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There is something up – or more accurately down – in the oil services business. A sector that should be riding a wave of Big Oil investment in exploration seems to stumble from one pratfall to another. First up this year was Saipem with a January profit warning that sent its shares crashing by a third. Now comes Aker Solutions with a tale of woe – cost overruns, project delays, idle ships, shrinking margins – across its entire business. The Norwegian operator's shares sank 23 per cent on Monday.
Forget the rosy background for a moment, though. The European oil services sector has underperformed for the past six months as order uncertainty, a weaker oil price, and slipping margins raised the question of whether exalted earnings expectations could be met. Saipem's failure to deliver rattled investors, too. Since its January 29 shocker, its shares are off nearly 30 per cent, and Petrofac is down a quarter. A good set of first-quarter results last week from Technip showed that the rot is not universal. But confidence in the sector has been dented. Investors should be very selective.
A lot of the value in oil services depends on managing the delivery of the order book. This is where Saipem and Aker have stumbled. The Italian company's operational review last week, focusing on risk management and a rejig of its engineering and construction unit, looks to be addressing the main issues. Aker may well have to do something similar. A handful of organisational changes announced with the profit warning look insufficient.
The bigger picture in oil services can be a distraction. True, capital expenditure looks set to rise sharply as exploration, development and production activity picks up after a multiyear lull. Macquarie Research estimates that deepwater spending alone could reach $650-billion in the next few years. That's a lot of stormy seas to navigate.