Tekmar falters in Q2, but renewables to drive subsea industry

For oilfield services, the second quarter of 2020 may have been the most troubling period in decades. The world’s largest services providers, the likes of Schlumberger (US:SLB) and Baker Hughes (US:BKR), all reported losses that have endured through to the third quarter, while the number of companies that filed for bankruptcy matched the attrition rate seen in the second quarter of 2016, according to the Haynes and Boone Oilfield Services Bankruptcy Tracker, the previous worst quarter for the sector.

The upshot is that the broader oil and gas sector has been the worst performer in the UK stock market thus far in 2020, even eclipsing the beleaguered travel and leisure industry, while share prices have fallen in the range of 24.1 to 58.8 per cent for the 10 largest constituents within the S&P 500 Energy index.

The sudden disruption to the global economy was exacerbated by the breakdown of OPEC+ talks in early March, which meant that global oil production was slower to fall than demand. Planned investments in upstream oil and gas have been slashed; down by around third since their high point for the decade in 2014.

By extension, the negative effects of project cancellations and deferrals were particularly noticeable in oil and gas support services, especially for those companies disproportionately reliant on capital expenditure to drive earnings, rather than lower-margin, yet more predictable, operational budgets.

Looking ahead, analysts at Goldman Sachs believe Brent Crude could hit $65 (£48) a barrel in 2021, supported by the release of an effective Covid-19 vaccine and a limited increase in supply from OPEC+. Yet in addition to the usual cyclical effects, oil producers and the companies that support them are now faced by a regulatory framework that bears comparison with the one designed to hobble the tobacco industry.

However, there is one area where oil services companies (and other specialist operators) can benefit from existing and future offshore fossil fuel activity, while tapping into the planned transition towards a carbon neutral future – the subsea market.

Companies engaged in subsea services and maintenance will undoubtedly suffer due to the expected decline in offshore rig utilisation through 2021/23, but while they wait for crude markets to rebalance, opportunities beckon in the offshore renewables market. The International Energy Agency expects both the US and China to see an increase in capacity additions in 2020/21, with an expiry of tax credits in the US giving rise to project development rushes.

Closer to home, SSE Renewables and its 50:50 joint venture partner, Equinor ASA (US:EQNR), have reached financial close on the first two phases of the Dogger Bank Wind Farm, located off the north-east coast of England, which will be the biggest offshore array in the world once all three phases are complete in 2026.

Opportunities abound, but it is pointless denying that this corner of the market has not been badly affected by curtailed upstream investments through 2020. Analysts at Rystad Energy estimate that demand for umbilical lines (used to transfer power, chemicals, communications to and from subsea developments) will fall by around a third this year. A year prior to the outbreak, the Norwegian energy consultants had pointed to growth rates exceeding 10 per cent on an annualised basis, with subsea equipment and SURF – subsea, umbilicals, risers, and flowlines – among the best-performing segments in oil services. But then the world caught a cold.

Aim-traded Tekmar (TGP), a relative minnow in this space, has been providing technology and services to global offshore energy markets for over 30 years, building significant depth-of-knowledge and intellectual property assets along the way. The company’s half-year figures suffered due to short-term delays in contract awards and sales order intake, although they were published after the election of Joe Biden and the release of further details from the UK’s Build Back Greener plan, both positive beats for offshore wind power.

However, you get the feeling that scale will be an increasingly important factor in offshore renewables, given an anticipated eight-fold increase in installed capacity by 2030. Applications stretch beyond renewables to include subsea agriculture, engineering and, increasingly, data management. Aside from the oil majors going down this road, many of the benefits of the development of larger arrays will allow the likes of GE Renewable Energy and Subsea 7 (SUBC:NO) to parlay their broader expertise and financial clout, whereas an approach from an industry heavyweight with deep pockets might be the most realistic scenario for Tekmar's shareholders to make good on their investments. Hold.  

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