Price pressures force change in oil and gas treasury strategy
The oil and gas sector has so far avoided making wholesale change to its treasury processes, but as the low price environment continues, firms are now being forced to explore cost cutting.
Low oil prices are here to stay.
Lance Kawaguchi, sector head, global liquidity and cash management, at HSBC, says: “Previously, the price correction has been a lot quicker. Even in 2008, Opec recalibrated and the price stabilized. Now the dynamic is different, and prices haven’t recovered.
"It’s not the case that prices have been low for a long time – now we’re in an environment where they are just low.”
One result has been an increase in consolidation. Kawaguchi points to the completion of the $53 billion merger of Shell and BG Group in February and General Electric’s purchase of a controlling share of Baker Hughes in a $7.4 billion deal in October. He notes there are numerous other deals taking place among smaller companies.
“Companies are divesting assets, anything that is not core to their strategy,” he says. “Those with stretched balance sheets are looking to sell or merge to survive. The industry is looking for ways to be efficient, which ties to their cash-management strategy.”
There have already been moves from other industries to consolidate treasury models, but oil and gas firms have not previously felt the same pressure.
Bruce Meuli, global transaction services advisory director, EMEA, at Bank of America Merrill Lynch (BAML), says companies are looking first at where they can cut excess spending, which means changing their approach to how treasury is run.
“If the business is generating significant cash, it can drive behaviour which does not optimize operational investment spend – that is, there is no burning platform to drive cost effectiveness,” says Meuli.
“Under a low oil-price environment, the oil and gas sector is reviewing how and where it spends tech investment dollars and investigating other approaches, including external consultants, contract resources and vendor solutions.”
In the past, the solution for treasurers in the sector looking for efficiency has been to adopt new technology.
Bruce Meuli, BAML
Meuli says the shift in attitude is a welcome change, adding: “Treasurers can rely too heavily on technology spend to drive operational improvements. For example, the sector has made significant investments in ERP systems, which has been viewed both positively and negatively by treasurers.
“As investment spend in technology is reviewed, they will need to work more effectively with internal – such as shared service centres – and external partners who can provide solutions which require less spend," he says. "This includes banks.”
Finding ways to consolidate to save funds internally has become more important too.
Kawaguchi says there has been a shift in focus towards reducing the number of bank accounts held, and the number of banks a company partners with. Companies can have hundreds of bank accounts and banking partners, which are costly and inefficient to maintain.
“They were fine before with having multiple accounts," adds Kawaguchi. "Now every account has to have a rationale, and be held with one bank, to reduce the number of relationships globally.”
With this, the role of the treasurer has become vital in pulling together the merged businesses.
Kawaguchi says: “Mergers bring increased workload, liquidity issues and technology challenges for treasurers. The biggest issue is often the acquired company will have a different or no ERP in place.
"Integration can be a tiresome task especially when faced with short timeframes but is extremely important. Companies are looking at how they can leverage their bank in this process.”
BAML's Meuli says that having to consolidate operations is a good long-term strategy for the oil and gas companies.
“Many lower-margin businesses have experienced the issue of shrinking budgets, and learned to make do with less," he says. "But it is a good learning process for them. They can become more effective and achieve what they need to do, in a more efficient way.
"This will provide continuing benefits if the discipline is maintained in a less-challenging business environment.”