Cash in the barrel

Working capital management in the oil and gas industry 2011

Summary
Contents
Overall WC results WC results by segment WC variations by segment How Ernst & Young can help Study methodology Glossary Contacts 1 2 3 4 4 4 5

Cash in the barrel is the latest in a series of working capital management reports published by Ernst & Young.
Global oil and gas companies managed to improve working capital (WC) performance in 2010 compared with 2009, with cash-to-cash (C2C) dropping by 4%. These results occurred in the context of stronger oil prices and recovery in capital spending. The level of improvement, however, did little to reverse the deterioration in WC performance seen in prior years. The industrys C2C was still up 21% between 2003 and 2010. While measuring like for like progress has been made difcult by changes in the oil price, analysis also shows varying trends across the industry. For leading performers, benets have been achieved by streamlining supply chains (although much of the focus in this area has been on reducing complexity and costs), managing payment terms more effectively with suppliers; collaborating more closely with each partner of the extended enterprise; globalizing procurement; and enhancing risk management policies. Today, current WC performance still varies widely across the industrys core segments and its companies. While part of this gap may be due to variations in business models, this is also explained by fundamental differences in the degree of management focus on cash and process effectiveness. For each company, huge opportunities for improvement exist, for example, within inventory replenishment, manufacturing scheduling, demand forecasting and supply chain planning, billing, collection and payment terms, contractor management and sourcing.

Cash in the barrel Working capital management in the oil and gas industry 2011

Overall WC results
A review of the WC performance of global oil and gas companies for 2010 reveals a year-on-year improvement compared with 2009, with C2C dropping by 4%.
Three segments out of four and two-thirds of the companies analyzed reported better results, but with a large difference in trends and in the degree of change among its constituents. Leading companies for example posted a reduction of 9% in C2C while there was an increase of 17% for laggards. Table 1: Change in WC metrics, Q409-Q410 Industry DSO DIO DPO C2C Q410 37.9 30.4 38.2 30.2 Q409 37.4 31.5 37.3 31.6 Change 1% -3% 2% -4% These results occurred in the context of stronger year-on-year oil prices (on average and at year-end) and recovery in capital spending. Gas prices were volatile, higher on average, but lower at year-end. There is generally a direct relationship between changes in oil price and changes in the industrys C2C performance, the degree of which varies across its core segments. Average oil and gas prices in 2010 were 29% and 10% above 2009, respectively. In Q4 2010 compared with the same period of 2009, oil prices were 12% higher, while gas prices were 18% lower. Variations in oil price also drive capital spending. In 2010, capital spending for the companies analyzed was up 2% compared with 2009, after being down 3% the year before. The level of WC improvement, however, did little to reverse the deterioration in performance seen in prior years. The industrys C2C was still up 21% between 2003 and 2010. This is largely attributable to the deterioration in levels of inventories (DIO), reecting the impact of much stronger oil prices, but also higher levels of physical stocks. By contrast, the differential between receivables and payables cycles has been reduced since 2003, with the level of DPO exceeding that of DSO at the end of 2010 (up 17% and 38%, respectively, over the period under review). For the industry, volatility in the oil price has led to large swings in C2C, notably in recent years. At the end of 2008, for example, when oil price reached its lowest level for ve years, C2C returned to within 8% of the level recorded at the end of 2003. Another signicant factor that inuenced C2C was the evolution of capital expenditure, with companies reacting quickly to changing oil market conditions by accelerating or slowing and deferring projects and programs. Table 3: Change in the industrys C2C, oil and natural gas prices, Q403Q410
35 30 100

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

Table 2: Change in C2C by segment, Q409-Q410 C2C Integrated Independent E&P Independent R&M Oileld services Industry Q410 27.4 2.9 34.0 96.7 30.2 Q409 29.6 6.4 30.7 98.4 31.6 Change -8% -55% 11% -2% -4%

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

80 25 20 60

Days
15 10 5 20 40

US$

Last years better WC performance was due to a combination of higher payables (DPO up 2%) and lower inventories (DIO down 3%). Receivables performance deteriorated slightly (DSO up 1%).

0 Q4, 2003 Q4, 2004 Q4, 2005 C2C Q4, 2006 WTI US$/bl Q4, 2007 Q4, 2008 Q4, 2009 Q4, 2010

Henry US$/Mmbtu (x10)

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

Cash in the barrel Working capital management in the oil and gas industry 2011

WC results by segment
Analysis of last years WC performance by segment shows signicant improvement for integrated, independent E&P and, to a lesser extent, oileld services, and a deterioration for independent R&M.

Integrated
For integrated companies, WC results were strong in 2010, with C2C dropping by 8% compared with 2009. Each WC component contributed to this improvement. Seven companies out of nine reported lower C2C. Variations in performance, however, were partly due to differences of exposure to E&P, R&M and oileld services. Since 2003, C2C increased by 18%, due to higher inventories (DIO up 52%) and, to a lesser extent, to receivables (DSO up 14%), partly offset by rising payables (DPO up 38%).

Independent E&P
Independent E&P companies posted better WC results in 2010, with C2C falling by 3 days. The magnitude of the change (-55%) was exaggerated by the relatively low level of WC inherent in the nature of the business. Four companies out of six reported lower C2C. Progress came mostly from payables, partly associated with rising capital expenditure and anticipation of near-term growth in activity. Payment terms with suppliers also appear to be slightly more favorable. By contrast, there was a severe deterioration in receivables performance. Since 2003, C2C decreased from 9 days to 3 days on the back of higher payables (up 27 days, or 45%), partly offset by increased receivables (up 20 days, or 35%). Inventories (DIO) rose slightly. Table 5: Change in WC metrics for independent E&P, Q409-Q410
Independent E&P DSO DIO DPO C2C Q410 76.9 12.7 86.8 2.9 Q409 65.5 14.4 73.6 6.4 Change 17% -12% 18% -55%

Table 4: Change in WC metrics for integrated, Q409-Q410

Integrated DSO DIO DPO C2C Q410 36.0 28.7 37.3 27.4 Q409 36.2 30.1 33.7 29.6 Change -1% -5% 2% -8%

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

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

Independent R&M
In contrast with other segments, independent R&M reported a year-on-year deterioration in WC performance, with C2C rising by 11%. However, only half of them showed higher C2C. DIO rose by 10%, reecting the impact on performance of much stronger oil prices due to the segments position in the industry value chain, compounded by the importance and composition of inventories. DSO was also up 6%, but this was offset by an increase of 7% in DPO. Since 2003, C2C increased by as much as 37%. Inventories were much higher (DIO up 59%) and only partly offset by increased payables (DPO up 33%). Receivables (DSO) were slightly up.

Oileld services
For oileld services, WC performance improved slightly in 2010 compared with 2009, with C2C down 2% and ve companies out of eight showing better results. Progess came entirely from lower levels of inventories (DIO down 9%). By contrast, levels of receivables increased by 3%, suggesting that E&P companies may have chosen to stretch terms with their suppliers despite a backdrop of better pricing conditions for oileld services. Yet measuring oileld services providers receivables and inventory performance (using DSO plus DIO as a measure) still shows a yearon-year decline of 3%. With regard to payables, last years results show a deterioration in performance (DPO down 6%), which indicates that service providers may have failed to pass that pressure from customers down to their own suppliers. Since 2003, C2C increased by just 3%. DSO plus DIO gained 5%, while DPO rose by 14%. Table 7: Change in WC metrics for oileld services, Q409-Q410
Oileld services DSO DIO DPO C2C Q410 70.4 55.1 28.8 96.7 Q409 68.1 60.8 30.5 98.4 Change 3% -9% -6% -2%

Table 6: Change in WC metrics for independent R&M, Q409-Q410

Independent R&M DSO DIO DPO C2C Q410 21.6 44.2 31.8 34.0 Q409 20.4 40.1 29.8 30.7 Change 6% 10% 7% 11%

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

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

Cash in the barrel Working capital management in the oil and gas industry 2011

WC variations by segment
WC performance varies widely across the oil and gas industry segments. This reects the specic nature of each segment, e.g., industry characteristics and dynamics, cost and investment prole, and regulatory environment, with each operating at various points of the oil and gas value chain.
Data shows stronger C2C performance for E&P (3 days) than for R&M (34 days), with integrated companies (27 days) close to R&M. For E&P, this reects strong results for DIO and DPO, supported for the latter by high levels of capital expenditure. R&M boasts a superior performance in DSO, helped by the low level of receivables inherent to the marketing operations. On the contrary, inventory levels (DIO) are kept high, as make-tostock is commonly used for rening products. Oileld services carry much higher C2C (97 days) than other segments. This reects the complex, sometime long cycle nature of the segments operating model, with certain long-term contracts carrying signicant down payment and progress billing terms. Some oil and gas companies are also exposed to the production of chemicals, which generally exhibits a high C2C. Analysis also shows wide variations in performance for C2C and other WC metrics among companies within each segment of the oil and gas industry. Part of this performance gap, however, is due to differences in sales mix (with each segment carrying varying levels of WC), levels of vertical integration, nature of supply contracts, and production, logistics and distribution infrastructure. The spread of performance among companies is larger for oileld services and E&P than for R&M. For E&P, this bigger dispersion of performance may be partly explained by differences in products and customer mix and levels of capital expenditure. For oileld services companies, this reects the nature of their related subsegments, with each individual company operating at various points of the life cycle of a reservoir, as well as variations in the way manufacturing strategies have been deployed.

Table 8: WC variations by segment, Q410 Days DSO DIO DPO C2C Industry 38 30 38 30 Integrated 36 29 37 27 Independent E&P 77 13 87 3 Independent R&M 22 44 32 34 Oileld services 70 55 29 97

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

Cash in the barrel Working capital management in the oil and gas industry 2011

How Ernst & Young can help

To support companies in gaining greater control over their cash ows and addressing WC opportunities and challenges, Ernst & Young helps identify, evaluate and prioritize realizable improvements in WC derived from process improvements, elevated compliance levels or changes to commercial terms. We also help companies to implement these WC and cash ow improvements and realize the resulting benets.
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 ow forecasting practices. We can then assist in implementing processes to improve forecasting and frameworks to sustain improvements. WC improvement initiatives are often self funding. In addition to increased levels of cash, signicant cost benets may also arise from process optimization, through reduced transactional and operational costs and lower levels of bad and doubtful debts and inventory obsolescence.

Study methodology
This report is based on a review of the WC performance of the largest 31 oil & gas companies (by sales) headquartered in the US and Europe. Insights developed are based on publicly available annual and quarterly sources of information.
Integrated (13 companies): Amerada Hess, BP, Chevron, ConocoPhillips, ENI, Exxon Mobil, Marathon Oil, Murphy Oil, Neste Oil, OMV, Royal Dutch Shell, Statoil and Total. Independent E&P (6 companies): Anadarko Petroleum, Apache, BG Group, Chesapeake Energy, Devon Energy and Occidental Petroleum. Independent R&M (4 companies): Petroplus, Sunoco, Tesoro and Valero Energy. Oileld services (8 companies): Baker Hughes, Cameron International, FMC Technologies, Halliburton, National Oilwell Varco, Oil States International, Schlumberger and Weatherford International. While the ndings are based on publicly available data, the performance of individual companies is not discussed or disclosed.

Glossary
DSO (days sales outstanding): year-end trade receivables net of provisions, including VAT and adding back securitized and factored 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) DPO (days payable outstanding): year-end trade payables, including 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 VAT and adjusted for acquisitions and disposals when this information is available

Cash in the barrel Working capital management in the oil and gas industry 2011

Contacts
Working Capital Services contacts
Region
UK&I

Oil & Gas Sector contacts

Local contact
Global Oil & Gas Sector Leader Dale Nijoka

Local contact
Jon Morris Matthew Evans

Telephone/email
+44 (0) 20 7951 9869 jmorris10@uk.ey.com +44 (0) 20 7951 7704 mevans1@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 +1 213 977 3679 eric.wright@ey.com +61 3 9288 8016 wayne.boulton@au.ey.com +1 416 943 3958 simon.rockcliffe@ca.ey.com +86 20 2881 2898 noreen.tai@cn.ey.com +33 1 55 61 00 67 benjamin.madjar@fr.ey.com +33 1 46 93 77 67 francois.guilbaud@fr.ey.com +49 6196 996 27586 dirk.braun@de.ey.com +49 711 9881 14243 carsten.lehberg@de.ey.com +31 88 407 8834 danny.siemes@nl.ey.com +39 0280669423 stefano.focaccia@it.ey.com +46 8 5205 9324 johan.nordstrom@se.ey.com +46 8 5205 9426 peter.stenbrink@se.ey.com

Telephone/email
+1 713 750 1551 dale.nijoka@ey.com

London

Andy Brogan

US

Steve Payne Peter Kingma Edward Richards Eric Wright

+44 (0) 20 7951 7009 abrogan@uk.ey.com +1 713 750 1395 jon.mccarter@ey.com +65 6309 8688 sanjeev-a.gupta@sg.ey.com +81 3 5401 7100 kentaro.nakamichi@jp.ey.com +61 8 9429 2496 roger.dartnell@au.ey.com

Houston

Jon McCarter

Singapore

Sanjeev Gupta

Tokyo

Kentaro Nakamichi

Australia Canada Far East France

Wayne Boulton Simon Rockcliffe Noreen Tai Benjamin Madjar Franois Guilbaud

Perth

Roger Dartnell

Germany

Dirk Braun Carsten Lehberg

Benelux Italy Nordics

Danny Siemes Stefano Focaccia Johan Nordstrm Peter Stenbrink

Acknowledgments
Our special thanks go to Marc Loneux, our WC research director, for his energy in driving to completion the data accumulation and analysis required for this report.

Cash in the barrel Working capital management in the oil and gas industry 2011

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