13
Asia Pacific Sector Insights
| Oil Price Drop: How Treasurers Might Navigate the Current Volatility
As a consequence, oil majors, mid-tiered and
oil services companies have been forced to
implement drastic cost-cutting measures.
Braving Volatilities
To weather lower oil prices, some immediate
steps company boards may consider include:
i
Deferring major projects requiring
significant capital expenditure (capex);
ii
Booking impairments following asset
write downs;
iii
Selling and leasing back pipeline
infrastructure;
iv
Making redundancies; and
v
Cutting discretionary spending.
The current period of price drop is the longest
peak-to-trough decline since the 1980s. Although
analysts suggest oil prices are likely to remain at
depressed levels for the foreseeable future, such
protracted swings will not last forever.
With some market estimates suggesting USD150
billion of capex is at risk if the oil price remains
around USD50/bbl, swift action is essential.
One priority is for companies to quantify their
exposure under different oil price scenarios for
the period ahead and to determine how resilient
they are. Findings from this modelling may call
for the following measures:
•
Reduce usage of cash:
Reduce overall capital
expenditure by delaying discretionary and
non-essential projects. If possible, boards
should consider reducing dividends to ride out
the current downturn.
•
Maintain adequate liquidity buffer:
Exploration and production companies with
an insufficient liquidity buffer should consider
reducing or deferring capital expenditure
accordingly. Additional funding measures
should be considered to repair stretched
balance sheets.
•
Migrate from organic to inorganic growth:
Delay investment or replace projects with
opportunistic acquisitions. Explore the
possibility of substituting organic growth with
inorganic growth, which is earnings accretive.
Strategic mergers and acquisitions are likely
to increase as illustrated by the Halliburton
acquisition of Baker Hughes in November 2014
and more recently Shell’s acquisition of BG.
•
Reserve for the future:
Acquisitive firms
have maintained a lower leverage level to
keep “dry powder” for future acquisitions. If
leverage is not high, potential acquirers
should issue now to build a liquidity buffer.
If leverage is high, consider raising equity to
strengthen the balance sheet.
•
Reduce financing costs:
Consider refinancing
higher cost debt and lock in lower rates
available in the current low interest rate
environment, replace short-term debt with
longer tenor debt.
•
Deploy strategic hedges:
Establish a hedging
policy that ensures appropriate action can be
taken when the opportunity arises. Issuing in
US dollar provides a natural hedge as oil is a
US dollar-denominated commodity.
That said, treasurers should examine tactical
measures to optimize processing efficiencies
and drive down often hidden costs across their
treasury operating environment. These include:
•
Benchmark and optimize working capital:
Review end-to-end treasury processes and
front-to-back operations to ensure best-in-class
solutions are deployed for optimal working
capital management.
In that regard, we have worked with our
clients using Citi’s Treasury Diagnostics
benchmarking tool to measure their
treasury practices relative to their industry
peer group. The diagnostic is specifically
designed to evaluate treasury practices
by measuring a company’s performance
relative across six critical areas of treasury
operations: governance and controls,
liquidity management, cash and working
capital management, subsidiary funding and
repatriation, risk management and systems
and technology.
Based on a detailed questionnaire providing
insight on the client’s treasury performance,
a customized benchmarking report is
generated. This is then evaluated against
industry peers and best-in-class companies,
namely, those that continually set benchmarks
of truly world-class practices.
•
Control and visibility of cash:
Treasurers
should also review their existing cash flow
forecasting (CFF) processes. Manually
intensive processes, which typically use
Microsoft Excel to gather data from operating
entities before the treasurer has a clear view
of cash availability across the organization,
should be improved.
As cash availability and CFF assume even
greater importance, how fast this information
is collated, transmitted and disseminated is
critical to ensure excess cash is deployed to
where it is most needed.
We have
worked with our
clients using
Citi’s Treasury
Diagnostics
benchmarking
tool to measure
their treasury
practices
relative to their
industry peer
group.
