Total costs increased for the majority of oilfield service companies in 2018, despite business activity being relatively weak, according to the 2019 Daily Oil Bulletin Service & Supply Outlook Survey .
Fifty-seven per cent of survey respondents reported an increase in total costs, while 22 per cent said they declined. In contrast, responding to last year’s survey, only 46 per cent of companies said total costs increased in 2017, with 34 per cent indicating a decline.
In 2018 service companies continued to be compensated less than required to meet greater demands on equipment in the field. Sixty-nine per cent of respondents said they were not being compensated at all for wear and tear on equipment, an increase of 11 percentage points from the year before. Eighteen per cent indicated they are being partially compensated, while only 13 per cent said they were paid enough to meet replacement capital investments.
Midsized companies most challenged in managing costs
Increases in total costs may have outweighed declines for all strata of oilfield service companies in 2018 based on size of company revenue, but those in the $50-$100 million range were much more likely to suffer cost increases. Eighty percent of respondents from these companies saw cost increases last year, but none greater than 10 per cent, with no companies reporting declines.
In contrast, only 56 per cent of service companies outside the $50-$100 million revenue range saw total costs increase last year, with 23 per cent experiencing a decline.
Service companies tended to be compensated less than needed to meet replacement investment costs again in 2018, but this was much less the case for large companies (revenues greater than $100 million) than smaller ones. Eighteen per cent of survey respondents from large companies said they were being compensated enough to meet wear and tear on capital, almost a quarter reported they were partially compensated, while 59 per cent said they were not being compensated at all for greater demands on equipment in the field.
In contrast, only 11 per cent of smaller companies reported being sufficiently compensated, 17 per cent partially compensated, and almost three-quarters said they were not being compensated at all for greater wear and tear on their equipment.
All industry subsectors report cost management challenges
More companies reported increases in total costs than declines in all sub-sectors of the Canadian oilfield services industry in 2018 with the exception of exploration and development. Thirty-one per cent of survey respondents focusing on exploration and development said they experienced an increase in total costs last year, while 38 per cent saw declines.
On the other hand, companies specializing on maintenance were the most likely to see cost increases last year. One hundred per cent of respondents from this sub-sector said total costs increased, with a third reporting cost increases of greater than 20 per cent.
Companies in the oilfield services/field operations subsector were more middle of the road, with almost a half reporting an increase in total costs, and 31 per cent experiencing a decline.
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Not a single sub-sector in the oilfield services industry had a majority of companies report compensation that at least partially covered replacement investment costs in 2018. The hardest hit sub-sector was exploration and development, with a mere 8 percent of respondents saying they were being compensated enough to meet greater wear and tear on equipment, another 8 per cent reporting partial compensation, and a massive 83 per cent said they were not compensated at all.
In contrast, the distribution sub-sector was the best compensated last year, with 29 percent of companies reporting being fully compensated for greater wear and tear on capital, 14 per cent partially compensated, but still 57 per cent saying they were not being compensated at all.
The oilfield services/field operations subsector was again more middle of the pack, with over a third being at least partially compensated to cover replacement investment costs, and almost two-thirds not at all.
Customers continue to squeeze suppliers
An oversupply of most equipment and services in Western Canada allowed the oil companies to continue to squeeze oilfield service companies in 2018 in an attempt to slash supply costs and return to profitability. Survey respondents reported 42 per cent of customers delaying invoice payments, 41 per cent requesting pricing concessions under 30 per cent, and 39 per cent cancelling or delaying existing orders, when asked for the three most common.
The two biggest changes from the previous year’s survey were an 11-percentage point rise in customers seeking collaborative cost reduction solutions to 34 per cent, and only 8 per cent of them requesting pricing concessions over 30 per cent, roughly half as many as the year before.
Methods to Control Costs
There are a number of ways that oilfield service companies are planning to control costs in 2019 in an attempt to improve their own profitability. When asked to select their top three, 43 per cent of survey respondents cited rationalization of their services and/or products, 37 percent said by implementing new technologies and 28 per cent indicated through layoffs and other staff reductions. Layoffs increased the most from the previous year, jumping 17-percentage points, while implementing new technologies dropped 7 points.
Focus on operations and maintenance market continues
Since the majority of the Canadian service industry are planning to continue to focus efforts on the battered domestic market, it should not be surprising that survey respondents saw operations and maintenance and repair as the two business areas with the most potential for growth. Thirty-seven per cent of companies selected each of these areas when asked to name their top two, a jump of 9-percentage points for maintenance and repair from the previous year, and a decline of 3 points for operations.
Small capital projects again came in third place, at 22 per cent, representing a decline of 4-percentage points, while large capital projects suffered a more precipitous slide, dropping 10 points to 12 per cent.
Focus on Collaboration
Canadian oilfield service companies have relied on a wide range of collaboration efforts to best weather the prolonged downturn facing the industry. Internal collaboration among their division easily topped the list, with 52 per cent of respondents selecting it when asked for their top two. This represented a 6-percentage point increase from last year’s survey.
The second most popular collaborative approach, at 35 per cent, was increased transparency about costs and prices with their customers, a slight decrease from the year before.
Alliances with like-minded organization for mutual benefit was the third most popular collaborative approach, with 26 per cent of respondents going this route. This was a 6 point decline from last year’s survey, and the largest drop off.