By Nicolas Hutnayk (firstname.lastname@example.org)
Out of the market chaos that has taken hold of 2020 come winners and losers, and a legion of industry pioneers who can avoid complacency and succeed in turmoil. Tumultuous times have always created new titans, and toppled old ones. Only 60 of the Fortune 500 companies from 1955 are still in business. By those odds, companies that fail to avoid complacency and are slow to evolve are prone to extinction. What worked before may not work in the future. Your company can create enormous additional value by breaking through the status quo.
Welcome to the Friday Update. Each week, we will focus in this space on important topics for the market environment. This week we are addressing a question we hear often: “How do we go from best practices to optimal process?”.
Oil and gas companies and producers are going out of business at an alarming rate. The reason? They’re relying on the same practices that they have for 20 years. The market has changed.
Crude and natural gas prices have seen their share of volatility and overall weakness rise dramatically since 2014. Producers must evolve to be able to successfully operate in the potential new norm of $35-$45 crude and $2.00-$2.50 natural gas. The capital bid is backing up as banks are tightening covenants, reducing RBL commitments, exiting the energy space, and private equity companies are reducing their exposure or exiting the energy space altogether. Credit is tightening at the same time $140B of energy debt will mature between 4Q2020 and 2022. What has worked in the past isn’t going to work in this new pricing and credit environment. The status quo needs to change.
What that looks like: greater insight in unfamiliar areas. Historically, the attitude about back office functions from marketing to accounting to contract administration has been “if it ain’t broke, don’t worry about it.” It’s time to break free of this paradigm. In addition to a sound risk management program, there are millions of recoverable dollars hidden in contracts, accounting, and product marketing. We urge our clients to take a look at each of these areas and ask yourselves: are they operating at their maximum potential?
When we ask this, our clients often answer “yes!” right away, convinced they’re operating at the highest level. In truth, there is usually plenty of room for improvement.
Earlier this year, one of our clients, an oil and gas producer with a well-established physical marketing and financial hedging team asked us to provide a high-level performance review.
We parsed a comprehensive set of contracts and pricing and identified opportunities for streamlining and driving economic value into their existing process. Physical process improvement, renegotiation of gathering, marketing, and midstream agreements yielded an increase in netbacks by $2.25/boe. The company got actionable insight and a strategy to move from “best practices” (the status quo) to a new, optimal performance.
Companies need to increase their netbacks and improve operating functionality, while reducing G&A costs. They need experts to help bridge the knowledge gap and level the playing field. Our team has 3,500-plus repetitions on the physical side per year and will bring the same level of institutional strength as a major merchant shop to renegotiate gathering, marketing, and midstream agreements. Companies need access to experts that can help streamline and automate the physical process, from wellhead to revenue check. Companies often either think they can ignore or allow the middle and back office functions to operate themselves. This is the status quo. Process improvement can and will yield significant economic efficiencies and value additions. Companies will also be able to improve their decision making process with timely access to actionable data and insight. Companies can and must break through the status quo to survive.
Moving away from a perceived best practices standard to solving for optimal processes results in recovery of lost revenues, reduction in G&A costs, higher net-backs, transparency into performance relative to market, streamlined reporting, an increase in actionable data, and keen insight into corporate performance. Familiarize yourself with the unknown. Ask the hard questions and no longer accept the status quo. Be a pioneer in your industry by challenging yourself to break through the status quo.