AGUSTO & CO: The Oil & Gas Servicing Industry: Another Phase of Short-Live Gains?

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Agusto & Co., a foremost rating agency and research company, has released its 2020 Oil & Gas servicing industry report, which shares the COVID-19 experience and its effect on the oil and gas industry.

According to the report, the Nigerian Oil and Gas servicing industry is dominated by a few foreign servicing firms, which are estimated to be engaged on close to 60 per cent of oil and gas projects in Nigeria.

Nevertheless, supported by the local content legislation, the industry has recorded a substantial increase in not just the number of indigenous servicing companies but also in terms of technical contribution to oil and gas projects.

Agusto & Co confirms that local firms currently dominate less complex field support services such as security, transportation and procurement, due to relatively low scalable technology compared to foreign counterparts and that security escort services are also quite promising given the militancy in Nigeria’s oil-producing region and growing level of piracy activities in the Gulf of Guinea.

The company also affirms that indigenous oil and gas field support companies have also scaled on fabrication and welding however, the ability to grow exponentially continues to be limited by funding challenges.

“Although the Nigerian Content Development Monitoring Board (NCDMB) launched an intervention fund in 2017, it remains inadequate due to several reasons,” it stated.

First is that the indigenous segment of the oil and gas servicing market is quite fragmented, making it difficult to provide the much- needed financing support.

Secondly, the intervention facilities are largely targeted at financing oil field equipment fabrication and manufacturing and thus, leaving out key oil field professional services such as procurement.

Following the recovery from the 2014 to 2016 oil market crash, hydrocarbon production in Nigeria became relatively stable, with several sanctioned oil field projects particularly Total E&P Egina ultradeep offshore project.

During the short recovery (2017 – 2019), exploration and production (E&P) operators adopted various alternative financing models as a solution to lingering joint venture (JV) cash call issues.

According to Agusto & Co, this created some cash flow relief for oil field contractors who had payment terms elongated for up to a year or even more in some instances. The fate of offshore support servicing companies was not entirely positive during the recovery period.

Due to the market crash and the surfeit of offshore support equipment including vessels, operators have had to contend with relatively high operating costs and the consequential debt burden.

The firm further says the data gathered by Agusto & Co. shows that there were close to a hundred stacked offshore vessels in Nigeria as at the end of 2019.

Nevertheless, day rates improved from the lows of 2014 – 2016 but provided limited gains due to a slower recovery from downtimes. The average day rate for security vessels increased to about US$6,000 per day from below US$5,000 during the last oil crash.

While servicing or contractor rates did not go back to normal during the short-lived recovery, the firm noted that it translated to marginal improvements. However, a large number of indigenous operators are still struggling with legacy debt obligations, as the recovery was not strong enough to optimise demand for oil field support.

The report read in part, “The trajectory of 2019 was expected to follow in 2020. However, the favourable crude oil regime resulted in increasing US shale oil production, recreating the 2014 – 2016 scenario.”

Unfortunately, the COVID-19 outbreak worsened conditions in the oil market. The pandemic led to the closure of air and land borders while a large number of economies also enforced a partial lockdown which affected demand for crude.

“Despite the easing of some of these restrictions in the second half of 2020, economic activities have yet to fully recover. Several key projects in Nigeria, including the Obiafu-Obrikom-Oben pipeline project and Shell’s Bonga North field development, have been suspended due to lull in the crude oil market,” it hinted.

Delays in sanctioning of these projects will impact Nigeria’s oil and gas servicing industry’s near to medium-term performance considering the substantial contracting opportunities these projects provide.

Owing to prevailing difficulties in the operating terrain, a number of operators in Nigeria including international and indigenous companies have slashed contractor rates by up to 50% while capital budgets have been reviewed downwards by an average of 20 person.

In addition to the aforementioned, the regulatory and policy environment for the petroleum sector is not as supportive. Several promising exploration and incremental projects have been stalled partly due to the unfavourable regulatory stance. This situation is expected to be worse-off considering the adversities created by the COVID-19 pandemic.
Agusto & Co. expects the crude oil market is likely to remain depressed for the rest of 2020 considering that with no antidote to the virus, the wheel of many economies is likely to remain slow and thus consumption of crude oil will also remain weak in the near term.

As a result, crude oil consumption is expected to decline by about 9 million barrels per day (mbpd) to 90.6 mbpd in 2020, further suppressing opportunities for a recovery of oil field activities in the near-term. Agusto & Co. expects a huge number of job losses, while some oil field servicing companies may eventually go bankrupt.

The agency believes that a strategic option for when the market recovers might be consolidation, given the lack of strong fundamentals for a stable oil market. In addition to bolstering performance, a consolidation may help regain some level of bargaining power from E&P operators.

Barring no improvement in the dire global economic situation, cash flows are expected to remain very weak. Legacy debt obligations coupled with a likely spike in the impairment of newly acquired debt could lead to a massive deterioration in the financial condition of oil and gas servicing companies.
Albeit marginal, naira denominated debt obligations will expand owing to the devaluation, which creates a worse-off situation. Potential for growth is also likely to remain muted, owing to unfavourable oil prices.