How to survive and thrive in the ‘new normal’ era of low oil prices and squeezed liquidity

Lower for longer

There is a growing realisation that lower oil and gas prices are here to stay. In a region where between 65%-95% of government revenues come from oil and gas, this is already having an impact - not just on Governments and Oil & Gas companies, but across all entities, corporate and Government.

It’s important that management teams act now if they are to survive, succeed and grow in this ‘new normal’ macro environment. Whilst there will be challenges, there will also be opportunities - those with the strongest balance sheet and agile management will be best placed to take advantage.

But, it won’t be easy. Liquidity is tightening as Governments absorb cash to fund their plans. In short, the ripple is being felt across all organisations operating in the region - how you react now will set a course for your future success.

Here we set out positive actions that all management teams can and should take now to survive and thrive in the ‘new normal’.


How can we help

1

Strategy and status – critical assessment

  • Assess whether your strategy and  operations are appropriate for the  changed business environment
  • Challenge your forecasts to determine whether you have sufficient available funds to control your own destiny for 18–24 months
  • Stress test your business plan
  • Consider whether your management information gives you the right information at the right time to make critical decisions

We will work with you to appraise the health of your business and explore your strategic options in the ‘new normal’ environment, examine your finances, identify areas that require focus and where you should be investing to be fit for the future.

Winners demonstrate agility and flexibility; we can help you model a range of financial, operational and workforce scenarios that reflect the impact of the oil price on your business, so you can adapt quickly.

2

Managing assets, people and capital

  • Reduce investment in working capital
  • Optimise cash management systems and reduce cash leakage
  • Identify key talent and retain them
  • Continuous productivity improvement – people, knowledge, performance culture
  • Review and reshape assset portfolios and business lines

We work alongside you to understand your cash concerns and explore the working capital and cash management across your business, whilst balancing any potential knock-on impact that might have with stakeholders such as lenders, shareholders and suppliers.

We can identify your key talent and develop appropriate incentives for them - retaining and motivating the best people is critical to your future.

3

Raise cash and access alternative sources of finance

  • Build a cash buffer and control your own destiny
  • Explore options to raise cash from non-core asset sales
  • Raise cash in the debt markets (debt, bonds, sukuk, PPP)
  • Explore equity financing

If you are a developer, we can help to renegotiate or increase your existing credit facility, understand the needs of your lenders and help you get the right information in place. We can help to manage a reduction in your credit lines, and explore what other options may be available as an alternative to bank lending including debt finance, PPPs and help in accessing local and international credit.

If you are a government body, we can help you structure transaction to attract long term private financing to cover budget short falls.

4

Managing your cost base

  • Drive operational performance & efficiency, remove waste
  • Targeted rather then general reductions
  • Reduce unnecessary complexity
  • Assest strategic sourcing, review supplier agreements
  • Does your business model need to change?

We can help you plan and execute targeted rather than across the board cuts, reduce unnecessary complexity and look at whether your business model needs to change. Businesses that successfully manage their costs only invest in those areas that are required to achieve strategic goals. They constantly plan, monitor and revise their cost strategies.

The challenge lies in managing profit with the help of cost-cutting targets, without jeopardising the long-term health of the enterprise.

5

Innovate

  • Harness and optimize technology
  • Attract international business (new technologies and insight)
  • Share knowledge internally
  • Rapid implementation of solutions

We help you to understand the role innovation plays in your strategy, and how to structure and allocate limited resources, harness knowledge and technology to be able to identify opportunities and quickly implement ideas and solutions.


PwC Perspective on the ground

Alternative Financing

Many government agencies and bodies now face budget constraints and lower funding allocations from their respective ministries of finance. However priority projects under construction along with legally binding committed projects in social and economic infrastructure still need to proceed. Private financing through Public Private Partnerships (PPP) procurement models are being seriously considered and implemented throughout the region. Building on the success of the PPP model in utilities, large scale financings in transportation, healthcare and housing sectors are now being structured in a bankable manner.

Government agencies familiar with PPP models will have a useful tool to use to cope with reduced capital budget allocations while still being able to deliver much needed investments while contractors, operators, and banks who have experience in PPP project financings will have an edge over those who do not.

Working capital

Many banks have withdrawn working capital facilities for a host of SMEs. This increases pressure on companies to quickly find means to generate their own cash.

Very quickly we’ve seen payments delayed in areas such as construction, where new projects are delayed current projects are facing payments and project delays. However, this is not isolated to the construction sector and squeezed margins, delayed payments and falling revenues threaten all sectors as the ripple effect continues.

Trading environment

A more challenging trading environment is evident in sectors such as construction, real estate, retail and hospitality and across segments of the market such as Small and Medium sized Enterprises (SMEs). In particular we are seeing a large number of small traders already experiencing severe difficulties and in some cases shutting up shop and leaving.

This anecdotal evidence is supported by the increased number of Non-Performing Loans (NPLs) reported by many local banks in the last round of quarterly results.

Debt markets and availability of credit

Banking market liquidity is reducing very rapidly following the collapse in oil prices - which has seen Governments become net borrowers. This, coupled with growing demand for debt to fund large projects and the ending of QE (seeing US rates creep up - sucking liquidity out further), has seen supply and demand shift significantly and will lead to a smaller pot of funding being available, more difficulty in accessing it and higher prices.

Divestment of assets

We are witnessing an uptick in deal flow, as vendors are looking at divestments as a means of raising capital to fund other activities. This creates a potential buying opportunity for investors with available funds that can move quickly.