The UK and world economies have suffered a severe recession. In the energy industry, the chill winds are being felt across the production and service sectors, although some businesses have been hit earlier and harder than others.
Subsea, for example, is grappling with a business environment which is as harsh as mother nature has thrown at it over the decades.
The current economic turmoil has various impacts on the oil majors, including greater pressure on large capital expenditure projects and relatively high extraction costs for new finds.
In addition, there is increased pressure to maintain dividends.
Political difficulties and threats in certain less stable geographies are other challenges, while firms are fining it less easy to access debt and equity markets.
The significant pressures on the major companies are transmitted down the supply chain and in turn become significant pressure on the service companies, large and small.
Many of these have faced demands in recent months to reduce their prices by anything up to 20%. In some sub-sectors, large-scale equipment charter-hire for example, a collapse in demand relative to supply has seen even more dramatic and sudden reductions in revenue levels.
While some service firms have successfully resisted pressure to simply cut their prices and others have reached amicable arrangements, many are finding business tough.
However, as is always the case, some companies are positively thriving from the opportunities created by such fast-moving and turbulent economic times.
So as a business in the oil and gas sector, how do you survive and beyond that prosper through and beyond the current storm ? In the oil and gas sector, companies will have to focus on:
Cash: I touched upon some strategies that should be considered in an earlier article. To recap, consider sacrificing a small amount of margin to secure earlier payment from customers and longer payment terms from suppliers.
Also be firm in pursuing payment of overdue accounts – a customer who does not pay you is not a customer worth having.
Examine all possible tax planning opportunities, aggressively manage costs and dispose of non-core and especially non-productive assets.
Payroll: Make sure the level of resource being paid for is productive and fits the current level of activity, but be creative.
Do not simply make people redundant. This is arguably a sensible short-term fix for a business in significant distress, but it will inevitably result in significantly greater long-term cost being borne by the business recovering to its previous size.
Your management team must properly assess and strategically focus the business.
Plan and manage risk: Don’t just react to events. For example, properly consider the potential impact current market turbulence has on your customers and then actively manage your exposures.
Good credit risk management is not about chasing outstanding invoices, it is about being better able not to expose the business to a high risk of non-payment in the first place.
Seek potentially-appropriate joint venture partners to spread risk and financing requirements.
Speak to your bankers: Don’t hide. A good ongoing dialogue and relationship with your bank is essential. Life gets difficult when the first a bank hears of a problem is only a couple of days before a crisis emerges.
Ensure that the high-quality business that you have and/or aspire to is matched and supported by high-quality management financial information.
As a minimum, the business should have reconciled monthly manage- ment accounts and a yearly (month-by-month) projection as well as a documented short-term (i.e. 13-week) cash-flow forecast.
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