Working capital management in the oil and gas industry 2014€¦ · 1 Cash in the barrel: working capital management in the oil and gas industry 2014 Summary Cash in the barrel is

Cash in the barrelWorking capital management in the oil and gas industry 2014

1 Cash in the barrel: working capital management in the oil and gas industry 2014

SummaryCash in the barrel is the latest in a series of working capital (WC) management reports based on EY research.EY’s analysis of the WC performance of global oil and gas companies in 2013 shows a deterioration from 2012, with cash-to-cash (C2C) increasing by 2%. This outcome contrasts with the one reported in the previous year, when C2C dropped by 3%.

Despite the setback last year, the oil and gas industry as a whole still reported an overall drop of 4% in its C2C between 2007 and 2013.

Oil and gas companies have been focusing much more rigorously on cash and WC management in an effort to grow their returns on capital and deliver sufficient cash flow to cover investments and dividends. This shift is taking place against a background of volatile oil prices, expanding project development costs and risks, geopolitical uncertainty, tighter regulations, and intense pressure from shareholders.

In response to these factors, most significant WC initiatives have included implementing more effective management of payment terms and tightening up controls around contracts with partners, customers and suppliers; further streamlining of supply chains; better management of procurement; improved coordination between engineering, manufacturing and field support functions and processes; closer collaboration with each of the participants in the value chain; more active management of the trade-offs between cash, cost, service levels and risks; and closer alignment of employee compensation with appropriate cash performance measures.

However, a more detailed review reveals major differences in the extent and speed at which each segment of the industry has been able to deliver these efficiencies.

Today, WC performance continues to vary widely across the industry’s core segments and between individual companies. These disparities point to fundamental differences in the intensity of management focus on cash and the effectiveness of WC management processes.

For 2014, we expect the WC results to reveal even wider divergences in performance between individual companies within each segment of the industry, as some embrace more substantial and sustainable operational and structural changes in the way they address WC.

Overall, our research findings suggest that most companies still have significant opportunities for improvement in many areas of WC, including supply chain planning; demand management; scheduling and inventory management; billing, collection and payment terms; joint-venture payment arrangements; contractor management; sourcing; and shared services.

Our experience in this industry confirms that a dedicated focus on WC management could release additional cash flows totaling tens of billions of US dollars across the companies in our survey, given that their aggregate levels of gross WC — defined as the sum of trade receivables, inventory and accounts payable — amount to some US$700 billion.

ContentsSummary 1

Overall WC results 2

WC results by segment 3

Current WC performance by segment 4

Driving WC excellence 4

How EY can help 5

Methodology 5

Glossary 5

Contacts 6

2Cash in the barrel: working capital management in the oil and gas industry 2014

Overall WC results

The results from our analysis of leading global oil and gas companies in 2013 shows a deterioration in WC performance, in contrast to the improvement seen in the previous year. C2C increased by 2% in 2013 after falling by 3% in 2012.Only one of the four segments in the industry — and half of the companies analyzed in the study — reported a higher C2C in 2013 than in 2012. There were also major variations both in the level and degree of change in C2C between different companies within each segment. The top-performing companies posted a reduction of 14% in C2C, while the worst showed an increase of 12%.

These overall results were achieved against an industry background in which oil prices were almost unchanged for Brent but up 11% for West Texas Intermediate (WTI) in the final quarter of 2013 compared with the same period of 2012.

The overall deterioration in WC performance in 2013 arose from a combination of higher DSO and DIO (up 5% and 4%, respectively), partially offset by higher DPO (up 6%).

Despite the setback last year, the oil and gas industry as a whole still reported a drop of 3% in its C2C between 2007 and 2013. These improved results were driven by an increase in DPO (up 9%), partially offset by higher DIO (up 8%). DSO was slightly higher (up 1%). Half of the companies analyzed reported a lower C2C in 2013 than in 2007.

A significant factor influencing C2C — and both DIO and DPO — over time has been changes in the industry’s levels of capital expenditure, as companies take on larger and more complex

exploration and production (E&P) projects while reducing their exposure to refining and marketing (R&M) and chemical activities. For the oil and gas companies in our survey, overall capital expenditure jumped from 27% of sales (or US$170 billion) in 2007 to 40% of sales (or US$210 billion) in 2008. This proportion then gradually fell back to reach 33% of sales in 2011, as some projects were downsized or deferred in response to weakening oil prices and the global downturn, before rising again to exceed its previous peak at 42% of sales (or US$290 billion) in 2013. For 2014, overall capital expenditure is expected to level off and then ease back, as the industry becomes more selective in developing projects in order to improve returns and increase free cash flows.

Movements in oil prices have also played some part in driving the industry’s C2C, but the scale of their impact remains difficult to assess. This effect is due to a number of factors, including timing differences in passing on price changes to customers, futures/spot price arbitrage arrangements (resulting in refiners choosing to increase or reduce physical stocks) and investment decisions based on oil prices. The graph below reveals a strong relationship between changes in the oil price and the industry’s C2C between 2007 and 2009, which became much weaker in the ensuing four years.

Figure 1. Change in the industry’s capital expenditure in value and % of sales, 2007–13

Source: EY analysis, based on publicly available financial statements.

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bFigure 2. Change in the industry’s C2C and oil prices, Q407–Q413

Source: EY analysis, based on publicly available financial statements.

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Source: EY analysis, based on Q4 publicly available financial statements.

Note: DSO (days sales outstanding), DIO (days inventory outstanding, based on FIFO), DPO (days payable outstanding) and C2C (cash-to-cash), with metrics calculated on a sales-weighted basis.

Table 1. Change in WC metrics, Q413 vs. Q412

Industry Q413 Change Q413 vs. Q412DSO 39 5%DIO 30 4%DPO 40 6%C2C 29 2%

Table 2. Change in C2C by segment, Q413 vs. Q412

C2C Q413 Change Q413 vs. Q412Integrated 27 5%Independent E&P 0 down 1 dayIndependent R&M 25 -5%Oilfield services 97 -8%Industry 29 2%


A closer analysis reveals major variations between the different segments of the oil and gas industry in the degree and direction of change in C2C over time.Integrated Compared with 2012, integrated companies reported a deterioration in WC performance in 2013, in contrast with the previous year. This segment’s C2C was up 6% in 2013 after falling by 8% in 2012.

These weak results arose from higher DSO and DIO (up 6% each), partly offset by DPO (up 6%).

Seven integrated companies out of the 9 analyzed in our study reported higher C2C, with wide variations in the degree of change, partly due to differences in the levels of exposure to E&P and R&M.

Since 2007, integrated companies’ C2C has fallen by 12%, owing to much higher DPO (up 12%) partly offset by an increase in DIO (up 7%). DSO was lower (down 3%). For DPO, the increase reflects rising E&P spend, partly due to the higher development costs of new oil and gas fields. Better management of procurement and payables processes was a further contributing factor.

These improved results came from higher DPO (up 5%), while the changes in both DSO and DIO were limited (down 1% and up 1%, respectively). Two R&M companies out of the four analyzed in our study posted lower C2C.

Despite the progress made, the results for independent R&M companies still show a significant deterioration in WC performance since 2007, with C2C up 10%. DSO and DPO were down 13% and 14%, respectively. DIO is up 5% since 2007 but remains well below the levels recorded in the 1990s, as supply chains have become much more efficient through logistics and distribution rationalization, improved inventory management and use of new technologies.

WC results by segment

Independent exploration and production (E&P)Independent E&P companies’ WC results improved in 2013, partly recouping the ground lost in the previous year. C2C was down by 1 day, after rising by 2.5 days in 2012. These improved results were driven by both payables and inventory (with DPO up 2% and DIO down 8%), partly offset by a poor showing in receivables (DSO up 1%). Five independent E&P companies out of the eight analyzed in our study reported lower C2C.

Since 2007, independent E&P companies’ C2C has decreased by 12 days, driven by much higher DPO (up 12 days, or 17%), partly due to increased capital expenditure. DIO was down 3%, while DSO remained unchanged.

Oilfield servicesIn comparison with 2012, oilfield services companies reported much better WC results in 2013, helping them to recoup some of the ground lost in the previous year. C2C was down 8% after a rise of 12% in 2012. Six companies out of the eight analyzed in our study in this segment posted lower C2C in 2013 than in 2012.

Despite the progress made, the results for oilfield services providers still show a significant deterioration in WC performance since 2007, with C2C up 12%.

The high degree of change in C2C and in each metric reflects the considerable changes undergone by the oilfield services industry in recent years, precipitated by factors including intense price competition, input cost inflation, additional supply chain responsibilities (as oil and gas producers outsource more of their service operations), technological innovations, tighter regulations and industry consolidation. These factors have resulted in additional WC requirements, with clients also demanding bigger discounts, together with enhanced payments terms (including lower advances) and higher service levels.

The industry’s risk profile has also continued to evolve. Projects are larger and more complex; some of these contracts are also agreed on a fixed-priced or shared-risk basis, bringing additional risks associated with cost overruns, cost inflation, labor availability and supplier performance; and the demand for oilfield services has increasingly been coming from new regions and clients, adding new challenges.

Independent refining and marketing (R&M)Compared to 2012, independent R&M companies reported a strong improvement in WC performance in 2013, with C2C dropping by 5%. This was in contrast to the 1% rise in C2C in 2012.


Table 3. Change in WC metrics for integrated, Q413-Q407

Integrated Change Q413 vs. Q412 Change Q413 vs. Q407DSO 6% -3%DIO 6% 7%DPO 6% 12%C2C 6% -12%

Table 4. Change in WC metrics for independent E&P, Q413-Q407


Independent E&P Change Q413 vs. Q412 Change Q413 vs. Q407DSO 1% 0%DIO -8% -3%DPO 2% 17%C2C down 1 day down 12 days


Table 5. Change in WC metrics for independent R&M, Q413-Q407

Independent R&M Change Q413 vs. Q412 Change Q413 vs. Q407DSO -1% -13%DIO 1% 5%DPO 5% -14%C2C -5% 10%


Table 6. Change in WC metrics for oilfield services, Q413-Q407

Oilfield services Change Q413 vs. Q412 Change Q413 vs. Q407DSO -1% 17%DIO -7% 13%DPO 10% 27%C2C -8% 12%


Current WC performance by segment

Today, WC performance continues to vary widely between the different segments of the oil and gas industry. This divergence reflects the characteristics of each segment, with each type of business operating at varying points in the oil and gas value chain.Of the various oil and gas segments, independent E&P still exhibits the lowest level of C2C (0 days). This reflects the segment’s strong results for DIO and DPO, with the latter supported by high levels of capital expenditure. Integrated companies and independent R&M present similar levels of C2C (25-27 days), but with differences for each WC metric. Independent R&M companies boast a superior performance in DSO, helped by their marketing operations’ inherently low level of receivables. In contrast, their DIO is much higher, as supply chain capabilities continue to be regarded as a lower priority

than the need to absorb fixed costs and maximize refineries productivity. Their DPO is lower due to reduced capital expenditure requirements.Oilfield services providers display much higher C2C (97 days) than the other segments. This reflects the complex, long-cycle nature of these companies’ operating model, which involves a contract payment structure.Our analysis also reveals wide variations in performance on C2C and other WC metrics between different companies in each segment. However, these differences in WC performance may be due — at least in part — to variations in a number of factors, including the mix of products and services (with each segment carrying varying levels of WC); levels of vertical integration; the nature of production and distribution arrangements and supply contracts; and production, logistics and distribution infrastructure.

Companies seeking to achieve further progress in WC will need to take an approach that balances tactical, operational and structural levers.

Table 7. WC performance by segment, Q413


Days Industry Integrated Independent E&P Independent R&M Oilfield servicesDSO 39 38 63 21 74DIO 30 29 11 31 56DPO 40 40 74 27 33C2C 29 27 0 25 97

Oil and gas companies have made some strides in improving the management of their WC, albeit with variations in the degree and pace with which each of them has been able to deliver these efficiencies.

Driving WC excellence

E&P R&M Oilfield services

Stru

ctur

al

Strategic and operational planning Demand forecastingSupply chain planning

Scheduling and inventory managementFacilities maintenance schedulingSourcing and fulfillment strategies

Collaboration across the extended enterprise

Tact

ical

Payment deferralsUse of zero balance accounts

Collections push via discounts

Timely billing

Ope

ratio

nal Management of production and service agreements and contractsEffective management of payment terms for customers and suppliers

Management of excise dutiesManagement of royalties

Speed and accuracy of billing and cash collectionsEnhancement of risk management policies

Appropriate measures and incentives for cash improvement

Shared-services organization

Table 8. Cash improvement levers


5

This report is based on a review of the WC performance of the largest 29 oil and gas companies (by sales) headquartered in the US and Europe. The insights are derived from an analysis of publicly available annual and quarterly sources of information. The oil and gas companies in the research sample include integrated (9), independent E&P (8), independent R&M (4) and oilfield services companies (8).

• Integrated: BP, Chevron, ENI, Exxon Mobil, Neste Oil, OMV, Royal Dutch Shell, Statoil and Total.

• Independent E&P: Anadarko Petroleum, Apache, BG Group, Chesapeake Energy, ConocoPhillips, Devon Energy, Marathon Oil and Occidental Petroleum.

• Independent R&M: Marathon Petroleum, Phillips 66, Tesoro and Valero Energy. • Oilfield services: Baker Hughes, Cameron International, FMC Technologies,

Halliburton, National Oilwell Varco, Oil States International, Schlumberger and Weatherford International.

While the findings are based on publicly available data, the performance of individual companies is not discussed or disclosed. Any broader industry commentary is based on general industry observations and not on views of any single organization.

Methodology

• DSO (days sales outstanding): year-end trade receivables net of provisions, including excise duties and VAT and adding back securitized receivables, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise)

• DIO (days inventory outstanding): year-end inventories net of provisions, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise). Reported DIO for oil and gas companies have been restated based upon first-in, first-out (FIFO) valuation.

• DPO (days payable outstanding): year-end trade payables, including excise duties and VAT and adding back trade-accrued expenses, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise)

• C2C (cash-to-cash): equals DSO, plus DIO, minus DPO (expressed as a number of days of sales, unless stated otherwise)

• Pro forma sales: reported sales net of excise duties and VAT and adjusted for acquisitions and disposals when this information is available

Glossary

EY’s global network of dedicated working capital professionals helps clients to identify, evaluate and prioritize realizable improvements to liberate significant cash from WC through sustainable changes to commercial and operational policy, process, metrics and procedure adherence.We can assist organizations in their transition to a cash-focused culture and help implement the relevant metrics. We can also identify areas for improvement in cash flow forecasting practices and then assist in implementing processes to improve forecasting and frameworks in order to sustain those improvements.WC improvement initiatives often create value. In addition to increased levels of cash, significant economic benefits may also arise from productivity improvements, reduced transactional and operational costs and lower levels of bad and doubtful debts and inventory obsolescence. Our WC professionals are there to help wherever you do business.

How EY can help


Contacts

6

Region Local contact Telephone/email

Americas Steve Payne +1 212 773 0562 [email protected]

UK&I Jon Morris +44 20 7951 9869 [email protected]

Matthew Evans +44 20 7951 7704 [email protected]

Paul New +44 20 7951 0502 [email protected]

Marc Loneux +44 20 7951 3784 [email protected]

US Edward Richards +1 212 773 6688 [email protected]

Peter Kingma +1 312 879 4305 [email protected]

Mark Tennant +1 212 773 3426 [email protected]

Eric Wright +1 408 947 5475 [email protected]

Australia Wayne Boulton +61 3 9288 8016 [email protected]

Canada Simon Rockcliffe +1 416 943 3958 [email protected]

Chris Stepanuik +1 416 943 2752 [email protected]

Asia Alvin Tan +65 6309 8030 [email protected]

France Benjamin Madjar +33 1 55 61 00 67 [email protected]

Germany Dirk Braun +49 6196 996 27586 [email protected]

Bernhard Wenders +49 211 9352 13851 [email protected]

Benelux Danny Siemes +31 88 407 8834 [email protected]

Finland Gösta Holmqvist +358 207 280 190 [email protected]

India Ankur Bhandari +91 22 6192 0590 [email protected]

Latin America Matias De San Pablo +5411 4318 1542 [email protected]

Sweden Johan Nordström +46 8 5205 9324 [email protected]

Peter Stenbrink +46 8 5205 9426 [email protected]

Oil and Gas Sector contacts

Local contact Telephone/email

Global Oil and Gas Sector Leader

Dale Nijoka +1 713 750 1551 [email protected]

London Andy Brogan +44 20 7951 7009 [email protected]

Houston John McCarter +1 713 750 1395 [email protected]

Singapore Sanjeev Gupta +65 6309 8688 [email protected]

Tokyo Kentaro Nakamichi +81 3 5401 7100 [email protected]

Perth Roger Dartnell +61 8 9429 [email protected]

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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How EY’s Global Oil & Gas Center can help your businessThe oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Center supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield service sub-sectors. The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively.

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Working capital management in the oil and gas industry 2014€¦ · 1 Cash in the barrel: working capital management in the oil and gas industry 2014 Summary Cash in the barrel is