What does the successful Canadian oil and gas company look like as the world emerges from the COVID-19 pandemic?
Many of the attributes that have been key to success in the turbulent last five years will remain essential, says KPMG’s National Energy Leader Michael McKerracher.
This includes a strong balance sheet enabling companies to be agile in the face of continuing price and market volatility, he says. “They need lots of liquidity to manage the continuing commodity and demand cycles.” The focus on leveraging innovation and new technologies to minimize costs needs to continue, he adds.
This includes continuous improvement in existing technologies to cut fuel costs or improve water handling. It also means investing in new digital technologies like cloud computing, data analytics, automation and machine learning.
“The industry must become more data driven in order to access the next five per cent to 10 per cent of value. Maximizing company data, moving from experience-based “gut feel” decision making to deeper, more informed insights that may provide the basis for better decisions. For example, when deciding which wells to temporarily shut in – an issue every producer is grappling with – data can provide greater surety on well-level profitability.
It also positions operators to run scenarios and develop new ways of working that can carry forward and improve future performance, ensuring not only that savings put in place now are sustainable and not just cyclical, but provide a running start for recovery.”
Beyond financial acumen and operational excellence, operators need to layer on new skills as investor and public expectations evolve.
Currently investors are looking at free cash flow and real returns, but as the recovery strengthens there will be shift back to growth, says McKerracher. But the quick wins of the past are likely over, meaning investors will have a longer-term focus. Companies that can maintain growth prospects through the downturn and tell a compelling story about sustainable future opportunities will be positioned to attract this new, long-term investor.
This could include moving further downstream to get closer to the customer. Integrated oil producers have been successful throughout the last five years by touching more of the value chain. Natural gas producers are now moving in that direction as they sell directly to power generators and utilities. Midstream and pipeline companies also continue to integrate into power markets, NGL exports or petrochemical production.
“Gas producers are going to have to look for other uses for their production,” he notes. “There hasn’t been enough work done to balance the system. They are going to need to do a lot more.”
Attracting investors will also require a strong ESG focus. It won’t be enough just to gather compliance data or to produce a sustainability report, he says. Operators will need to proactively use that data to set ESG targets, implement the necessary changes to operations or processes, measure progress, and report back to the investment community.
“The oil and gas company of the future will have a strong ESG component in it,” says McKerracher. “Large and small companies need to build a strategy. They need to build it into the structure of their companies.”
This ESG focus will move beyond investors to the global public, he adds. “Part of the downfall when it comes to perceptions of the industry is that we haven’t thought a lot about the end user of our products. We have to get closer to the consumer. They don’t understand a lot of what the industry does to drive innovation and operate sustainably and we need to change that.”
Canada’s oil and gas industry is at an inflection point. After five years of wild price volatility, market access issues, and other challenges, it now finds itself in the midst of a pandemic that has driven demand to lows not seen in decades.
This year’s Daily Oil Bulletin Top Operators report reflects the great uncertainty facing the oil and gas sector and tries to make sense of what the industry and successful operators in the post-pandemic future will look like.
To do so, we made some changes to the Top Operators format.
Rather than comparing year-over-year data, in some instances our CanOils analysts compared first quarter 2019/2020 data to measure the impact of the early stages of the COVID-19 pandemic.
We also tapped into the experience of professional services firm KPMG to gain insight into what strategies operators and service companies could pursue to survive and thrive through the difficult days ahead.
Further, we leveraged the reporting power of the Daily Oil Bulletin staff and its ongoing coverage of the industry over the last four months to capture the industry’s response to the pandemic and its future outlook.
Download the report here.