Falling energy consumption and the credit crisis have slashed liquidity in the capital markets, yet Booz & Co.’s energy consultants advise oil companies to remember that strategic growth remains possible.
“The industry’s initial response has been to retrench, restructure, and ‘live within one’s means.’ Companies have reduced their capital spending budgets,” Booz partners said in letter to oil and gas clients.
Reminding clients that long-term energy fundamentals are strong despite currently depressed valuations, Booz suggests that now could be a good time to invest in core businesses.
“Indeed, the long-term fundamentals do support a robust outlook for the industry: The International Energy Agency forecasts that the global economy needs 64 million b/d of incremental crude supply, the equivalent of almost six times Saudi Arabia’s current capacity, by 2030,” the partners said.
A recession also represents an excellent time to gain ground in the competition for talented employees, said the Booz letter signed by R. Andrew Clyde and Andrew Steinhubl, both partners, along with Eric Spiegel, senior partner.
E&P spending forecasts
A recent report by IHS Herold suggests 2009 exploration and production spending in Canada and the US will decline at least 10% from 2008 levels. Major projects, especially oil sands projects, have been delayed or canceled.
However, Booz partners question whether the sky is falling. Instead, they say an “often-ignored part of weathering a recession successfully is about strategic growth.” They advise energy companies to contemplate strategic opportunities.
“While it is prudent to reconsider capital spending in light of reduced liquidity, companies shouldn’t miss the opportunity to fund or even accelerate projects that capitalize on future industry trends,” Booz said.
For example, service companies could invest to expand in regions, such as the Middle East, that are expected to see above-average growth.
“We realize that capital budgets will remain under pressure in the near term, given the high degree of uncertainty and the need for companies to live within their cash flow,” Booz said. “But don’t overlook the fact that as activity decreases, we are likely to see a reduction in the cost of services and raw materials, which will improve the economics of project investments.”
A recent Booz analysis identified a 12-month lag between crude prices and declines in the IHS cost inflation index.
“This suggests that now might be the right time to begin planning and negotiating with your suppliers, making key procurement decisions in anticipation of the economy’s eventual recovery,” the Booz letter said.