The £5bn ($6.1bn) merger of UK-based firms Wood Group and Amec Foster Wheeler is set to create a market leader in the engineering, and maintenance, modifications and operations (MMO) market for upstream oil and gas.

Wood Group has agreed a £2.2bn takeover of the rival company, which it hopes will allow it to cut £110m of costs in the combined operations.

The deal was agreed at a challenging time for the two companies due to a slump in spending in the global oil and gas sector due to lower crude prices.

The combined company will rank in the top 15 oil field services companies in the world with a workforce of 64,000.

“The engineering and MMO markets have been very fragmented for a long time, so a market consolidation was not surprising” says Audun Martinsen, vice president of oil field service research at Norway-based Rystad Energy.

“Wood Group have previously been active with mergers and acquisitions by acquiring Mustang and Alliance Engineering, Baker Energy and PSN, so it was expected that they would not squander this unique opportunity during a downturn in the market,” he added.

Amec Foster Wheeler is itself the result of a takeover. UK-based Amec acquired US-listed rival Foster Wheeler in February 2014 when oil was trading at over $90 a barrel.

Wood Group has a larger exposure to upstream oil and gas, while Amec Foster Wheeler also works in downstream, civil work and mining. The combined revenues of the two groups was $14.2bn in 2015.

Amec Foster Wheeler has a strong presence in the Middle East and North Africa (Mena) region as one of the leading companies for front-end engineering & design (feed) studies and project management consultancy (PMC) contracts. The group has worked on several ongoing megaprojects including Saudi Aramco’s $6bn Fadhili gas plant and Oman’s Duqm refinery.

Wood Group is more active in MMO. In January, the company secured a framework agreement with Aramco to continue to provide engineering and project management services for the state-controlled oil and gas giant’s onshore capital programmes.

Rystad Energy estimates the combined company as the clear market leader in upstream engineering and MMO sector with revenues of $5bn compared with revenues of $2bn respectively for its closest rivals, France’s TechnipFMC and UK-based Petrofac.

Amec announced this week an 8 per cent drop in revenues for 2016 due to “continuing weakness” in oil and gas.

In February Wood Group revealed revenues had dropped 16 per cent last year and pre-tax profit halved to $66m. The company also cut about 18 per cent of its employees last year.

Rystad expects market growth for the combined group to further contact in 2017 before a recovery in 2018.

“The market outlook will still be challenging for Wood Group and Amec Foster Wheeler, but they should be able to leverage on their size going forward through realised synergies and dominating some markets. Now, it is only time before we expect their competitors to consolidate” says Martinsen.

Wood Group’s chairman Ian Marchant said that synergies gained from the merger would create a “leaner and more competitive combined group”.

“The combination will create an asset-light, largely reimbursable business of greater scale and enhanced capability, diversified across the oil & gas, chemicals, renewables, environment & infrastructure and mining segments,” said Marchant.