Oil services rebounding and consolidating

Reflecting an attractive oil price, recovering rig counts and the rebuilding of company earnings following 2009's lows, the oil services sector performed strongly in 2010 - indeed, it burst into life with two significant mergers late in the year. First, the long-anticipated acquisition of Wellstream finally played out through a recommended £800m offer from US conglomerate General Electric. Just a day later, John Wood announced the acquisition of Aberdeen-based rival PSN in a deal worth $955m (£609m).

A higher and more stable oil price has encouraged capital spending by the oil majors and national oil companies (NOCs), which held a backlog of development projects deferred from 2009. NOCs control around two-thirds of global oil and gas reserves and are becoming increasingly powerful. These state-owned companies have developed substantial in-house expertise, which often removes the need to partner with oil majors. A growing model is for NOCs simply to employ oil services firms for their execution skills.

Onshore engineering and construction proved more resilient during the downturn than more cyclical offshore markets. Offshore spending has been recovering, although deepwater drilling could take several more months to recover fully from April's Gulf of Mexico oil spill.

What's more, growing investment has created earnings momentum in the services sector, which now sits on healthy cash balances. The acquisition of Wellstream followed several earlier bid approaches and the sector is likely to see further consolidation. The unavailability of specialist staff had been a constraint to growth prior to the downturn, but it's now much less of a problem. Acquirers are more probably looking to build their presence in the activity hotspots of the Middle East, Brazil and Australia, and to differentiate their offerings through proprietary products. Hunting could be a target due to its expertise in high-pressure, high-temperature environments, which are growing in importance as drilling moves to more challenging arenas.

WELLSTREAM HOLDINGS78378831.41.350.5
WOOD GROUP (JOHN)5572,95122.51.264.7

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