I’ve always heard that you never know how strong you are until you’re faced with adversity. If that’s the case, companies in the oil and gas industry, as well as businesses that provide services to them, have had plenty of opportunities to demonstrate their strength lately. Time and time again the oil and gas industry has been faced with serious challenges and has always emerged stronger and more competitive.
I’m sure you’ve been keeping a close eye on the daily developments in the industry – the price of a barrel of crude oil, in particular. But it’s also helpful, I think, to take the 30,000-foot view from time to time, and examine the industry at the macro level. With a slightly different perspective, two major trends appear, and from those trends come suggestions for using this slightly slower period to strengthen your ability to respond to the challenge of the next boom market.
Trend #1 – Revenue Volatility
The world is watching the price of crude oil and wondering if it has hit bottom, but the consequences are being and will be felt here at home in the following ways:
- Demand for oil and gas field services is falling as producers pare back operations following years of heightened production that led to an oversupply. As a result, buyers of these services have become well positioned to negotiate more favorable pricing and terms in their new contracts.
- Oil and gas service companies have been and will be challenged by cheap oil, which has hampered activity in their customers’ markets and, thus, forced them to reduce prices.
Trend #2 – Increasing Regulation and Evolving Policy
Regulation in the U.S. continues to play a major role in the oil and gas industry. Here are three of the top consequences of this regulatory environment:
- Offshore oil drilling will likely experience weak growth over the next five years due to stringent permitting for new drilling rigs.
- Growing regulations will likely increase operating costs for companies in this industry, preventing large gains in profitability.
- Downstream oil and gas extractors will likely expand abroad to countries where political conditions permit energy exploration, thereby lowering demand for industry services.
The oil and gas field services industry has a low level of market share concentration, with the four largest operators accounting for less than 30 percent of industry revenue. With such a diffuse market, businesses have a relatively easy entry into the field. Staying there, however, is more difficult because of fierce competition.
The good news is that the price of oil is forecasted to increase at a steady clip during the next three years, and although the market is down, companies have the ability to prepare for the future. Players in these service markets win when they anticipate their customers’ needs and position themselves to react quickly as the market improves. Some opportunities to consider are:
Opportunity #1 – Competitive Advantage through Differentiation
Differentiation is key to winning new business in this highly competitive market. What makes your company and its services the best choice for your customers?
- Many of the companies involved in land drilling are middle-market companies and can gain competitive advantage against industry giants through the emphasis of quality and niche expertise. Are you taking advantage of every opportunity you have to tell your customers about your dedication to quality and your expertise?
Opportunity #2 – Strengthening Your People
- In the area of oil and gas well servicing, an important competitive factor in establishing and maintaining long-term customer relationships is having an experienced, skilled and well-trained workforce. Are you investing in your people? Have you identified the training they need to provide high-quality service to your customers?
Opportunity #3 – Upgrading Technology and Processes
- Companies that have the most up-to-date and efficient technology have a major advantage in this industry. Are you upgrading your technology infrastructure?
- Because companies hire out rigs and crews on an agreed day-rate basis, efficient work practices are needed to ensure that costs do not exceed revenue. Have you examined your ability to work smarter and faster while delivering a quality product? What changes would help you maximize your profitability?
Conclusion
The good news is that, based on historical evidence, we will see brighter days ahead. While you wait out this slower time period, housekeeping can be done to position yourself for maximum benefit when the prices and demand start to soar. Now is the best time possible to plan for the future so that when the time comes, you can act quickly and intelligently.
The HORNE PMM team is available to help. This is the first blog dedicated to the energy industry, and we’ll share our perspective and best practices to help you prosper. Of course if you need anything from a short consultation to a in-depth analysis, just give us a call.
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