A new report from ACCA (the Association of Chartered Certified Accountants) outlines the key things business leaders in the oil and gas sector need to master if they want to be successful in the most volatile and competitive era the sector has ever seen.
With oil prices plummeting to below $30 dollars a barrel today for the second time this week and further drops in price not out of the question, Faye Chua, head of futures at ACCA says:
“Right now, the risk of going under is a very real one for many oil and gas companies. Three major factors have combined to create a perfect storm in the sector. One – lower cash-flows due to depressed oil prices. Two – the existing debt overhang. And three – the so-called ‘great crew change’ as the impending retirement of senior expert professionals over the next five years leaves a talent vacuum in its wake.”
Business chiefs who can successfully steer their organisation through this challenging period will be set to prosper. So what should the successful leader consider as he or she negotiates these challenges?
According to Faye Chua, after analysing market conditions and taking the views of a range of key strategic players in the sector, four key areas of focus emerged.
“The key to navigating the choppy waters we are currently experiencing in the oil and gas sector is good management of growth, costs, funding and externalities. Get those four factors under control and you give your organisation the best chance of success.”
Growth Management
Identify and post-pone projects with a high degree of uncertainty. Be especially ruthless with any at the early stages of development which can be killed without much fuss.
Seek partners to share in the risk – and of course, reward, of projects. For example, through part-sale of operating interest in new discoveries.
If you can, explore opportunistic growth via acquisition in areas with room for consolidation, for example oilfield services. There is no reason that the current environment should lead toe a growth paralysis mindset. There could be valuable growth opportunities right now, for example via M&A or by continuing investment in nationally important, high-profile projects with longer-term value.
Cost Management
Do not throw out the baby with the bath-water. Concentrate your asset sales on those not central to long-term strategy as much as possible. Organisations with a strong core focus are always better prepared in times of extreme stress or volatility.
Where redundancies are inevitable, manage them carefully to account for skills-gap impact, and ensure readiness for future growth when the oil price rebounds.
Re-negotiate discounts with contractors to manage service costs and on-going expenditure. There could be room here as many suppliers may prefer lower margins to idle machinery in the challenging times we are currently experiencing.
Funding Management
In the near term it can often all be about survival but do not lose sight of a credible growth story for the longer-term. To give your organisation the best chance of attracting funding, ensure the security of your current income stream, even if it is reduced. That stability is key to ensuring there is a consistent stream if income.
It is important to model the impact of rising interest rates on sourcing bank and debt funding. Seek a realistic picture as oil prices cannot be modelled on a safe, upward trajectory to pay for higher rates with future income as they have been in the past.
As minimising risk and exposure becomes critical, explore non-debt options for funding. For example, with specialist equity investors who play exclusively in the oil and gas sector. In short, private equity funds are going to be your friends.
Managing externalities
Your organisation should aspire to a clear and respected voice on key sector issues such as the advocating role of government, whether via regulations and global transparency frameworks, or tax incentives to support reduced revenues.
On a similar note, the inevitable short-term fire-fighting should not come at the expense of the long view. You should also be looking at on-going evaluation of strategic issues such as climate change policy (COP 21), and its implications in the near and longer term.