Oil Field Services - The Hunger Games

Note: This article is for general audience interested in the oil industry, so it may sound oversimplified for OFS professionals

---------------------------------------------------------------------------------------------------------

The Oil Field Services industry, also known as OFS, consists of a vast number of companies that provide a wide range of technical services and products to oil & gas producing companies. Those services range from onshore and offshore drilling rigs’ rental, to well evaluation, drilling, completion, and workover.

Since the Saudis' decision to cripple OPEC's ability to cut down production and to control market supply, oil prices per barrel have fallen from a steady $115 to painful mid $20s. The supply glut has extended beyond most pessimistic analysts' projections, supported by the longer-than-expected production life of shale wells, the lifting of sanctions on Iran, and a historical ramp up of Iraq's production. This has hit the oil industry hard, forcing oil companies to substantially reduce drilling plans, which has heavily impacted OFS companies, leading to hundreds of thousands of layoffs, and pushing many companies to file for bankruptcy. Virtually, all companies had to respond to this crisis strategically and tactically.

This paper studies how sales have changed in the OFS sector in response to the oil price crisis, and the shifting grounds of the industry, especially as the bargaining power shifted more towards the client side of the equation. In-depth market research was conducted and industry leaders, from Schlumberger, Halliburton, Baker Hughes, and several smaller companies, were interviewed in different regions. The findings are compiled in several dimensions of industry trends and insights

Pricing

The huge reduction in the oil prices worldwide has affected all the players in the oil industry and had significant changes throughout the chain. However, the impact on oil services providers was uneven across the regions. North Sea, for example, has a higher cost of oil production compared to the Middle East. Higher cost producers, therefore, were more affected by the current oil price crisis, and passed this to their service providers in the form of reduced drilling activity and heavy service price reductions. Oil services’ prices have dropped by as much as 60-70% in offshore operations in the North Sea and APAC, while price reductions for certain clients in the MENA region were relatively nominal as clients were not under the same cost pressure.

Salesforce Structure and Size

Looking into how OFS companies have changed their salesforce structure and size over the past two years, it was interesting to see how companies have reacted extremely different under the same circumstances. When it comes to the salesforce structure and sizing, the majority of companies have adopted either one of the following two strategies:

1.    Passive/Conservative (Bottom Line Strategy): Many companies have reacted to the crisis by substantially reducing their salesforces to match the expected decreasing demand on services and products in a considerably shrinking market. In many companies, as much as 80% of sales reps were laid off, or put on unpaid leaves, in an attempt to reduce costs under the pressure of decreasing revenues.

Additionally, companies had to restructure their salesforce in a way that would keep them functional despite the reduction in the headcount. Key Account Managers were repositioned to cover larger geographies or portfolios, and product champions/experts were appointed as a higher layer of sales expertise rather than being on the frontline.

2.    Aggressive (Top Line Strategy): This strategy has been adopted mainly by large companies with deep pockets. The idea is, in difficult times, companies need to keep, and even increase, their sales troops. By keeping, or adding, sales reps to the team, those companies’ aim is to capture as much market share as possible in times when every sale counts, and when companies cannot afford to lose any deals. Those companies are bringing their A game to the market, because “this is not the time for half measures”, as one industry leader put it.

This strategy may be difficult to sustain in the short run, and can cause cash bleeding, but many OFS companies believe it is their best chance to keep their topline afloat in the short run, and guarantee a larger footprint in the market when oil prices pick up again

Salesforce Compensation

Even though companies have not substantially changed sales reps’ compensations, the carrot, the pressure of job insecurity has created a different kind of incentive for those reps, as they started to work under the continuous implicit threat of losing their jobs, the stick. Additionally, many of the companies that offer a large variable portion of sales reps’ compensation, have increased the fixed component to ensure more stable income for their employees, allowing them to work in a less stressful environment and deliver better results

The Act of Selling

The majority of the interviewed industry leaders agreed that the recent crisis has transformed the nature of the act of selling. Rather than concentrating on missionary sales roles, order taking, and “show up and throw up” tactics, sales representatives are now playing a more consultative role, where they have to deeply understand the problems and challenges their clients’ are facing, ask the right questions, advise them how to deal with these challenges, and add value by offering solutions that would help the client reduce cost and increase productivity

Procurement Behavior and the Buying Center

A recent KPMG study of the oil field services sector has observed an emerging trend in the industry, as clients’ demand is switching from a pick-and-choose approach to turnkey projects and bundled and integrated services, a trend also confirmed by the interviewed OFS industry leaders. This approach allows clients to reduce costs through operational synergies and economies of scale. It also ensures enhanced Quality Control as service companies tend to exchange blame when Service Quality is compromised on the wellsite.

Additionally, due to tight constraints over drilling and completion budgets, clients’ procurement is leaning more towards inferior/commodity products and services, and are passing on high-end technologies for the most part, despite missing out the value that these technologies could add.

On another note, this crisis has reshaped “buying centers” and how purchasing decisions are made within oil & gas companies. The most significant change is the rise of procurement departments’ role in purchasing decision making over technical managers who are transitioning to an influencer role. Procurement departments are generally more fierce, and have been recently reported to have developed aggressive tendering methods that force contractors to go through multiple rounds of negotiations, slashing prices in every round. Due to these changes, sales cycles are becoming longer and more complex. Industry leaders estimated an increase in sales cycle length by an average of 30%.

Procurement departments in many large oil producing corporations have took advantage of the relatively cheap oil services at today’s market to sign long-term contracts, as much as 5 years in some cases, to lock prices when the market revives and service companies start raising prices. In Kuwait, the national oil company, KOC, is exploiting the current market prices to drill wells that will be put on production in the future. On the contrary, many companies are substantially reducing their drilling plans’ span in response to the market volatility.

Emerging Trends

This crisis has hit the market while the resources supply is at historically high levels (See Figure 1), and as the crisis extended, it shadowed companies’ profitability and threatened their survival. Therefore, oilfield service companies had to revolutionize their business models and accept unorthodox deals they would not accept under normal circumstances.

The industry is witnessing deals that are changing the transactional nature of the business. For example, many small-sized oil companies are offering oil production revenue sharing to oil service companies in exchange of the services they provide. Larger companies are demanding their service providers to “put more skin in the game” as one of the interviewees put it, by accepting risk-sharing measures, and by directly tying service companies’ payments to the provided service quality

With regards to Account Receivables, despite the cash scarcity on both sides of the equation, it seems that clients are winning the battle and are becoming more reluctant in paying their service providers. In average, service companies are reporting a 40% increase in their Days Sales Outstanding, DSO, which is adding a financing load to service companies as they have to increase their working capital.

Figure 1 : Oil & Gas Rig Count in the US

Wrap Up

In conclusion, this crisis has shook the Oil Field Services sector drastically, and forced the industry to fundamentally restructure how sales are carried out. Companies are experimenting new ways to handle the market pressure, and it is obvious that the industry no longer posseses the same sales frameworks. Companies that survive this phase will only do because they dared to go where others were not willing to. This is the new HUNGER GAMES

[1] https://home.kpmg.com/xx/en/home/insights/2016/03/oilfield-services-companies-unsung-workhorses-oil-industry.html

#oil #oilservices #halliburton #schlumberger #weatherford #bakerhughes #OOTT #crude #markets #sales #economy