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Three practices companies must implement now during the downturn

Oil and gas companies have to focus on three key areas to survive and even thrive during the downturn says EY.
Three practices companies must implement now during the downturn

As oil and gas companies look at ways to endure and even discover many opportunities in the downturn, EY shines a light on three key areas in its recent report “Resilience in a time of volatility: Oil prices and the energy industry”. Companies must focus on financial, portfolio and operational resilience and also hold on to critical talent.  So what does that look like?

Financial Resilience

When targeting financial resilience, EY points out that companies must learn to manage the imbalance between new levels of cash generation in a lower-priced environment and balance their internal and external obligations. This includes optimizing the company’s capital structure, restructuring the balance sheet, refinancing certain loans, if possible, and raising equity. Also, to keep stock holders happy, it is critical to assess dividend structures to ensure that cash flows are sufficient at a variety of price points for payout levels. If that cash flow is limited, companies could look at divesting assets or business units to generate cash. EY also recommends reviewing existing tax and corporate structures.

Porfolio Resilience

EY notes that portfolio resilience is also critical saying that now is a good time to optimize overall portfolios by restructuring capital allocations away from high-cost, lower-return projects. For companies with stronger balance sheets and less debt, it might also be time to seek out acquisitions of challenged businesses or expand into growth markets. To share the risk, joint ventures could also be explored. EY points out that size matters in the downturn. Many of the largest oil and gas companies will realize a new normal with opportunities to pick up affordable acquisitions that strengthen their strategic positions. In addition, EY says most national oil companies will endure intense fiscal and political pressures, but will survive. However smaller independents, particularly those that are insufficiently hedged, will struggle if the price of oil stays lower for an extended period of time.  It is probably no surprise that in the months to come, the oil and gas market will see a number of acquisitions and asset sales as distressed companies seek relief and strong companies seek bargains.

Operational Resilience

On the operational front, the report recommends that leaders challenge operational assumptions. In the current environment, it is more critical than ever to deliver capital projects on time and on budget. All projects should be under scrutiny. EY urges leaders to look at re-scoping, deferring or even shutting down projects that are not on track. In addition, companies should be working to re-engineer their business models to lower their cost base, as well as renegotiating their supply chain and supplier arrangements to reduce expenses and collaboratively drive efficiency.

What about talent?

EY cautions against tightening the talent belt too much and points to lessons learned from the 1980s and 1990s.  When oil prices fell during these times, the core workforce was hollowed out across the industry. This would be devastating today at a time when many oil and gas companies have finally restocked their technical and managerial benches. Of course the anticipated great "crew change" hasn’t gone away either. Forward thinking companies will find a way to hold on to their key people by keeping crews active and moving them to core assets. EY notes that a number of workers may take retirement earlier as companies look to shed costs and provide early retirement packages.

EY does see a lot of opportunity even in a more challenging price environment. Companies can be resilient and even move into a position for greater success when prices rebound by optimizing their financial position, holding on to key talent, reshaping their portfolio, limiting costs and reducing risks. 

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