The oil price has now fallen by more than half since June of last year when the price stood at $110 per barrel. Less than a week into the New Year, it traded at below $50 a barrel, the first time it will be dropping so low since April 2009. Analysts have blamed weak global demand and booming U.S shale production as reason behind the price plunge and with the Organisation of Petroleum Exporting Countries (OPEC) reluctant about cutting output, it is likely that we will see further decline in the coming weeks towards the $40 mark.
While the drop is good news to consumers and businesses in countries that import the product, oil producing countries such as Nigeria, Russia and Venezuela where oil is the main stay of the economy have taken some hit. Nigeria for example, needs oil at $123 to balance its budget and has since revised the benchmark for the 2015 budget and devalued the Nigeria Naira as part of fiscal measures to cushion the effects on the economy.
Should we panic?
Naturally, there is some measure of apprehension in the oil & gas industry especially among small indigenous oil and gas companies. These are largely companies that sprang up in the last couple of years following the implementation of the Nigeria Oil and Gas Industry Content Development Act (NOGICDA) which makes provisions to enable locals play more significant roles within the energy sector. With weak capital bases, a lack of specialization and given that often times 3 or 4 of these companies are deep in the transaction of a project, these companies are likely to have their profitability adversely affected.
It is important that we do not panic however. On the one hand, projections indicate that oil production will remain high and oil will continue to be important to the global economy. On the other hand, the current situation is not entirely new. As recently as 2008, oil prices fell to as low as $38 per barrel from $146 -a drop of over $100 (see figure below). Essentially, the Industry is not going anywhere. However, the companies that will survive and continue to play in it are those that are disciplined and able to implement relevant strategies that have been outlined here. The way we see it, this is a fantastic opportunity for small indigenous oil & gas companies to look again at their business model, do a review of their internal processes and ensure they are solid and attractive to investors.
Strategies for survival
- Companies should look at forging partnerships with companies of similar size who have expertise in specific areas of the industry. This will build the partnering companies' capacity to bid for and execute projects while making them more competitive and attractive.
- For other companies to find you attractive for a partnership, you need to bring something to the table. This informs the need for indigenous companies to define their niche along the areas they have competitive advantage and expertise. Currently, a lot of companies claim to offer virtually all the services in the value chain but on closer observation are not specialists in any.
- Cost control and working capital management has never been more important. Companies need to become innovative in the way they run their operations and quit the stereotypical show of affluence associated with the industry. Unnecessary travels, unjustifiable recruitments, unrealistic pay packages etc must be cut down. For example there is absolutely no need for two staff to fly business class to Abuja for an hour meeting that can be held via Skype.
- Closely related to cost cutting is the need for companies to put the right processes in place for risk mitigation. Critical to doing this is carrying out in-depth planning before engaging in any activity and ending the culture of spontaneous decision making.
- It is also important to invest in your people through trainings. This might seem contradictory to the call to cut costs but it is not. Your employees are your most important assets and they determine how successful you can be. Having identified their area of expertise, companies should sponsor their people to be trained and certified in such areas. The importance of this cannot be over emphasized.
- This is also time to have frank discussions with your bankers. Given the decline in revenue, some companies might be at the risk of defaulting on loan covenants. It is important to avoid such embarrassing situations by discussing with your bankers and exploring opportunities for waivers and renegotiation of repayment plans.
- Active business development and relationship building is another key activity for this period. This is not the time to sit in the office. Your people should be out there making cold calls, revamping old relationships, creating new ones, attending the right events etc. A lot of this can be done by innovatively using the internet and social media. It is amazing how much one can achieve using LinkedIn alone.
- If you are able to do all the above; specialize, review processes, cut cost, train your staff and actively expand your network, you are in pole position to attract attention within the industry. This may be the right time to open up to equity investment or to explore opportunities in mergers or formation of joint ventures.
When the going gets tough...
It is expected that many pretenders will altogether choose to leave the industry or be forced out at this time. Only the tough and resilient companies who are clear about their vision and strategy will stay going. Survival will entail being on top of every aspect of your business and ensuring that you are operating at an optimal level.
Volatility in oil prices should naturally elicit apprehension, but savvy business leaders are able to ride the storm to profit and uncommon successes.
Ritch Wingo, is a Director, Oil and Gas Advisory for the Nigeria firm of PwC (PricewaterhouseCoopers). PwC is the world's leading advisor to the energy industry and has been helping energy companies succeed for more than 100 years. We work with every segment of the business — from upstream to midstream and downstream —providing business solutions tailored to meet clients' needs. Our industry specialists understand the issues that indigenous Oil & Gas companies face and have the experience and expertise needed to address them and recommend sustainable solutions that help these companies outlive their founders while also positioning them to compete better in the international market. At PwC, we constantly monitor key developments in the industry, analysing the potential impact that they will have on our clients and generating solutions to assist companies in managing these ever-changing dynamics. Ritch has been living and working in Nigeria since 2008 and has many years of experience working very closely with indigenous Oil and Gas companies in West Africa. He can be reached for enquiries and consulting engagements at email@example.com.
When the going gets tough...
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