We hired our regular contributors and clients in the Oilfield HUB supply network to act as energy ‘physiotherapists’, or more likely ‘psychologists’ at this point in time! We tasked them with the job to put the oil & gas industry through their brand of rehab and to share their thoughts, opinions and suggestions on what still needs to happen to get healthy and stay healthy!
When you go to rehab with a physical injury there are three common phases to healing. The first phase is the initial injury where the pain and suffering are the worst. Hopefully the industry has seen the worst of that! The second phase is where you transition to repairing the damage. During the past couple of years repairing the damage has almost exclusively been focused on reducing activity and cutting capital and operating costs. The third phase involves strengthening and maintaining your progress. One might suggest this is where the industry is sitting today and most likely into the foreseeable future.
The face of the oil & gas industry is very different now and many things have changed. From people being laid off or leaving the industry, to companies that have gone bankrupt, downsized or shut down voluntarily. As activity begins to pick up, and gathers some level of sustained momentum, Producers are facing a whole new set of challenges. One such area that preys on the minds of many companies is the fear that service costs will re-escalate beyond their control and ability to pay.
So, what can be done to alleviate this fear? On one hand, you can appreciate why struggling Producers need to keep prices down, but on the other hand, you can also appreciate why starving Energy Services Companies are also looking for ways to recover margins that have been lost. Relapsing is usually the final worry after any recovery. Old habits die hard and we need to take a step back and look at what external and internal forces may cause another downturn. Oil prices, world production, outdated procurement and sourcing practices; to name a few. In many peoples minds the industry rehab needs to be a reinvention of sorts. We need to take a long hard look at how we do business to avoid falling back into old destructive habits of how things used to be done. The ‘old boys club’ mentality has led many in our supply network to suggest that the cost of sales in the oil & gas industry is still just too high.
Now that service companies have been
beaten into submission to lower their prices,
where are surplus dollars to build back up and
find those new relationships?
When one mentions the cost of sales, most people immediately focus on the cost to acquire or deliver services, supplies and rentals for the complete range of field projects. Costs in these areas have been driven down likely to as low as they can go over the past couple of years. Yet when we are speaking to both sides of the industry there is still a major cost efficiency gap in how companies perceive they are doing business together before the bit hits the ground.
Producers constantly complain about the revolving door of salespeople bombarding every level of their organization with the hopes of striking up any sort of relationship which might lead to a sale down the road. Yet in the same breath, Producers readily admit to ignoring their repeated advances out of sheer frustration and total lack of time to see them all. Salespeople have traditionally resorted to marketing by expense account to help establish these relationships, but at what cost to the Producer? Surely everyone understands these sales and entertainment costs are built into service prices they are so desperately trying to lower and keep under control. While both the number of salespeople and expense cards have diminished over the past couple of years, many still feel this is the only way business can get done in the patch. In our view the cost of sales is too high, and there is a better way!
Talk to any owner of an Energy Services Company and ask them about the effectiveness of their sales team and you will get an ear full. Their biggest concern; how do you get in front of Producers to show off your wares and make some sales. Their biggest complaints; they are constantly chasing Producers and nobody returns emails and phone calls. For the past several decades, everyone believes selling has been based on relationships and it costs substantial travel and entertainment dollars to establish, nurture, and maintain those relationships. When the industry is in full swing, expense dollars are plentiful to sustain this practice, but once the downturn hit and dug in deep, those dollars quickly disappeared. Long standing relationships also evaporated on both sides of the fence as those responsible for buying and selling also disappeared from the equation. Now that service companies have been beaten into submission to lower their prices, where are surplus dollars to build back up and find those new relationships? Once again the cost of sales is too high, and there is a better way!
Have you ever heard, “Don’t worry about it, we’ve been doing it this way for 20 years”? Or, “I know what I’m doing and we don’t need to change”. These two comments should strike the fear of God into every CEO and VP Finance! As one CEO we know recently put it, that cost us an extra $400K over our AFE budget. He too felt his cost of sales was, and is still, too high, but now he’s on a path to discovering new business processes and additional cost efficiencies.
My Industry Rehab Prescription: There is a better way!