OFSEs must focus on core, diversify or fully pivot
Oil field services and equipment (OFSE) companies should pick one of three strategic archetypes to form the basis of their strategies, according to McKinsey research.
Focus on the core
This archetype presumes hydrocarbons will remain an important part of the energy mix for decades to come, requiring oil-field activity that will continue to provide OFSE companies with attractive opportunities or, at the very least, will counter declining production rates. Companies pursuing this play will need to ensure operational and capital preparedness to capture any potential up cycles and to plan for industry consolidation by positioning themselves to either act as industry consolidators or be acquired by another entity.
Diversify the portfolio
While hydrocarbons will remain important, growth will stall as the energy transition eventually curtails incremental demand growth or long-term profitability for hydrocarbons. Successful strategies under this scenario hinge on increasing optionality through diversification.
OFSE companies will need to correctly identify new energy segments in which they have an advantaged position and reorganise their corporate and business unit structures to enable a hybrid portfolio of hydrocarbons and new energy segments. Companies that pursue this archetype may implement it with wide variations, such as in the level of diversification; for example, as a percent of target revenues or capital reallocation with varying commitments to diversify) or in the maturity of target-market segments, such as relatively mature offshore wind or burgeoning green hydrogen. There are also possibilities in the types of moves made (one or two big bets or a larger number of small bets) and the timing of moves; for example, immediate investments in relatively mature markets, such as solar or wind, versus a long-term plan of investments in nascent markets, such as hydrogen or CCUS.
This scenario anticipates an accelerated energy transition with oil and gas peaking imminently and limited up cycles in the future. It will be hard to consistently beat the cost of capital, and certain capabilities, such as high-end engineering and R&D, will be better valued in emerging areas. OFSE companies pursuing such a complete portfolio shift will undergo a full metamorphosis into new energy service, equipment, or solutions providers.
These strategies can, in turn, drive capital allocation, top-line growth, capital efficiency, and potential profitability. Ultimately, the success of a strategy will hinge on a company’s ability to develop sustainable and low-emissions operations, secure access to alternative financing, build new capabilities, transform execution, effectively manage stakeholders, and prepare the organisation to embrace the change. OFSE companies should therefore anticipate a multiphase journey to accomplish a strategic shift.
The second phase of the journey entails preparing to identify the market segments, and the investible opportunities within them, to pursue. Possibilities include solar, on- and offshore wind, geothermal, hydrogen, and CCUS, among others. This can be achieved with a three-step iterative process:
- Complete an intrinsic economic analysis of various potential markets (for example, at the subsegment, detailed value-chain level)
- Evaluate subsegments (individually and in aggregate) for fit with the strategic archetype
- Shortlist the subsegments that align with the company’s core capabilities
Finally, the third phase of implementation can begin: pursuing the organic (for example, create a dedicated business unit) and inorganic (for example, acquire a company) moves required to realise the strategic initiatives and implement the strategy. Successfully delivering the strategy is just as important as creating the right strategy in the first place, if not more so.
In conclusion it says OFSE companies face a daunting challenge and not all will succeed or even survive.
"While creating a robust energy-transition strategy is a formidable task, evading or delaying it will certainly be detrimental to long-term success. In a rapidly evolving global energy industry, OFSE companies must act swiftly and pursue an informed strategy. Capital markets have shown that passively riding out the cycle and waiting for the upswing is not an option in the long run."
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