In the last five years, Canadian oil and gas companies have faced several challenges, including structurally low oil prices and the threat of climate change. In response to these challenges, many have increased their focus on working capital management.
Efficiently managing cash flow is crucial to any business, however, this can be especially difficult in the volatile and unpredictable oil and gas industry. And while many oil and gas companies have improved their working capital management, there is still room for improvement.
According to “Cash in the barrel", a new report from American Express® and EY, as much as CAD $30 billion is trapped on the balance sheets of Canada's oil and gas businesses. There are ways for them to access this trapped cash, namely by optimizing the three pillars of working capital: accounts receivable, accounts payable and inventory.
In the report, members of the Canadian Heavy Oil Association (CHOA) share their strategies to boost cash flow management. Here is an overview of their best practices, so that you, too, can take inspiration to make improvements in your business.
Reduce and optimize costs
One strategy oil and gas companies use to optimize their working capital management is to cut costs by adopting lean thinking. All kinds of expenses can be reduced, such as general and administrative (G&A), capital costs, operating costs and business development costs. To reduce G&A, you can sublease offices or reduce office space. Increasing the number of layoffs and replacing full-time technicians with part-time mentors will reduce your operating costs.
Those are internal measures to reduce costs, but you can also take external measures. Making strategic partnerships, acquisitions, or investments can help minimize costs and offer opportunities to generate more revenue. Divesting non-core assets and postponing certain growth opportunities are other ways to keep more cash on hand as needed.
You can also improve the management of working capital by using less short-term debt. That could mean selling assets, raising capital or using cash flow, as well as renegotiating loan terms to limit losses while staying competitive. Other options: litigating instead of settling over damages and accessing government funding for training as well as business and technology development.
Manage suppliers and payment terms
Besides reducing capital spending, there are other ways you can address cash flow problems. According to the report, managing suppliers is the easiest way for oil and gas companies to improve working capital, as it can be easily influenced. You can do this by setting up a more effective management of payment terms.
Oil and gas companies are paying more attention to payment terms and are increasingly adopting supply chain financing. This has helped certain companies increase their DPO (days of payable outstanding) and gives suppliers greater financial flexibility. You can improve your payables by paying over a longer period or later.
With longer payment terms, your business can keep cash on-hand for a longer time, improving its liquidity. American Express can help your business improve its efficiency and working capital with a number of offerings, including up to 55 days of unsecured credit.*
In addition, CHOA members are reinforcing controls with their suppliers, partners and customers. These controls include assessing vendors, master service agreements (MSAs) and other supply chain streams.
Invest in technology and innovation
The oil and gas industry has put in place short-term measures, such as reducing costs and staff, as well as putting pressure on suppliers. However, these measures are not as sustainable nor provide long-term benefits as much as investment in technology and innovation. Oil and gas companies should modernize their processes in order to survive in today's challenging environment.
In the short term, oil and gas companies will find that digital technology has the most significant impact and the best returns in terms of consolidation and normalization of disaggregated business processes in the supply chain. This can result in a strong improvement in efficiency and minimize "cash leakage," as seen in other manufacturing industries.
For the longer term, digital transformation can reduce operating costs, increase asset utilization and boost efficiency. By enabling better and faster business decisions, digitilization generates value that will ultimately improve cash flow.
To improve business performance, investing in data science and workflow automation should be a priority. By optimizing production and improving processes, automated workflows and on-site operations reduce downtime and maximize revenue. Advanced software capabilities and automation solutions improve internal efficiencies and significantly speed up the implementation of a cash flow optimization strategy.
Oil and gas companies should also focus on clean technology and Environmental, Social, and Governance (ESG) issues. ESG is a trend that is not about to fade, so your business must respond to these concerns to be better prepared for the future.
Implement best practices in your business
To implement these strategies successfully in your business, you should first determine how much cash could be released from working capital by addressing underlying business challenges. Then, look at the initiatives your company has already implemented to drive working capital improvement to see what could be done to further improve the situation. Finally, set a cash flow improvement objective in the next 12 to 18 months to evaluate progress.
* As a charge card, the balance must always be paid in full each month in which no interest charges will apply. The interest free grace period is 28, 29, 30 or 31 days from the closing date of the current statement to the closing date of the next statement depending on the number of days in the calendar month in which the closing date occurs. The number of interest-free days varies based on a variety of factors, including when charges are posted to your account, whether your account is in good standing, and the closing date of your statement.
This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.