article banner

Oil price drop: windfall or worry?

Jim Menzies

The slump in oil prices has its winners and losers. Jim Menzies, global leader for the food and beverage sector at Grant Thornton, says the outlook is good for food and beverage companies

From the farm or factory to the supermarket shelf, food and beverage producers depend on energy every step of the way. So the prolonged fall in oil prices has been good news for the sector.

Companies have seen substantial cuts in their energy and transportation costs, although some have benefited more than others. Larger businesses, which often produce more and distribute further afield, have saved more than their smaller competitors. But perhaps the major difference lies in the impact on oil-exporting versus oil-importing economies.

For the oil exporters, low prices have clearly hit oil and gas businesses, leading to increased job uncertainty and even redundancy. The workers affected are cutting back on consumer spending, which is hitting sales of food and beverage producers, thus wiping out some of the savings gained from reduced energy and transportation costs.

The fall in the price of oil has been much better news for food and beverage producers that are based in oil-importing countries. These producers are also benefiting from reduced energy and transportation costs, but without the corresponding slowdown in consumer spending.

Bargaining for benefits

Regardless of whether they are big or small winners, all food and beverage producers have the opportunity to lock in the benefits of the oil price crash, at least for a period. Agreeing a long-term price for oil and natural gas with energy suppliers is one way of doing that. The downside of that is of course that if the price drops further they wouldn't benefit.

Companies can also seek rebates from their transportation companies proportionate to the savings in the supplier’s fuel cost; they can either negotiate a contract upfront that links transportation costs to the price of oil or negotiate costs down in response to specific price falls.

Now is a good time to do this. Lower oil prices give food and beverage producers leverage with transportation companies that are under pressure to retain business and even increase market share. 

Long-term gains

There are more strategic benefits to be gained from the current situation. If they weren't already, oil-dependent economies will be looking to diversify into other sectors in a bid to spread risk. This could offer food and beverage companies access to previously untapped business growth opportunities.

Producers should identify and target those economies now. Larger producers with experience of global expansion are at an obvious advantage but opportunities for mid-sized producers will be plentiful too. They need to start building relationships on the ground in these economies today and get a better understanding of the business operating environment. This will allow them to hit the ground running when economic diversification starts rolling.

The fall in the oil price offers a huge potential windfall to food and beverage producers – the short and long-term opportunities are there for business leaders with the drive and foresight to take on a new challenge.

Linda Beal global leader for the oil and gas sector at Grant Thornton, says, oil and gas companies are facing significant challenges

Who would have thought that the price of oil could fall so far, so quickly, for so long? Certainly not the oil and gas industry itself, which continues to experience significant challenges as a consequence of reduced oil prices.

Paramount among those is the fall into limbo. Just over 42% of oil and gas companies will be putting their strategic plans on hold in 2015 as a result of the prolonged drop in oil prices, according to a recent Grant Thornton survey of senior executives in the sector.

While this is understandable in the short term, doing nothing is not an option nor is it sustainable in the long term.

Supply chain woes

There is already clear evidence of supply chains suffering in various ways as a result of price reductions. Some companies are imposing unilateral cuts on suppliers, whatever the contract says. Our survey revealed that 42% of companies believe M&A activity in the supply chain is likely as a result of the pressures suppliers are facing.

Companies will need to become agile to succeed. A mobile, flexible workforce that can be readily scaled up or down – even more so than has been the case so far – will be essential.

Even if the oil price rebounds fully, it’s unlikely that supplier pricing can simply revert to where it was. Throughout the supply chain a far greater focus on operational efficiency can be expected and a greater premium on flexibility, such as more hiring of equipment rather than purchasing.

New business models are being explored beyond the supply chain too. The Wood Report on the North Sea oil industry recommended a greater sharing of infrastructure. And these different methods of working could apply elsewhere in the world, in the development of Mexican oil fields, for example. Companies willing to adopt new business models could see new opportunities open up before them.

Access to capital

Taking advantage of these opportunities will depend on having ready access to funding. But companies across the sector are finding it increasingly difficult to raise finance given the more uncertain returns. Anticipating the tougher lending environment, producers have been actively managing their debt positions to avoid related issues.

On the upside, low prices are bringing new investors into the market – namely private equity firms and sovereign wealth funds – attracted by lower company valuations. Companies with access to cash will also be in a strong position when a predicted wave of M&A occurs. We see consolidation as a good thing, giving companies added flexibility and diversity, but target companies will need to face the fact of lower valuations before deals start filtering through.

So what does the future hold for the oil and gas sector? Despite being on the losing side of the slump in oil prices, individual companies can survive and even thrive. The winners will be those who can access cash, that are agile and dynamic, and can spot opportunities even in adversity.