Can working capital efficiency rescue the oil and gas industry?
November 20, 2015
As has been widely reported globally, Oil & Gas companies are facing a challenging trading environment following the oil price crash of oil prices in the second half of 2014.
As relations with Iran have improved, sanctions have been dropped. This has added further supply to the global market, so prices are very unlikely to bounce back in the short term. With this in mind, cash is king right now for Oil & Gas companies.
Working capital has improved… but more can be done
Many projects are becoming increasingly unprofitable as prices decrease and debt becomes more expensive. Cash is cheaper than external sources of financing. Working capital optimisation can help unlock that cash to help get through difficult times. However, there are still billions of dollars of cash that could be unlocked from oil and gas companies’ balance sheets.
We have recently completed a study of working capital in Oil & Gas companies globally (both listed and unlisted) with revenues greater than $100m in 2014 in the Exploration and Production (E&P) and Oil Field Services (OFS) area. Whilst our findings show a considerable improvement in working capital in recent years, it looks as though there is still plenty to go for. Our results show both a cash opportunity and performance gaps that the industry needs to bridge.
$338bn of cash available
We estimate that up to $338bn of cash is yet to be unlocked by E&P and OFS companies moving to the next performance quartile. In general OFS have higher working capital balances than E&P companies largely due to the purchasing power of oil majors allowing for easier stretching of payment terms. Working capital issues are also compounded by E&P firms re-negotiating supply chain costs downwards.
The key findings of our study are:
- Q1 2015 revenues of listed entities sampled are down 20% on the same period last year
- $338bn of cash could be unlocked from the balance sheets of Oil & Gas companies. This represents $284bn for E&P and $54bn for OFS
- Q1 2015 results also show cash position deteriorating from a worsening cash conversion efficiency (CCE)
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.
What’s been your experience of the current trading environment? To what extent could working capital improvement help your company or the sector as a whole? Share your thoughts below or schedule a meeting to discuss your situation in confidence.