Oilfield equipment & services industry performance: Roland Berger's new quarterly newsletter
For many years, we have been helping oilfield equipment and services companies understand and improve their relative financial and shareholder return performance using the Roland Berger Winners' analysis. This year we are launching our first quarterly newsletter to describe the performance of the industry and comment on industry hot topics. Our complete newsletter can be found here.
All indicators in the red
This newsletter launch happens in a difficult industry context. 2015 was a very challenging year for the oilfield and equipment services industry. Facing a combination of reduced oil & gas activity and price pressures from E&P players, industry players struggled financially – all metrics were in the red. Overall shareholder value contracted by a third, and share prices were more than halved for a large number of small and mid-size regional players. Looking at the Roland Berger Winners' metrics, we saw that invested capital shrunk by 10% reflecting asset adjustments, write downs and reduced capital investments as players expect the challenging environment to last longer. Industry returns were significantly lower than the cost of capital, indicating a worsening over an already unprofitable 2012-2014 period. Even industry leaders Schlumberger and Halliburton were not able to create value. Players in different segments of the value chain were impacted to varied extents. The decline in industry profits drove a sharp increase in solvency risk, resulting in many players being in breach of debt covenants. Though the industry structure did not change significantly, some changes may be expected if the tough environment persists through 2016.
The prolonged downturn negatively impacted industry cash flow. Our analysis shows that working capital played a significant role in maintaining cash levels for the industry.
Working capital decreased substantially in 2015 releasing ~USD 22 billion in cash – more than 50% higher than operating profits – as players shifted to a cash-conservation mode.
With industry-wide cash levels relatively stable year-on-year, working capital was a critical source of funding for investments in 2015. This will be difficult to replicate in 2016 as stable oil prices and activity levels are expected, unless significant improvements in working capital management practices are implemented.
Improvements in working capital management provide opportunities to navigate the downturn and position for recovery
With their companies strapped for cash, several of our clients and business leaders in the industry have asked us to help them identify short-term performance improvement opportunities to face the persisting low oil price environment. While many players have successfully optimized SG&A spend and other fixed costs, we have found significant latent value in improving working capital management.
Based on our analysis of the industry, if the average industry player improves its working capital to best practices levels, the savings could represent 10% of sales, or about USD 26 billion, the equivalent of 18 months of operating profits (based on 2015) or 75% of all industry debt due in 2016-2017!
Measures such as price and terms policies harmonization, purchasing and stock management processes optimization, and deployment of effective collection processes have enabled companies to free up cash to better manage sustained challenging industry conditions, and also be favorably positioned in the recovery – working capital investment requirements will be lower.
This is our first quarterly newsletter for 2016; we will continue to analyze each subsequent quarter throughout the year.
…
Frederic Choumert is a Principal at Roland Berger, a global strategic consulting firm. Follow him here on LinkedIn