Newsletter: ‘Dancing on the head of theoretical pins’
“This isn’t the time to be dancing on the head of theoretical pins, it’s a time to consolidate, to balance power between the oil majors and the helicopter operators,” Clark McGinn tells Helicopter Investor.
He is answering the competition concerns arising from the CHC’s purchase of Babcock’s $10m oil and gas business. In other words: it is trivial to think that the deal will bring higher prices and lower quality services for customers, as declared by the UK’s Competition and Markets Authority (CMA). CHC has until November 25th to address the CMA’s concerns.
CMA senior director, Colin Raftery, said the CMA’s investigation showed the purchase takes out an important competitor. “While oil and gas exploration in the North Sea is expected to decline over time, these are safety-critical services on which customers continue to spend hundreds of millions of pounds a year. It is therefore important that this deal is subject to more detailed scrutiny if our concerns aren’t addressed,” he said.
However, McGinn says the North Sea oil and gas rigs have been served by three operators until very recently, when Belgian operator NHV added a base. “The average over the cycle has been three operators,” says McGinn. “I don’t understand why the CMA thinks CHC and Babcock joining together is a change from what’s been happening in the industry.”
The UK CMA had no further comment at the time of writing.
Air & Sea Analytics founder, Steve Robertson, agrees with McGinn. He tells Helicopter Investor one can flip the concerns of reduced competition to ask: “Were four companies in Aberdeen ever really going to be sustainable? And is this merger simply market forces acting to restore equilibrium?”
Competitive intensity in the Aberdeen – and the wider UK rotorcraft market – is very high, says Robertson. And whilst the merger may lead to higher prices, he adds: “We are also expecting a recovery in activity next year which will erode spare capacity and potentially offer further support to pricing levels.”
Data from Air & Sea Analytics shows 584 return flights flown between November 13th-19th, 2021 by Bristow, CHC, Offshore Helicopter Services UK (ex. Babcock MCS) and NHV. With the combination of CHC and Babcock, there is a new market leader with 45% of the flight activity.
However, Robertson says this is not a situation where the buyers have no bargaining power (for example, if two large utility companies were merging with millions of combined customers.) “We have seen in other oilfield services markets that oil companies are able to encourage new entrants if they feel there is not enough competition and in this way this industry becomes almost self-regulating,” says Robertson.
Both experts also said CMA concerns undermined the high safety standards set by offshore rotorcraft operations. To say that the deal brings risk of lower quality is to completely ignore the safety culture in both CHC and Babcock, says McGinn.
Robertson says: “Let’s remember also that this is a highly regulated industry operating in one of the harshest offshore environments in the world. The four rotorcraft companies in Aberdeen all take considerable pride in the quality of their work and it is regularly audited by their clients.”
What must be considered is the human element, says McGinn. “The real risk the CMA has totally missed is that pricing spirals down. It has come down over the last five years. The real worry is cost cutting within the operators – not deliberately – but if you’re reducing the size of the workforce, doing more overtime and that introduces the human element of risk,” he says.
Quick-fire answers from Steve Robertson:
|Higher prices?||“Probably, particularly as the market recovers in 2022 and there is less spare capacity.”|
|Lower quality?||“Highly unlikely.”|
|Did CHC underestimate the extent to which the CMA could disrupt the deal?||“I think so.”|
|Will CHC be permitted to integrate the two businesses in their current form?||“It doesn’t look like it.”|
New NHV CEO Thomas Hütsch tells Helicopter Investor there is a risk that the merger will put pressure on pricing through a revision in cost structure, as with the Era-Bristow merger a few years ago. However, he said the flexibility of a smaller operator like NHV means it will enjoy loyalty from the smaller oil and gas companies.
Hütsch says: “We will still have our niche with companies that like to work with a smaller organisation, being more flexible and reactive than bigger organisations.”
McGinn doesn’t think NHV has a lot to be worried about. He explains that traditionally there were two big companies – CHC and Babcock – and a third smaller company that “acted as the swing keeping the two big guys honest”.
There could be a few potential outcomes, says Robertson, should the CMA not approve of the merger. “The most probable outcome, I think, is that a part of the Offshore Helicopter Services UK business is either spun out as a separate stand-alone entity run separately from CHC, but continued to be owned by them.” If not, he thinks it could be spun out and sold to either Bristow or NHV, or sold to a party not currently at the airfield in Aberdeen.
What are the longer-term prospects for oil and gas? “It’s not going to be an area of stellar growth,” says McGinn. “But you have to factor in two things: an end of big oil and there’ll be some part of [oil and gas] exploration coming back. The facilities that are running today will be going for 25-30 years, and there is still an important need for helicopters to service the oil and gas industry. If you think about offshore energy – helicopters rather than oil and gas, it is potentially a very positive story.”