Surfing the downturn

Okay - so we're in a downturn the depth and length of which cannot be determined at this point. The last time a downturn occurred, producers and service companies spent nine long years trying to survive. Given the production overhang this time (8%), compared to the last time (25% in 1984), it's a fair bet we're going to emerge from this one in several years. Meanwhile, those of us trying to spread reduced cash flow so that shareholders won't lose all confidence, need to put some

Dec 1st, 1998

Leonard Le Blanc
Okay - so we're in a downturn the depth and length of which cannot be determined at this point. The last time a downturn occurred, producers and service companies spent nine long years trying to survive. Given the production overhang this time (8%), compared to the last time (25% in 1984), it's a fair bet we're going to emerge from this one in several years.

Meanwhile, those of us trying to spread reduced cash flow so that shareholders won't lose all confidence, need to put some positive action into our "now what" strategies. Here are some suggestions:

  • Even when the capital is not available, be an actor with regard to acquisitions, not a reactor. Search continuously for fit. Every downturn triggers creative realignment, and there is lots of room for no-cost, no-tax merging of interests and operations. A productive merger should be independent of the balance sheets, or it's just a sham for investors.
  • Revise your growth strategy every quarter, no matter what, and this goes for divisions as well as companies. During any downturn, the corporate scenery changes continuously. If another producer or service company is looking at your operations, you should know immediately if this is the direction you want to go.
  • Maintain funding for technical research and development, and shift to joint industry research if you have to. This area is always the first to be cut, but it's too good a performer over the long term to ignore (witness plunging finding costs over the last four years).
  • Challenge operations support or cost center professionals to save the equivalent of their salaries in performance efficiency, but make certain the savings are not at the expense of other cost or operations centers. Once they've tasted success in this endeavor, there will be no stopping them.
  • Upper and middle management salaries, overrides, and stock options aren't written in stone. Cut them in inverse proportion to need and performance when contracts expire.
Committed managers understand a distressed balance sheet and realize the economic chasm doesn't last forever. Nine out of ten recently employed professionals, when asked whether they would have preferred to remain employed and take less money, replied in the affirmative.

  • Keep key employees in the lower ranks from becoming preoccupied with the external search for a safe landing. With salaries capped or cut, it is psychologically necessary to avoid shrinking performance bonuses, however tempting. Give good employees a reason to wait out the downturn.
  • Don't be embarrassed about a staff reduction (you hired them!) or too proud (liftoff for share prices!). Staff reductions are a part of employment life. Poor behavior is not making a valid effort to help ex-employees find employment elsewhere. Sincere help demonstrates compassion and strength, and provides a good example to surviving employees.
The vision and attitude of a chairman or CEO are only part of any firm's long-term success in performing well during a downturn. The people who must execute that vision or relate effectively with customers or partners must be equally competent.

More than royalty

Nigeria and Indonesia will eventually emerge from severe domestic difficulties when oil prices rise, but both will ably demonstrate the problems that accompany government involvement in the petroleum industry, other than as royalty earners. Both countries are hugely dependent on oil revenues in various forms that leave little flexibility when oil prices collapse.

  • In Indonesia's case, Pertamina pledged to buy dollar-denominated crude to meet internal supply obligations. Unfortunately, the rupiah's value collapsed and Pertamina had to curtail domestic crude purchases, sending producers elsewhere. Of course, most Indonesian producers have production tied to Pertamina's transport facilities, creating a secondary investment problem for a shift to export.
  • In Nigeria's case, in order to maximize production revenues, NNPC owns a part of each field and is responsible, like all shareholders, for cash calls on exploration and development costs. Unfortunately, NNPC has passed on all the production revenues to the government and has little available for cash calls. A total of $2.5 billion has been appropriated, but very little has emerged thus far. Producers have to decide whether to carry NNPC's share and hope for payback some day, or attempt the political risk in cutting back operations.
In terms of geological risk, both countries remain extremely attractive. Also, low crude oil prices have lessened the damage by limiting production and exports. However, the dilemma has been a costly lesson for producers involved with governments that seek more than a royalty position.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.

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