Oilfield service profit margins suffered last year as companies were unable to withstand relative weakness in revenue growth, especially as they had already squeezed costs hard over the previous three years.
After a nice blip higher in 2017, profit margins unexpectedly fell back to earth in 2018, according to the 2019 Daily Oil Bulletin Service & Supply Outlook Survey .
In 2017, 43 per cent of survey respondents reported an increase in profit margins, compared to 28 per cent reporting a decline, with almost two-thirds of the risers in the up to 10 per cent range.
Sixty-three percent of companies had expected profit margins to rise in 2018, and a mere 10 per cent a decline. In fact, in the most recent survey, only 36 per cent of respondents reported an increase in profit margin last year, and 46 per cent a drop.
On the whole, service companies are more optimistic about profit margins in 2019 than their performance last year, but few see potential for a large increase. Forty per cent expect profit margins to rise this year, and 29 per cent foresee a decline.
Large service providers take biggest hit
Profit margins fell back to earth in 2018, along with revenue, with larger service companies (greater than $20 million revenue) leading the decline. Larger companies were twice as likely to report a decline in profit margins last year than a rise, 29 per cent versus 58 per cent, respectively.
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Service companies as a whole are more optimistic about profit margins in 2019 than their performance last year, but this is driven by mid-revenue companies ($5 million to $100 million). Fifty-five per cent of respondents from these companies expect profit margins to rise, compared to 23 per cent foreseeing a decline.
In contrast, only 30 per cent of respondents from small and large companies expect a rise in profit margins this year, while a third expect a decline. And these companies are much more likely to expect larger declines in profits, with almost a fifth expecting a drop greater than 10 per cent, compared to 5 per cent for mid-size companies.
Profit Margins decline most in E&P focused service providers
The performance of profit margins and revenue tended to be closely aligned in 2018 for the service industry as a whole and for individual sub-sectors. The exploration and development sub-sector was the hardest hit in terms of profit margins, companies specializing on distribution the top performer, while the oilfield services/field operations sub-sector again came in near the industry norm.
A mere 8 per cent of companies focusing on exploration and development reported an increase in profit margins in 2018, compared to 44 per cent for the distribution sub-sector, and 42 per cent for oilfield services/field operation. Declines in profit margins differentiated the distribution and oilfield services/field operation sub-sectors, at 33 per cent and 45 per cent, respectively.
The service industry and individual sub-sectors are relatively optimistic about profit margins in 2019 compared to their performance last year, with engineering, procurement and construction management the most optimistic with 67 per cent expecting a rise. In contrast, only 23 per cent of companies in the exploration and development sub-sector expect an increase in profit margins this year, and 37 per cent focusing on oilfield services/field operations expect an increase.