2015 Market Outlook Workshop

Transcription

1 2015 Market Outlook Workshop Feeling the Squeeze Deloitte Consulting LLP August 7, 2015

2 Agenda Introduction to Deloitte Our View of the Oil & Gas and Oil Sands Market Trends in the Oil Patch Cost Reduction Cost Reduction for Producers and what that means for Manufacturers (Cost Modeling) Cost Reduction for Manufactures (Direct Materials) Conclusion Questions

3 Introductions Martin Brotschul Principal Deloitte Consulting LLP Grant Poeter Specialist Leader Deloitte Consulting LLP Ted Brennan Senior Manager Deloitte Consulting LLP

4 About Deloitte Consulting LLP #1 Global Consulting Gartner, Kennedy, Forrester Collaborative US/Bangalore Team #1 Supply Chain 1,3, Finance 1,3, HR 3, Customer Management 1, IT 3 Transformation Proprietary Tools and Methodologies Examples: Strategic Choice Cascade, The Visual Decision Accelerator (VDXTM) 9 Innovative Alliance Relationships Including Singularity University, 3D Systems and XPRIZE Unmatched Breadth and Depth 15 =-- 54 E&R consulting Offices Consulting services to 76% E&R Companies 2020 Global Procurement Outlook Centers for 2 Energy Solutions E&R studies and published articles In As 4 ranked by Gartner; 2 Per International Association of Outsourcing Professionals ; 3 As ranked by Kennedy

5 The Market Risk Profile of the Western Canadian Sedimentary Basin (WCSB) has Changed Structural shift away from natural gas drilling Full cycle dry gas has been uneconomic in Canada for several years no indication that this will change Liquids rich strategies can work but are challenged by infrastructure constraints and depressed gas prices Remain cautious on gas due to LNG uncertainty and mountain of gas in the Marcellus The average cost per well drilled in the WCSB has risen dramatically as: new technologies are implemented (multi-stage fracturing) deeper, more technically difficult reservoirs are targeted (i.e. Duvernay) Risk for new entities has shifted from exploration to development Balance sheets need to adjust accordingly hence larger initial capital raises Undercapitalization remains a risk 5 Source: Spears

6 The Market West Texas Intermediate The Challenging Market Continues Deloitte recently interviewed 20 CFOs to get a pulse check on the market. Their perspectives were quite similar. THEMES Which of the following describes your outlook of when WTI prices will return to US $70 80/bbl? Recovery of WTI prices to US $70-80/bb Longer than 12 months Many also commented on factors that have softened the impact of the price decline: The weakening of the CAD vs the USD Hedging positions for the remainder of 2015 >12 Months 72% 28% <12 Months USD WTI prices (FX rates per Bank of Canada)S USD WTI CAD WTI Interview Period June 2013 CAD WTI $96 USD WTI $93 April 2015 CAD WTI $72 USD WTI $60 Weakening FX rate resulting in favourable CAD WTI WTI pricing per *from May,

7 The Market Global Crude Cost Breakeven Curve Even with low production costs, OPEC members rely on oil prices to be in the $80 - $100BBL range to fund their governments. Source: Reuters, Oil prices below most OPEC producers' budget needs, September 8, 2014; - IMF, Statistical Appendix, Regional Economic Outlook - Middle East and Central Asia Update, May 2014 and Deloitte MarketPoint Analysis 7 Prices will be further tested with the possibility of Iran production coming back into the world market as a result will likely stay soft for the foreseeable future. Source: Spears

8 The Response Global Oil and Bitumen Production Will Reduce as a Result of Cancelled Projects Canada has been the hardest hit with a double whammy of lower oil prices and a weak Canadian Dollar. If sub $50 oil were to persist, this list would be pages long. Source: Deloitte Canada Study 8

9 The Response Actions to sustain performance in the current environment Companies are looking at a number of ways to mitigate both the immediate deflationary pressures and how to make structural changes to manage at a lower price per barrel range. Proportion of participants (CFOs) considering or applying the following strategies to manage current and potential future prices REDUCING COSTS SHORT-TERM CASH FLOW DEBT MANAGEMENT ALTERED PLANS TO ACCESS FINANCING DEFER SPEND CUT DIVIDEND STRATEGIC ACQUISITIONS DIVESTITURES TO MONETIZE ASSETS 9

10 The Response Cash Flow Management Most companies have engaged in Cost Reduction programs in If there is a continued softening, there will be further contractions and negotiations. Percentage cost reduction achieved by CFOs, shown proportionally CFOs were asked what elements of operations excellence are priorities in the next 3 to 12 months 8% 17% 8% 67% 10 Achieved 10% reduction Achieved 15% reduction Achieved 20% reduction Achieved 40% reduction Source: Deloitte Canada CFO Study Reducing contractor and employee headcount. Seeking cost reductions from suppliers. Most indicated that achieving approximately 10% reduction is a realistic first step Improving management of receivables from JV partners while being strategic in vendor payments and realizing discounts for early payment. The resounding feedback from CFOs is that there is increased focus on getting the most out of what you ve got. In their view, relevant areas being considered include: Field productivity Asset management Many highlighted recent or planned investments in operations technology to do more with field data available, as well. Operational readiness was also highlighted as a priority by those dealing with the transition of capital projects to operations.

11 Summary The Market and Our Thoughts The combination of weak oil prices and a strong US dollar have driven a shift in oil price fundamentals. With no end in sight for either oil demand increasing or the dollar weakening, low oil prices are likely here to stay. Consensus of analysts and data point to no real improvement for 12 Months or more Upside is in the $70BBL - $80BBL range. No one is predicting $100 anytime soon All operators have conducted cost out programs with mixed results more will likely follow Companies with strong balance sheets are seeing this as an opportunity to gain market share and scale, ultimately meaning fewer, larger customers in the market Marginal programs/projects will be mothballed or abandoned Added uncertainty with Iran s potential move back in to the mainstream will keep prices lower It s not all bad for other industries, it is estimated that low oil prices is a $1.1Trillion stimulus in to the world economy* We see some examples of trends to be more competitive in this market environment for both customers and manufacturers 11 Source: Citi Group

12 Per foot Per foot Customer Response Cost Model Example: Region A Seamless 7 in. 32# HCP110 Casing There are two types of Cost models; one is used to estimate both the Total Cost of a Material or Service to a company and the second estimates the cost for a supplier to produce a component/input $35 $30 $25 $20 $15 $10 $5 $0 $8.73 $0.98 Total Cost of Ownership Manufacturing Distribution Fees and Freight Total $2.58 $26.21 $2.85 $29.06 $0.84 $1.16 $0.27 $31.33 $0.91 $9.90 $3.11 Should Cost $35 $30 $25 $20 $15 $10 $5 $0 -$5 $8.16 Manufacturing Distribution and Freight Total $29.07 $24.50 $27.69 With your customers driving to this level of information, it can enable you to have different conversations on pricing, including indexing to some of your key cost drivers 12

13 Per foot Per foot $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 Customer Response Cost Model Example: Region B Welded 7 in. 23# J55 Casing The example pipe accounts for 40% of Region B s OCTG spend. As modeled, Region B is paying 7% under the Should Cost. $7.30 $0.43 $0.68 $1.49 Total Cost of Ownership Manufacturing Distribution Taxes and Freight Total $1.69 $0.81 $12.39 $1.63 $14.02 $0.72 $0.56 $15.30 $18 $16 $14 $12 $10 $8 $6 $4 -$2 $0 $2 $7.85 Should Cost Manufacturing Distribution and Freight Total $15.34 $16.13 $13.33 This type of analysis can also help to ferret out pricing anomalies in the market, such as this case where a foreign company that recently had a 15.89% countervailing duty levied against it. 13 Source: International Trade Commission

14 Manufacturers Response Overview A number of market trends in the manufacturing industry lead to increasing pressure on companies Decreasing product differentiation Increasingly sophisticated procurement managers Stronger end customers Typical company in the manufacturing industry Mature, slow-growing markets Appearance of new competition Globalization of supply and customer base M&A among competitors and customers 14

15 Manufacturers Response Volatility here to stay We are in the second cycle in the past 15 years Commodity Prices Since Index = Aluminum Raw Materials Index Petroleum Maize Increasing sophistication in commodity management Commodity management as a competitive advantage Note: Raw Materials Index includes Timber, Cotton, Wool, Rubber, and Hides Price Indices, Aluminum based on LME price, Petroleum based on simple average of three spot prices: Brent, West Texas Intermediate, and the Dubai Fateh, Maize (corn) based on U.S. No.2 Yellow 15

16 Price Index Manufacturers Response Supplier pricing cat and mouse Purchase price timing and variation among suppliers indicates an opportunity for price reduction 6 Month 1 Year Delay Delay 1 Year Delay All Hydraulic Cylinder Cylinder Steel Index Timing Steel price increases are met with more rapid purchase price increases than steel price reductions Decline in steel prices over the past two years has not seen a commensurate purchase price reduction There is an opportunity for purchase price reduction due to steel price decline over last 18 months 16

17 Manufacturers Response Another approach Continuous cost reduction efforts are crucial for lasting success Reacting to immediate cost pressure Improving product competitiveness Reaching strategic targets PRIMARY TARGET COGS Old Product Cost reduction COGS New SECONDARY TARGET Operational effectiveness Reduction of complexity Process efficiency Reduced cycle time Product optimization Increase of product margin Increase of competitiveness Improved product quality 17

18 PRODUCT FOCUSED APPROACH TRADITIONAL Manufacturers Response Cost take out at the product level Margin focused cost take out focuses on value to the business 1 Cost perspective 2 Collaboration 3 Value Chain Organization driven Functional Isolated focus Personnel cost Cost reduction Material 1,3 Quality Engineering Procurement Manufacturing Logistics OEM Procurement Manufacturing Sales Manufacturing Sales & Marketing Finance/ Admin Product driven Cross-functional Integration of suppliers/sub-suppliers Product 1 Product 2 Quality Engineering Procurement Manufacturing Logistics RAW MATERIA SUPPLIER Tier 1 OEM Customer Product 3 18

19 Manufacturers Response Overall Methodology To Calculate Manufacturing Cost of Hydraulic Cylinders Raw Material Operation Cost Finishing Cost Assembly & Testing Purchased Parts Castings & Forgings Welding Assembly Fixed Cost ( ) Manufactured Parts Volumes (cm^3) Cost( ) / Weight(Kg) Tubes, Rods, Plates Geometric Features Define Operations - Turn, Grind, et. al. Setup, Pre-heat, Handling, Cleaning (min) + Weld [Length / Speed] (min) = Welding Time (min) X Fully Loaded Labor Rate ( / hr) = Welding Cost ( ) Consider: Part Weight Torque Need Forced Fit Need Total Time (min) X Fully Loaded Labor Rate ( / hr) = Assembly Cost ( ) Testing Material Type - Density (Kg/ cm^3) Weight (Kg) Setup Times (min) Cycle Times (min) Chrome, Nitrite Plating Surface Area (mm^2) X Cost ( / mm^2) = Plating Cost ( ) Standard Testing Time (min) X Fully Loaded Labor Rate ( / hr) = Testing Cost ( ) X Material Cost ( / Kg) Raw Material Cost ( ) X Fully Loaded Labor Rate ( / hr) Operation Cost ( ) Painting Surface Area (mm^2) X Cost ( / mm^2) = Painting Cost ( ) 19

20 Conclusion and Questions Dynamic market will continue for the foreseeable future Crude Supply Demand Balance USD Strength Geopolitical uncertainty New entrants will further erode the balance Companies are struggling to get costs in line Different Thinking is Required Cost Modelling and Supply Chain Analytics will become more mainstream Restructured relationships with key suppliers to align incentives will continue Managing Risks and Relationships will become more important to Sourcing & Procurement groups As used in this document, "Deloitte" means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte network ) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. Member of Deloitte Touche Tohmatsu Limited. 20