The oil and gas industry is currently facing tough challenges following the fall in oil prices that commenced in the second half of 2014. With no expectations of a price rebound, exploration and production (E&P) companies in the sector are being forced to re-evaluate major capex projects, and implement long term cost reduction strategies as they get used to a life of lower prices for longer that expected. Meanwhile oil field service companies (OFS) are beginning to feel the margin pressure passed down from E&P companies implementing cost reduction strategies.
All of these pressures lead to one conclusion, the industry needs cash to support itself and invest for the future. Working capital can assist in tapping into this valuable resource. Globally, PwC is working with many companies to help optimize working capital and achieve sustainable performance improvement. What would you do if you could realize the equivalent of 5% of revenue from working capital?
With many projects now unprofitable, we have seen a large number of projects decommissioned and unhedged production revenue reduced up to 50%. And with sanctions against Iran being dropped—adding further supply to the global market—the likelihood of prices bouncing back in the short term are slim.
For oil and gas companies, cash is particularly key right now. With the sharp decline in oil prices, many projects are becoming increasingly unprofitable, and debt is becoming more expensive. Cash is a viable source of cheap financing, and working capital optimization can help unlock cash to assist getting through these uncertain times.
In this study we look at E&P and OFS companies across the world (both listed and unlisted) with revenue greater than $100m in 2014. Whilst our findings show considerable results from working capital improvements in recent years, there is still plenty to go for. Our results show both cash opportunities and performance gaps that the industry needs to bridge. We estimate that up to $338b of cash can be unlocked by both E&P and OFS companies moving to the next performance quartile.
Having already helped to release over $28b of working capital benefits to companies around the world, we believe that we are in the best position to help your company tap into this cash reservoir.
Middle East Oil and Gas Firms Can Dive into Billions of Reservoir Potential by Tightening up Working Capital
- Firms Missing Out on Opportunities to Tap into Global Working Capital Reserves Totaling $338b
Middle East oil and gas firms are sitting on a war chest of billions that could be released by simply improving their working capital management according to new research released by PwC.
With no sign of an oil price rebound in sight, E&Ps and OFSs 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 for $50.” As a result, debt is becoming more expensive and many are re-evaluating major capex projects and implementing long term cost reduction strategies.
The Middle East 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 $338b global reservoir waiting to be tapped by savvy organizations. There are, however, measures business leaders can take to optimize their cash flow, releasing their capacity to adapt and grow.
This includes 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 organization. This is in addition to optimizing the trade-offs between cash, cost, and service.
Ross Hunter, global oil and gas leader at PwC, stated, “Working capital is the lifeblood 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 lower oil prices and, as a result, being cost effective in a $50-$60 barrel world will be vital; every move they take to achieve this will be crucial in securing their short term prosperity and, potentially, long term survival,” explains Hunter, “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 in their cost base. Working capital management can assist in releasing valuable cash resources, providing much needed headroom and funding in this critical transformational period.”
The report tracks the success of companies in optimizing working capital across territories; covering different types of companies such as E&Ps, OFSs, 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 $338b of cash could still be unlocked.
Other Findings Include:
Service companies hold five times more working capital on average than other oil and gas sectors, largely due to outstanding sales; a total of $54b could be unlocked.
Africa lags behind 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.
Across listed oil and 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. “It is clear that that oil and 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,” said Windaus, adding “our team has already helped firms across the globe to release almost $29b 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 and 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,” explains Windaus.
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DR. AHMED RASHWAN
PwC Director- Head of Oil & Gas
PwC Partner- Utility, Mining & Energy Leader
PwC Partner-Assurance Leader
PwC Director, Industry Expert