UK Oil & Gas firms can dive into a £20bn reservoir by tightening up working capital

Published at 00:04 AM on 19 October 2015

 

  • Savvy firms missing out on opportunities to tap into global working capital reserves totalling £217bn

UK oil and gas firms are sitting on a war chest of £20bn that could be released by simply improving their working capital management according to new research released today by PwC.

With no sign of an oil price rebound in sight, exploration and production (E&P) and oilfield services firms are facing a longer term trading challenge than anticipated, resulting in an increasingly pressing need for them to focus on cost efficiency and be ‘Fit at $50’.  As a result, debt is becoming more expensive and many are re-evaluating major capital expenditure projects and implementing long term cost reduction strategies.

And the UK is not alone. According to the report, Working Capital in the Oil & Gas industry, other territories also need to address working capital in order to achieve a more sustainable business model; it reveals a hefty £217bn global reservoir waiting to be tapped by savvy organisations.

There are measures business leaders can take to optimise their cash flow, releasing their capacity to adapt and grow. These include completing a robust working capital benchmarking exercise and diagnostic reviews to identify quick wins and deliver longer term strategies that will both boost and sustain revenue performance; creating and embedding a ‘cash culture’ within the organisation; and optimising the trade-offs between cash, cost and service. 

Alison Baker, oil and gas leader at PwC, said:

“Working capital is the life blood of every company and is a barometer for how freely cash flows. In efficiently run businesses, cash runs freely; in others, cash gets trapped in working capital, restricting the company’s ability to grow.

“Oil and gas firms are facing a future of low oil prices and, as a result, being cost effective in a $50-$60 bbl world will be vital; every move they take to achieve this will be crucial in securing their long term survival.

"As they respond to this challenge, many operators and supply chain businesses are under pressure to make transformational changes to their business models and secure a 30-40% sustainable reduction.

“Working capital can assist in tapping into valuable cash resources, providing much needed headroom and funding for these critical transformational investments.”

The report tracks the success of companies in optimising working capital across territories and also sectors such as exploration and production (E&P), oil field services (OFS) and downstream, covering refineries and product distribution.

While the findings show considerable results from working capital improvements in recent years, there is still plenty to go for. Across E&P and OFS companies alone, as much as £217bn of cash could still be unlocked.

Other findings reveal:

  • Service companies hold five times more working capital on average than other oil and gas sectors, largely due to outstanding sales. A total of £35bn in total could be unlocked;
  • Africa lags other countries in terms of working capital performance – but it is quickly catching up;
  • Australasian firms outpace OFS companies across other territories with the lowest net working capital (NWC) ratio; and
  • Across listed oil & gas entities that posted Q1 results, revenues have fallen by 20% in Q1 2015 compared to the same period last year.

According to the report authors, OFS firms have higher working capital balances than E&P companies largely due to the purchasing power of oil majors which allows for easier stretching of payment terms.  Working capital issues are also compounded by E&P firms re-negotiating supply chain costs downwards. 

With reduced profit margins, cash will be critical to maintaining liquidity until oil prices rise and contract rates improve, particularly when it comes to working capital terms in contract renegotiations. 

According to Daniel Windaus, working capital partner at PwC, the oil and gas industry has the power to get their working capital back on track – but they need to act now.  He said:

“It is clear that that oil & gas firms can and should unlock cash from working capital across the board, particularly given the real economic cash constraints being placed on the industry as a result of low oil prices.

“Our team has already helped firms across the globe to release around £18bn in cash tied up in working capital, showing it can be done and that the process needn’t be painful either.

“Regardless of the sector, it’s vital that oil & gas industry players pay special attention to the efficiency of their working capital management if they wish to successfully navigate this lower oil price environment and consolidate a sustainable, long term future for their business.” 

Ends


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