How will companies survive $40 oil?

The oil price dropped below $40. It is now a big question whether oil companies, especially exploration& production (E&P) companies, will be able to survive at this price or not. Here are some proposed actions that oil companies can take.

1. Cost cutting


Companies should keep cutting costs. ConocoPhilips, the largest E&P company, has cut their capital spending to $5.5 billion. There are two types of cost cutting; one is permanent, and the other is cyclical. Permanent cost-cut involves how companies drill and frack wells. This kind of cost-cut is easy due to improvement in technology. Now it is possible to drill cheaper. It is possible to keep on cutting the permanent costs. The cyclical cuts are driven by the capacity of drilling rigs and fracking crews. This may not be possible once rig activity goes up.

2. Sell assets


Many companies are trying to fill the gap between cash flow and spending by selling assets. 75% of the E&P companies are taking this step.

3. Sell shares


Many companies like Marathon Oil, Newfield Exploration, Pioneer Natural Resources and others priced secondaries at the beginning of this year. Devon Energy priced a 69-million share secondary at $18.75, and it was snapped by the investors. Selling shares is a drastic step. Companies must try to cut costs and sell assets instead.

4. Mergers


It is the most drastic step to take. The small and mid-size companies like Concho Resources, Pioneer Natural Resources, Cimarex Energy and others might need to take this step. But big companies like Apache, Anadarko or EOG might be well off without merging with other companies.

We have to be optimistic that the price of oil will better soon. But we must also be prepared for the worse scenario. These steps can help the oil companies to survive during the low oil price period.

Steps the supply chain leader should take to improve value

The supply chain organization controls 70-85% of the costs of a manufacturing organization. Cost management and supply chain are closely related. With the rising costs of transportation and commodity, labor productivity is in focus. Companies want supply chain leaders to drive cost improvement and also to improve the value of the firm. Here are some steps that supply chain leaders can take to improve value.

1. Have a balanced portfolio across the source. When companies let the functions of manufacturing, procurement, and transportation to have separate targets, they will sub-optimize the whole.

2. They should be good at Sales and Operations Planning. The team must report to a profit center manager, and the company must develop planning capabilities to analyze alternatives and align on market options. Only about 20% of businesses have this process in place today.

3. Supplier strategies and development decrease supplier issues and increase supplier reliability. Looking at the development of horizontal processes, we see that companies are stronger in the areas where there is a new product launch and weaker in the revenue management and supplier development areas. The center of the supply chain is better than the end of the supply chain. It is necessary to align all the horizontal processes to deliver end-to-end supply chain strategies.

There is a need to develop supply chain talent by focusing on the value chain. The supply chain leaders should teach the teams that supply chain is the language of business. They should do everything to improve the alignment with commercial and finance teams.