Exciting times for MENA Region’s Oilfield Services

09/02/2011

In our view, 2011 and the near-future, represent exciting times for the oilfield services (OFS) segment, both globally as well as in the Middle East & North Africa (MENA) region. As a result of the changing stance of National Oil Companies (NOCs), increasingly favorable policies of local governments, reopening of the financial markets, and growth in regional entrepreneurial talent, opportunistic regional OFS companies stand to benefit significantly in the near-future. We also believe that the opportunity to build indigenous regional OFS companies is fundamentally underexploited.

 The Global Quotient

According to GBI Research, the global OFS market is expected grow at a CAGR of 7.3% from $131 billion in 2009 to $200bn by 2015. Similarly, Barclay’s estimates that the global E&P capital expenditure will reach $490bn in 2011 highlighting the strong business potential for OFS companies. This is further underscored by the estimates of the International Energy Agency (IEA) that more than 80% of producing assets globally, are in rapid decline and the resulting need for supporting OFS companies to provide the necessary technology and know-how to maximize recovery and improve efficiency.

The Regional Quotient

The MENA region’s OFS expenditure is expected to grow from approximately $11 billion in 2010 to approximately $13 billion by 2012, as per Douglas-Westwood. Whereas, the region’s onshore and offshore drilling and work over expenditure on OFS was approximately $7.7bn in 2007, and is expected to increase by 61% to reach $12.4 billion by 2012, and $27.9bn by 2014.

The number of rigs working the market is normally a good leading indicator for assessing the OFS segments growth or shrinkage trends.  Growth in rig count is usually associated with higher demand, both due to an increasing scale as well as enhanced service intensity. The rig count across the MENA region has been in an upward secular trend over last few years, despite a minor dip in 2008-09 due to the global financial crisis, and is expected to continue upwards in the near-term indicating that the OFS sector in the region can witness sustainable steady growth.

The Landscape

From a demand perspective, OFS in the MENA present a clear and obvious opportunity.  Notwithstanding, the supply side of the equations paints an erratic picture, whereby many of the regional firms are poorly positioned to exploit the same.  In particular the MENA regions OFS industry structure is highly fragments, with approximately 19,478 companies operating in the Oil & Gas sector in the MENA region, as per recent estimates.  Most of these are concentrated in the UAE and are largely operating under agency type agreements with foreign entities.

A select few of these regional/local OFS companies are in a position to compete effectively in niche areas with the international OFS companies.  Such companies have been able to capitalize on the opportunities presented in the OFS segment as a result of being converted from family-owned to corporate structures, growing inorganically through well-timed acquisitions, and/or establishment of joint ventures (JV) with reputed international companies.

The Opportunity

We believe there continues to be an opportunity for regional OFS companies to jump on the bandwagon.   World oil demand is expected to continue to grow unabated, leading to a call on the region to further increase production. It is widely accepted that in the long-term, most increases in the production and reserves in the MENA countries, are not expected to result from existing giant fields or from any major new discoveries, but from marginal fields and as a result of applying enhanced production and recovery techniques in existing fields. This is where the OFS companies come into the picture. Both, development of smaller fields and production enhancement, are highly service intensive. To sweeten the deal, NOCs are promoting regional companies through favorable policies and initiatives. We believe that in the near-future, as a result of the increasing emphasis on local content, regional OFS companies will potentially have access to a larger portion of the total OFS spend.

This is being complemented by the favorable policies and initiatives of the MENA governments to source increasingly larger volumes of services locally, in order to promote local employment, prevent wealth outflow, develop local talent, and help diversify the economy.

Additionally, the region does not lack talented entrepreneurs. Many of them emanate from well-established family businesses that have decades of experience in the oil and gas industry, and are now expanding to provide higher end OFS. Some of the eminent regional names worthy of mention are the UAE based Al-Mansoori Group and the NPS Group which was the result of a merger between the National Oil Well Maintenance Company (NOWMCO) of Qatar, National Petroleum Technology Company (NPT) of Saudi and National Drilling Company (NDC) of Saudi.

Another variety of entrepreneurs are those that are leaving large NOCs, IOCs, and global OFS companies alike, to establish start-up businesses to provide niche energy services. For example, companies like Target and Falcon oil field services (both from Oman) and the Kuwait based Gas & Oilfield Services Company (GOFSCO) were started and/or strengthened by such entrepreneurs. There are also a small but growing number of regional OFS companies that are moving from being agents of global OFS majors to establishing their own services, and forming a niche in their own countries as well as throughout the region.

Any discussion on opportunities in the MENA regions OFS segment cannot exclude the potential presented by Iraq.  Various estimates suggest that the Iraqi OFS market is expected to rise from $1.3bn in 2010 to $8bn by 2014. It is further estimated that over 2010-2016, with a base case target production of 5 million barrels per day, there is a need to drill approximately 5,000 wells; making the Iraqi OFS market-size around $20bn, with local companies accounting for 35% market share. On the bullish side, with a target production of 11 million barrels per day, the market size is estimated to be around $60bn with local companies accounting for a $20bn market share. These statistics alone might be enough reason for the regional OFS companies to capitalize on the aforementioned opportunity.

Exploiting the Opportunity

In our view, the approach to exploit the regional OFS opportunity is multipronged. The low hanging fruit is for regional OFS companies to form JVs with international companies. There are numerous examples of such engagements being successful in the past, and there is potential for more. Another approach is for regional OFS companies to acquire companies that provide a specific service or possess a specific technology. Lately, this approach has been the path of choice for regional companies, providing an avenue to rapidly grow their portfolio and allowing them to effectively compete with international OFS companies. Last, and possibly the least explored approach, is to build indigenous OFS companies, ground-up.

In summary, the MENA OFS sector represents a large opportunity for regional companies. It is likely that the MENA’s OFS sector is at an inflection point; there is potentially space for several regional OFS players to capture a reasonable portion of the MENA OFS market.

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About Kuwait Financial Centre “Markaz”

Kuwait Financial Centre S.A.K. 'Markaz', with total assets under management of over KD1,03 billion (USD 3,64 billion) as of September 30, 2010, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997.