Profitable at $50 Oil – Getting Beyond Cut and Cope

On Monday, October 27th, a Wall Street Journal article Cash Crunch Clouds Future for Oil Firms highlighted the cash crisis facing the major oil companies whose expenditures to fund projects, buyback stock and pay dividends is still significantly outpacing cash flow in the extended $50 per barrel oil price environment. What was once thought, optimistically by many, to be a temporary adjustment to allow the global oil supply to come to terms with demand is now becoming a sustained economic reality that all E&P companies are struggling to adjust to. For the past year or so E&P companies have been content to CUT headcount, reduce capital expenditures, and delay projects in an effort to COPE with the pressures of maintaining fiscal viability. Now that the price drop is well into its second year with no signs of abating, the struggle to drive cash flow as well as return to profitability is forcing E&P companies to fundamentally rethink their operating model, structure, and core competencies.

The following day, the quarterly earnings report from BP provided their point of view

"This reinforces the need for a business model that can withstand a longer period of lower oil prices and we have been resolved to that for some time. More importantly, we believe we are well positioned in our industry to take advantage of the opportunity this brings. This new environment has provided a much-needed catalyst to rebase our industry and instill greater efficiency right across our sector, and there are advantages for those who are most adaptable. The ability to adopt a more efficient business model will become a point of differentiation."

If companies don’t think about how they change their operating model while the oil price is low, it may end up damaging their business in the medium term if oil prices don’t go back to $100/barrel as soon as expected. And, if prices do come back up sooner and companies haven’t made any real operational changes, the opportunity to do so could be lost.

Bill Duffy

As a Vice President, Bill delivers client programs, cultivates client relationships, mentors junior members of the organization and supports thought leadership efforts. He thrives on the collegial, family-like atmosphere at the firm, and strives to further promote this culture. His pragmatism is reflected in one of his favorite sayings, “Hope is not a strategy.”