Oilfield services firms have the opportunity to implement sustainable operational efficiency improvements during the downturn
OverviewAnother downturn in the price of oil is upon us, and cost cuts are underway yet again, with one of the hardest hit sub-sectors in the oil and gas industry being oilfield services (OFS). In the last major downturn, OFS companies made cuts to expenses with a broad brush that proved to be unsustainable once demand for oil increased again. In addition to temporary expense cuts, OFS companies began consolidating, with the larger, more efficient companies acquiring those less efficient. However, data shows that perceived gains in efficiency were only temporary, as synergies were lost with time. It is no longer 2008, yet we are again seeing acquisition announcements, as two of the largest OFS companies have become targets for acquisition.
2009-2013: Prosperity And Growth
Lost Opportunities Within Mergers And Acquisitions
There is an opportunity to increase operational efficiency on a more sustainable basis by focusing attention on critical performance areas. As winston churchill said, “never let a good crisis go to waste.”
- Baker Hughes Acquires BJ Services Company. While initial OER levels decreased for BHI post-acquisition, they quickly increased upwards as synergies were lost. This can partially be attributed to a large reduction in headcount as part of the integration process.
- NOV Purchases Robbins & Myers. At the time of acquisition, Robbins and Myers had undergone significant operational efficiency improvements, becoming more efficient than NOV. These improvements did not seem to slow NOV’s upward trend, however.
- Schlumberger Procures Geoservices S.A. While Schlumberger’s total OER has remained flat after the acquisition, Geoservices’ OER levels skyrocketed to well above 1, indicating it operates as a loss. Should Geosciences work to get OER levels to that of Schlumberger, it would equate to an increase in operating income of at least $41 million.
Oil price fluctuations clearly place increased pressure on net income and increases the need for OFS companies to cut costs. While some argue that crude price drops present an opportunity to implement sustainable cost-cutting measures, most chose to undertake significant layoffs instead. The negative results from this are numerous: negative public perception, damage to employee morale, and ultimately exposure to the same mistakes companies made during the drop of 2008.
Taking a structured, detailed, top-down financial look at the organization to find key performance areas is a necessary step in ensuring sustainable operational effectiveness. Next, a bottom-up approach should be implemented to identify the detailed processes within each key impact area, streamlining operations wherever possible. This method creates sustainable cost-cutting measures that generate a positive image, internally and externally. Within the company, morale increases with perceived job security. Externally, the company can avoid negative press associated with layoffs and often see positive financial coverage from analysts looking favorably at increased efficiency. Further, it makes the company stronger, and much better prepared for the rebound in oil prices and related demand.
Will History Repeat Itself?In the fall of 2014, when the price of oil was in the middle of its steep decline, two large-scale acquisitions were announced within the OFS industry. Interestingly, the two companies being acquired were significantly above the Top 10 OER average at that time.
North highland believes that this is the perfect time for companies to increase their focus on running efficient organizations, instead of aggressively adjusting headcount or relying on broad-stroke budget cuts in an attempt to keep up with the market.For more information please contact:
email@example.com Scott Mullen
- Haspelagh, Phillippe C., and David B. Jemison. "Acquisitions – Myths and Reality." Sloan Management Review: n. pag. Print.