Business Outlook 2020 - Activity and Supply Chain

BUSINESS OUTLOOK 2020: Activity and Supply Chain

Financial Viability of Supply Chain Companies

chain companies report a level of 3.3 out of 5 (where 1 indicates significantly challenged and 5 indicates financially robust) in terms of their short-term financial sustainability. Whilst half of companies report that they are in a relatively robust financial position, a quarter report that they are challenged, or significantly challenged, and a further quarter report a more ‘neutral’ position. If activity levels remain depressed long term, pressures are likely to continue to build, even in companies who report relatively robust short-term positions. OGUK will be monitoring this on a quarterly basis throughout the year. Although there are strains across all areas, some sectors of the supply chain are more exposed than others. Those which are most exposed to capital projects, such as drilling and wells contractors, will see an almost immediate impact as contracts are cancelled — examples of this are also being seen in other areas such as subsea. However, companies whose revenue is mainly based on operational expenditure will also see reductions due to the deferrals of non-safety critical maintenance. Most of the companies in the most financially challenged position are relatively small, typically with less than 50 employees; these organisations do not possess large enough balance sheets to cope with additional pressures. Over recent years, many companies, both large and small, have invested in capabilities to service new contracts and work scopes which have since been deferred or cancelled and therefore returns on these investments may not be realised. Cash flow management will be crucial for companies in this position and effective and fair management of this throughout the industry is critical. It is more important than ever that all companies within the sector work constructively together to overcome the difficulties the whole industry faces. OGUK encourages all companies operating in the UK industry to adhere to the values outlined in the Supply Chain Principles . 5 This will help to increase effectiveness and efficiency, support industry performance, eliminate unnecessary costs, add value and strengthen our competitive proposition.

The fragile financial position of many companies across the supply chain is all too apparent. There has been pressure to volunteer contract rate reductions, and OGUK is aware of a number of examples throughout the supply chain where reductions of up to 40 per cent have been requested. In some cases, these are in addition to reductions seen during the previous downturn, compounding pressure on companies. It is likely that many companies will simply be unable to absorb reductions of this scale, likely leading to a loss of companies and capabilities within the UK economy. On average, supply

Financial Position of Supply Chain Companies

Significantly Challenged

2

3

4

Financially Robust

SignificantlyHigher

Higher

About the same

Worse

Significantlyworse

5 www.oilandgasuk.co.uk/supplychainprinciples

Source:OGUK

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