As the service and supply sector repositions to the new normal of midrange oil prices forecast to continue through 2017—a reprieve from the trough in oil prices experienced over the previous two years—it is essential to remember the lessons learned through the most challenging period the industry has faced in a generation, according to Grant Thornton LLP.
Higher oil prices alone aren’t the solution for all of the challenges facing the Canadian oilpatch, which has customarily faced high production and transportation costs, and today is confronted by new competition from rising production in the U.S., traditionally its largest market.
“After surviving the worst downturn in recent memory it is important for business owners and management not to forget the lessons learned,” said Jeremy Fearnley, Grant Thornton Northern Alberta leader, Oil & Gas.
Some indications point to a modest recovery for 2017. In January, the Petroleum Services Association of Canada (PSAC) adjusted its drilling activity forecast upward by 23 per cent to 5,150 wells to be drilled (rig released) from its original estimate of 4,175 made in early November.
PSAC said it was observing positive signals through the first quarter, including parts of the Canadian oilfield service, supply and manufacturing sectors realizing an uptick in activity as prices recover. Rig utilization rates were above 50 per cent, service rig utilization is growing quarter-over-quarter and cash flow for Canadian oil and gas producers is expected to more than double to $45 billion in 2017.
As activity picks up, it is easy to slide back into inefficient ways of doing business, when the prime imperative becomes the need to produce more oil and gas. However with oil prices predicted to remain far below the highs of the $90-$100/bbl range experienced in the lead up to the crash in mid 2014, companies won’t have the luxury of relying on high prices to mask inefficiencies any time soon.
“During busy times the tyranny of the urgent can take over, whereby businesses when busy may overlook cost control and efficiencies. It is important to constantly examine all business processes to make sure they make sense. It is easy to hastily jump at new opportunities in a time of recovery to regain lost revenues without carefully considering if it’s the right decision,” Fearnley said.
Rather than fall back into pre-bust habits, now is a good time to establish a stable foundation to build on as activity picks up—one that will also put companies on the right path even if prices take another dip.
Service and supply companies should keep their eyes on the price control ball and look to ways to increase competitiveness to be prepared for whatever the price outcome is this year. There are many ways to do this, according to Fearnley.
“I have seen success where customers and suppliers have worked together to understand each other’s needs. For example a customer gives their supplier forecasts three months in advance to inform the supplier of anticipated needs. This allows the supplier to purchase appropriately, which assists in both inventory and cash flow management. In a hyper-competitive environment it is important to build relationships of trust with industry partners to the mutual benefit of both parties,” Fearnley said.
Companies should consider meeting with their banks to ensure growth can be properly financed prior to entering into significant purchasing agreements, he added.
Continuity planning and keeping appraised of new technologies that could cut costs and increase productivity are also important considerations going forward.
In terms of strategies for continuity, Fearnley said cross-training and employee retention plans such as profit sharing and flexible benefit plans seem to be growing in popularity.
According to the Service & Supply 2017 Outlook Report—Delivering Change: Aligning to the New Normal, to be released in April, cross-training of employees in business critical roles was one of the top two most favoured succession planning strategies for companies for 2017.
Along with training and coaching programs, the two strategies were favoured by 42 per cent of survey respondents. Another 18 per cent favoured plans to identify, develop and promote high-potential employees (e.g. management fast-track rotational programs), while 15 per cent indicated they had no current formal succession plans at all.
More than 350 industry professionals were surveyed for the second annual Service & Supply Outlook Report, published by JWN with sponsor Grant Thornton.
“Loss of knowledge and skills is a tremendous risk to businesses in a recovering market,” Fearnley said. “Cross-training is an effective tool to protect companies should this occur, while retention plans aim to reduce the risk of its occurrence.”
Implementation of new technologies, such as the emerging digital oilfield offerings that are showing promise in dramatically cutting costs over time, is another means to establish a strong foundation as cautious growth returns to the oil and gas industry.
A plurality of respondents to the Service & Supply 2017 Outlook Report indicated they believe technology disruption that will fundamentally change the way service and supply companies operate is already underway.
Creating a safe environment for innovation was the most popular strategy named to deal with that disruption. The fact that 15 per cent of respondents indicated they are not prepared to deal with technology disruption indicates a significant number are putting off this crucial means to modernize their operations and remain competitive.
However, many are seeing the benefits of technology disruption, which can not only increase efficiency but also help to companies to cope with the shortage of skilled workers often experienced at the front end of an industry turnaround, Fearnley said.
“We are seeing some success where businesses are embracing technology and utilizing it to reduce the reliance on skilled labour. Implementation of efficient processes that reduce cost should be maintained and expanded.”
While the green shoots of recovery appear to be taking hold, significant uncertainty remains in terms of the oil price trend. Much depends on the impact of U.S. policy undergoing change under a newly installed administration and the ability of OPEC to rein in output in order to maintain a reasonable floor price to promote industry investment. Companies should remain prepared for any eventuality, Fearnley said.
“Most importantly companies must manage growth and cash flow to ensure they do not grow beyond their means. While the industry is improving economically it is important to remain cautious and be prepared to revert to a contracted model should oil and gas prices decline.”