When the oil price crashes as it has this year, it is often tempting for oil and gas companies to batten down the hatches and withdraw into themselves in order to weather the storm, coming out the other side when the price recovers.
Whilst this option may often be seen as easiest and simplest route it is not necessarily the best or right course of action. Stakeholders, and investors, in particular will want to know how the company is able to adapt to low price environments and how management is responding. It is not simply a case of whether the company is able to survive – it is multi-faceted, overhead cost cutting needs to be considered in the context of the wider host country’s economy and unemployment trends. Investors will want to know whether they need to prepare for a cash call to strengthen the balance sheet and past performance on remuneration and corporate governance will be scrutinised.
Like many capital intensive industries often little can be done to the fixed costs but what is management doing in terms of the growth pipeline to preserve value and how does this company’s strategy compare to the peer group?
What usually happens in a low oil price environment?
As has been seen in the last few weeks the oil and gas companies have already taken action in a number of ways with a view to combatting the oil price decline and ensuring that their company is one of the survivors. These include:
- cutting dividends
- cutting operational expenditure
- deferring operations / drilling
- shutting in production
- laying off consultants / staff
All these are very significant steps in reducing costs for companies and are typical actions during price falls. However, these actions are seen as negative and certainly need to be communicated carefully.
So how should you communicate negative news in a low oil price climate?
There are a number of key things to bear in mind in for communication in these climates:
- Decide the key messages you want to communicate
Devise and refine your key messages around the situation. How does the low oil price affect your business? What are you doing to combat this? What are the business’s continued strengths?
Once refined, have a copy of these on your desk so they are readily available as prompts for any call that you may receive from stakeholders or the media.
- Keep your shareholders informed
It is essential in these environments to keep your shareholders and stakeholders updated appropriately. This does not mean flooding the market with information and news in the hope that your price will react accordingly. It means responsible, factual reporting of the situation and what is happening at your operations, as well as what actions you are taking to mitigate the situation. However, you should also look to provide appropriate updates when you have something significant or material to say.
Your shareholders will realise it is a tough time for the company, but will still want the reassurance from the management that they are doing everything they can and should be during a low price environment.
- Put things in context
Put the actions and the news that you are announcing in context. For the first / significant announcement, which will probably outline what actions you are taking / considering, take time to explain the situation, what you are doing and why you are taking these actions, so that all the stakeholders have a clear understanding.
- Know your business
Know what is going on with the rest of your peers / sector. Be able to put what you are doing in context with the sector. During oil price crashes, capex cuts and cost cutting actions are often seen as sensible actions to ensure the continuation of the business.
Also, don’t speculate. The oil price is out of your control; leave the price speculation to the analysts rather than be drawn into comments, which may come back to haunt you in the future.
- Be available
This goes without saying. Management, especially in trying times, should make themselves available to shareholders so they can provide reassurance about the actions that are being taken and how the business is performing. Silence will lead to rumours, worries and potentially share price over reactions.
For the first / major announcement it is also worth considering an investor call or event to explain the situation fully.
- Share price watching
Whilst it is natural for executives of listed companies to be preoccupied with their share prices during times of stress, it is important to remember that in a low oil price environment, the share price is often affected by macro events which are out of their control and ruled by sentiment rather than fundamentals.
Whilst sympathising with and reassuring stakeholders and investors, the overriding message from the management team should be that providing the right actions are taken in the interim. The share price will eventually recover once oil prices return to the new normal.
- Oil Price & the eventual price return
While a low oil price environment is a painful and trying time, history has continued to show the cyclical nature of the industry and price fluctuations – higher prices will return.
Production remains intact for now, but as more restrictions are added on the movement of people and equipment, the harder it will become for producers to maintain production. Slowly but surely, maintaining day-to-day business activity is becoming increasingly difficult, and the fear is that some projects may eventually grind to a halt.
Supply will inevitably fall; however, when the world begins to head towards some sort of normality and those who traditionally stimulate an increase in oil demand, become more active, it is widely thought that demand will begin to spike quickly, as will the oil price. The key question then remains, which companies are still in a position to benefit following a period of under investment and closedowns?
What management need to make sure is that they keep their stakeholders informed and take the appropriate actions. If appropriate, communicate to your market the robust steps you are taking in a low oil price environment, but also how your business can potentially profit in the future, as and when markets return to a form of normality. If this is done, then those businesses will potentially make the most of the opportunities available when the oil price returns and continue to receive the backing from their stakeholders.