Service firms bulk up against the trickle down

The proposed merger of oil field service firms Technip and FMC is the natural conclusion to two years of supressed oil prices. A decade of good times for the sector ended abruptly with the Opec meeting of November 2014, and the hangover has yet to clear.

The sector has borne the brunt of an unprecedented slowdown in expenditure — both capital and operational — and few things trickle down the supply chain faster than cost cuts. This year was pretty much written off no sooner than it began, particularly for those with hefty exposure to North America’s upstream.

The plight of the service firms has been intensified by oil companies’ absolute refusal to do anything other than maintain their dividends — shareholders (let alone employees) in companies such as Technip and FMC have been sacrificed at the altar so those holding Shell and ExxonMobil stock may thrive and survive.

Having slimmed down separately, Technip and FMC now see a chance to bulk up. That is, before slimming down some more — cost savings should reach $400mn/yr by 2019.

Technip has been more exposed to upstream capex — a dangerous position at a time when final investment decisions are rarer than hen’s teeth. When a company the size of BP can let go its head of exploration, then you must worry about the prospect of future business in this sector.

One problem is the combined company’s relative lack of exposure to the Middle East, which is proving the most resilient of markets. An otherwise gloomy set of updates from Wood Group and Cape this month both flagged the region as somewhat more robust than, say, the high-cost North Sea.

But FMC’s subsea expertise should allow the combined group to provide a more integrated offering with reduced development costs. This was the rationale behind Technip’s courting of seismic data specialist CGG in late 2014 — it put $1.8bn on the table for its fellow French company, but was rebuffed. With the benefit of hindsight, Technip is probably relieved.

Those who did deals in haste, at the early stage of the price downturn, have had time to repent at leisure. Even if it had passed muster at the US Justice Department, making the Halliburton-Baker Hughes deal work would have been difficult given the deterioration of the sector since the takeover was agreed in 2014.

With crude again knocking on the door of $50/bl, TechnipFMC will hope its timing is better.

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