2019 Service & Supply Outlook Survey Results: Cash Flow Is King When It Comes To Covering Costs
In late 2018 the Daily Oil Bulletin surveyed 120 representatives from all subsectors of the oilfield services industry to gauge how the industry performed in 2018 compared to 2017, and to get a sense of the sector expects 2019 to play out. In this seven-part series, Vince Lauerman sifts through the results of the 4th annual Service & Supply Outlook Survey to identify key trends in the sector. Parts one, two and three of the series looks at the financial performance of oilfield service companies in 2018, and expectations for this year. Parts four to six will examine the market conditions the industry faced last year, and expectations for this year. Part seven will examine the role technology is playing in the sector today, and in the future.
Today, part three reviews company cash flow and financing plans in 2018 and provides an outlook for 2019.
To read the full report, click here.
In an extremely difficult operating environment cash flow will continue to be king for oilfield service companies in 2019, as 59 per cent of survey respondents indicated it would be their primary source of capital.
In total, 32 per cent of companies said they were planning to rely on equity, debt or a combination of the two as their primary source of capital this year. Equity and debt came in at 8 per cent each, while 15 per cent expect the combination of the two to dominate.
On the whole, equity is an unattractive option due to generally poor stock prices, while companies are trying to avoid taking on additional debt to avoid becoming takeover targets or becoming insolvent.
The increasing risk aversion of service companies can also be seen where they plan to obtain their capital in 2019 compared to last year. Twenty-three per cent are to seek funding from private capital and 15 per cent are planning to borrow from major financial institutions, for declines of 3 percentage points each from last year’s survey. Only 7 per cent of respondents are planning to use capital markets as a funding source, half as many as 2018.
At the same time, 7 per cent of companies are planning to rely on economic development organizations for funding in 2019, an increase of 3 percentage points from last year, and 54 per cent are to lean on free cash flow – a 7 point rise.
Cash flow priorities for 2019
How do oilfield service companies plan to spend their cash flow in 2019?
Fifty-two per cent ranked spending on operations as their top priority, an increase of 6-percentage points from 2018.
Fifteen per cent of respondents said debt servicing would be their top priority in 2019, compared to 12 per cent the year before.
A mere 2 per cent ranked spending on mergers or acquisitions as their top priority, a drop of 11 points from 2018.
Small companies challenged to survive on cash flow
Cash flow may continue to be the main source of capital for oilfield service companies in 2019, but this is much less the case for small companies (less than $5 million revenue) than larger ones – a half versus almost two-thirds, respectively.
A potential sign of financial distress among small companies is the fact 15 per cent said the issuance of equity would be their primary source of capital this year, five times more than larger companies, despite generally poor stock prices at the present time.
The divergence in cash flow priorities for 2019 between small service companies (less than $5 million revenue) and larger ones also appears to reflect their relative financial strength. Sixty-per cent of respondents from larger companies ranked operations as their top cash flow priority, whereas only 38 per cent of respondents from small companies did the same.
On the flip side, 26 per cent of small companies said debt servicing would be their number one cash flow priority this year, almost three times more than larger companies.
Companies report there is little left to cut to manage cash flow
Cost reductions dropped substantially as a means of managing cash flow for service companies in 2018, with companies already running lean after cuts in previous years. Non-employee related cost reductions may have been cited by the most survey respondents as one of their top approaches for managing cash flow, but at 45 per cent this represented a 14-percentage point decline compared to 2017. Employee related cost reductions saw even a bigger drop, 19 points to 25 per cent, falling from top ranking to fourth place in the process.
The biggest gainer for managing cash flow last year was aggressively pursuing overdue account receivables, an indirect sign of rising financial distress in the Western Canadian oil industry. Pursuit of overdue account receivables gained 20 points to 29 per cent to become the second most common approach, compared to a sixth place finish the year before.
The other two top five methods for managing cash flow, reducing inventory or selling assets and the delay or deferral of investment were mentioned by 28 per cent and 21 per cent of respondents, respectively, 3 points less for each than 2017.
Subsectors have different capital plans
Cash flow may continue to be the main source of capital in the oilfield service sector in 2019, but there is a great deal of divergence between different sub-sectors, possibly due to debt loads and relative financial health.
Forty-six per cent of companies specializing on exploration and development, the most battered of the sub-sectors, said cash flow would be their main source of capital in 2019, with equity coming at 23 per cent.
Cash flow is expected to be the least important source of capital for the transportation sub-sector, with 38 per cent of respondents saying it would be their primary source this year, compared to 15 per cent for equity.
Companies specializing in oilfield services/field operations continue to be indicative of the industry as a whole, with 66 per cent of respondents saying cash flow would be their primary source of capital this year and a mere 3 per cent equity.
Differences in cash flow priorities for 2019 between companies from different sub-sectors may also reflect their relative debt loads and financial health.
Sixty-two per cent of respondents from the exploration and development sub-sector said operations would be their top cash flow priority this year, and only 8 per cent said debt servicing.
A modest 15 per cent of service companies focusing on transportation said operations would be their number one cash flow priority in 2019, compared to 38 per cent citing debt servicing.
Fifty per cent of respondents from the oilfield services/field operations sub-sector said operations would be their top priority this year, with only 13 per cent saying debt servicing, which again track the industry norm.
To read the full report, click here.
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- Financial Results