Oilfield Equipment and Services Winners Light Footprint survives the Lost DecadeMay 2019Management summaryThe Oilfield Equipment and Services (OFES) industry's 2018 financial performance nulls minullednull nullile revenue and invested capital nullonullth nullth slonulled donulln relative to 201null the industry nulls disciplined in reducinnullcostsnull This led to improved profitanulllitynullproductivity and lonull nuller denull levelsnullnull evernullall nulley financial performance indicators nullere still sinullificantly nullorse than cycle aver nullanulls for the 2008null01nullperiod and shareholder returns sinullnificantly lanullnulld the Snullnullnull0 for the 12th year in a ronullnullnullfenulltanulleanullysnullnull nullevenue nullenull y 8null nullt invested capital shrannullnully nullnull EnullT continued to improvenullfrom null in 201nullto null in 2018nullnullt remained nullell nulllonullcycle averanull of 1nullnull nulloductivity increased throunull lonuller nullornullnnullcapi nulltal relative to revenues at 1null (2 percentanull points lonuller than 201null and hinuller overall asset turnover (0null compared to 0null in 201nullnull nulleturns remained sinullificantly nulllonullcost of capital at nullnullnulland thounull there nulls a nullpercentanull point increase over 201null only 1null of companies nullnerat nulled positive returnsnull nulleduced risnulldue to lonuller denull translated to lonuller cost of capitalnullhonullevernulldenull levels remained sinullinullficantly hinuller than historical levels (nullnull to EnullTnullnull ratio nulls nullnullin 2018 compared to a cycle averanull of 2null)nullvestor fatinullue set in after another difficult yearnullnullth enullreme oilfield stocnullsellinnullnullhaviornullassociated nullth the oilnullrice collapse in null 2018nullThis resulted in anoth nuller year of nenullative TSnullreturns of nullnullnullnull this environmentnulltnullo nulloups of companies nullere successfulnullnull Financial ennullneers nullnefittinnullfrom the efficiency of capital marnullets to lonuller their asset cost nullsenull nullnullt footprint companies nullich nullilt truly nulluturenullroofnullnullsiness models nully applyinnulllinullt footprint principlesnullile fenulland far nulltnulleennulllinullt footprint companies pursued stratenulles that provide food for thounullht on honullto thrive in the challennullnnullcurrent environmentnullThis nulloup of companies is the focus of our industry spot nulllinullt sectionnullThe nullnners' analysis lets companies understand their performance relative to the industrynullThe nullnners' met nullrics are descrinulld in more detail in Section null Our nulloland nullrnullr Oilfield Services team nullould nullelcome the opportunity to offer perspectives on companynull specific performance and nullve you our enullernal vienullon the stratenullc challennulls facinnullthe industrynull2 Roland Berger Focus Oilfield Equipment and Services WinnersContents1. Oilfield Equipment and Services industry performance review . 4Another tough year as the lost decade continues2. Industry Spotlight and highlighted performers . 12Light Footprint approach best adapted to short-cycle, low-price environment3. Roland Berger Winners' metrics . 18AppendixCoverphoto: Focussy/GettyImages; vasiliki/GettyImagesOilfield Equipment and Services Winners Roland Berger Focus 3Section 1:Oilfield Equipment and Services industry performance reviewAnother tough year as the lost decade continues4 Roland Berger Focus Oilfield Equipment and Services Winners2018 nulls a rocnully year for Oilfield Equipment and Ser nullvices companiesnullnullile the oil price nulls hinuller on av nulleranull than prior yearsnullthe year anullain turned out to null a tale of tnullo partsnullnulllthounull the first nullmonths sanullrisinnull oil prices driven nully stronnulldemand nullonullth and favor nullanulle nullopolitical moves (tensions and reinstallation of sanctions on nullan)nullthe price plummeted in the last quarter follonullnnullthe financial marnullet crash and the fear of an economic slonulldonullnnullThe oil price lost nearly nullnullin the last fenullnulleenull of 2018nullendinnullthe year at nullnullnullnullnull nulllonuller than nullere it startednullThe stronnullr oil price environment prior to the crash led to nulltter financial performancenullincludinnullan increase in EnullT dollarsnullreduced nullornullnnullcapital and an improved denull position across the universe of companies in our analynullsisnullnullspite stronnullfinancial performance across the nullardnullnulley indicators remained nulllonullcycle averanullsnull Only 1null of companies returned their cost of capi nulltal nulla slinullt improvement over 201nullin nullich only 12null didnull nulls suchnull 2018 nullas the nullth consecutive year in nullhich three quarters of the industry did not earn its cost of capitalnullnullvestor fatinullue nullthin the sector nulls very ap nullparent nullen share prices and TSnullcollapsed nully nullnullin null of 2018 nullat a much steeper decline relative to oil than in previous crashesnull null this difficult environment nullere nullorth nullerican shale oil producers continued to nullonullproductionnull nullorth nullerican oilfield suppliers failed to deliver re nullturnsnull This nullas despite attractinnull 80null of industry capenull and seeinnulla nullnullnullonullth in capenullvsnulla correspondinnull nullnullnull decline for European players over the 201nullnull2018 periodnull GROWTHSlower 2018 revenue growth compared to 2017 along with reduction in invested capital signified a shrinkage in growth The comnullned revenues of the 1null companies in our analysis nullenull y 8nullfrom 201null despite the collapse in oil price in null 2018nullnulllarnull portion of this nullonullth could null enulllained nully oil pricenullnullich nullenullfrom an averanull of nullnullnullnullnull in 201nullto nullnullnullnullnull in 2018 nulla nullonullth of 2null after adnullustinnullfor currency effectsnullnull terms of in nullvested capital nullonullth nullthe sum of denull and equity nullthe industry shrannull nully nullnull from the previous yearnull larnullely driven nully nullornullnnullcapital collapsinnullin the fourth quar nullter driven nully a decline in oil pricesnullindicatinnullthe nulln nulleral difficulty in manullnnullnenullinvestments in a challennull nullinnulleconomic environmentnull A EBITContinued improvement in EBIT dollars but level still significantly below cycle averagesnullspite the slonuller revenue nullonullthnullEnullT marnulln con nulltinued to improve industrynullide in terms of nullth dol nulllars and percentanullnullrisinnullfrom null to nullnullThe increase nulls predominantly driven nully the nullonulll nulltenullated playersnullall of nullom nullere anulle to increase their dollar profit and even turn around their performance in the case of nullOnull and nulleatherfordnull enullonal nullversified play nullInvestor fatigue has set in and markets are reacting more strongly to declines in oil prices.Oilfield Equipment and Services Winners Roland Berger Focus 5relative to the cycle averanull over 2008null01nullnullen over nullnullof the industry earned more than their cost of cap nullitalnullnullst of the companies nullneratinnullpositive returns nullere Focused players or nullatenullry nullllersnullOver the threenullear periodnull nullenullonal nullversified players had the nullorst performancenullnullth nullnull returnsnulland nullonulll nullte nullnullated players nullere the nullst performinnullnulllosinnullonly 10nulldriven nully their lonuller cost of capitalnull A CDEBTThough industry debt is falling, debt levels are still very highThe industry nulls disciplined anullut denull reduction nullth overall industry denull fallinnullnully nullnull8 null (appronullnullnull drop relative to 201nullnullThisnullcomnullned nullth risinnullEnullT nullnullnulllevelsnullresulted in improved nullnull to EnullTnullnullratiosnull null evernullthe ratios nullere still very hinull compared to previous years and multiple players nullere at risnullof nulleachinnull denull covenantsnull Focused players and nullatenullry nullllers nullere the most disciplined in terms of reducinnull denullnull nullth players linulle Ennullidnullnull nullcific nullillinnulland Saipem leadinnullthe pacnull nullery fenullplayers toonullon nenulldenullnull A ers nullho nullere collectively losinnullmoney in 201nullnullere also anulle to turn around their performance and enullceed nulleanulleven levels (1nullEnullT marnulln)nullnullatenullry nullllers nullere in the middle of the pacnullin terms of EnullT perfor nullmance of nullnullEnullT marnullnsnullhonullevernullremained sinullifi nullcantly nulllonullthe cycle averanull of 1null (for the 2008null201nullperiod)null A CAPITAL PRODUCTIVITYContinued improvement on working capital and asset turnoverSince the crash of 201null OFES players across the nullard nullere loonullnnullto improve productivity and reduce nullornull nullinnull capital levelsnull The metrics overall indicate that there nulls pronulless on nullth fronts as companies nullept nullornullnnullcapital in checnullnullile nullonullnnullrevenuenullnulls a resultnullnullornullnnullcapital as a percentanull of revenue dropped nully 2 percentanull points and ended at 1null in 2018nullnullompanies across the nullard nullere also anulle to shed unproductive assetsnull as the overall asset turnover ratio increased from 0null in 201nullto 0null in 2018nullSimilar nulllynull evenue over nullvested nullapital nullenullfrom 0null in 201null to 0null in 2018null A RETURN ON CAPITALROIC still negative across the board with only 16% of companies earning above cost of capitalnulleturn on nullvested nullapital nulls still nenullative across the nullard at nullnull nullenullonal nullversified players had the nullorst nullOnull performance over a threenullear timeframe (nullnullnull nullhile nullatenullry nullillers had the nullst performance nullt still lost money at 1null nullonsiderinnullrisnulladnullusted prof nullitanulllity (after nettinnullnullnullnullnullout of returns)nullthe indus nulltry nulls far into the rednullnullth the averanull spread indus nulltrynullide nullinnullnullnullnullnulllthounull 1null of companies (2null companies in total) nullnerated returns anullve the cost of capitalnullnullpercentanull points more than the previous yearnullfinullures nullere still sinullificantly nulllonullperformance 6 Roland Berger Focus Oilfield Equipment and Services WinnersA: Financial metricsOilfield Equipment and Services industry financial performance dashboard1Source: Capital IQ, Roland BergerGROSSPROFITS% of industry earning cost of capital (ROIC > WACC)16% 12% 9%2018Revenue growth year-on-year 0%8% 15%CAPITALPRODUCTIVITYRISKWorking capital as % of sales2Debt/EBITDA21%5.0x19%4.4x21%5.0xAsset turnover 0.4x0.5x 0.4xEBIT margin 6%7% 6%20172016-2018 AVERAGEWINNERS' METRICSMedian ROIC-WACC -11% -12% -13%Median invested capital growth -5% -1% -4%1Includes 179 OFES companies with publicly available finances and headquartered or listed in developed markets2 Defined as (Accounts Receivable + Inventory Accounts Payable)/RevenueOilfield Equipment and Services Winners Roland Berger Focus 7TOTAL SHAREHOLDER RETURNSignificant underperformance relative to the S&P 500From a TSnullperspectivenullthe industry nullnerated returns of nullnullnullsinullificantly underperforminnullthe Snull null0 indenullnullnullich nullnerated returns of nullnull nullonulll nulltenullat nulled players nullere hit the hardestnullOf themnullnulleatherford strunullled on nullth nullonullth and profitanulllitynullflirtinnullnullth delistinnullafter a manullr sellnulloff durinnullnullich its stocnull traded nulllonullnullnull1 on the nullSE for over null consecutive daysnull and therefore stronnullly focused on restructurinnull and cost cuttinnullnullEven industry nullhemoths such as Schlumnullrnullrnullnullllinullrton and null nullnuller nullnulles strunull nullnulled to create value and earned sinullificantly nulllonulltheir cost of capitalnullnullthin this small nulloup of companiesnull investors had to also nullapple nullth uncertaintynullnullth null continuinnull to sell its stanulle in nullnuller nullnulles and focusinnullon core positions in aviationnullponuller and re nullnenullnulle enernullynullthe future of nullnuller nullnulles remains uncertainnull B Cnull summarynulldespite continued cost disciplinenullthe in nulldustry continued to underperform on all frontsnulland nulls punished nully financial marnulletsnullnullth a nullneral cap nullital flinullt anully from the oilfieldnullenullendinnullthe nullost nullcadenull DIn spite of improved financial performance across the board, key indicators remained below cycle averages.8 Roland Berger Focus Oilfield Equipment and Services WinnersB: Value of USD 100 invested1The overall OFES industry has severely underperformed the S&P indexSource: Capital IQ, Roland Berger1Total shareholder returns account for capital gains and dividends 212/31/201512/31/2018, 12/31/201712/31/2018, 12/31/201612/31/2017 3Aggregation of all OFES companies in the analysisOFES Peer Index Regional Diversified Category Killer S&P 500 O&G Focused Global Integrated S&P 500 PHLXTSR2 %2018201720162018OFES Peer Index3 -26 -9 -3Global Integrated -43 -13 -13Reg. Diversified -40 -11 -6Category Killer -24 -10 -4Focused -13 -6 5S&P 500 O&G -20 -7 -1S&P 500PHLX-6-4619-197-20170160150140130120110100908070605001/16 07/16 01/17 07/17 01/18 07/18 01/19Oilfield Equipment and Services Winners Roland Berger Focus 9C: Financial performance matrix1All segments within the OFES industry have struggled on both growth and profitability in the last 3 yearsSource: Capital IQ, Roland Berger1For 3 years 2016-2018. Includes 170 companies with financials for three full years during 12/31/201512/31/2018. The metrics displayed in the grey boxes are the median of the companies in that quadrant. The revenue is the median revenue for the period among the WinnersRETURNS: 3-YEAR AVERAGE ECONOMIC PROFIT SPREAD (ROIC-WACC)SEGMENT ROIC-WACCGROWTHFocused -12%-5%Category Killer -13%-2%-13%-4%Global Integrated -10%-8%Regional Diversified -16%-3%TSR -11.6%Revenue USD m 419% of capital 10.4%TSR -3.4%Revenue USD m 867% of capital 54.4%TSR -7.8%Revenue USD m 556% of capital 13.7%TSR -30.3%Revenue USD m 246% of capital 21.4%Ø -13%Ø -4%IIIIV IIIREALGROWTH:3-YEARINVESTEDCAGRCAPITAL-40% -30% -20% -10% 0% 10% 20% 30% 40%50%40%30%20%10%0%-10%-20%-30%-40%-50%10 Roland Berger Focus Oilfield Equipment and Services Winners