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Cash in the barrelWorking capital management in the oil and gas industry 2011
Cash in the barrel — Working capital management in the oil and gas industry 2011
SummaryCash in the barrel is the latest in a series of working capital management reports published by Ernst & Young.
Global oil and gas companies managed to improve working capital (WC) performance in 2010 compared with 2009, with cash-to-cash (C2C) dropping by 4%. These results occurred in the context of stronger oil prices and recovery in capital spending.
The level of improvement, however, did little to reverse the deterioration in WC performance seen in prior years. The industry’s C2C was still up 21% between 2003 and 2010.
While measuring “like for like” progress has been made diffi cult by changes in the oil price, analysis also shows varying trends across the industry. For leading performers, benefi ts have been achieved by streamlining supply chains (although much of the focus in this area has been on reducing complexity and costs), managing payment terms more effectively with suppliers; collaborating more closely with each partner of the extended enterprise; globalizing procurement; and enhancing risk management policies.
Today, current WC performance still varies widely across the industry’s core segments and its companies. While part of this gap may be due to variations in business models, this is also explained by fundamental differences in the degree of management focus on cash and process effectiveness.
For each company, huge opportunities for improvement exist, for example, within inventory replenishment, manufacturing scheduling, demand forecasting and supply chain planning, billing, collection and payment terms, contractor management and sourcing.
Contents
Overall WC results 1
WC results by segment 2
WC variations by segment 3
How Ernst & Young can help 4
Study methodology 4
Glossary 4
Contacts 5
1
Overall WC resultsA review of the WC performance of global oil and gas companies for 2010 reveals a year-on-year improvement compared with 2009, with C2C dropping by 4%.
Three segments out of four and two-thirds of the companies analyzed reported better results, but with a large difference in trends and in the degree of change among its constituents. Leading companies for example posted a reduction of 9% in C2C while there was an increase of 17% for laggards.
These results occurred in the context of stronger year-on-year oil prices (on average and at year-end) and recovery in capital spending. Gas prices were volatile, higher on average, but lower at year-end.
There is generally a direct relationship between changes in oil price and changes in the industry’s C2C performance, the degree of which varies across its core segments. Average oil and gas prices in 2010 were 29% and 10% above 2009, respectively. In Q4 2010 compared with the same period of 2009, oil prices were 12% higher, while gas prices were 18% lower. Variations in oil price also drive capital spending. In 2010, capital spending for the companies analyzed was up 2% compared with 2009, after being down 3% the year before.
The level of WC improvement, however, did little to reverse the deterioration in performance seen in prior years. The industry’s C2C was still up 21% between 2003 and 2010. This is largely attributable to the deterioration in levels of inventories (DIO), refl ecting the impact of much stronger oil prices, but also higher levels of physical stocks. By contrast, the differential between receivables and payables cycles has been reduced since 2003, with the level of DPO exceeding that of DSO at the end of 2010 (up 17% and 38%, respectively, over the period under review).
For the industry, volatility in the oil price has led to large swings in C2C, notably in recent years. At the end of 2008, for example, when oil price reached its lowest level for fi ve years, C2C returned to within 8% of the level recorded at the end of 2003. Another signifi cant factor that infl uenced C2C was the evolution of capital expenditure, with companies reacting quickly to changing oil market conditions by accelerating or slowing and deferring projects and programs.
NB: 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
Cash in the barrel — Working capital management in the oil and gas industry 2011
Table 1: Change in WC metrics, Q409-Q410
Industry Q410 Q409 Change
DSO 37.9 37.4 1%
DIO 30.4 31.5 -3%
DPO 38.2 37.3 2%
C2C 30.2 31.6 -4%
Source: Ernst & Young analysis, based on publicly available fi nancial statements
Table 2: Change in C2C by segment, Q409-Q410
C2C Q410 Q409 Change
Integrated 27.4 29.6 -8%
Independent E&P 2.9 6.4 -55%
Independent R&M 34.0 30.7 11%
Oilfi eld services 96.7 98.4 -2%
Industry 30.2 31.6 -4%
Source: Ernst & Young analysis, based on Q4 publicly available fi nancial statements
Table 3: Change in the industry’s C2C, oil and natural gas prices, Q403–Q410
Last year’s better WC performance was due to a combination of higher payables (DPO up 2%) and lower inventories (DIO down 3%). Receivables performance deteriorated slightly (DSO up 1%).
Source: Ernst & Young analysis, based on publicly available fi nancial statements
20
40
60
80
100
10
15
20
25
30
35
US$Days
00
5
Q4, 2003
Q4, 2004
Q4, 2005
Q4, 2006
Q4, 2007
Q4, 2008
Q4, 2009
Q4, 2010
C2C WTI US$/bl Henry US$/Mmbtu (x10)
2 Cash in the barrel — Working capital management in the oil and gas industry 2011
WC results by segment Analysis of last year’s WC performance by segment shows signifi cant improvement for integrated, independent E&P and, to a lesser extent, oilfi eld services, and a deterioration for independent R&M.
Table 4: Change in WC metrics for integrated, Q409-Q410 Integrated Q410 Q409 ChangeDSO 36.0 36.2 -1%DIO 28.7 30.1 -5%DPO 37.3 33.7 2%C2C 27.4 29.6 -8%
Source: Ernst & Young analysis, based on Q4 publicly available fi nancial statements
Table 5: Change in WC metrics for independent E&P, Q409-Q410 Independent E&P Q410 Q409 ChangeDSO 76.9 65.5 17%DIO 12.7 14.4 -12%DPO 86.8 73.6 18%C2C 2.9 6.4 -55%
Independent R&MIn contrast with other segments, independent R&M reported a year-on-year deterioration in WC performance, with C2C rising by 11%. However, only half of them showed higher C2C.
DIO rose by 10%, refl ecting the impact on performance of much stronger oil prices due to the segment’s position in the industry value chain, compounded by the importance and composition of inventories. DSO was also up 6%, but this was offset by an increase of 7% in DPO.
Since 2003, C2C increased by as much as 37%. Inventories were much higher (DIO up 59%) and only partly offset by increased payables (DPO up 33%). Receivables (DSO) were slightly up.
Table 6: Change in WC metrics for independent R&M, Q409-Q410 Independent R&M Q410 Q409 ChangeDSO 21.6 20.4 6%DIO 44.2 40.1 10%DPO 31.8 29.8 7%C2C 34.0 30.7 11%
Oilfi eld servicesFor oilfi eld services, WC performance improved slightly in 2010 compared with 2009, with C2C down 2% and fi ve companies out of eight showing better results.
Progess came entirely from lower levels of inventories (DIO down 9%). By contrast, levels of receivables increased by 3%, suggesting that E&P companies may have chosen to stretch terms with their suppliers despite a backdrop of better pricing conditions for oilfi eld services.
Yet measuring oilfi eld services providers’ receivables and inventory performance (using DSO plus DIO as a measure) still shows a year-on-year decline of 3%.
With regard to payables, last year’s results show a deterioration in performance (DPO down 6%), which indicates that service providers may have failed to pass that pressure from customers down to their own suppliers. Since 2003, C2C increased by just 3%. DSO plus DIO gained 5%, while DPO rose by 14%.
Table 7: Change in WC metrics for oilfi eld services, Q409-Q410 Oilfi eld services Q410 Q409 ChangeDSO 70.4 68.1 3%DIO 55.1 60.8 -9%DPO 28.8 30.5 -6%C2C 96.7 98.4 -2%
IntegratedFor integrated companies, WC results were strong in 2010, with C2C dropping by 8% compared with 2009. Each WC component contributed to this improvement.
Seven companies out of nine reported lower C2C. Variations in performance, however, were partly due to differences of exposure to E&P, R&M and oilfi eld services.
Since 2003, C2C increased by 18%, due to higher inventories (DIO up 52%) and, to a lesser extent, to receivables (DSO up 14%), partly offset by rising payables (DPO up 38%).
Independent E&PIndependent E&P companies posted better WC results in 2010, with C2C falling by 3 days. The magnitude of the change (-55%) was exaggerated by the relatively low level of WC inherent in the nature of the business. Four companies out of six reported lower C2C.
Progress came mostly from payables, partly associated with rising capital expenditure and anticipation of near-term growth in activity. Payment terms with suppliers also appear to be slightly more favorable. By contrast, there was a severe deterioration in receivables performance.
Since 2003, C2C decreased from 9 days to 3 days on the back of higher payables (up 27 days, or 45%), partly offset by increased receivables (up 20 days, or 35%). Inventories (DIO) rose slightly.
Source: Ernst & Young analysis, based on Q4 publicly available fi nancial statements
Source: Ernst & Young analysis, based on Q4 publicly available fi nancial statementsSource: Ernst & Young analysis, based on Q4 publicly available fi nancial statements
3Cash in the barrel — Working capital management in the oil and gas industry 2011 3
WC variations by segment WC performance varies widely across the oil and gas industry segments. This refl ects the specifi c nature of each segment, e.g., industry characteristics and dynamics, cost and investment profi le, and regulatory environment, with each operating at various points of the oil and gas value chain.
Data shows stronger C2C performance for E&P (3 days) than for R&M (34 days), with integrated companies (27 days) close to R&M. For E&P, this refl ects strong results for DIO and DPO, supported for the latter by high levels of capital expenditure. R&M boasts a superior performance in DSO, helped by the low level of receivables inherent to the marketing operations. On the contrary, inventory levels (DIO) are kept high, as make-to-stock is commonly used for refi ning products.
Oilfi eld services carry much higher C2C (97 days) than other segments. This refl ects the complex, sometime long cycle nature of the segment’s operating model, with certain long-term contracts carrying signifi cant down payment and progress billing terms.
Table 8: WC variations by segment, Q410
Days Industry Integrated Independent E&P Independent R&M Oilfi eld services
DSO 38 36 77 22 70
DIO 30 29 13 44 55
DPO 38 37 87 32 29
C2C 30 27 3 34 97
Source: Ernst & Young analysis, based on Q4 publicly available fi nancial statements
Some oil and gas companies are also exposed to the production of chemicals, which generally exhibits a high C2C.
Analysis also shows wide variations in performance for C2C and other WC metrics among companies within each segment of the oil and gas industry. Part of this performance gap, however, is due to differences in sales mix (with each segment carrying varying levels of WC), levels of vertical integration, nature of supply contracts, and production, logistics and distribution infrastructure.
The spread of performance among companies is larger for oilfi eld services and E&P than for R&M. For E&P, this bigger dispersion of performance may be partly explained by differences in products and customer mix and levels of capital expenditure. For oilfi eld services companies, this refl ects the nature of their related subsegments, with each individual company operating at various points of the life cycle of a reservoir, as well as variations in the way manufacturing strategies have been deployed.
4 Cash in the barrel — Working capital management in the oil and gas industry 20114
How Ernst & Young can helpTo support companies in gaining greater control over their cash fl ows and addressing WC opportunities and challenges, Ernst & Young helps identify, evaluate and prioritize realizable improvements in WC derived from process improvements, elevated compliance levels or changes to commercial terms. We also help companies to implement these WC and cash fl ow improvements and realize the resulting benefi ts.
To help organizations make the transition to a cash-focused culture, we also help them implement the relevant metrics and identify areas for improvement in cash fl ow forecasting practices. We can then assist in implementing processes to improve forecasting and frameworks to sustain improvements.
WC improvement initiatives are often self funding. In addition to increased levels of cash, signifi cant cost benefi ts may also arise from process optimization, through reduced transactional and operational costs and lower levels of bad and doubtful debts and inventory obsolescence.
Study methodology
This report is based on a review of the WC performance of the largest 31 oil & gas companies (by sales) headquartered in the US and Europe. Insights developed are based on publicly available annual and quarterly sources of information.
Integrated (13 companies): Amerada Hess, BP, Chevron, ConocoPhillips, ENI, Exxon Mobil, Marathon Oil, Murphy Oil, Neste Oil, OMV, Royal Dutch Shell, Statoil and Total.
Independent E&P (6 companies): Anadarko Petroleum, Apache, BG Group, Chesapeake Energy, Devon Energy and Occidental Petroleum.
Independent R&M (4 companies): Petroplus, Sunoco, Tesoro and Valero Energy.
Oilfi eld services (8 companies): Baker Hughes, Cameron International, FMC Technologies, Halliburton, National Oilwell Varco, Oil States International, Schlumberger and Weatherford International.
While the fi ndings are based on publicly available data, the performance of individual companies is not discussed or disclosed.
• DSO (days sales outstanding): year-end trade receivables net of provisions, including VAT and adding back securitized and factored 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)
• DPO (days payable outstanding): year-end trade payables, including 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 VAT and adjusted for acquisitions and disposals when this information is available
Glossary
5Cash in the barrel — Working capital management in the oil and gas industry 2011
ContactsWorking Capital Services contactsRegion Local contact Telephone/email
UK&I Jon Morris +44 (0) 20 7951 [email protected]
Matthew Evans +44 (0) 20 7951 [email protected]
US Steve Payne +1 212 773 [email protected]
Peter Kingma +1 312 879 [email protected]
Edward Richards +1 212 773 [email protected]
Eric Wright +1 213 977 [email protected]
Australia Wayne Boulton +61 3 9288 [email protected]
Canada Simon Rockcliffe +1 416 943 [email protected]
Far East Noreen Tai +86 20 2881 [email protected]
France Benjamin Madjar +33 1 55 61 00 [email protected]
François Guilbaud +33 1 46 93 77 [email protected]
Germany Dirk Braun +49 6196 996 [email protected]
Carsten Lehberg +49 711 9881 [email protected]
Benelux Danny Siemes +31 88 407 [email protected]
Italy Stefano Focaccia +39 [email protected]
Nordics Johan Nordström +46 8 5205 [email protected]
Peter Stenbrink +46 8 5205 [email protected]
Oil & Gas Sector contactsLocal contact Telephone/email
Global Oil & Gas Sector Leader
Dale Nijoka +1 713 750 [email protected]
London Andy Brogan +44 (0) 20 7951 [email protected]
Houston Jon McCarter +1 713 750 [email protected]
Singapore Sanjeev Gupta +65 6309 [email protected]
Tokyo Kentaro Nakamichi +81 3 5401 [email protected]
Perth Roger Dartnell +61 8 9429 [email protected]
AcknowledgmentsOur special thanks go to Marc Loneux, our WC research director, for his energy in driving to completion the data accumulation and analysis required for this report.
Ernst & Young
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