Future of oil, gas firms depends on good management

The key to navigating the choppy waters buffeting the oil and gas sector is good management in areas such as growth, costs and funding, according to a report by the Association of Chartered Certified Accountants (Acca) yesterday.

"The risk of going under is a very real one for many companies," said Ms Faye Chua, head of futures at Acca, who headed the study.

"Three major factors have combined to create a perfect storm in the sector," she noted, citing lower cash-flows given depressed oil prices and the existing debt overhang.

The third factor is the so-called "great crew change", as the impending retirement of senior expert professionals over the next five years leaves a talent vacuum.

"Business chiefs who can successfully steer their organisation through this challenging period will be set to prosper," she said.

The report noted that one key area of focus for chief financial officers (CFOs) at oil and gas firms is managing growth and projects.

"With little clarity on when revenues will pick up again, CFOs need to be agile in how they re-scope or refine projects, and decisive in making short-term spending decisions for longer-term gain," it said.

They should identify and postpone projects with a high degree of uncertainty, while seeking partners to share in both the risk and reward of projects, said Ms Chua.

"If you can, explore opportunistic growth via acquisition in areas with room for consolidation," she added, pointing to oilfield services as one such potential segment.

"There is no reason that the current environment should lead to a growth paralysis mindset. There could be valuable growth opportunities right now, (such as) via mergers and acquisitions or by continuing investment in nationally important, high-profile projects with longer-term value."

CFOs should also concentrate asset sales on those not central to the company's long-term strategy as much as possible, while carefully managing redundancies - where inevitable - to account for "skills-gap impact and ensure readiness for future growth when the oil price rebounds", said Ms Chua.

At the same time, they should ensure the security of the firm's income stream to attract funding, even if it is reduced, and model the impact of rising interest rates on sourcing bank and debt funding.

After all, the global industry is due to repay US$550 billion (S$770 billion) in debt over the next five years, said the report.

"This means, while oil prices remain depressed, bankruptcies and distress sales are likely to be a feature of the industry," said Ms Chua.

She also urged companies to keep an eye on key sector issues, as the "inevitable short-term fire-fighting should not come at the expense of the long view".

"All these calls must be made amid ever-changing regulatory and fiscal pressures, and the biggest unknown - the outcome of the December 2015 COP21 talks on sustainability and the impact of any climate change agreements."

A version of this article appeared in the print edition of The Straits Times on February 16, 2016, with the headline 'Future of oil, gas firms depends on good management'. Print Edition | Subscribe