Working the New Normal in the Time of a Pandemic

Monday,
January 11, 2021 /05:45 PM / By Proshare Research/ Header Image
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Executive Summary -
O&G: Managing a Transition Mindset

Always expect
the unexpected. The oil and gas industry is terrible at predicting anything.
Always have a back-up plan.
–David Dixon

The
O&G business is in a period of transition as executives of various
companies in the sector begin to reimagine, rethink, and strategize their
models. Sustainability will no longer be just about wellheads and sales volumes
but about technology adoption, cost minimization, and adaption to new market
expectations (see illustration 1 below).

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Illustration 1 O&G: A Time of Change and Challenge

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In
2020, the oil market became frenetic as forward prices crashed to negative
values as storage capacity disappeared and oil sellers had to pay buyers for
picking up excess quantities of fuel in the absence of storage capacity. The
anomaly corrected itself, but not before Saudi Arabia, a leading member of the
organisation of petroleum exporting countries (OPEC), entered into price and
production cut agreements with close competitor Russia, the leader of the
so-called OPEC-Plus bloc of countries. The agreement worked as it slowly mopped
up excess crude supplies, reversed previous deep discounts, and restored
stability to the international price discovery process as American shale
producers saw their rig-head counts eviscerated by tumbling prices.

Oil
analysts’ expectations for crude prices in 2021 fall between a floor of US$48
per barrel and a ceiling of US$51 per barrel (even though in the first week of
the year Brent crude oil breached the ceiling by reaching US$54.3 per barrel).
The average price of crude in 2021, according to analysts’ opinions sampled,
would settle at US$49 per barrel. For oil-dependent countries like Nigeria, the
economic prospects are mixed as a rise in the price of crude oil would bolster
fiscal revenues, but it would also increase the domestic retail pump price of
petrol, leaving the country squeezed between improved fiscal revenue and
increased domestic cost of transportation which would feed into higher domestic
food and other retail prices.

Nigeria’s
inflation rate is already a cause for worry for many analysts as the headline
inflation rate has sprinted ahead from 12.13% in January 2020 to 14.89% in
November. Food inflation rose from 14.67% in January 2020 to 18.3% in November.
The enthusiastic rise in the county’s average price level indicates that every
hundred naira in the pocket of the average Nigerian would be worth
approximately fifty naira in a matter of just five years.

A
rise in the retail pump price of petrol and a jump in the cost of domestic
electricity would pummel both individual and corporate citizens in 2021,
leaving households worse off than they have ever been. The international oil
market in 2021 will not only shape the direction of the Nigerian economy, but
it would also determine the life and livelihoods of its citizens (see Table 1 below).

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Table 1 Nigerian Households, Riding a Carousel

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However,
beyond oil, households, and the economy, the industry itself is at the cusp of
being reimagined. The change in international macroeconomic perspectives with a
greater emphasis on environment, society, and corporate governance (ESG), means
businesses must rework their earlier operational modes of existence and set new
targets for pursuing emerging paths and engaging in fresh activities.

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Riding the Technology
Tsunami

A
global shock wave related to both the COVID-19 pandemic and disruptions to
market demand and supply were only the first in a series of expected
disruptions in the O&G industry. Other dislocations that could emerge
include, a shift in technology deployment and the move towards unlearning old
ways, learning new ways, and relearning what was forgotten in the fog of
previous corporate execution. The technology-supported corporate governance
framework of the industry would also be expected to change as governance
expectations tighten.

Oil
and Gas experts concede that going forward, the required skills expected of
workers would be dictated by a different approach to meeting fluid consumer
expectations and preferred user-experiences (see
table below). The alternative energy market that emerges may quietly
but surely displace the demand for high carbon-emission sources of power. The
new low-carbon energy alternatives would lean heavily on international oil
prices and unhinge the collaborative price mechanism created by the OPEC and
OPEC-Plus partnership. With wellheads gradually closing and oil rigs nodding to
a stop, the new kings of power will be the old or new corporations that take a
ten-year view of continued oil production and a declaration of purpose towards
cleaner energy activities such as Solar, Battery, Hydro, and Windfarm
technology.

Table 2: The New Job Imperatives
for O&G Companies

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Research
and Development (R&D) must become an integral part of the corporation’s
reason for being, as O&G companies find new ways of providing economically
competitive sources of energy. Some developments that are likely to occur in
2021 and 2022 are the collapse or mergers of a few O&G companies and a
reclassification of the business purpose of others (merger activities in the
O&G industry have declined steadily across Africa between 2015 and 2019) (see chart 1 below). Companies that are unable to
keep up with emerging technology and the requirements of adaptive service or
product delivery pipelines may disappear.

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Chart 1: Gazing at African O&G Mergers

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Breaking Down Numbers and Dredging up Opportunities

The
report takes a helicopter view of the state of the O&G sector globally and
in Nigeria and explains the powerful trends that will bring about change in the
sector from 2021. Section 1 of the report new corporate visioning,
governance standards, and profit margins based on existing realities and
prospects.

Section
2 of the report looks at the link between the financial
service sector and the O&G sector and points out the significance of the
sector to the quality of bank’s statement of financial position and the size of
their bottom lines. It draws attention to the anomalous state where banks
thrive as O&G companies’ pine. If O&G companies represent a significant
proportion of bank books, then their fortunes and misfortunes should reflect in
bank profitability contrary to recently published deposit money bank (DMB)
results up to 9 months 2020.

To
gain a deeper understanding of how O&G firms have performed in recent times
under a variety of situations between 2015 and 2020, section 3 of the
report deconstructs the revenues and profit of companies in the O&G sector
listed on the Nigerian Stock Exchange (NSE). The results show a mixed bag of
outcomes, upstream companies seem to have been under severe strains in the last
two years. A company like SEPLAT Plc has seen revenues dipped from N228.39bn in
2018 to N214.16bn in 2019. However, it must be noted that SPELAT Plc’s revenue
rose from N138.28bn in 2017 to N228.39bn in 2018, representing a growth of +65.16%. NDEP, listed on the over the counter
(OTC) NASD Exchange has also seen its turnover rise steadily despite a
disruptive global oil market in the last 36months.

NDEP
saw revenue rise from N33.78bn in 2017 to N39.05bn in 2018 and 45.96bn in 2019.
NDEP’s stable revenue growth has been notable when considered against a
frenzied global oil market that was unforgiving in dragging O&G company
revenues down. Another O&G company, 11Plc equally saw revenues rise
consistently between 2017 and 2019 but its 2020 number could prove to be tricky
as the 9month 2020 revenues of the downstream corporation fell by -18.91% from N141.51bn in 9months 2019 to N114.75bn in
9months 2020.

In
2020 the performance of the NSE O&G Industry Index trended upwards in a
similar manner as the NSE All Shares Index (ASI). However, the Oil and Gas
sector Index movement appears to have been sharper than the ASI. While the ASI
saw mild bearishness in the early half of the year the O&G Index showed a
more severe orientation up until July 2020. However, both indices showed
similar bullishness between August and October with the ASI shooting ahead of
the O&G sector between November and December 2020 (see chart 2 below).

Chart 2: O&G Industry Index Vs
NSE ASI

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Source: NSE, Proshare Research

Section
4 of the report picked up a telescope and took a long
gaze into what could be considered the O&G industry’s future and concluded
that the best gambit for firms in the sector was to shift their concentration
from crude oil to gas. According to the report, “As white oil products see
demand fall and prices drop, O&G companies will increasingly see a rise in
demand for gas, hence shifting the dynamics of their businesses. Industry
connectivity will be more gas-facing than oil-facing and the industry value
chain will pivot away from oil as new gas-related technical skills become more
in demand and logistic channels alter to accommodate the new requirements of
distribution and delivery“.

In
this light, section 5 of the report concludes by giving insights into
the emerging gas market and how O&G companies will have to wash out the
grime of the past from their eyes and vision a new global gas reality. The
authors of the report point out that “The new business mindset would need to
address the cost efficiencies that would make cleaner manufacturing and power
generation practical and affordable. Therefore, O&G firms will have to
drive operational models that cut costs, reduce time to market, and integrate
horizontal and vertical value chains to deliver goods in a cheaper, cleaner,
and safer manner. This is not impossible, but it is a massive request to
ask from companies that are not familiar with such levels of technological
innovativeness, operational efficiency, and cost-effectiveness“.

The
section also provides readers with all relevant references to issues raised in
the report and helps users of the report with comprehensive background
information and related articles that enhance the information experience of the
reader. It also provides readers with advice on how the report can be used and
represents the report’s appendices with provides the reader with a list of the
charts, tables, and illustrations that were used during the analysis. The last
section of the report also gives acknowledgment to those that participated in
putting the report together and informs readers on how to contact Proshare or
its analysts.

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