Digitalization of Operations: Brains vs Brawn
After so many years of reduced spending, oil and gas operators are expected to significantly increase spending for both Opex and Capex in 2022 and beyond. With many old hedges dropping off and commodity prices soaring, cashflow will be strong in the energy space for operators. At least some of this windfall will trickle down to increasing production. While slow to concede, these same companies are now expected to offer modest price increases to those who have served them faithfully throughout the years. This is a highly anticipated change in the market as both price and volume of work will likely see double digit increases this year. For many, the result will be finally turning the corner on positive cash flow, providing relief from a couple of years of liquidity worries. Even recently, many companies small and large have been forced to auction off assets just to cover payroll. All this to say, oil and gas service companies are not likely to enter quickly into a season of abounding prosperity any time soon.
With this said, most expect (if not hope) the next few years will offer a relief from the trials of the past that were fueled by rock bottom commodity prices coupled with a countless year of undisciplined capital funding new and aggressive competition. The planets are aligned to take advantage of a remarkable time in our industry where the opposite is in play. Oil and gas prices seem stable, and few deals are being done to bring in new assets to the market. M&A in the OFS space is almost nonexistent other than cashless mergers. While producer energy stocks have rebounded in dramatic fashion, only the top shelf OFS equities have enjoyed any real appreciation back toward normal stock prices. Exits (for now!) for almost every form of OFS company are not expected in the foreseeable future as the only capital available for such buyouts is illiquid stock from small cap OFS players.
Its abundantly clear to managers that double digit growth will put pressure on tired people and support systems. All attempts to increase EBITDA margins beyond the anemic single digits many have reported will be the result of smart managers putting into play new ideas compared to the old way of working people harder and staffing up only when people are at a breaking point. Any hope of cash distributions to ownership is simply a fantasy unless real change is brought to navigating this once in a lifetime opportunity to grow into an expanding, yet stable OFS market. Management teams are going to have to run their companies smarter than ever with less access to growth capital than ever and less focus on exit than ever.
Winners in this new fight will almost certainly turn to data to make these decisions. Critical information related to job costing, daily P&L’s, accurate projections, DSO, DPO, real time inflation impacts, asset utilization, employee turnover, QHSE, ESG, and more will all impact the balance sheet. Time and time again, CFO’s and boards turn to the ERP to solve these problems. It makes sense as some of these systems cost more than house for even the most modest of packages. The problem remains that the ERP was never intended to solve these issues. As a result, those doing the work have to resort to the time and proven excel spreadsheet to digitize any solution to their operational woes. In turn, this method results in more and more time spent on manual processes to provide the data needed to make key decisions about very limited spending ability. This ultimately results in hiring more people doomed to be laid off when things slow down.
Operational management systems are there which offer ways to consolidate all things operational in real time both offline and online. The best CEO’s have access to real time revenue, costs, and formulaic projections for their business that can only be provided by data captured in the cloud and not on a file on a spreadsheet. The strongest companies rely on electronic invoicing and ticketing
and have shaved weeks or months off their DSO’s. CFO’s and CEO’s are listening to the people doing the work out of the office and giving them the digital tools to be successful at the things that make the entire company successful. Effective safety managers produce tremendous amounts of data from inspections and incidents to identify and prevent dangerous trends. Shop and asset managers are brilliantly able to know where each asset is and are aware of when that asset needs maintenance long before it becomes urgent. Ops managers know daily revenue down to customer, job, and service type. They know their costs by job and any labor, repairs, third party costs or supplies are tracked by job by day. Dispatchers have a broad view of available people and assets. Sales professionals have perspective on every lead and where they are in the process. Effective AR processes always include real time digitization of tickets for immediate and time tracking of approval to expedite invoicing therefore shrinking DSO. This list goes on and on.
In summary, the winners are digitizing operations at every level so they can spend more time implementing new forward-thinking strategy that the competition can’t employ because the company across the road is always spending its time and increased margins mending the same old self-inflicted wounds. The next few years will show a fascinating evolution or even revolution of the OFS space and how it uses digitization and data to improve every aspect of the sector. For those who refuse to embark on this change, time will tell if brain vs brawn prevails.
Article originally published on EnergyNow.com