Market conditions for the subsea engineering sector have not been the best for past three or four years. However, it may be that things have started changing for the better. The nosedive that oil prices took a couple of years ago had, like in many sectors, a significant impact on the subsea industry. But if you look at recent results, you will notice that things have got much better in the past year or so. However, the news coming from the sector still has mixed flavors and, in short, things aren’t completely on track just yet.
The Offshore Subsea Industry 2018-19
Recent performance reports show that key players in the Subsea Industry have performed really well over the recent year. They have earned great profits and the estimates of a better future are being discussed. Let’s take a look at some the companies and their returns in the third quarter of 2018.
Dril-Quip pipped forecasts and achieved revenues of more than $93 million. EBITDA of around $0.8 million was also on the upside. These positive returns from the company have further driven expectations for the full year.
The CEO and president of the company says, “We continue to believe that we are operating at the bottom of the current cycle and that backlog will trend upward over the next 18 months.”
Importantly, frame agreements and FEED contracts with Premier Oil helped significantly. They are partnering on Sea Lion located off the Falkland Islands with the provision of Phase 1 equipment and is worth more than $200 million. Norway is also an area of success for the company in terms of earnings with increased revenue of 9%.
It is not just the current figures that are looking better as the expected last quarter of 2018, according to company execs, will see revenue in the region of $90 million. The company CEO is content with the performance and said, “Looking to the fourth quarter of 2018, our expectation is that the Company’s revenue will be between $80 million and $90 million, which is consistent with our prior guidance at the end of the second quarter.”
In September, the company had a backlog of around $249 million. Annualized efficiency savings should reach the $50 million mark before the year reaches its completion.
Total company revenue in the quarter was $3.1 billion. Adjusted EBITDA of $431 million reflected strong operational performance as well as reflecting the trend of the industry in continuous cost optimisation.
Douglas J. Pferdehirt stated ‘In Subsea, we are clearly in a period of recovery that began nearly two years ago. In 2017 we saw our Subsea order inbound increase 27% year over year, and we continue to expect 2018 inbound to exceed that of 2017’
TechnipFMC are really pushing their integrated services and indicate that it is proving to be successful for them and their customers Kaikias, Visund Nord, and Trestakk projects demonstrated the power of the integrated model. The strong collaboration with partners and customers, beginning with integrated FEED studies, have demonstrated that project economics are improved as well as time to first oil being accelerated.
$2.8 billion of the $6.3 billion in total backlog in Subsea is scheduled for 2019, this is up from $1.6 billion at the beginning of 2018 and points to a growing tender and award trend.
Subsea7 made revenues of $1.1 billion in the third quarter of the year. While the incremental difference was not huge, year on year, the fact there WAS an increase is a positive one. Egypt & Australia were significant contributors to the increased revenue. The CEO of Subsea 7, Jean Cahuzac, said, “Seven Seas, Seven Pacific and Seven Eagle have finished their campaigns, with only Simar Esperança remaining in country to complete her scope.”
EBITDA was $217 million after adjustment. When compared with the previous year, this was a decrease of 13%. This reduction is attributed to strain on Price, primarily agreed in the depths of the recession. The vessel utilization has been strong in the third quarter as well with it currently sitting around 85%, representing a four-year high.
On the future, Cahuzac said ‘We have $2.2 billion in our backlog for 2019, which cover approximately 60% of the consensus expectation. This level of coverage is relatively low compared to the historical average, but the expected rate of new awards to market and the strong competitive offering give us confidence that market expectation are achievable’.
What the Future Holds for the Subsea Construction Industry
The past three years have been tough for the subsea industry. However, this has been a great learning phase for the companies that make these projects possible. “The subsea industry has always been at the forefront of new technology; developing safe and efficient ways of working in even the most hostile environments across the globe”, said the Subsea UK chief executive, Neil Gordon.
The vessel lay-ups and scrappage was on the rise during this period. If you look at 2015, 2016, and 2017, scrappage increased with every year. In 2015, scrappage activity was light with only 10 events. However, there were 12 additional scrappage activities in 2016 which were followed in 2017 by more significant vessel scrappages hitting the 16 mark.
However, you could say the market needed to rid itself of “old metal”. In 2018, six scrappages had taken place by May. Does this mean that the industry is still in decline and future is dark? We believe that is not the case at all as there are still plenty of vessels roaming the seas. The key fact is that these vessels are modern with the latest technological equipment.
There are too many mothballed vessels in docks around the globe but industry experts say that these unoccupied vessels and dozens of scrappages are not a sign of a dark future but only the reminders of the recent past. According to them, the worst has passed and the good time will return in 2019. The European markets have been seeing some boost in the activities. The fleet of vessels in the North Sea saw some great months this year including one month where there was not one single unoccupied vessel.
Also, certain Service Operators are still reluctant to put vessels to sea. They are holding off and looking for more lucrative contracts that can keep their vessels occupied and working for several months. This reluctance from the vessel owners has actually created a shortfall in some areas which, as a result, has increased day rates from around £25,000 to £30,000.
One thing can be said with surety: any further progress in the Oil and Gas industry is now reliant on the use of modern technology. Digital is bound to change things for the oil and gas industry as a whole. Oil producing companies and countries should not focus merely on producing more with higher count of oil rigs. They should zero in on efficiency and produce more energy while consuming the same or fewer resources. As per Dr. Sultan Ahmed Al Jaber, the chief executive officer of ADNOC, “The fast adoption of these breakthrough technologies will help ensure we meet the world’s growing energy needs, create new market opportunities and address inequalities in access to energy.”
When we look at the overall condition of the industry, usage of vessels and the demand in Asian markets, the subsea exploration and production market may seem slow but there are clear signs of a turn-around. The improving financial reports of certain key players in the industry are an indication that 2019 is promising to be a better year.
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