend that will force services providers to shift their focus, too, Bain said.

As these companies brace for an extended bout of anemic crude prices and a further retreat from the oil patch, the companies that supply exploration and production firms with the tools, software and services they need to produce oil and gas are on the prowl for new ways to lower costs for their customers while shifting their portfolios away from high-cost developments that no longer have the same allure they did when companies could fetch much higher prices for a barrel of crude.

That move away from expensive, technically complex projects could cause some pain for providers who made bets on that technology during the boom times, Phillips said.

“If you built your products and services portfolio, as many equipment and services providers have, to push the technical boundaries around harsh environments, around allowing access to the deepest of deepwater, you’re going to be in trouble,” he said.

In addition to transforming their portfolios, services companies will also have to change the way they manufacture and design, the Bain report found. Instead of engineering tools and equipment from scratch without serious thought about the price tag, services providers increasingly are looking for ways to standardize their designs or partner with operators to develop projects with a specific budget in mind, Phillips said.

“We’ve seen services and equipment providers go to operators and say, ‘Here are the standards and design parameters you gave us that are leading to a substantial cost increase. Are there areas where we can be creative and still meet safety and operational parameters? How can we collectively take costs down?'” he said.

It’s a practice that’s been embraced by other industries and manufacturers long ago, but services companies never had an incentive before to try to bring costs down until their finances started getting pinched by the lingering downturn, he said.

And while it may seem counter-intuitive to spend money at a time of extreme pinny-pinching, services companies are also continuing to invest in new digital tools and technologies to improve their operations and better analyze the reams of data spewing from complex oil field machinery to make better predictions about when maintenance is needed, Phillips said.

“There’s a huge appetite for any technology or offering that can deliver clear efficiency gains,” he said. “Anything with a rapid payback period, or a clear return on investment, will be able to secure investment, even in this current environment.”