Navigating the Crude Cycle

Transcription

1 Navigating the Crude Cycle 10 strategic actions for oilfield service and equipment companies

2 Introduction Amid volatile how-low-will-they-go oil prices, oilfield service and equipment (OFS&E) companies are again facing strong headwinds for the first time since US rig counts are down, and supermajors and independents have reduced near-term capital expenditures across the board. OFS&E backlogs are shrinking and top-down mandates for cost reduction have been communicated to operating units. Equity values dropped precipitously in late 2014, wiping out billions of dollars of market value. Investors are now looking for higher capital efficiency, and incentives to continue placing their cash and trust in this segment. Learning from the finance-induced 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. The downturn of caused by the financial crisis was relatively short lived compared to what analysts are projecting this time around for the 2015 downturn induced by longerterm crude supply and demand dynamics. By adjusting portfolios, operating models, productivity levels and market positioning, companies can reduce costs now and position themselves for the next rebound, stronger and more competitive. Many firms have decided to cut capital spending and freeze the hiring of talented people. Others have announced, or are considering, acrossthe-board layoffs. Capital spending cuts and cost-reduction efforts by the upstream segment mean a drop in revenues for OFS&E firms. To emerge stronger from oil price volatility, Accenture suggests 10 practical actions for companies to consider now.

3 Turn core suppliers into business partners. Meaningful change in the cost base requires rethinking supplier relationships with a focus on mutual value creation. 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 OFS&E companies to take greater advantage of a slackening of the supplier market. The first step is to identify strategic suppliers in key categories. With these core suppliers typically in labor and overhead intensive categories such as engineering, maintenance, secondary services, machining, 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 jointperformance targets and incentives, not just a simple demand for price reduction. These renewed or newly established strategic partnerships can enable OFS&E firms and their core suppliers to increase their resiliency during a crisis and emerge with long-term advantages.

4 Obtain more favorable terms with non-core suppliers. In , many OFS&E companies executed market response initiatives to reduce prices across the board. These initiatives can be effective but should be used only 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.

5 Upgrade pricing capabilities to mitigate customer demands for double-digit price concessions. OFS&E firms can upscale their pricing capability, leading to competitive differentiation, defensive revenue capability during downturns, and profitable growth in the interim and eventual rebound. The cost-plus approach to pricing tenders, services, equipment, and even aftermarket often leaves money on the table. It also leaves organizations susceptible to successful attempts at price concessions demanded by their largest customer base in the downturn. Amid low prices for crude, staying with the blanket cost-plus and even bundled pricing approaches is likely to result in suboptimal revenue compared to peers. Leading practices, such as yield management and new techniques and tools with enterprise pricing optimization, allow firms in the OFS&E industry to identify and capture opportunities not visible with traditional pricing approaches.

6 Crosslink continuous improvement efforts for greater impact. Efforts focused on single functions (e.g., plant-oriented) need to be extended across the supply chain and also to linked support functions. This approach can lead to sustainable improvements by sharing incremental gains and best practices. It is crucial to identify and re-align projects to support corporate priorities and also to break down siloed functional optimization. Standardization and linking of functions will help reduce costs and equip companies to run more efficiently in the long term. Here are three ideas that accomplish effective transformational impact toward corporate top-down metrics: 1. Recognize where value is created along the cross-functional critical path of complex transactions that traverse the enterprise supply chain. 2. Create a view of the activities required to get work done along that path and drive sustainable efficiencies. 3. Prevent backsliding on results by linking underlying capabilities on the critical path to improve business outcomes.

7 Equip the field with digital technology to boost productivity. It is tempting during downturns to decrease investment in innovative tools and solutions. Instead, companies should take the opportunity 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, stronger safety performance, and gaining clearer visibility through analytics into asset effectiveness. Those who invest now are likely to reduce their cost base for future operations and realize the benefits earlier than competitors.

8 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 $40 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 restructuring operating models.

9 Restructure functional operating models for long-term advantage. Operating models for finance, human resources, supply chain and information technology can be operated at structurally lower cost profiles. Here are four 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) Understand how much activity of your technical/senior, most skilled functional employees is truly transactional versus strategic. Decouple those activities and structure as a service unit. c) Relocate consolidated functions to costadvantaged locations. This might mean moving from remote areas to city downtown, from downtown to the suburbs, or from one state or province to another or to an offshore location. d) Transfer management of back- and middleoffice activities to a third party to run as a service. Offer incentives to improve productivity and reduce costs over time even further. Some OFS&E companies have taken steps in this direction and have reaped the benefits. They have decided their true core competencies are not payroll, procurement and planning analytics, three of many such target functions. Now would be the time for OFS&E 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.

10 Modify headcount with a scalpel, not an axe. 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 bottomperforming 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 labor is another area of opportunity. Representing up to 50 percent of energy companies workforces, 1 expensive contingent labor increases costs of operations and of capital projects. A stronger bottom line can be gained through tighter management of contingent labor, including better role definition and standardization, using analytics for increased visibility into spend, and implementing tactics for improved safety and quality. 1 Advanced Contingent Labor Management: Is the Workforce with You? Accenture,

11 Upgrade your planning processes. Today, OFS&E companies brightest minds are scrambling to rework the numbers on their annual plans. The replanning rush, however, can lead to rash decisions with negative long-term consequences. Here are two ideas to upgrade planning processes: 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.

12 Adopt a more leveraged smart model for manufacturing. With high oil prices and consistent year-over-year growth projections, it was relatively easy to justify investments in plant and equipment. But the times have changed. Historically, there was valid rationale to justify a high level of vertical integration for tool and equipment manufacturing: quality control, product maturity, specialized secondary processes, and co-location with product development. It is hard to let go of those assets and processes and easy to convince the organization to hold on to assets just in case. a) Development of core suppliers to manufacture key components and retain the most difficult machining, along with final assembly and test functions. b) Turn-key manufacturing and assembly of mature, stable product lines and subassemblies. c) Reduction of mature machining capabilities, consolidation of facilities and boosting the leverage ratio, thereby improving the shipments-per-square-foot metric. d) A rebalancing of plant location, sustaining engineering and product development locational profiles to be more cost- and market-centric. During periods of prolonged downturns or uncertainty, plant and equipment assets are going to be under-utilized. The pressure is on to rationalize those facilities, thereby increasing angst due to the potential loss of manufacturing know-how. Total landed cost scenarios should be generated that articulate the options available to the operating unit for a more flexible model of manufacturing to reduce costs now. The scenarios should also help businesses position themselves to respond quickly to the eventual rebound by developing leverage. Some options to consider and quantify: Leading OFS&E firms have been able to accomplish a leveraged model with the highest level of product technologies and complexities. They have done this by developing new suppliers and expanding the work of core suppliers. The benefits have included cost reduction, moving closer to key markets, maintaining intellectualproperty protections and preventing new competitors from forming. Investing upfront in strategy and planning, has also helped them improve product quality and reliability.

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. 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 is presented by a crisis. Take decisive action to position your company for high performance, enabling a strong bounce back as the eventual up-cycle returns.

14 Author Thomas F. Kelly Managing Director Accenture Strategy Author Andrew Brown Senior Manager Accenture Strategy Author Anupama Umachandar Consultant Accenture Strategy About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 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 generates net revenues of US$30.0 billion for the fiscal year ended August 31, Its home page is 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.