Traditional strategies of reducing operating costs through cuts in inventory, personnel and capital expenditures, and the corresponding reduction in rates paid by oil producers to oilfield services companies and equipment providers, have had limited effectiveness as these reductions have supported the resiliency of North American marginal suppliers and have, in part, perpetuated the oversupply of oil.

Amid this uncertainty and recognizing the fundamental shift that is underway within global energy markets, strategically minded companies are beginning to search for ways to capitalize on these changes. Given the protracted length of this downturn, it is likely that the Canadian energy sector that emerges will look fundamentally different from the sector as it exists today.

The question then becomes, how do companies land on the winning side of this change?

To survive with reduced cash flow and compressed margins, operational consolidation will become paramount. Put simply, in order to conserve capital, companies will be required to have a clear vision of their core business objectives and understanding of their operational and research and development capital requirements.

For some, this may necessitate a transition away from a diversified, research and innovation based business model towards a structure which identifies core-competencies and fortifies efficiencies, allowing the company to operate at the lower-end of the cost spectrum and preserve the health of their balance sheet. For others, this may provide an opportunity to double down on new or disruptive technologies as a means of lowering their customer’s costs through more efficient technologies and processes. Both approaches entail a move beyond mere price reductions and accepting compressed margins to a focus on cultivating low-cost synergies that position a company as their clients’ core service provider during the current downturn and as prices rebound.

At this crossroad, oilfield service companies must make fundamental strategic decisions regarding the future of their business and plot a survival strategy from which they cannot readily reverse. In particular, it may be necessary for projects or technologies under development for a high-commodity price environment to be shelved in order to conserve capital, notwithstanding their potential applications, and for management teams to identify new systems or strategies moving forward. These decisions require skill, critical analysis and a holistic assessment of a company’s strengths, weaknesses, liabilities and opportunities.

Ensuring that a company has obtained proper financial, legal and operational advice with respect to such strategic decisions is critical to addressing the risk of indiscriminate cuts, emotional decision-making or unduly narrow assessments of market conditions.

Strategic decisions require strategic advice. Strong management teams recognize the importance of working closely with their trusted advisors to foster a collaborative and open dialogue, challenge assumptions, and leverage experience and expertise.

That being said, consideration must be given to the limits of the advice being received. Trusted advisors should not hesitate to leverage their own networks, whether it be their relationships with other service providers or industry leaders to ensure that their clients are getting the right advice, at the right time and to make the best informed decisions they possibly can.

There is a short window of time, while balance sheets are sufficiently robust, to permit these operational changes and position companies to survive in a low cost market.

External financial, legal and strategic advisors can greatly assist companies in making the necessary transition by providing the market knowledge necessary to facilitate greater integration and drive synergies across multiple levels of the production chain.

Although these moves require bold, visionary thinking and flawless execution, they start with asking the basic question: Are we ready?

Invitation for Discussion:

If you would like to discuss this blog in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Linmac LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.