Mitigating Financial Losses post Covid-19 for Oil Field Service Companies
The COVID-19 pandemic has caused unprecedented losses for oil field service companies around the globe and making them rethink prevailing operating models. For this reason, it becomes imperative for these companies to try and mitigate further risks of financial losses during and post COVID-19. High uncertainties raise the curiosity of OFS companies to deploy the application of technological solutions for better alignment between companies and their clients. Some expected changes include working remotely as against the traditional physical meetings which would help reduce their cost base and cut unnecessary non-value adding spend.
These current realities raise questions regarding the advisability of OFS Companies to maximize liquidity, by drawing down on available lines of credit before they remain more difficult to access as cash availability shrinks. In a chat with ManUp recently about how Oil service companies could mitigate financial losses in these times, Mr George Osawaye, Co-Founder of Blue Polygon Nigeria Limited, an African focused Oil services firm warn that OFS companies need to put into consideration the cost of capital and have clear visibility on how the finance would be employed or deployed to generate value or additional revenue before accessing any loans. Things are increasingly becoming very fluid in the oil industry particularly with the slump in oil price, raising the likelihood based on precedence that E&P companies may renegotiate existing contracts, hence the need for Oil service companies to be very conservative and avoid unnecessary exposures to risks such as expensive finance, which may lead to bankruptcy. Also, the issue of securing finance may become more difficult, but it is one component in a business, and other levers should be considered to ensure business survival, so the business remains a going concern. Other levers could include streamlining operational or delivery models, establishing more efficient partnership models, reviewing the competitive landscape and considering possible opportunities for developing win-win partnerships, to name a few. Years ago, the oil industry experienced downturns approximately every 7 years, but in the last 10 years, we have seen about 3 downturns between 2010–2020 , an indication of a change in the industry’s operational cycle.
SURVIVAL STRATEGIES: Exploring Joint Ventures partnerships is a strategy that can reduce high risks and uncertainties during this period as opposed to M & A activities which tend to be more permanent. Companies can experience the same benefits from JV’s while maintaining a decent level of independence, as against being permanently connected to a structure in the case of a merger. From a business point of view, we need to revisit this model and see if it makes business sense in the climate that we currently find ourselves and redeploy assets if there is overcapacity in other parts of the world as an example. JV agreements provides the opportunity to utilize assets of partners hence reducing the need to own capital-intensive equipment. The Nigerian government also needs to revisit their push for ownership of equipment and allow companies to be more flexible with the way they approach or partner international companies to access some of these equipment that they do not necessarily need to own. The ability of local companies to be nimble, flexible, and smart about how they structure themselves is of grave importance.
DIVIDEND PAYMENT Vs CAPITAL SPEND: The debate on dividend payment versus capital reinvestment comes down to how well the capital can be put to use by the E&P companies. For some investors, the question raised becomes, would I rather be paid my dividend and put the money to work myself or leave the funds with the E&P Company to continue to generate returns on investment on my behalf? In this regard, visibility on operational cost, activity and other factors must be put into consideration in the local environment, and if the E&P companies are unable to generate superior returns for their shareholders, then dividend payment should be prioritized over capital reinvestments.
Return on investment is based on global events, which drives the profitability of E&P companies. In the last 10 years, we have seen the price of oil crash because of the introduction of shale in the US. The recent power tussle between Saudi Arabia and Russia, has proven how significantly our investments can be impacted based on disagreements by other oil producing nations, hence the need for investors to regularly revisit their investments in the industry, as the investment risk profiles are regularly changing.
For companies like Blue Polygon Nigeria Limited, which offers subsea and asset integrity services mainly in Nigeria and West Africa, they have successfully created a business model that supports JV partnerships with both local and international companies. They have a strong risk-averse approach to their business which includes regular review of exposures, commitments, CAPEX levels and other risks that can impact the company in particular and the industry at large.
Finally, it is expedient that OFS companies look at areas where barriers to entry are high and add significant value to the value chain of their clients.
