Improving Access to Capital for US Oilfield Services Companies
For small- to medium-sized oilfield services companies in the United States, the financial impacts of the pandemic, competitive pressures, and a range of recent disruptors have made it incredibly tough to stay healthy. While the peak of the pandemic may be behind us, those oilfield services businesses that made it through continue to face many challenges and tough decisions as they look to remain viable today and improve the health of their companies moving forward.
Here, we take a look at the oilfield services market in the US and key factors that will shape the financial futures of the companies that comprise it.
Oilfield Services in the United States
The oilfield equipment and services (OFS) industry encompasses the broad collection of services and products that support the exploration and production of oil and gas. This includes drilling equipment, fracking equipment, wellhead services, transportation, supplies, and a range of other supportive elements. In 2022, the OFS industry in the US is on pace to surpass $89B and is projected to grow more than 30% by 2030.
Despite this strong revenue outlook and growth projections, viability and success remain tenuous. The small- to medium-sized OFS companies that emerge with a larger and/or more profitable slice of the pie than they presently have will be those that innovate and respond best to the challenges and opportunities ahead.
Challenges & Opportunities for OFS Companies
The good news about the majority of the challenges in the OFS sector is that they affect virtually every organization. Capitalizing on creative approaches to navigate them more effectively than competitors can give OFS companies a difference-making edge. Three top challenges most OFS companies will likely have to contend with are:
- Continued Dependence on Upstream Cycles – The volatility and unpredictable nature of oil and gas prices continue to have a huge impact on revenue and spending for OFS companies as they try to maintain sufficient margins and match the wave.
- Constrained Capital Resources – Because Reserve Based Lending (RBL) institutions and debt investors are seeking less exposure in the upstream oil and gas sector, fewer of them are lending dollars to companies in the OFS space.
- Decarbonization Trends – Across virtually every industry, pressures persist to lower reliance on carbon-based energy sources and move further towards energy sources that produce lower levels of greenhouse gas emissions. This is one of several ESG (Environmental, Social, and Governance) factors affecting OFS companies.
In most cases, maintaining the status quo will not support long-term growth and health. There are several opportunities for OFS companies to stand out positively. These opportunities include:
- Prioritizing Capital Discipline and Free Cash Flow Generation – A reactive approach of undisciplined investment in more pumps, trucks, and equipment in booms has led to the demise of many OFS companies that found themselves unable to quickly divest assets to stay afloat during tough times.
- Evolving Traditional Business Models – OFS companies should assess how their business and operating models can be reengineered to drive efficiencies, improve competitiveness and resilience, and strengthen asset performance monitoring.
- Diversification and Digital Transformation – Emerging solutions and advances in digital technology are enabling many OFS organizations to move beyond the core services they’ve historically provided and industries they’ve served as demands for renewable energy and support for wider industrial applications take hold.
- Forming New Partnerships and Alliances – Weathering storms and realizing opportunities is often more easily achieved when resources are pooled and impacts are diluted. In a market that appears open to change, OFS companies have an opportunity to find new synergies with others in the industry.
Five Factors for Improving OFS Access to Capital
Realizing the opportunities noted above won’t just happen with the proverbial tightening of the belt, OFS companies will continue to need capital to remain competitive and position themselves for a better financial future. In this period of fewer available capital resources, how can OFS companies make themselves more attractive to investors and secure the funding they need?
- Firm Up Financials – Investors want confidence in those they lend to. Strengthening one’s balance sheet, effectively managing debt, and improving the quality and performance of business assets (especially for asset-based lending) are good ways to instill it.
- Adopt Rock-solid Reporting Practices – Transparent financials and audit-ready financial statements reduce friction in the lending process and play a key role in streamlining due diligence activities.
- Invest in Digital Infrastructure – Emerging applications and cloud technologies are removing reliance on on-premises hardware and desktop applications, enabling OFS companies to magnify their returns on pre-existing assets. Instilling a data culture to improve business visibility and beefing up cybersecurity are great complements to these investments.
- Embrace ESG Practices – Embracing ESG initiatives doesn’t have to mean abandoning non-renewable energy altogether. Demonstrating footprint reductions, stronger safety performance, positive community impacts, and moves to modernize shape investor perceptions and open OFS companies to funds focused in these areas.
- Be Open to Restructure and Consolidation – In line with the Partnerships and Alliances opportunity noted above, merging with or being acquired by another entity may make the difference in whether needed capital can be raised and provide a win-win for all parties.
Meeting Energy Demands and Strengthening Your Financial Future
The demand for oil and gas isn’t going away in the foreseeable future, but neither are the obstacles standing in the way of OFS companies trying to maintain profitability and long-term financial health as they work to meet this demand. Success within the OFS industry moving forward will largely depend on an organization’s ability to adapt and move beyond the limitations of doing things the way they’ve always been done.
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