Price volatility, regulatory initiatives and the pressure to use the most advanced extraction technologies command most of the oil and gas industry's attention, but companies shouldn't overlook the opportunities that exist for those companies that actively manage their cash and working capital, according to a report by Ernst & Young.

In a survey of companies between 2003 and 2009, Ernst & Young consultants found that working capital among oil and gas companies in terms of cash-to-cash (C2C) grew 29% to 32 days from 24.9. The industrywide expansion of the C2C cycle was driven by 20 of the 34 companies surveyed, but "the difference between the best performers and laggard performers is considerable."

Working capital, which measures a company's current assets after subtracting the liabilities, often negatively impacts cash flow when it increases, said the authors.

"There is a growing awareness throughout the industry of just how much value is being left on the table as a result of too little focus on working capital management," the report said. However, other challenges, such as price volatility, tend to draw attention away from working capital management.

Exploration and production (E&P) companies were found to carry the lowest level of working capital across the industry, seven days, which "reflects a combination of low inventory and high payables levels."

Refining and marketing, and integrated firms had significantly longer C2C cycles of 32 days and 30 days respectively. Oilfield service companies, meanwhile, carried working capital levels of about 97 days, reflecting "the complex, sometimes long-cycle nature of the segment's operating model, with certain long-term contracts carrying significant down payment and progress billing terms."

The industry has been confronted with challenges that exert pressure on cash flow, financing and operations at a time when it also is challenged to produce more energy to satisfy demand, said the report.

For example, upstream and downstream industry costs nearly doubled between 2003 and mid-2008.

"Though capital costs eventually fell between 15% and 20% in 2009, the absolute levels still represented a long-term increase," said the authors. Rising investments in exploration, as well as new refining capacity and tightness in the services sector, all contributed to the rising costs.

"Such trends are exacerbated by a prolonged period of underinvestment across the whole industry through the 1990s," the report said. "Moreover, as actions to regulate the carbon molecule accelerate, and as discovery and recovery require ever greater technological and operational sophistication, costs can only move higher."

The oil and gas industry "tends to underemphasize" working capital performance, putting more attention on "operational metrics" that include throughput, day rates and pricing, and not on inventory or payables.

"In many cases, parts are purchased and then never used or even returned or sold," the authors found. "Similarly, there is little collaboration between upstream field sites -- even when these operations are relatively nearby. There are no attempts to standardize parts, consolidate inventories or collaborate on procurement."

A key factor in the deterioration of the industry's C2C performance was found to be inventory levels, which grew substantially from 2003 to 2009. The meaning behind the performance decline may not be "immediately apparent," but "it reflects the impact of stronger prices on the value and composition of total inventories, as well as higher levels of physical stocks."

Wide variations were found to exist in working capital management performance in the oil and gas industry, often because of the variations in business models, customers, levels of vertical integration, nature of supply contracts and production and distribution infrastructure.

However, the size of performance disparities suggests "fundamental differences" in how management focuses on cash and process effectiveness.

"Huge opportunities for improvement exist within areas such as inventory management, demand forecasting, supply chain planning, billing, collection, commercial terms, contractor management and sourcing," according to the report.

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