Recap on the big picture: how and why the oil companies will change strategy Overall we believe that oil companies are set to increase offshore activity and spending, the first of the two potentially being apparent already this year. Updating our E&P spending survey published in August (“On the road to recovery”) with recent developments and updates, we now expect upstream E&P spending to be in the range of 0-5% in 2017 compared with 2016.
This is an upward revision from our -10% spending scenario from August last year as the oil price has moved ahead of our estimate and oil and gas companies in general seem both able and willing to put growth back on the agenda.
Annual change SEB global upstream E&P spending (1977-2017E)
Source: SEB
In terms of structure, we still expect offshore spending to be down in the range of 5-10% in 2017 compared with 2016, implying that onshore and in particular onshore US spending will increase relatively more. But also our updated offshore spending estimate has been revised up compared with our previous estimate of a decline of 10-15%. With continued deflation, of which the majority is derived from old contracts and projects rolling off, our base scenario is that a 5-10% decline in offshore dollars spent can yield an increase in activity for 2017. This is a key thesis for our market view in the short term.
7 14
36
11 16 16
-33 -9
-20 -24
8 7 3
10 6 0
20 19 7
16 23
3
-25 8
16 6
21
27 23 26 19 22
-8 15 19
14 11 2
-26 -27 -40
-30 -20 -10 0 10 20 30 40
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017E 0-5%
SEB Equity Research 06 February 2017 49 2017 global upstream spending, change from 2016, by segment (SEBe Aug16 vs Jan17)
Source: SEB
We reiterate our main thesis that the oil industry is able and willing to re-start activity again following the worst industry downturn and investment cuts in the past 30 years.
Firstly, driven by underlying cost cuts, deflation (both marginal and legacy) and overall capital efficiency improvement, the global oil and gas industry is likely to generate more free cash flow at a Brent price of USD 45/bl than the average in the period 2010-14 when the oil price stayed above USD 100/bl. With SEB’s current oil price forecast (2017:
USD 55/bl, 2018: USD 60/bl) the industry is estimated to generate around USD 9/bl in free cash flow – a level not seen since the period 2004 to 2007.
Oil and gas industry free cash flow per barrel: base case and USD 45/bl oil price
Source: SEB, Bloomberg
As a result of this improved cash flow, larger oil companies focus on balance sheets and dividends is set to change. Based on the long-term growth and asset depreciation, we believe the focus will again turn to reserve replacement, growth and investments.
-20%
-10%
0%
10%
20%
30%
40%
50%
Offshore US shale Other onshore
Aug-16 Jan-17
-10-15%
-0-10%
10-15%
30-40%
-10-15%
+/- 0%
3.5 5.0
2.2
-0.4 2.4
-3.9 -1.2
7.5
9.2
3.2 3.8
-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
FCF/boe (USD/boe)
FCF/boe: base case FCF/boe: flat USD 45/bl
SEB Equity Research 06 February 2017 50 Organic reserve replacement ratio, 1994-2015 Reserve-life ratio, 1994-2015
Source: SEB Source: SEB
The majority of the oil and gas companies will report their reserve statement in the coming months; so far only Petrobras has published official numbers recording an organic reserve replacement for 2016 of 25%.
Petrobras organic reserve replacement ratio, 2006-2016
Source: SEB, Petrobras 102%110%
128%
152%155%
123%
110%112%
103%95%
85%78%
89%
107%
91%
108%111%
126%
96%
124%
114%
26%
0%
25%
50%
75%
100%
125%
150%
175%
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
12.0 12.012.2 12.6
12.8 12.9 12.5 12.5
12.312.1 11.811.9
12.912.8 12.6
12.912.8 13.3
13.0 13.313.1
11.9
10.5 11.0 11.5 12.0 12.5 13.0 13.5
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
82%
133%
36%
209%
172%
116% 101%
145%
117%
-183%
25%
-250%
-150%
-50%
50%
150%
250%
-250%
-150%
-50%
50%
150%
250%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
100%
SEB Equity Research 06 February 2017 51 Accommodation demand is a levered spending game
Based on a bottom-up analysis of accommodation demand over the past 10 years, we believe that the most important take-away among several interesting findings, is how we should think of MMO – the single most important sub-segment of demand. To us, the finding is relatively straightforward: although some part of the maintenance is more tilted towards an oil company’s opex line, overall MMO demand is a levered game on oil companies’ investments – and in particular development spending.
Our detailed analysis covers the three components of demand for accommodation, which are, in decreasing order of importance:
● MMO (maintenance, modification and operations). From the customers’
perspective, demand for MMO is driven by both capex and opex budgets, and overall MMO demand is driven by oil companies’ investments especially development spending.
● Hook-ups and commission of new offshore projects. The second most important demand driver has interesting prospects looking a bit further into the future, as the global FID pace is increasing, including what looks like a likely pick-up on the NCS – a key region for offshore accommodation in general and Prosafe in particular.
● Decommissioning. This is the smallest source of demand, normally around 10% of the total.
Oil service value chain overview
Source: SEB
• 2D
• 3D
• Processing
• Make a discovery • Find out where the reservoir ends
• Determine reservoir characteristics
• Optimal location of
production wells • FEED study
• Engineering
• Concept choice (fixed or floating)
• Construction
• Subsea engineering
• Pipeline or shuttle tanker
• Subsea equipment
• Production unit
• Heavy lift
• Maintenance &
modifications
• Further drilling
• 4D seismic
• Well intervention
• Reservoir management
• Increased recovery rates
• Plug &
abandonment
• Removal of offshore installations
• Heavy lift
Exploration phase Production phase Decommission
Seismic Exploration
drilling Appraisal
drilling Production
drilling Field
development Installation Production Removal/
decom.
Accommodation demand (size) Hook-up
(10-30%)
MMO (60-80%)
Decommission (10%)
SEB Equity Research 06 February 2017 52 A look in the rear-view mirror, analyzing 10 years of accommodation demand, leads us to the following conclusions:
● The UK and Norway are the two most stable basins of accommodation demand.
Comparing the two, the UK has had a larger share of both the total number of accommodation jobs and the number adjusted for duration – around 315 rig months contracted versus 246 in Norway. As such, the UK has been the marginally more important accommodation market driven by high MMO activity.
● Brazil has had the biggest swing. After several years with huge demand, the accommodation demand has been reduced substantially, alongside the overall slowdown in Petrobras’s investments and project execution. Should Petrobras’s financial position and overall strategy change for the better, or Brazil’s offshore and in particular pre-salt development be more diversified through stronger international ownership, this should be a substantial positive for global accommodation demand. A similar argument applies for the Mexican market in our view.
● The average accommodation contract over the past 10 years was around 11 months, but with a substantial variance. Brazil and Mexico were at the higher end at 37 months and 42 months respectively, whereas in UK and Norway the average contract duration has been around 10 months. This is interesting in more than one context, but to us helps an understanding the dynamics of dayrate levels across the regions.
Accommodation rig moths by year started, 2006-16 Number of accommodation contracts, 2006-16
Source: SEB Source: SEB
Demand by region (rig months) 2006-16 Demand by region (number of contracts) 2006-16
Source: SEB Source: SEB
22 6 12 15 23
113
6 19 11 14
25 32 24 13 8
60
37 46 77
6 10 29 95
14
22 6
12
8 3 5
13 128
96 48
12 7
14
5 0
50 100 150 200 250 300 350
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
WAFR NO UK Russia Mexico US GoM SE Asia Brasil Australia
4 4
10
6 7
11
1 6
16 15
9
3
0 2 4 6 8 10 12 14 16 18
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
UK, 314
NO, 246 Brazil, 284
Mexico, 132
Aus, 36SE Asia, 29US GoM, 18 Row, 38
UK, 45
NO, 22 Brazil, 7
Meixco, 6 Aus, 4 SE Asia, 4
US GoM, 3 Row, 10
SEB Equity Research 06 February 2017 53 Average contract length per region (months) Average contract length per year (months)
Source: SEB, sorted from left to right on total number of accommodation months awarded 2006-2016 Source: SEB, sorted from left to right on total number of accommodation months awarded 2006-2016
Number of accommodation contract by type, 2006-2016 Number of accommodation contracts by operator, 2006-2016
Source: SEB Source: SEB, the chart excludes operators with one accommodation contracted awarded
8 37
10 42
9 7
22
6 8
4 6
2
12 11
15
6 5
29
7 8
12 9
6
0 5 10 15 20 25 30 35
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Hook-up, 36
MMO, 63
Other, 2 11 11
10 10
8 7
5 5
4 4
3 3
2 2 2 2
0 2 4 6 8 10 12
SEB Equity Research 06 February 2017 54 MMO (maintenance, modification and operations)
There is a clear paradox in accommodation demand in that the single most important source of demand is also the segment with the least visibility. Our conclusion is that if one believes that overall development activity and spending will rise, so will MMO.
Based on the experience of the past 10 years, MMO accommodation demand tends to be more closely linked to annual upstream E&P development spending than to hook-ups, which normally have longer lead times and thus to some extent greater visibility.
To some extent one could argue that this contradicts the thesis that MMO demand is driven by the oil companies’ opex. We see two reasons for this: modifications can often be investments and secondly, at the end of the day, there is probably not much difference in an oil company’s strategy between opex and capex.
Global upstream development spending (left) and MMO accommodation demand (right)
Source: SEB
This is further supported by the analysis below of the correlation between the number of MMO and hook-up accommodation contracts and annual upstream investments. To us the chart below and the correlations seem to support the argument that MMO activity has the higher beta to annual development investment in the oil and gas industry. With this, and given our outlook for offshore oil and gas investments and activity, we believe there is more upside to accommodation demand through increased MMO activity than the current basket of tenders implies.
0 1 2 3 4 5 6 7 8 9 10
60 80 100 120 140 160 180 200
Number of contractsMMO Development
spending, rebased
Upstream development spending, rebased Global MMO accomodation contracts
SEB Equity Research 06 February 2017 55 Upstream development spending (rebased) and number of floatel contracts
Source: SEB
Looking closer at the modification component within the MMO segment – which in some cases can be argued to touch on the second most important demand sub-segment, hook-ups and commissioning through subsea tie-ins – we believe that one leading indicator is the magnitude and structure of the PDO project pipeline.
Based on our own bottom-up analysis of offshore projects in the pipeline, the number of projects being sanctioned globally is set to increase after being cut by around 75% from its 2007-14 average during the downturn in the past couple of years.
For 2017 and 2018 our bottom up analysis shows that around 55 projects globally are prospects for being sanctioned, up from around 20 in 2015 and 2016.
The lead time from FID to accommodation contract is normally around two to three years – but in our view FIDs are good leading indicator for demand and likely the most important inflection point for changes in asset valuation.
Annual number of global offshore FIDs
Source: SEB
R² = 0.47 R² = 0.64
0 1 2 3 4 5 6 7 8 9
80 100 120 140 160 180 200
Number of contracts
pr year
Upstream development spending (100 = 2006) awardsMMO
Hook-up awards
40
13
9
32
24
0 5 10 15 20 25 30 35 40 45
2007-2014 avg 2015 2016E 2017E 2018E
SEB Equity Research 06 February 2017 56 SEB offshore FID tracking list, 2017-18
2017 Operator Region Likley FID Water
depth (m) Water depth
(segment) Size mmboe Development type Project
Mad Dog phase 2 BP US GoM 2017 1999 UDW 472 Subsea
Leviathan Noble Energy Middle East 2017 1634 UDW 3900 Subsea
Coral Eni Eastern Africa 2017 2260 UDW 1096 FLNG
R-Series Reliance SE Asia 2017 2260 UDW Subsea
Snefrid Nord Statoil N Europe 2017 69 SW Subsea
Baleia Ana Petrobras South America 2017 1480 DW 20 FPSO
Utgard UK Statoil N Europe 2017 114 SW 12 Subsea
Fortuna FLNG Ophir Energy West Africa 2017 1680 UDW 411 FLNG
Ca Rong Do Repsol SE Asia 2017 319 SW 78 FPSO
Kangaroo Karoon Brazil 2017 65 SW FPSO
Kudu NAMCOR West Africa 2017 72 SW FPSO
Libra Petrobras Brazil 2017 1964 UDW 5104 FPSO
Sepia Petrobras Brazil 2017 2131 UDW 360 FPSO
Greater Jubilee Tullow West Africa 2017 1158 DW 55
Golfinho Anadarko Eastern Africa 2017 890 DW 3456 Subsea
Liza ExxonMobil South America 2017 1743 UDW 827 FPSO
Rosebank Chevron N Europe 2017 1100 DW 240 FPSO
ZabaZaba Eni West Africa 2017 1720 UDW 469 FPSO
Etan Eni West Africa 2017 1720 UDW 469 Subsea
Liwan Phase 2 Husky SE Asia 2017 1300 DW
Ande Ande Lumut AWE SE Asia 2017 73 SW 75 FPSO
Snorre 2040 Statoil N Europe 2017 307 SW 150 Subsea
Johan Castberg Statoil N Europe 2017 373 SW 539 FPSO
Apsara Kris Energy West Africa 2017 1800 UDW FPSO
Snadd North Aker BP N Europe 2017 391 SW 150 Subsea
Penguins Shell N Europe 2017 188 SW 38 FPSO
Yme Okea/Repsol N Europe 2017 93 SW
Snadd North Aker BP N Europe 2017 115 SW Subsea
Itapu BP West Africa 2017 2009 UDW 399 FPSO
Ubon Chevron SE Asia 2017 76 SW 122 Fixed platform
Njord Future Statoil N Europe 2017 330 SW 160 Semi
White Rose extension Husky 2017
Skarfjell Wintershall N Europe 2017 368 SW 139 Subsea
2018 Project
Buckskin Repsol US GoM 2018 2110 UDW 127
Shenandoah (WR 52) Anadarko North America 2018 1772 UDW 500 Spar
Cosmos Fields Medco Energi Northern Africa 2018 120 SW 7 FPSO
Marconi Engie E&P N Europe 2018 95 SW 20 Subsea
Vito (MC 984) Shell North America 2018 1231 DW 298 Semi
Sirasun Energi Mega Persada SE Asia 2018 1500 UDW
Cameia Cobalt West Africa 2018 1720 UDW
Angelin BP West Africa 2018 1600 UDW
Platina BP West Africa 2018 1700 UDW
Block A KrisEnergy SE Asia 2018 73 SW 8 Fixed platform
Liuhua-1 CNOOC SE Asia 2018 1339 DW FPSO
Ana & Doina Carlyle Group Eastern Europe 2018 84 SW 60 Fixed platform
Block 4 Shell Eastern Africa 2018 1405 DW 1073 Subsea
Rossukon KrisEnergy SE Asia 2018 65 SW 11 Fixed platform
Lucapa Chevron West Africa 2018 1800 UDW 300
Gendola Hub Chevron SE Asia 2018 1263 DW
Nsiko Chevron West Africa 2018 1400 DW 288
Negage Chevron West Africa 2018 1444 DW 120
Hadrian North ExxonMobil US GoM 2018 2060 UDW 304
Block 18 West BP Middle Africa 2018 1500 UDW 223 Subsea
Carcara Petrobras South America 2018 2027 UDW 980 FPSO
West Med Deepwater BP Northern Africa 2018 998 DW 387 Subsea
Buzzard Phase 2 Nexen N Europe 2018 98 SW 30 Fixed platform
Tiber (KC 102) Chevron North America 2018 1259 DW 554 Spar
Source: SEB
Understanding the structure of the project list is of relevance in estimating accommodation demand. The use of floatels is more common on fixed installation and spar platforms than for semis and FPSOs, as more of the commissioning activities on a floating unit can typically be done before it is towed offshore.
However, there are examples where FPSOs and semis have used floatels –recently with the Goliat FPSO hook-up where Floatel Superior was chartered in mid-2015.
SEB Equity Research 06 February 2017 57 On the other hand, we have seen fixed platform developments which have not used floatels (Gudrun, Valemon). As such one should keep in mind that there is no simple one-to-one correlation between field concept selection and the use of incremental accommodation during hook-up and commissioning.
In conclusion, the overall increase in FIDs is positive in our view; however the tendency to favour floating production units is marginally disadvantageous for overall accommodation demand.
Offshore projects by development type, 2017E-2019E
Source: SEB
Further, looking closer at the PDO pipeline on the NCS, the slowdown in new developments between 2013 and 2015 is now set to rebound with more new projects on the agenda according to our estimates. Again, there will be a lead-time from PDO submission to actual accommodation demand and contract awards, but we believe asset valuation will look more to leading indicators.
Number of PDOs (by year approved, 2Y avg) NCS
Source: SEB, Norwegian Petroleum Directorate
11
4
11
2 14
3
7
1
4
1
1 1
2
1 0
2 4 6 8 10 12 14 16
2017 2018 2019
Subsea FLNG FPSO Fixed platform Semi Spar
0 1 2 3 4 5 6 7 8 9
10 This lowering current
demand... ...this triggering higher future demand
SEB Equity Research 06 February 2017 58 Addressing the structure of the current and potential pipeline of new projects on the NCS, the majority of the projects are subsea tie-backs, which transferred to accommodation demand are relevant when they require substantial modification jobs at existing platforms.
PDO project list, 2013-19E
PDO year Project Operator Project type
2013 Ivar Aasen DetNor Fixed platform
Gina Krog Statoil Fixed platform
Aasta Hansteen Statoil Spar
Oseberg Delta 2 Statoil Subsea tie-back
2014 Gullfaks Rimfaksdalen Statoil Subsea tie-back
2015 Johan Sverdup phase 1 Statoil Fixed platform
Gullfaks Sør Statoil Subsea tie-back
Gullfaks / Lista Statoil Subsea tie-back
Maria Wintershall Subsea
Oseberg Vestflanken 2 Statoil Subsea tie-back
2016 Dvalin DEA Subsea tie-back
Trestakk Statoil Subsea tie-back
Byrding Statoil Subsea tie-back
Utgard Statoil Subsea tie-back
Oda Centrica Subsea tie-back
2017 Snefrid Nord Statoil Subsea tie-back
Snorre2040 Statoil Subsea tie-back
Johan Castberg Statoil FPSO
Snadd North AkerBP Subsea tie-back
Yme Repsol
Njord Future Statoil Subsea tie-back
Skarfjell Wintershall Subsea tie-back/FPSO
Storklakken AkerBP Subsea tie-back
2018 Mikkel South Statoil Subsea tie-back
Fogelberg Centrica Subsea tie-back
Pil&Bue VNG Subsea tie-back
Valhall Flank West AkerBP Subsea tie-back
2019 Luno II Lundin Subsea tie-back
Snilehorn Statoil Subsea tie-back
Krafla/Frigg Gamme Delta Statoil/Centrica FPSO
Garantiana Total
Johan Sverdrup phase 2 Statoil Fixed platform
Source: SEB, Norwegian Petroleum Directorate (NPD)
SEB Equity Research 06 February 2017 59 Thoughts on maintenance on NCS and UKCS
For maintenance activity, the two most important regions for accommodation demand over the past 10 years have been the NCS and UKCS. The MMO market in UK has the largest share of contracts awarded (31), while Norway is second (11).
Break-down of global accommodation demand 2006-2016 (number of contracts)
Source: SEB
For maintenance, we believe looking at overall investment estimates for both NCS and UKCS should provide an insight into the overall activity level.
According to current estimates (NPD and UK Oil & Gas), it looks like we are at or close to trough levels in 2016-17. For the NCS in particular – should the current investment estimates for existing production facilities come through – we see this as supportive for an increase in maintenance work and thus accommodation activity. The relatively old average age of existing platforms on the NCS is a reason why this pocket of investments should develop positively if our base scenario for oil prices and overall investment materializes.
Total investments NCS (NOKbn) Investments in existing production installations NCS (NOKbn)
Source: SEB, Norwegian Petroleum Directorate (NPD) Source: SEB, Norwegian Petroleum Directorate (NPD)
101
35 31
11 14
10
0 20 40 60 80 100 120
Global UK NO RoW
MMO Hook-up/tie-ins
45
21
89 96 103 112
103 132
161 187 183
162
136
121 115 124
0 50 100 150 200
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E
12
16 17
23
28 26
32 41
32
20 14
17
21 23
-5 5 15 25 35 45
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E
SEB Equity Research 06 February 2017 60
Total investments UKCS (GBPbn) Development investments UKCS (GBPbn)
Source: SEB, UK Oil & Gas Source: SEB, UK Oil & Gas
Decommission
The third and smallest sub-segment relevant for offshore accommodation demand is decommissioning. We regard the UKCS as the most relevant basin, characterised by mature fields and installed base of platforms and fields in structural decline. This is likely to drive investments in decommissioning and according to the UK regulator, decommissioning capex is set to double from 2014 (GBP 1.0bn) to 2017-18 (GBP 2.0bn).
UK Crude production (‘000 barrels/d) UK decommission investments (GBPbn)
Source: SEB, Bloomberg Source::SEB
Average age of North Sea installations
Source: SEB, OSPAR
6.6 6.6 6.2 6.3
7.4 10.2
13.8 16.9 16.9
13.5
11.2 10.0
11.0
0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
5.7 5.3
4.8 4.9 6.0
8.5 11.4
14.4 14.8
11.6
9.0 7.3
8.3
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
0 500 1,000 1,500 2,000 2,500 3,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
0.1 0.2 0.2
0.4 0.3 0.5
0.7
0.9 1.0 1.1
1.5
2.0 2.0
0.0 0.5 1.0 1.5 2.0 2.5
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
24
26 26
28
Denmark Netherlands Norway UK
SEB Equity Research 06 February 2017 61