Achieving sustained excellence in the oil and gas industry can, quite frankly, be a challenge. One of the primary reasons for this is the cyclical nature of the business. For suppliers in particular, jostled by unpredictable and often drastic changes in demand, the task of shifting between expansion and contraction can be especially disruptive.
To be sure, numerous factors contribute to the industry’s volatility. These include, but are not limited to, vacillating commodity prices, changes in exchange rates, availability of capital (or lack thereof), seasonality and weather, shifts in government policy and regulations, geopolitical upheaval, etc.
Taken as a whole, these factors can and do have serious implications on suppliers serving the industry. Unfortunately, they are almost always outside their control. Still, how they plan for and handle these never-ending ebbs and flows can mean the difference between success and failure. It can also play a large role in how they are perceived by customers.
But a strategy more focused on the long term can help tame the effects of these cycles. Why? Because a longer-term perspective gives companies the ability to sidestep some of the negative influences of a flighty marketplace. It also reduces management’s inclination to grow too quickly during upswings and cut recklessly during downturns. In other words, it provides balance where there is none.
Integral to the ability to execute a long-term strategy is the financial strength to survive the troughs and respond to the peaks as they arise. Sound financial footing also allows for greater investment, including research and development, throughout the cycle, which leads to differentiated performance over time.
The best performing suppliers also take steps to add visibility to their business. While many can’t effectively hedge their revenues using financial instruments, they can enter into long-term, take-or-pay or minimum-payment contracts with customers (many of whom can and do hedge). The resulting cash flow stability is invaluable during difficult times.
Finally, suppliers that outperform across cycles almost always display an outsize commitment to process. These processes usually exist at all levels of the company. They are the proven playbooks companies follow during both contraction and expansion. They are also revised and perfected over time.
A supplier’s commitment to process is almost always evident in its approach to talent management. Because they typically experience lower employee turnover, top companies are more willing to invest in training, cross-training and re-training of their people. This enhances employee loyalty and morale. The upshot is better performance, even as activity fluctuates.
During downturns, the best workforce-reduction plans ensure employees are treated fairly, communication is clear and responsibilities are transferred smoothly. During expansions, prior employees — those already familiar with the culture and who’ve retained much of their past training — are among the first contacted to return. For top-performing companies, many will.
As in most industries, there are far too many short-sighted players in the oilfield to expect all will heed the advice given here. However, those that do will find the deck stacked in their favor over time. And in an business where opportunity can turn to challenge (and vice-versa) overnight, that kind of advantage shouldn’t be ignored.
This article is for information and discussion purposes only and does not form a recommendation
to invest or otherwise. The value of an investment may fall. The investments referred to in this
article may not be suitable for all investors, and if in doubt, an investor should seek advice from
a qualified investment adviser. More