The energy sector has already felt the impacts of the coronavirus. The outbreak has contributed to a dampened demand for oil, resulting in plummeting oil prices and production declines, especially in the wake of the Russia-OPEC price war. As we move forward, then, the energy sector expects to face two headwinds: managing the issues of the health emergency all sectors face, and simultaneously coping with a low oil-price scenario, lower demand and the need to shore up revenue and manage debt obligations.
Typical contingency plans enable operational effectiveness following events like natural disasters, cyber incidents and power outages, among others. They don’t generally take into account the widespread quarantines, extended school closures and added travel restrictions that may occur in the case of a health emergency, such as COVID-19.
When it comes to disaster preparedness, we know you’re laser focused. However, here are some areas to think about as you address potential issues related to COVID-19.
The energy industry is likely to continue to struggle in the wake of a precipitous drop in oil and gas prices (and share prices) due to dampened demand from the effects of COVID-19 and recent failed negotiations between OPEC and Russia.
Looking ahead, this environment of depressed oil prices, and revenue, and production declines will likely continue to present major challenges for oil and gas companies, especially for those at risk of being unable to refinance debt or meet existing debt covenants. As a result, the industry could well face potential bankruptcies.
Even in a scenario in which the market rebalances from Saudi Arabia’s decision to add production, and demand bounces back following a COVID-19 containment, the industry may still be looking at a prolonged recovery period lasting as long as two years (based on historical production decline curves). If, however, OPEC and Russia come together on joint energy policies, the recovery could likely be shorter.
Energy companies will need to take immediate and contingent safety measures for their employees, in particular, deciding which functions can be done remotely should an outbreak occur within their ranks.
Operators will also likely reduce their capacity and cost structure through staff reductions and related measures as their activity levels decline.
Energy companies may need to consider outsourcing portions of their corporate functions, moving IT to the cloud, for example, or shifting internal non-core operating functions to contractors. Such changes can lower operating costs and eliminate maintenance capital.
Companies should expect weak links in their supply chain, as some vendors and suppliers may face operational or financial struggles of their own. This may create supply chain bottlenecks both nationally and internationally.
As with previous downturns, the industry will likely move quickly to cut discretionary and capital spending to support operations. A key question for oil and gas companies: Do they have the financial reserves to weather the storm or even capitalize on the tumult in the industry?
Disruption in the sector may lead to numerous financial disclosure implications, and companies may need to make the necessary assessments across their business — from the value of assets to liquidity and other risk disclosures.
Energy companies must react to and plan for changes to supply chains and workforce global mobility due to COVID-19. Each of these changes requires careful consideration of potential tax implications, and companies ought to consider these implications now.
Multinational companies should expect potential cash flow constraints from foreign operations — including cash repatriation complications and irregularities. Cash could also get bottlenecked when goods are paid for but are not supplied (or delayed or stranded). Such cash bottlenecks may occur in geographies most affected by COVID-19.
Companies should prepare for challenges in access to capital and credit markets and plan for a possible contraction in global cash liquidity.
The energy sector has been buffeted by external events — and how and when things will return to normal depends on fast-changing variables, from geopolitics to the global containment of COVID-19. For some companies in the sector, it may mean taking every measure possible to survive. For others, there may be opportunities to prepare for a recovery by protecting their cash flow or acquiring undervalued companies.
Plan for a future in which prices begin to recover. What assets, people and capabilities will you need or want then? Look for ways to preserve what you might need later.
Many energy companies will be compelled to make cuts during this volatile period. Some will be austere. So be surgical with cuts while balancing short- and long-term needs.
Keep in mind that austerity measures should be tempered to preserve long-term objectives. While moving quickly can certainly create an advantage, knowing where you’re going makes every change you make more impactful.
Successful energy companies have weathered down cycles before, emerging stronger afterward. Despite the stress down cycles cause, cool heads and measured, informed decision-making will help better position you to capitalize on the market recovery.