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Field-based operating services companies are under enormous pressure, and their headaches are likely to only intensify in coming years.
Field-based energy and infrastructure services companies are the true workhorses behind many of the capital-intensive industries that move the world economy—from oil and gas to utilities to engineering and construction, among others. They range from multinational conglomerates to mom-and-pop operations with a few pieces of rented equipment. What they share are high levels of entrepreneurship and an extremely competitive marketplace.
For these companies, the transition from supporting hydrocarbon-based projects and assets to an investment landscape more focused on renewables and the grid (See Figure 1) will drive disruption. This transition affects everything from segment growth outlooks to the ability to speed up response cycles to drive bottom-line performance. At the same time, current headwinds abound. Monetary policy is tight. Inflation is stubborn. Demand is subdued in developed economies. Market dynamics are shifting amid the clean-energy transition, and oil and gas players—saddled with high-cost infrastructure—are reluctant to invest.
These pressures are not trivial. AlixPartners research estimates more than half of field-based services companies are exposed to markets being disrupted by energy transition, potentially reducing available profit pools over 20% by 2030. With the energy transition investment trajectory clear, waiting for macro shifts or capital recoveries without a strategy for managing the energy transition and protection against downsides, can be disastrous.
Figure 1: The energy transition is gathering pace, disrupting the traditional markets for many energy and infrastructure services firms.
To be sure, sizable opportunities do exist to improve offerings for existing customers, including exploration and production companies, midstream pipeline operators, petrochemical refiners, nuclear powerplants, utilities, and others. This near-term priority can be achieved while aggressively pursuing diversification and preparing for a structural shift in global energy markets.
A confluence of pressures
Even as the forward outlook for traditional industrial services companies appears troubled, the sector’s near-term prospects are already being impacted for several reasons.
First, poor sentiment has resulted in investor reticence to invest in end markets, resulting in a slower ramp up in upstream and midstream pipeline construction in developed markets. This will eventually curb the potential for growth in certain energy sector markets.
Second, markets have not seen the expected Capex recovery after COVID-19. For example, oil and gas spending has not reached pre-pandemic levels, and many forecast continued lower spend or deferrals (See Figure 2). There has instead been a priority placed on maintaining profitability and managing the balance sheet, leading to richer dividends, share buybacks, and debt paydowns.
Figure 2: Reduced investments by oil and gas companies into fossil fuel production constrains outlook for energy and infrastructure services.
Third, customers are pushing harder on service companies to reduce prices. When combined with stricter and potentially costlier ESG requirements, the table is set for an intense margin squeeze. Adding to the pricing and profits pressure is the continued threat from smaller competitors that most often come in the form of smaller operators with lower overhead and greater flexibility.
Lastly, inflation, seen in rising wages and other key cost areas, has affected profitability at a time when increased staff turnover and a tight market make it difficult to hire skilled labor. The cost of capital is also going up. Inorganic growth is expensive and the rising cost of capital further challenges companies looking to profitably expand.
Roadmap required for a disrupted future
To prepare for a successful future in this more disrupted market, service companies pursue a dual mandate. First, they must optimize within their current operations. At the same time, they must reinvest the returns from today to make strategic investments for a landscape much more focused on grid and non-hydrocarbon assets. These imperatives demand an updated approach that comprises four strategic pillars:
1. Focus on profitable top-line growth and strategic choices
Miscalculating the economics of a bid can lead to unprofitable contracts covering 1-, 3-, and 5-year terms. Now is the time to deploy targeted pricing increases and ensure the business is making all pricing decisions with a full understanding of the true cost-to-serve for each customer. Automatic price escalators in longer-term contracts are required, especially amid high inflationary risks.
To maximize salesforce effectiveness, companies must tightly align corporate functions with branches/operations on sales growth drivers, strategy, and incentives. This enhances existing customer relationships and ensures strategic customer recruitment efforts are a focus area. Salesforce deployment should consider total addressable market size, market share, profitability, and future growth potential to maximize ROI.
Customer-centric delivery technologies offers a huge advantage to driving top-line growth if thoughtfully managed. Developing new services by utilizing technology that reduces the cost to customer, does it faster, and at better quality are critical. Service companies are employing robotics in place of labor-intensive tasks and using drones in place of technicians where there are safety, access, or speed concerns. Technology can also reduce operating costs, giving additional wiggle room to negotiate around competitors.
2. Lower operating costs
The most successful companies find ways to optimize margins even in tight markets. Enabling operations no longer requires large investments or long timelines—solutions can be developed and implemented in weeks. Employing practical solutions in the following areas will give an upper hand on competition:
- Revisit approaches to manage capacity and scheduling. Having a program isn’t enough. Is it structured in a way to ensure all stakeholders understand daily targets and achievements of the workforce, and inform capacity decisions over longer horizons?
- Utilize digital timekeeping to improve customer receipt, reduce administrative burden, and generate greater visibility to utilization and performance metrics.
- Leverage equipment telematic and maintenance information to reduce operational and capital costs through an informed Total Cost of Ownership model.
- Create greater visibility to field-level performance metrics. Track profitability detail per manhour or equipment hour and make choices with real-time information rather than lagging monthly data.
- Hold operations leadership accountable by reviewing financial and operational metrics on a set cadence. Ensure data integrity and adoption of the existing systems by only leveraging the data output from these systems in this process.
- Review the operating model. Field services businesses can carry higher operating costs due to partial integrations or lack of intentional design. A reset can create scale and standardization while still allowing the entrepreneurial spirit to drive the business. Be intentional about dividing branch roles and central responsibilities.
3. Optimize cash
Cash is critical in today’s markets. A clearly defined, and tightly managed capital program—combined rigorous working capital management—can create additional free cash flow and avenues for investment, both inside the business or otherwise. Effectively managing capital will require:
- An allocation and management process that does not deviate from strategic priorities.
- Thorough vetting and executing value creation plans for any acquisition.
- Clear understanding of allocation of capital and assets in the field—ensuring the right assets in the right place at the right time without overcapitalizing.
- An intentional and procedural approach to managing working capital. It is important that process and controls are in place upstream in contracting and through invoicing and payment/receipt so downstream impacts in DSO and DPO are minimized.
4. Strategic Reinvestment
While running current operations, companies will need to make strategic choices to diversity into adjacent industries and geographic markets. Companies serving underground markets may be seeing a phase-out of hydrocarbon infrastructure but can move into fiber or water. This will require leaders to articulate a compelling vision, what services to provide, and where to play based on capabilities, competitive landscape, gross profit, and growth trajectory. As new opportunities are sought, exits from areas of business that are unprofitable, highly competitive, and costly should be considered. Assets can then be redeployed to profitable business.
Given the lower individual asset complexity associated with many renewables markets, companies will likely need to understand business requirements and serve markets with different labor skillsets and a longer capital maintenance cycle.
The Path Forward
Field-based energy and infrastructure service companies are near an inflection point both in macro-industry trends and pressures on operating performance. It is critical to focus limited resources on the right actions. Missteps come with long and expensive consequences.
What will separate those making marginal improvements from those who truly transform? A grounded, market-back strategy and prioritized set of actions to optimize cost and operations is the way to gain the upper hand.
