Oil sector in survival mode, survey finds

Few firms have plan for lengthy downturn

Canadian oil and gas companies have been quick to initiate short-term fixes to withstand the downturn, but haven’t spent much time focusing on long-term strategy to sustain their business in an era of low oil prices, according to a new survey.

Nine out of 10 Canadian oil and gas companies surveyed by management consultancy Ernst & Young reported having either minimal or no longterm strategic cost management strategies in place to counter the current unfavourable economic conditions.

Like their global counterparts, Canadian oil and gas companies reacted swiftly to a 50% drop in prices since September by reining in capital costs, cutting staff and deferring projects in the past two quarters.

“There was a knee-jerk reaction, but there was a requirement to do that when your cash is cut in half,” said Lance Mortlock, the Calgary-based Can- adian strategy services leader at EY, said in an interview.

“Those are the low-hanging fruits, the quick wins that you can pull, which is cutting capital allocation and reducing head count. But round after round of doing that is not going to bring about structural change. It really is not a recipe for success.”

Many companies are in a “valley of despair” and in survival mode, as executives feel the downturn is worse than the collapse of 2008-09, Mr. Mortlock said.

“The feedback I got is it’s worse — it feels worse,” said Mr. Mortlock, noting that the consultancy surveyed more than 130 companies and spoke to more than 30 oil and gas executives as part of the survey.

“Executives are starting to realize this [era of low oil prices] might not change for some time. That’s why a shift to the long-term, structural approach needs to happen — it cannot all be just kneejerk.”

Oilfield services companies have been the first to report job cuts and profit squeezes, but conventional oil companies and oilsands producers are also hard-hit by the crisis, which was triggered by a glut of oil supplies amid weak global economic growth.

Looking at major projects during the next 12 months, the EY survey results suggest that Canadian conventional oil and gas projects will take the largest hit in the coming months, with 78% of respondents identifying the current economic conditions as having a high or very high impact.

“Of respondents surveyed, 69% also see the current economic environment having a high or very high impact on oilsands projects,” the survey said. “Midstream and pipeline projects will feel some impact, though far less than their upstream business partners will feel, due partly to the contractual nature of pipeline and midstream projects.”

Just over 56% of the companies surveyed said they have created a central group to manage costs, but the smaller companies are already operating in survival mode, and are instead focused on process optimization, seeking different business models, innovation, outsourcing or strategic sourcing and contracting.

The big fear is that companies’ tactical changes would cause so much damage that when the industry comes out of the downturn, it will take those bare-bone companies years to respond.

Lack of asset diversification, especially with oilsands producers, is also another area that needs to be considered.

Mr. Mortlock said while many companies are slowly focusing on the long term, the short-term cost-cutting cycle has not fully played out yet.

“There is the strong possibility that there will be headcount reductions to come,” he said. “We have an OPEC meeting in June that’s going to be key milestone and indicator of what’s going to happen. Then there are other geopolitical items at play such as Ukraine and the nuclear proliferation deal with Iran being another.”