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New Rules
for a New Game
Optimising Working Capital in Asia’s Oil
and Gas Sector
David Andrada
Regional Sector Head, Resources and
Energy Group, HSBC Global Liquidity
and Cash Management,
HSBC Singapore
Historic low oil prices are forcing oil and gas companies
to overhaul their operations through various cost-reducing
measures. According to speakers at a Working Capital
roundtable hosted by HSBC and staged in Singapore, such
exercises provide only part of the solution. Implementation
of financial efficiencies can prevent losses and stimulate
cost-competitiveness, and prepare for future growth.
Arguably, the biggest story in the global markets over the past
two years has been the somewhat spectacular decline of oil
prices. Indeed, in June 2014 Brent Crude was priced at around
US$115 per barrel (bbl)[i] – 18 months later, it was lower than
US$40 bbl[ii].
The cause of the commodity’s price drop has been attributed
to numerous factors. First, the United States’ shale revolution,
where domestic oil production has soared and imports from
places like the Middle East have dramatically slowed; second,
demand from China has also cooled, where the nation’s
transition from a fossil fuel-powered industrial-base to an
economy driven by cleaner energy has seen demand for crude
wane; and third, the Organization of the Petroleum Exporting
Countries has maintained production levels in member countries
like Saudi Arabia, Kuwait and United Arab Emirates, which has
further contributed to oversupply worldwide.
The decline in oil’s pricing has been further exacerbated by
resource-rich markets selling the commodity to Asian customers
for as low as US$25 bbl[iii]. All of the above has made operating
conditions highly problematic for oil and gas companies globally,
irrespective of whether they operate in the upstream, midstream
or downstream segments. “Anything that happens in one part
of the value chain will have a profound impact on what happens
in another,” says Mark Elia, Director, Energy and Natural
Resources, KPMG. “There are so many different interests that
are interlocked, and at the core of this is working capital – the
relationships between people, the arrangements between
companies, and how all parties work together,” he adds.
Restructuring and Refinancing
In a recent KPMG study, which examined the views of more
than 160 CEOs from the energy sector globally[iv], around 60%
of respondents said that they were planning either operational
restructuring or financial restructuring, with more than one-fifth
considering refinancing. Additionally, almost 25% of respondents
said they were considering a merger of equals, and more than
half said they were eying an acquisition. While historically
these activities have taken place among oil and gas companies,
irrespective of the state of the market, today’s appetite for such
measures is notably greater than usual. This is in part due to the
fact that few energy companies are able to breakeven at an oil
price of less than US$60 bbl, according to research compiled by
Wood Mackenzie[v].
Elia notes the measures various types of energy companies
are taking in order to operate in today’s low oil price scenario.
For upstream companies, these include exiting marginal or
low-return plays, company-wide cost-cutting, deferral of new
projects, and divestment of current assets. For downstream
players, these incorporate limiting exposure to low demand
areas, optimising costs, and rationalising overheads. For
midstream companies, these include a reassessment of trading
strategies, and an increasing of storage capacity to house assets
until prices rise. All of the above are being actioned against the
backdrop of corporate overhead rationalisation, among other
measures.
It’s not all gloom, however, as today’s low oil price environment
is presenting downstream firms with the opportunity to
purchase inexpensive feedstock. It is also enabling governments,
like those of Indonesia and Malaysia, to curb fuel subsidies
and reallocate these funds to developmental initiatives in areas
like infrastructure. “The oil and gas industry has traditionally
favoured growth over other financial strategies. Today, however,
managing the efficiency of the balance sheet and optimising the
supply chain are key enablers of industry competitiveness,”
Elia adds.
Efficiency and Optimisation
While certain cost-reducing measures can bring about stable
growth, working capital optimisation arguably creates greater
financial strength for businesses. According to Ng Poh Yee,
Head of Sales, Global Trade and Receivables Finance, HSBC
Singapore, optimising a firm’s working capital is a continuous
exercise, which ordinarily involves three components:
process efficiencies; financial efficiencies; and supply chain
management.
Ng advises that all working capital optimisation initiatives should
include a transactional cost review. This is designed to better
understand the parts of the business that are more capital
intensive and, where possible, introduce efficiencies through use
of tools like automation and outsourcing of trade documentation.
Supported by a review of workflows and the streamlining of
tasks, these measures make businesses more productive and
hence more profitable.
In the case of improving days payable outstanding, oil and gas
companies can turn to supplier financing solutions to manage
liquidity and protect cash flow. Corporate treasuries are also
now seeking to collaborate with other parts of the business,
such as procurement, to explore ways of optimising working
capital. According to David Andrada, Regional Sales Sector
Head, Resources and Energy Group, HSBC Global Liquidity
and Cash Management, and Winnie Wong, Vice President
Commercial Payments Solutions, MasterCard, wider use of
procurement cards is taking centre stage across many national
and integrated oil companies in order to improve efficiency in
the procure to pay process, and create value by monetising a
company’s payables.
“Corporate cards, which traditionally have been used for
employee’s travel and entertainment, are now becoming a
standard in the procurement space. This is already a popular
practice in North America and Europe, and while Asia is a late
adopter, demand is growing at a rapid pace,” Andrada says.
For days sales outstanding, receivables financing solutions
ensure businesses get paid earlier for goods or services
rendered. They are also an effective risk management tool,
and enable treasury to focus on cash generation and other
high-value tasks.
“When businesses enter a market where the risks are high,
receivables financing can aid their decision-making in the form
of credit cover, so they don’t overload their balance sheet
unnecessarily. Relationships between all parties in a project is
important and where possible all parties should leverage each
other’s balance sheet strengths to bolster the financial health of
a project,” Ng says.
Future Industry Expansion
HSBC explains that working capital solutions can be both ad
hoc or programme based, and can be implemented on selective
projects, countries or across an entire portfolio. With the current
environment of the sector, there is a business case to explore
creative methods that enable oil and gas companies to weather
subdued market conditions and maximise profitability when
more prosperous times return.
Indeed, the International Energy Agency (IEA) predicts the price
of oil will return to US$80 bbl by 2020[vi]. And in Asia, there are
numerous large-scale gas power projects slated for completion
by 2025, which present new opportunities, as those earmarked
in Indonesia, for instance[vii]. “Businesses that manage their
working capital better can offer more competitive prices. And
those that can offer better prices will be in a better position to
win work. Those that can compete effectively in this space and
manage the ecosystem
of suppliers and partners will thrive. Everyone else will fall to the
side,” Elia concludes.
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[i] http://www.bloomberg.com/quote/CO1:COM
[ii] http://www.bloomberg.com/quote/CO1:COM
[iii] http://www.bloomberg.com/news/articles/2015-12-14/never-mind-35-the-world-s-cheapest-oil-is-already-close-to-20
[iv] https://assets.kpmg.com/content/dam/kpmg/pdf/2015/10/global-CEO-outlook-energy-perspective-v2.pdf
[v]http://www.woodmac.com/content/portal/energy/highlights/wk2_Jun_15/Wood%20Mackenzie%20Paris%20Briefing_June%202015.pdf
[vi] http://www.iea.org/newsroomandevents/pressreleases/2015/november/low-prices-should-give-no-cause-for-complacency-on-energy-security-iea-says.html
[vii] https://www.eia.gov/beta/international/analysis_includes/countries_long/Indonesia/indonesia.pdf
Published: June 2016
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