Navigating the Crude Cycle

Transcription

1 Navigating the Crude Cycle With Low Oil Prices, 10 Strategic Actions for Canadian Energy Companies February 2015 $$$$

2 10 Strategic Actions for Canadian Energy Companies Amid volatile how-low-will-they-go prices, energy companies are facing strong headwinds. Investors are looking for higher capital efficiency and incentives to continue placing their cash and trust in Canadian energy companies, where equity values dropped precipitously in late 2014, wiping out billions of dollars of value. Learning from the energy-related crisis of , and recalling as well, industry observers understand that companies can win by taking strategic action and making targeted investments in times of crisis. By adjusting portfolios, operating models, productivity levels and market positioning, companies can emerge from times of uncertainty stronger and more competitive. The saying Never let a good crisis go to waste is true now for the Canadian energy industry. Many have decided to cut capital spending and freeze the hiring of talented people. Others are considering delaying maintenance and turnarounds. To emerge stronger from the global oil-price shock, however, Accenture suggests 10 practical ideas for Canadian energy companies to do now. 2

3 1. Turn core suppliers into partners. In the crisis, many suppliers to the oil patch were pressured to reduce prices. This time around, many suppliers are prepared for this simplistic tactic. It will take a more sophisticated approach for energy companies to take greater advantage of a slackening supplier market. The first step is to identify strategic suppliers in key categories. With these core suppliers likely in categories such as drilling and completions, engineering, construction, maintenance, camps, materials management and logistics longer-term agreements should be renegotiated to seek to achieve immediate benefits in return for continuing and possibly expanding business. Revised agreements could include risk sharing, innovation and investment, and joint-performance targets and incentives. These renewed or newly established strategic partnerships can enable energy companies and core suppliers to increase their resiliency during a crisis and emerge with long-term advantages. 3

4 2. Apply pressure to non-core suppliers to drive down prices. In , many energy companies executed supplier initiatives to reduce prices across the board. These initiatives can be effective, but they should only be used with non-core suppliers. Companies should consider short-term tactics to help reduce costs and search for more favorable terms: increasing spot buying, extending payment terms, reducing safety stocks, moving maintenance, repair and operations (MRO) inventories off the balance sheet (i.e., to vendors), and simplifying supply-chain processes and channels. $$$$ 4

5 3. Reassess capital projects planned and inflight to help increase value. Major projects have routinely exceeded cost and schedule estimates by roughly 30 percent 1. Performance can vastly improve, judging from Accenture s experience, when projects are critically evaluated in search of additional value throughout the life cycle, from concept selection through construction and commissioning. Amid low prices for crude, companies are scrambling to reevaluate projects but the use of traditional methods is likely to result in suboptimal decisions. A comprehensive reassessment should enlist an independent third party to review areas such as engineering, financing, project-management capabilities and tools, key performance metrics, and procurement and contracting strategies for materials and services. Emerging leading practices expand the review approach to identify and quantify operational risk and the impact projects will have on company portfolios. When the quantitative assessment is done correctly, it can be easier to make fact-based decisions on which projects should be continued, delayed or cancelled. 1 Edward W. Merrow. Oil and Gas Industry Megaprojects: Our Recent Track Record, Oil and Gas Facilities, April 2012, Society of Petroleum Engineers. 5

6 4. Prioritize turnaround and preventative maintenance. When prices are relatively low, the opportunity cost of downtime of producing assets is less. To the extent possible, schedules for planned maintenance and turnarounds should be brought forward. Executing necessary tasks during bear markets brings the added benefits of increased availability and decreased costs of equipment, service providers and contract labour. Market leaders are likely to use the downtime to reinforce a clear asset hierarchy, and refocus strategies for management of most critical assets and equipment so they are prepared as prices recover. 6

7 5. Equip the field with digital technology to boost productivity. During downturns, it is tempting to decrease investment in innovative tools and solutions. Instead, companies should take the opportunity to seek to accelerate the uptake of digital technology in the field. Examples include remote operating centers, a mobile-enhanced workforce, and digital materials and equipment tracking. These technologies can transform the way people work. Tangible benefits can be realized in terms of increased productivity among contractors, stronger safety performance, and gaining clearer visibility through analytics into asset effectiveness. Those energy companies that invest now are likely to reduce their cost base for future operations and realize the benefits sooner than competitors. 7

8 6. Shrink the corporate center. When oil ranged between $80 and $100 a barrel for West Texas Intermediate (WTI), corporate center costs seemed reasonable. Numerous corporate initiatives were approved, finance and planning departments were able to add positions and other corporate departments grew as well. At $45 to $60 for WTI, however, it is time to trim the fat. In the past, this process has often been done via across-the-board cuts. Ideally, corporate functions are evaluated in terms of value and contribution to the enterprise as a whole. Work that clearly contributes to achievement of corporate goals of safety, profitability, and asset integrity and reliability is justified; activity that does not should be curtailed and the roles shed. Accenture experience suggests that reductions of 10 percent to 15 percent in corporate costs could be attainable by simplifying and refocusing work. This can be done relatively quickly and without major operating model restructuring. 8

9 7. Restructure functional operating models for long-term cost reduction. Operating models for finance, human resources, procurement and information technology can be operated at structurally lower cost profiles. Here are three ways to achieve this objective: a) Consolidate functions to bring together similar capabilities, eliminating multiple locations that provide similar services to reduce inconsistencies and duplicative services. b) Relocate consolidated functions to cost-advantaged locations. This might mean moving from Northern Alberta to downtown Calgary, from downtown Calgary to the suburbs, or from Alberta to another province (e.g. New Brunswick) or an offshore location (e.g. Buenos Aires). c) Transfer management of back- and middle-office activities to a third party to run as a service. Offer incentives to improve productivity and to reduce costs over time even further. Many international energy companies have taken steps in this direction. Now would be the time for Canadian energy companies to catch up with and potentially leapfrog competitors. Since the operating models have been tested, the transition can be accomplished relatively quickly with minimal business disruption. Service providers typically bear the cost of transferring the service. 9

10 8. Get smarter about people management. Word of layoffs and unconditional hiring freezes has spread through the oil patch. Accenture recommends a more targeted approach in times of crisis. When necessary, make cuts to the bottom-performing 10 percent of the workforce. Correspondingly, companies should allow room to backfill a portion of these cuts with top talent. For a long time, the market has forced companies to make do with what they can get in terms of people. At times like these, however, some of the best talent may be available or open to a change. Contract labour is another area of opportunity. Representing up to 50 percent of Canadian energy companies workforces, 2 expensive contingent labour increases costs of operations and of capital projects. A stronger bottom line can be gained through tighter management of contingent labour, including better role definition and standardization, using analytics for increased visibility into spend, and implementing tactics for improved safety and quality. 2 Advanced Contingent Labor Management: Is the Workforce With You? Accenture

11 9. Upgrade your planning processes. In Calgary today, energy companies brightest minds are scrambling to rework the numbers on their annual plans. The re-planning rush, however, can lead to rash decisions with negative longterm consequences. Here are two ideas that could upgrade your planning process: a) Consider multiple scenarios at several price points, and build in leading indicators that enable identification of emerging scenarios to prompt decision-making and action. b) Replace the traditional and arduous annual planning process with a rolling, eight-quarter outlook. In this model, planning is refreshed quarterly and remains up-to-date, which could lead to better decisions for the short, medium and long term. 11

12 10. Better articulate your value story for investors. With high prices, it was relatively easy to sell the future value story, which is not as convincing today. For many companies especially those in heavy oil a large portion of value is attributed to future expectations. Stock prices, in other words, have been bolstered by the market s belief in companies ability to deliver on announced plans for profitable growth. In times of uncertainty, however, the faith in this rationale weakens. Company leaders should articulate how their decisions in response to low energy prices could: (a) benefit the organization today and (b) contribute to enhanced value in the future. It is vital for executives to communicate effectively amid the doom and gloom in recent reports about the industry. 12

13 Conclusion No one knows where oil prices are headed or when they will recover. But the winners are likely to be those who respond with measured and focused investments, and plan ahead with a multiyear horizon. The leaders will use this time of crisis to refocus their company s vision, making vital changes that would take years to accomplish amid organizational inertia when times are flush. In other words, seize the opportunity that a crisis hands you and take decisive action to position your company for high performance. 13

14 About Accenture Accenture is a global management consulting, technology services and outsourcing company, with approximately 319,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, Its home page is Authors David Taylor - Managing Director Accenture Strategy david.x.taylor@accenture.com Author Curtis Forsyth Senior Manager Accenture Strategy curtis.forsyth@accenture.com This document is produced by consultants at Accenture as general guidance. It is not intended to provide specific advice on your circumstances. If you require advice or further details on any matters referred to, please contact your Accenture representative. Copyright 2015 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.