The current climate of uncertainty hanging over the UK’s oil and gas sector continues to challenge firms at every stage of the supply chain.
The initial shock from the outcome of the EU referendum has caused commodity prices to drop with the pound, but the long-term effects of the result remain unclear.
Further uncertainty may be a feature in the months ahead, and now is the time for UK oil and gas businesses to do some financial housekeeping to ensure that they are running efficiently, and able to respond to whatever lies ahead.
One of the central findings of Bank of Scotland’s fifth annual report on the health of the industry was that almost half (43 per cent) of operators plan to continue to cut costs to mitigate the damage caused over the past few years.
But despite this, the report did find a healthy proportion of the sector still felt confident, with 30 per cent of surveyed firms saying they were optimistic about the next 12 months and almost half (49 per cent) claiming they intended to grow.
A sustained feeling of confidence could be based on past experience. One in four UK oil and gas businesses grew through the downturn by diversifying and investing in new technology, for example.
That could be a good strategy for firms to consider now. Staying at the forefront of product and service innovation is one way to maximise competitive advantage and revenue potential, even during difficult times.
One in six businesses (15 per cent) indicated that they wanted to adopt new technology to meet cost challenges, but almost half (48 per cent) said that making day-to-day efficiencies was their preferred route to meeting evolving cost challenges.
Marrying a desire for investment with the necessary tightening of belts can be challenging. However, an effective way businesses in the sector can do this is by properly managing working capital.
While many business feel they understand their working capital cycle, most recognise that they have not challenged themselves sufficiently in the past to seek efficiencies, mitigate risks and identify opportunities.
Working with their bank can provide an invaluable new perspective to this process and add genuine value to their business.
The correct financing framework is just one part of that process but it gives firms the option to invest in business growth through the adoption of new technology or expanding services without sacrificing crucial day-to-day functions.
When Bank of Scotland asked firms what forms of finance they had used to support their business, more than a third (35 percent) said they had used cash reserves or equity, compared with just one in seven (13 per cent) that had used trade finance and asset based lending and just one in nine (11 per cent) that had used invoice financing.
Respectively, these facilities help businesses import essential goods securely and release capital tied up in existing assets and outstanding invoices. The correct mix of products can be used to map out a programme of growth specific to a business’s individual ambitions and requirements.
For oil and gas firms looking to invest in potentially costly equipment upgrades, asset finance is another particularly useful tool. It enables investment by removing the need to fund the acquisition up front and allows the term of the facility to match the useful life of the asset, preserving working capital.
If day-to-day efficiencies are an immovable priority, and investment remains firmly off the cards, working capital management is still an invaluable way to support any potential operational restructuring firms want to undertake.
Flexible access to capital gives a company the freedom to select the aspects of their business they want to scale back without substantially damaging their offering during difficult times, and firms should speak to their lenders to work out a programme of financial support that works best for them.
Colin Walls is head of trade and working capital at Bank of Scotland.