gbFROM CHAOS TO CLARITY Ap

ril 20

20

Minimising commercial impact and realising opportunities in the volatile energy market

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In Genoa Black’s Chaos to Clarity series we have been taking a closer look at some of the influencing factors creating problems for businesses in the current market. Our initial report looked at the economic and commercial impact of COVID-19 and the related seismic changes and opportunities. In this report we focus on the energy sector and the economic shock which has come from falling oil prices and the coronavirus pandemic.

“Although the current volatility in the energy market is set to bring challenges like none ever experienced, business leaders should not bury their heads but lead their business through economic shock.”

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INTRODUCTION

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MARKET VOLATILITY In 2014 the global energy market crashed, sending the industry into a prolonged downturn which the sector was just beginning to recover from. In March 2020, falling demand caused by the coronavirus pandemic paired with oversupply from a Russia-Saudi Arabia price war created a ‘perfect storm’ in the market and oil prices plummeted to their lowest in 18 years. Since then, prices have been extremely volatile with West Texas Intermediate (WTI) prices plunging below zero for the first time in history on April 20th and Brent Crude hitting a 21-year low.

SO, WHAT IS DIFFERENT NOW, THAN IN 2014? During the 2014-2016 downturn, there was still a relatively healthy underlying global demand for oil, specifically from countries like India and China, and industries like airlines and car fuel. Where we sit right now, airlines are grounded, global flights are down 66% since January 20201 and petrol consumption has dropped by 75% and 71% for petrol and diesel respectively.2

In 2014, the oil industry had experienced years of high oil prices and many energy sector businesses were in a good financial position to tackle the crisis. Now, many companies are already cash-strapped following years of flat revenues and margins, and a reduction in activity levels will place considerable strain on finances.3 Quite simply many will fail, others will be acquired but the agile businesses who do not dither, will survive and the few who act decisively will uncover the opportunities that are there to be seized.

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‘Opportunity exists and it won’t find you’

With this oil downturn coming so soon after the last, ‘lessons learned’ will be fresh in the heads of many energy executives and examples of survival strategies aplenty. In the period 2014-2018, the UK led the way in reducing operational production costs, cutting operational expenditure by 31%, followed by Norway with 19% and the USA with 15%.4 This highlights an industry that prior to the 2014 downturn, was stagnant in its approach to innovation.

But amongst chaos comes opportunity. The changing landscape of the UK Continental Shelf is testament to those exploration and production companies who seized the moment during the previous downturn, with Chrysaor now the UK’s largest oil and gas producer following a series of strategic acquisitions.

Despite the growing sentiment that oil and gas is a declining industry, we must stop viewing oil as a fuel source slowly dying in the face of electric powered vehicles. Derivatives of oil and gas are essential for the production of many everyday essentials including plastics, fertilisers, chemicals and crucially during a global pandemic – pharmaceuticals.

‘Opportunity exists and it won’t find you’ is a term used often at Genoa Black as we guide our customers through their strategic thinking process. Although the current volatility in the energy market is set to bring considerable challenges like none we have experienced before, business leaders must not bury their heads but lead their business through economic shock.

LOOKING AHEAD

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MAINTAINING EQUILIBRIUM

One thing being done differently this time around is the speed in which cost reduction measures are put in place. We are already seeing investments cut, projects put on hold and redundancies are real and happening, but are these coming too soon? The importance of getting these decisions right, and at the correct time, is fundamental for the survival of the industry and operators must consider the knock-on effect into the supply chain.

With oilfield service companies in an already precarious position following years of flat margins, if operators make rash decisions that put further strain on the supply sector, they risk causing supply issues and an increase in supplier prices when activity and demand recovers.5

Research from a 2010 Harvard Business Review study6 examined strategy selection during three global recessions (1980, 1990 and 2000) and identified four approaches taken by businesses:

• Prevention-focused companies that focus on cost-cutting defensive moves

• Promotion-focused companies that invest in offensive moves to provide more value than the competition

• Pragmatic companies that combine both defensive and offensive moves

• Progressive companies that deploy the optimal combination of defense and offense.

Businesses which leaned too heavily on the defensive strategies such as reducing operating costs, lowering head counts and preserving cash were less likely to pull ahead of their competitors when the market saw an upturn. Those ‘progressive’ businesses which experienced the best post-recession growth, cut costs through improved operational efficiency and by making investments in R&D and marketing as opposed to staff cuts. Although these companies may inevitably have to make some redundancies, only 23% of businesses

which fell into this category had to do so compared to 56% of those ‘prevention-focused’ companies.

Three in four of the energy sector clients Genoa Black has worked with saw diversification as an opportunity and 35% saw product development as an opportunity. If these opportunities are to be seized, businesses will have to get the balance right between cutting operational costs and investing in the right areas.

75% of the energy sector clients we have worked with see diversification as an opportunity.

“Companies that act decisively and get it right not only survive but gain market share as they rebound faster and stronger when the economy recovers.”

Guest editor: JONATHAN WHITE, Business Development Director, Apollo

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A VIEW FROM INDUSTRY

COHERENCE IN CHAOSThese troubled times call for a strong management focus to provide leadership and positive direction for a company. Out of this crisis there are positive opportunities for companies that understand their strengths, clients, and opportunities. Whilst at Apollo we are forecasting a significant reduction in our traditional oil and gas revenue we continue to invest in our energy transition opportunities as they evolve across the nation, using our current skill set to adapt to the new norm.

Other positives include incorporating the new way of working into our day to day business as we come out of the imposed lockdown restrictions, for the benefit of staff and our bottom line. We continue to emphasise and strengthen our brand, maintaining our authentic narrative online externally and internally ensuring our engagement is not only with our clients and market but most importantly our people.

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OPPORTUNITY AMONGST CHAOS

Siccar Point purchased OMV assets

Chrysaor acquired Shell assets

Chrysaor acquired ConocoPhillips assets

Neptune Oil & Gas bought Engie assets

Ithaca Energy acquired Chevron’s North Sea assets

$1bn

$3bn

$2.7bn

$3.9bn

$2bn

As the industry emerged from one of the worst downturns it had experienced in decades, in the past five years we have seen some of the biggest merger and acquisition deals in history. In the mature North Sea, oil majors exited the region whilst smaller private equity-backed operators became more prominent. Since 2016:

If we look at the Neptune-Engie deal which took place in 2018; Neptune CEO, Sam Laidlaw (formerly CEO at Centrica) had been on a hunt for oil and gas assets since founding the company in the midst of the oil downturn. With a strategy that focused on investing in large oil & gas portfolios that become available as a result of energy market dynamics,7 the energy CEO saw opportunity amongst chaos and recorded a 2018 profit of £690m.

In the supply chain, as US oil prices plunge, global service companies with business in the states will be under pressure with Halliburton set to cut $1bn in costs after reporting a $1bn revenue loss in Q1 2020.8 Such drastic cuts will likely impact their ability to deliver efficiently which could create space for smaller, agile supply chain companies to step up and prove their capabilities.

FINDING A NEW RELEVANCE

In a chaotic marketplace, businesses will have to be clear on their positioning, points of differentiation and the real value they create for their customers. This can only arise from research into your stakeholders’ needs, their challenges, your market competitors, their weaknesses and thus your opportunities. This research then feeds and leads the development of a strategy which only then is implemented via the appropriate channel to market.

GENOA BLACK CASE STUDY: Subsea Technologies Ltd

Responding to the dramatic impact of the 2014 oil price downturn, Subsea Technologies Limited (STL) turned to Genoa Black to work on a staged marketing and business development investment programme. By developing and delivering a new global positioning and messaging strategy, they took control of their position and destiny and leveraged their market innovation opportunity.

Driving a profile around being a trusted pioneer and market leader in developing innovative new technologies for the oil and gas industry, this extended to a wider brand and marketing development project. Using PR, digital channels, industry awards and the global events circuit as integrated building blocks, we focused on driving customer awareness and understanding of the STL proposition.

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“Genoa Black has successfully built the STL brand and our profile over the course of 12 months and we have felt a noticeable impact on our business, in terms of a change in conversation with our clients and potential clients where they trust us as a reputable and credible supplier.” Drummond Lawson MANAGING DIRECTOR, STL (2018)

COMMUNICATION IS KEY

From our experience working with energy sector businesses during the last oil and gas downturn we know that marketing and communications resources are often the first to go. From our research sampling the energy sector businesses Genoa Black has worked with over the past six years, we found that none cited messaging as a strength.

This is a traditional industry which we’ve often seen be averse to bold and confident communications, both internally and externally. However, taking and being in control of communications during a crisis is critical for any business and those businesses which are proactive in their communications strategy minimise risks to reputation and internal engagement.

Earlier this month, oilfield service company Worley was branded a “disgrace” by union bosses after making 27 staff redundant at the Sullom Voe oil and gas terminal rather than choosing to furlough them.

Businesses must realise that eyes are watching whilst making these crucial decisions – many of these their key stakeholders. It is more important now than ever before, to understand stakeholders and their unique needs so that messages can be delivered in an authentic, and valuable way.

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“Genoa Black from the outset has understood the pressures and challenges facing the sector, and has worked closely with READ to establish a dynamic and differentiated global brand, increase our profile amongst key markets and target audiences and importantly worked closely with us to drive business development in a challenging and competitive sector.” Gavin Lindsay Global Business Development DirectorREAD CASED HOLE (2017)

CONCLUSION

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The longevity of the UK’s oil and gas industry has been in question for some time but with the Oil and Gas Authority estimating the remaining UKCS recoverable petroleum resources as 10 to 20 billion barrels or more of oil equivalent (BOE) and with West of Shetland an increasing area of focus for exploration, this crisis is unlikely to spell the end of the sector but looks certain to redefine it.

Domestic oil and gas production accounts for 51% of UK gas demand and 74% of oil products and thus considerably reduces the UK’s energy import dependency.3 The energy industry plays an essential part in sustaining the economy and the actions which are taken now will determine not only determine the future of your business but also the sector and the UK’s position in the wider global economy.

1 OAG, Coronavirus: Understand the airline schedule changes and manage the impact, 2020

2 The Grocer, Motor Fuel Group insists forecourts will remain open despite fuel sales collapse, 2020

3 OGUK, Business Outlook, 2020

4 Rystad Energy, Operational production costs have fallen globally, led by the United Kingdom, 2020

5 Wood Mackenzie, 2020: the new oil sector supplier crunch bites, 2020

6 Harvard Business Review, Roaring out of recession, 2010

7 The Carlyle Group, Neptune Energy completes the acquisition of ENGIE E&P International SA, 2018

8 The Times, Slump gives Halliburton a billion-dollar headache, 2020

This is part of a series of reports as we look to prepare for the new reality that faces us.

We hope you have found this useful, please contact us with any questions or to receive further reports.

Lois Atherton, Marketing Executivelois@genoablack.com

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Genoa Black is the UK’s highest rated B2B Strategy Consultant:For B2B research in the UKFor B2B strategy in the UKFor B2C research in ScotlandFor B2C strategy in Scotland

All Genoa Black generated statistics have been collected over a six year period and use a sample from the 180 energy sector businesses we have worked with.