With the collapse in oil prices over the past eighteen months, the major exploration and production companies have been doing everything they can to cut costs. Ultimately, this means the conglomerates have less cash available to pay suppliers, who provide them with essential services and products.
But, at the same time, the energy giants know they will need a healthy supplier base if they are to take full advantage of the upturn, when it eventually comes. It’s a real dilemma and one that needs a rapid solution if companies are to preserve their capital.
Despite efforts to streamline operations, cash available to pay suppliers has become scarce. Previously, the sale of equity and assets and the issuance of cheap debt buoyed the oil and gas super majors and their long tail of suppliers.
However, in response to higher financing costs and falling prices, the super majors have reduced operating costs and are facing 10-30% cuts in CAPEX this year, in addition to postponing exploration activities.
Although forecasts for the energy sector in 2016 remain pessimistic, oil companies are already positioning themselves for a market rebound by seeking additional ways to preserve their capital position.
Central to this will be their ability to access capital and maintain payments to their supplier base, which will be critical in order to take advantage of any opportunities and support their future growth.
In tackling this dilemma, energy companies are increasingly turning to supply chain finance. This facilitates faster payment between a big business and its suppliers, allowing companies, large and small, to fund their growth and inject cash back in to the real economy.
Greensill Capital is a pioneer in the supply chain finance market. Although our client is always the large company buyer and not the supplier, we help both parties achieve these aims. For suppliers, supply chain finance means they can choose when they get paid – enabling much greater control of working capital at a much cheaper price than short term bank loans or overdraft facilities.
For the large company buyers, supply chain finance provides access to previously unavailable sources of capital and minimises the risk of disruption to the supply chain while also reducing costs – and this in turn reduces the need for borrowing or CAPEX cuts.
Crucially, for both, the relationship between supplier and buyer is maintained during a period of uncertainty, enabling continued operation and forward planning.
An example of this is our current work with the Mexican state owned oil company, PEMEX. We entered into an agreement with the company in 2015 to service all US Dollar denominated contracts with suppliers.
PEMEX determines which suppliers are eligible for the supply chain finance programme and we then offer suppliers the opportunity to be paid immediately at a small discount if they wish, providing them with the option of managing their working capital at a much lower cost than traditional bank finance.
This financing solution enables PEMEX to preserve its own capital, reduce its borrowing needs, and maintain a healthy, resilient supply chain. This reduces the scale of the CAPEX cuts it needs to make, supporting future growth and leaving it well-positioned to respond to opportunities. Suppliers benefit from an increased ability to accelerate cash flow and reduce reliance on bank lines.
This additional liquidity source is available with easy documentation and carries no other costs beyond the discount charge. It means good, viable businesses are not forced out of business because of short term disruptions cash flow.
While there is no perfect solution to the current challenges faced by oil companies, supply chain finance offers a significantly viable option for oil and gas companies wanting to preserve their capital, whilst maintain essential relationships with their suppliers.
Roland Hartley-Urquhart is the US managing director of Greensill Capital