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Cash in the barrel

Working capital management inthe oil and gas industry 2012

Summary
Contents
Overall working capital results Working capital results by segment Current working capital performance by segment Driving working capital excellence Methodology Glossary How Ernst & Young can help Contacts 1

Cash in the barrel 2012 is the latest in a series of working capital management reports published by Ernst & Young.
Global oil and gas companies managed to improve their working capital (WC) performance further in 2011, extending the progress made in 2010. During 2011, cash-to-cash (C2C) fell by 3%, bringing the total reduction to 8% in the last two years. However, this recent improvement in WC performance has not been big enough to reverse the deterioration seen in previous years. As a result, the industrys overall C2C is showing an increase of 16% between 2003 and 2011. While measuring like for like progress is made more difficult by movements in global oil prices, a close analysis reveals major variations in WC trends and in the degree of change achieved by different industry participants. Leading performers, for example, have made major strides in improving their management of WC by taking a number of steps, including streamlining their supply chains, managing payment terms more effectively with suppliers, collaborating more closely with each of the partners in the extended enterprise, globalizing procurement, and enhancing their risk management policies. Today, current WC performance continues to vary widely across the industrys core segments and between specific companies. While these performance gaps may be partly due to variations in business models, they also point to fundamental differences in the degree of management focus on cash and in the effectiveness of WC management processes. Overall, our research findings suggest that each company in our study has huge opportunities for improvement in many areas of WC, supply chain planning, demand management, scheduling and inventory management, billing, collection and payment terms, joint-venture payment arrangements, contractor management, and sourcing. Our deep and long-standing experience in the oil and gas industry confirms that a dedicated focus on WC management could release additional cash flows totaling tens of billions of US dollars across the companies in our survey, given that their aggregate levels of gross WC defined as the sum of trade receivables, inventory and accounts payable amount to some US$800b.

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Cash in the barrel Working capital management in the oil and gas industry 2012

Overall working capital results


A review of global oil and gas companies WC performance for 2011 reveals a further improvement compared with 2010. Their cash-to-cash (C2C) was down 3%, bringing the total reduction to 8% in the last two years.
These results were achieved in the context of higher oil prices (with WTI rising by 10%) but amid deteriorating refining market conditions in the final quarter of 2011 compared with the same period of 2010. Each segment of the industry and half of the companies analyzed in the study reported improved results for the year. However, WC trends and the degree of change achieved by different participants varied widely. The top-performing companies posted a reduction of 11% in C2C, while the worst showed an increase of 13%. Table 1. Change in WC metrics, Q411 vs. Q410
Industry DSO DIO DPO C2C Q411 38 28 37 29 Change Q411 vs. Q410 0% -6% -3% -3%

However, the recent improvement has not been big enough to reverse the deterioration in WC performance seen in previous years. As a result, the industrys C2C is still showing an increase of 16% between 2003 and 2011, primarily due to much higher DIO (up 43%). The deterioration in inventory performance partly reflects the impact of much stronger oil prices. By contrast, the differential between the receivables and payables cycles has been reduced since 2003, with the level of DSO exceeding that of DPO by only one day at the end of 2011. During the period under review, DSO and DPO were up 16% and 35%, respectively. Across the industry as a whole, oil price volatility has led to large swings in C2C, particularly in recent years. Another significant factor that has influenced C2C has been the evolution of the industrys capital expenditure strategies, with companies reacting quickly to changing oil market conditions by accelerating, slowing or deferring various projects and programs. Figure 1. Change in the industrys C2C and oil prices, Q403Q411
35 30 25 20 15 10 5 0 Q403 Q404 Q405 Q406 Q407 Q408 Q409 Q410 Q411 C2C WTI US$/bl 20 60 US$ 100

80

Source: Ernst & Young analysis, based on Q4 publicly available financial statements

Table 2. Change in C2C by segment, Q411 vs. Q410


C2C Integrated Independent E&P Independent R&M Oilfield services Industry Q411 27 0.4 27 96 29 Change Q411 vs. Q410 -2% down 2.5 days -23% -1% -3%

Days

40

Source: Ernst & Young analysis, based on Q4 publicly available financial statements Note: DSO (days sales outstanding), DIO (days inventory outstanding, based on FIFO), DPO (days payable outstanding) and C2C (cash-to-cash), with metrics calculated on a sales-weighted basis.

Source: Ernst & Young analysis, based on publicly available financial statements

The industrys stronger overall C2C performance in 2011 was entirely due to lower DIO (down 6%), partly offset by reduced DPO (down 3%). DSO remained unchanged.

Cash in the barrel Working capital management in the oil and gas industry 2012

Working capital results by segment


In general, our findings indicate that there is a direct relationship between movements in the oil price and changes in the oil and gas industrys C2C performance. However, the strength of this relationship varies between the different core segments.

Independent Refining & Marketing (R&M)


Relative to 2010, independent R&M companies reported a significant reduction in C2C (down 23%), with two companies out of three posting improved results. DIO was down 31%, probably reflecting lower levels of physical stocks on the back of deteriorating refining market conditions at year-end. The drop in DIO was partly offset by a corresponding decrease of 20% in DPO, while DSO was slightly lower. With these latest results, the increase in C2C seen by independent R&M companies since 2003 was much reduced to 13%. DIO and DSO rose by 16% and 6%, respectively, while DPO was up by 11%. Table 5. Change in WC metrics for independent R&M, Q403Q411
Independent R&M DSO DIO DPO C2C Change Q411 vs. Q410 -2% -31% -20% -23% Change Q411 vs. Q403 6% 16% 11% 13%

Integrated
For integrated companies, WC results for 2011 showed a slight improvement over 2010, with C2C dropping by 2%. This enhanced performance was driven by inventory (DIO down 5%), while DSO and DPO were up 1% and down 1%, respectively. However, a minority of integrated companies (5 out of 12) reported lower C2C. Performance varied significantly, partly due to differences in companies exposure to E&P, R&M and oilfield services. Since 2003, integrated companies C2C has increased by 14%, due to a combination of higher DIO (up 44%) and DSO (up 15%), partly offset by rising DPO (up 36%). Table 3. Change in WC metrics for integrated, Q403Q411
Integrated DSO DIO DPO C2C Change Q411 vs. Q410 1% -5% -1% -2% Change Q411 vs. Q403 15% 44% 36% 14%

Source: Ernst & Young analysis, based on Q4 publicly available financial statements

Oilfield services
For oilfield services companies, WC performance improved slightly in 2011 compared with 2010, with C2C down 1%. Half of the companies in this segment reported improved results. Measuring oilfield services providers receivables and inventory performance (using DSO plus DIO as a measure) shows a decline of just 1%. These companies limited year-over-year variation in receivables performance suggests that there was no material change in payment terms with suppliers against a backdrop of uneven pricing conditions for oilfield services. Payables performance remained unchanged. Since 2003, C2C for oilfield services companies has increased by just 2%. DSO plus DIO gained 4%, while DPO rose by 13%. Table 6. Change in WC metrics for oilfield services, Q403Q411
Oilfield services DSO DIO DPO C2C Change Q411 vs. Q410 -1% -1% 0% -1% Change Q411 vs. Q403 -5% 18% 13% 2%

Source: Ernst & Young analysis, based on Q4 publicly available financial statements

Independent Exploration & Production (E&P)


Independent E&P companies posted improved WC results in 2011, with C2C falling by 2.5 days to just 0.4 day. Progress came from both inventory and receivables, partly offset by weaker payables performance. Half of the independent E&P companies analyzed reported lower C2C. Since 2003, independent E&P companies C2C has decreased from 9.1 days to 0.4 day, driven by higher DPO (up 25 days, or 42%), partly offset by increased DSO (up 18 days, or 31%). DIO was down 13%, but with the size of the change exaggerated by the relatively low level of inventory inherent in the nature of the E&P business. Table 4. Change in WC metrics for independent E&P, Q403Q411
Independent E&P DSO DIO DPO C2C Change Q411 vs. Q410 -3% -16% -2% down 2.5 days Change Q411 vs. Q403 31% -13% 42% down 8.7 days

Source: Ernst & Young analysis, based on Q4 publicly available financial statements

Source: Ernst & Young analysis, based on Q4 publicly available financial statements

Cash in the barrel Working capital management in the oil and gas industry 2012

Current working capital performance by segment


WC performance varies widely between the different segments of the oil and gas industry. This divergence reflects the specific characteristics of each segment, including the relevant industry dynamics, cost and investment profile, and regulatory environment, with each type of business operating at varying points in the oil and gas valuechain.
Of the different oil and gas segments, independent E&P exhibits by far the lowest level of C2C (close to nil). This reflects strong results for DIO and DPO, with high levels of capital expenditure supporting thelatter. Integrated companies and independent R&M carry similar levels of C2C (27 days) but have diverging results as measured by WC metrics. Independent R&M boasts a superior performance in DSO, helped by their marketing operations inherently low level of Table 7. WC performance by segment, Q411
Days DSO DIO DPO C2C Industry 38 28 37 29 Integrated 37 27 37 27 Independent E&P 74 11 85 0.4 Independent R&M 21 33 27 27 Oilfield services 70 55 29 96

receivables. In contrast, DIO is kept high, as make-to-stock is commonly used for refining products. DPO is also lower due to reduced capital expenditure requirements. Oilfield services providers carry much higher C2C (96 days) than the other segments. This reflects the complex, long-cycle nature of these companies operating model, with some long-term contracts carrying significant down payment and progress billing terms. Our analysis also reveals wide variations in performance on C2C and other WC metrics between different companies in each segment. These performance gaps are partly due to differences in sales mix (with each segment carrying varying levels of WC); levels of vertical integration; nature of production and distribution arrangements and supply contracts; and production, logistics and distribution infrastructure. They also point to fundamental differences in the degree of management focus on cash and in the effectiveness of WC management processes.

Source: Ernst & Young analysis, based on Q4 publicly available financial statements

Driving working capital excellence


Oil and gas companies can improve their WC performance by focusing on a number of levers.
Tactical efforts are relatively simple to implement and can be important in achieving desired benefits at a particular time, while operational and structural changes tend to drive more substantial and sustainable improvements in WC performance.

Figure 2. Cash improvement levers


E&P Strategic planning Structural R&M Oileld services Demand forecasting Production scheduling and supply chain planning Facilities maintenance scheduling Sourcing and fulllment strategies Outsourcing Collaboration across the extended enterprise

Management of production/service agreements and contracts Effective management of payment terms for customers and suppliers Management of excise duties Management of royalties Speed and accuracy of billing and cash collections Appropriate measures and incentives for cash improvement Payment deferrals Collections push via discounts Timely billing

Tactical

Operational

Cash in the barrel Working capital management in the oil and gas industry 2012

Methodology
This report is based on a review of the WC performance of the largest 29 oil and gas companies (by sales) headquartered in the US and Europe. The insights are derived from an analysis of publicly available annual and quarterly sources of information. The oil and gas companies in the sampling include integrated (12), independent E&P (6), independent R&M (3) and oilfield services companies (8).
Integrated: Hess Corporation, BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Murphy Oil, Neste Oil, OMV, Royal Dutch Shell, Statoil and Total Independent E&P: Anadarko Petroleum, Apache, BG Group, Chesapeake Energy, Devon Energy and Occidental Petroleum Independent R&M: Sunoco, Tesoro and Valero Energy Oileld services: Baker Hughes, Cameron International, FMC Technologies, Halliburton, National Oilwell Varco, Oil States International, Schlumberger and Weatherford International While the findings are based on publicly available data, the performance of individual companies is not discussed or disclosed. Any broader industry commentary is based on general industry observations and not on views of any single organization

Glossary
DSO (days sales outstanding): year-end trade receivables net of provisions, including excise duties and VAT and adding back securitized receivables, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise) DIO (days inventory outstanding): year-end inventories net of provisions, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise). Reported DIO for oil and gas companies have been restated based upon first-in, first-out (FIFO) valuation DPO (days payable outstanding): year-end trade payables, including excise duties and VAT and adding back trade-accrued expenses, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise) C2C (cash-to-cash): equals DSO, plus DIO, minus DPO (expressed as a number of days of sales, unless stated otherwise) Pro forma sales: reported sales net of excise duties and VAT and adjusted for acquisitions and disposals when this information is available

How Ernst & Young can help


To support companies in gaining greater control over their cash flows and addressing WC opportunities and challenges, Ernst & Young helps identify, evaluate and prioritize realizable improvements in WC derived from process improvements, elevated execution of policies or changes to commercial terms. We also help companies implement these WC and cash flow improvements and realize the resulting benefits.
To help organizations make the transition to a cash-focused culture, we also help them implement the relevant metrics and identify areas for improvement in cash flow forecasting practices. We can then assist in implementing processes to improve forecasting and frameworks to sustain improvements. WC improvement initiatives deliver a high ROI. In addition to increased levels of cash, significant cost benefits may also arise from process optimization, through reduced transactional and operational costs and from lower levels of bad and doubtful debts and inventory obsolescence.

Cash in the barrel Working capital management in the oil and gas industry 2012

Contacts
Contact details for our global working capital services team
Region UK&I Local contact Jon Morris Matthew Evans Paul New Marc Loneux US Steve Payne Peter Kingma Edward Richards Mark Tennant Eric Wright Australia Canada Wayne Boulton Simon Rockcliffe Chris Stepanuik Far East France Germany Noreen Tai Benjamin Madjar Dirk Braun Carsten Lehberg Bernhard Wenders Benelux Italy Latin America Nordics Danny Siemes Stefano Focaccia Matias De San Pablo Johan Nordstrm Peter Stenbrink Telephone/email +44 20 7951 9869 jmorris10@uk.ey.com +44 20 7951 7704 mevans1@uk.ey.com +44 20 7951 0502 pnew1@uk.ey.com + 44 20 7951 3784 mloneux@uk.ey.com +1 212 773 0562 steve.payne@ey.com +1 312 879 4305 peter.kingma@ey.com +1 212 773 6688 edward.richards@ey.com + 1 212 773 3426 mark.tennant@ey.com +1 408 947 5475 eric.wright@ey.com +61 3 9288 8016 wayne.boulton@au.ey.com +1 416 943 3958 simon.rockliffe@ca.ey.com +1 416 943 2752 chris.stepanuik@ca.ey.com +86 20 2881 2898 noreen.tai@cn.ey.com +33 1 55 61 00 67 benjamin.madjar@fr.ey.com +49 6196 996 27586 dirk.braun@de.ey.com +49 711 9881 14243 carsten.lehberg@de.ey.com + 49 211 9352 13851 bernhard.wenders@de.ey.com +31 88 407 8834 danny.siemes@nl.ey.com +39 0280669423 stefano.focaccia@it.ey.com +5411 4318 1542 matias.de-san-pablo@ar.ey.com +46 8 5205 9324 johan.nordstrom@se.ey.com +46 8 5205 9426 peter.stenbrink@se.ey.com Japan Kenji Endo Americas Marcela Donadio Asia-Pacific Sanjeev Gupta EMEIA

Contact details for our global oil & gas leaders


Region Global Local contact Dale Nijoka
Global O&G Leader

Telephone/email +1 713 750 1551 dale.nijoka@ey.com +47 5170 6600 john.avaldsnes@no.ey.com +65 6309 8688 sanjeev-a.gupta@sg.ey.com +1 713 750 1276 marcela.donadio@ey.com +81 3 3503 1943 endo-knj@shinnihon.or.jp

John Avaldsnes

Cash in the barrel Working capital management in the oil and gas industry 2012

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