With oil prices plummeting to below $30 dollars a barrel for the second time this week, here are four main areas business leaders in the oil and gas sector need to master if they want to survive the storm.
Growth Management
Identify and post-pone projects with a high degree of uncertainty. Be especially ruthless with any at the early stages of development which can be killed without much fuss. Seek partners to share in the risk – and of course, reward, of projects. For example, through part-sale of operating interest in new discoveries.Â
If you can, explore opportunistic growth via acquisition in areas with room for consolidation, for example oilfield services. There is no reason that the current environment should lead toe a growth paralysis mindset. There could be valuable growth opportunities right now, for example via M&A or by continuing investment in nationally important, high-profile projects with longer-term value.
Cost Management
Do not throw out the baby with the bath-water. Concentrate your asset sales on those not central to long-term strategy as much as possible. Organisations with a strong core focus are always better prepared in times of extreme stress or volatility.
Where redundancies are inevitable, manage them carefully to account for skills-gap impact, and ensure readiness for future growth when the oil price rebounds.
Re-negotiate discounts with contractors to manage service costs and on-going expenditure. There could be room here as many suppliers may prefer lower margins to idle machinery in the challenging times we are currently experiencing.
Funding Management. In the near term it can often all be about survival but do not lose sight of a credible growth story for the longer-term. To give your organisation the best chance of attracting funding, ensure the security of your current income stream, even if it is reduced. That stability is key to ensuring there is a consistent stream if income.
It is important to model the impact of rising interest rates on sourcing bank and debt funding. Seek a realistic picture as oil prices cannot be modelled on a safe, upward trajectory to pay for higher rates with future income as they have been in the past. As minimising risk and exposure becomes critical, explore non-debt options for funding. For example, with specialist equity investors who play exclusively in the oil and gas sector. In short, private equity funds are going to be your friends.
Managing externalities
Your organisation should aspire to a clear and respected voice on key sector issues such as the advocating role of government, whether via regulations and global transparency frameworks, or tax incentives to support reduced revenues.
On a similar note, the inevitable short-term fire-fighting should not come at the expense of the long view. You should also be looking at on-going evaluation of strategic issues such as climate change policy (COP 21), and its implications in the near and longer term.
**The above findings have been extracted from a recent report by the Association of Chartered Certified Accountants (ACCA).
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