It's no secret that falling oil prices have resulted in millions of dollars of lost revenue, the cancellation of major projects and significant job loss—both among oil and gas producers and service and supply companies. On the flip side, many companies that took steps to shore up their balance sheets before the slowdown are now better positioned to capitalize on the opportunities that a downturn presents.
To understand how the global commodity market downturn is playing out in Canada, research firm Junewarren-Nickles Energy Group (JWN), in partnership with Grant Thornton, conducted a detailed review of the oilfield service and supply market. In addition to surveying 545 service sector leaders in companies with revenues primarily between $5 million and $100 million, we completed a series of in-depth interviews and workshops to understand how the sector plans to survive and thrive in a protracted low-price commodity environment.
Not surprisingly, coming off of a challenging 2015, many business leaders continue to predict a grim year ahead. Among the 45 service companies that had released their spending plans by late January 2016, capital expenditures were expected to fall from $16.3 billion in 2015 to $11.5 billion this year. Based on this trend, JWN and Grant Thornton predict a further 29.5 percent cut in capital expenditures in 2016.
Despite these concerns, however, there is still optimism. While profitability among service and supply companies is expected to further decline in 2016, it will do so at a slower pace than last year. In fact, while 35 percent of companies expected declines over 21 percent last year, only 25 percent of companies expect similar declines this year. There are even some pockets of optimism—with almost 30 percent of companies expecting their profits to go up for the year and over five percent anticipating increases of more than 20 percent.
Needless to say, the companies poised for survival have adopted a wide range of cost cutting measures—from layoffs and non-employee related cost reduction to reduced inventory purchases, investment deferrals and debt restructuring. That may explain why many survey respondents continue to seek out additional cost-cutting opportunities such as laying off employees; reducing employee compensation; cutting upstream supply chain costs; eliminating the least profitable products and services; and investing in productivity improvements—including new technologies that can deliver cost savings, like supply chain management systems.
There is little doubt that there will still be rough times ahead. However, companies continue to innovate and focus on efficiency—and expansion is still possible—but only for businesses that have a strong strategy in place. If your company hopes to join those ranks, you should take steps to
- continue managing your cash flow,
- focus on sales and marketing to grow market share,
- work closely with your banks and lenders to manage any debt challenges,
- proactively manage your talent,
- seek out consolidation or integration opportunities
- consider diversifying into other petroleum basins or other industries where you have a competitive advantage and
- innovate to further reduce costs and improve productivity.
Discover more strategies for responding to prevailing market realities and strengthening your competitive position by downloading the full Service and supply outlook report: Adapting to a lower-for-longer commodity market
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