In the oil services sector, Amec Foster Wheeler is a little like the canary in the coal mine.
As the HSBC sector analyst Phillip Lindsay puts it, Amec’s unusually diversified business model, which focuses more on service contracts than on providing equipment such as oil rigs, coupled with its operating mantra – “fishing where the fish are” – means it tends to be less volatile and more fleet of foot than many of its peers in the sector.
In other words, it is a kind of leading indicator for where markets are growing, and vice versa.
It is no surprise, then, that the company is expecting its business in the Arabian Gulf to expand, even while a prolonged period of lower oil prices bites into oil and gas investment budgets worldwide.
The group is the result of last year’s purchase by London-listed Amec of Houston’s Foster Wheeler for US$3.2 billion. This brought together a portfolio that divides roughly into a third each in Europe and North America, with a little more than a quarter in the Middle East. The rest comprises a global power business, according to estimates by the Moody’s analyst Roberto Pozzi.
A little more than half of Amec Foster Wheeler’s business is in oil and gas, both exploration and production, and downstream projects such as refinery construction or revamps.
Other units include renewable energy sectors such as solar and nuclear power, plus a smaller interest in mining.
One of its most important Middle East projects is Upper Zakum, probably Abu Dhabi’s most strategically critical oil development. The contract for the oilfield was renewed last month by Zakum Development Company, a joint venture between Abu Dhabi National Oil Company, which owns 60 per cent, ExxonMobil with 28 per cent and Japan Oil Development Company with 12 per cent.
The Upper Zakum field, located about 84 kilometres off Abu Dhabi’s north coast in the Arabian Gulf, is the world’s fourth-largest oilfield, with a target to reach production capacity of 750,000 barrels per day by 2017. Amec, which has been the project manager since 2008, said there was now a longer-term objective – with an unspecified time frame – for the field to be capable of generating 1 million bpd and produce for at least the next 30 years.
Despite steady projects such as Upper Zakum, Amec has suffered with its peers in the past year as oil prices halved, with its London-listed share price declining by about 40 per cent. But it remains one of the favoured companies in the sector, with buy recommendations from Goldman Sachs, Barclays, Nomura and others.
The company has started to reap “cost synergies” since the merger was completed last November, mainly by cutting jobs, Mr Pozzi said. About $125 million of annual cost savings are expected to be made by 2017.
But the real test for its business model will be winning additional business. As Mr Lindsay says, Amec still has a lot of “revenue synergy opportunities … that are gathering momentum, particularly in the areas of [liquefied natural gas], petrochemicals and brownfields, and notably in the Middle East”.
What exactly are revenue synergies, and where will they come from?
Roberto Penno, Amec’s head of southern Europe, Africa, the Middle East and Asia, points to Kuwait National Petroleum Company’s clean fuels project at the Mina Al Ahmadi and Mina Abdullah refineries, a Foster Wheeler contract for several years, as well as Amec’s more recent Al Zour refinery contract, which together are worth about $1bn.
“It is a perfect combination. Now we are together working for KNPC and on top of that we are able to provide additional services … in the oil and gas as well as in the environmental and infrastructure area,” he says. “In this case it is not exactly one and one makes three, but it is additional.”
After reviewing plans after the oil price crash, Kuwait and others in the region have committed to spending huge amounts on major strategic projects even while lower oil prices have forced sharp cuts elsewhere.
“It is the beauty of the Middle East market,” says Mr Penno. “Here the operating companies are producing oil and gas at the lowest prices in the world and have decided to continue with longer-term investments, when in other parts of the world investments have been stopped.”
In recent weeks, Kuwait approved spending on new projects valued at more than $17bn, including a major new refinery near the airport. Industry estimates put spending on capital projects over the next five years in Kuwait at more than $230bn.
In Abu Dhabi, about $25bn will be spent on the offshore oil and gas sector alone to develop projects over the next five years, which will bring offshore’s share of national oil production from 40 per cent to 50 per cent, according to Dagher Al Marar, the chief executive of Esnaad, Adnoc’s offshore services unit.
Meanwhile, spending elsewhere is under pressure.
Wood Mckenzie, an energy consultancy, said last week that investment is sharply lower in the sector overall.
“As the upstream industry responds to the low oil price, investment is down $220bn in 2015 and 2016 compared with our pre-oil price crash projections,” said James Webb, a WoodMac analyst.
North America and older provinces such as the North Sea have been particularly hard hit. “We estimate that as much as $1.5 trillion of investment spending destined for new and US tight-oil projects is now out of the money. … This spending is very much at risk,” Mr Webb said.
The US Energy Information Agency echoed the gloom in its latest report last week, warning that it might continue for some time.
“Given the fall in oil prices that began in the middle of last year and the relationship between oil prices and upstream investment, it is possible that investment levels over the next several years will be significantly lower than the previous 10-year annual average,” the EIA said.
Obo Idornigie, an upstream analyst at WoodMac, says oil services companies are pressured to cut costs. “The weak pipeline of new projects is resulting in very competitive bidding from the service sector as E&P companies negotiate hard,” he says. But he adds, “pushing the service sector too hard now is only likely to shore up problems once more attractive fundamentals return – increasingly severe job cuts means that the industry is losing skilled resources that will take time to attract back when prices recover”.
Amec’s first-half earnings showed the pressure, with average margins declining from 10 to 7 per cent. But Mr Penno says engineering services companies such as Amec account for only about 15 per cent of overall project costs, whereas construction costs account for 50 per cent and have yet to feel the squeeze.
“We’ve not seen constructions costs coming down yet in this region,” Mr Penno says, pointing to the new KNPC refinery project, which actually had to increase its budget. “Probably this adjustment was needed because costs increased beyond what was rational. But I think we’re just at the beginning [of industry cost deflation] and it will take a few years yet.”
Still, regional business is good and Amec plans to announce a new multibillion-dollar oil project contract win next month.
“That’s the difference between this region and other parts of the world. The national operating companies have decided to continue their investment despite the cost pressures,” he said. “Our new contract is going to be major and very interesting, and we expect more to come.”