Exploring opportunities in a dynamic marketplace

Weakness in the oil and gas sector provides an opportunity for corporate treasurers to make changes that can have a positive impact across an entire business.

The oil and gas industry is facing a prolonged downturn that has serious ramifications for companies operating in the sector. This difficult period keenly affects corporate treasurers, who face increased pressures to manage working capital and deal with heightened currency volatility. And as businesses start to cut costs, a treasury can find itself having to cover more ground with less resources.

Proactive treasurers however, can do more than just mitigate the effects of the subdued energy markets. A challenging time for the industry can actually be turned into an opportunity to rethink treasury processes in a way that can have a positive impact across the entire business.

These topics were addressed at a HSBC customer engagement event held in Kuala Lumpur, which assembled a group of experts from both the energy and financial sectors. The discussion moved from a market outlook to the practical measures that treasurers can take to manage the tough environment.

Exploring opportunities in a dynamic marketplace

Lance KawaguchiManaging Director, Global Sector Head – Global Banking Sectors, Global Liquidity and Cash Management, HSBC Bank plc

David AndradaRegional Sector Head, Natural Resources & Utilities, Global Liquidity and Cash Management, HSBC Singapore

feel this in the form of reduced capital expenditure as projects get deferred which has a knock on effect on oilfield service companies seeing their order books dry up, said Mr. Andrada.

Malaysia however is not standing still, as the industry is working hard to adapt to the new environment. “For the local industry this is definitely a period of transformation,” said Sofiyan Yahya - Advisor, Malaysian Oil & Gas Services Council – an association that represents the interests of a membership that includes more than 600 oil and gas service providers. “We need to look at how the local industry is structured to serve the oil and gas industry”.

Mr. Yahya explained the different ways that Malaysian energy companies can reshape themselves for the future. One option is to go global, leveraging local expertise to provide services on oil and gas projects abroad. Another possibility is for the country to become a regional hub for large multinationals, which will be served by home grown companies.

1 http://www.bp.com/content/dam/bp/pdf/energy-economics/energy- outlook-2016/bp-energy-outlook-2016-regional-insights-asia-pacific.pdf

2 http://www.iisd.org/gsi/energy-subsidies-india, http://www.forbes.com/sites/ gauravsharma/2015/07/28/emerging-markets-curbing-painful-fuel-subsidies-on- lower-oil-price/#1eeaf5a676db

3 http://www.iisd.org/gsi/energy-subsidies-indonesia, http://www.bloomberg. com/news/articles/2016-06-21/for-jokowi-real-test-on-indonesia-fuel-subsidy- may-be-starting

4 http://www.mida.gov.my/home/oil-and-gas/posts/, http://www. freemalaysiatoday.com/category/highlight/2016/08/23/dependence-on-energy- o-oil-economy-hurting-malaysia/

The future of energy in Asia

The session started with a keynote speech from Mr. Lance Kawaguchi, Managing Director and Global Sector Head – Global Banking Corporates under HSBC’s Global Liquidity and Cash Management division where he outlined his observations of companies around the world adopting similar strategies in the current down cycle.

“No one can say that they have been completely immune, whether you are a national oil company, international oil company or an oilfield services firm, the impact of low commodity prices have forced corporate treasuries to rebase and recalibrate focusing on liquidity management, working capital optimisation and operational efficiencies,” said Mr. Kawaguchi.

Despite the current market weakness, the consensus among the panellists is that the long-term prospects for Asia remain bright. BP projects that by 2035, Asia Pacific’s energy consumption will grow by 54% and the region will account for 47% of global demand1.

“Asia is highly diverse. You cannot say that the downturn has been completely negative for the region,” said David Andrada, Regional Sector Head - Natural Resources & Utilities, Global Liquidity and Cash Management, HSBC Singapore. Countries that subsidise their energy needs, such as India2 and Indonesia3 , benefit from the reduced cost of oil. So too do countries like Vietnam, where the local economy is reliant on power-intensive manufacturing.

That said, there are parts of Asia where the downturn is having a more negative impact. Malaysia is a particularly good example, because the economy is still highly dependent on oil and gas4 . Companies operating in the upstream of the sector

The US dollar index, which tracks the US unit against a basket of foreign currencies, has risen almost 25% over the last three years6 – a large move that has significant implications for companies all over the world. After such a substantial rise though, the currency is likely to have limited upside, according to Alvin Kong, Managing Director, Head of Markets, HSBC Bank Malaysia Berhad.

Data from the last 40 years suggests that after the dollar has risen more than 20% it will start to fall, said Mr. Kong. The trigger point is usually when interest rates start to rise – something that has already tentatively happened after the US Federal Reserve hiked rates late in 2015. “History suggests that US dollar is perhaps reaching its peak,” he said7.

Volatility in energy prices and the value of currencies both add to create an uncertain environment that treasurers in the sector have to navigate. Highly unpredictable macro factors put treasury processes to the test, making it hard to get accurate information when it is needed most.

“Many of the people we speak to are still using spreadsheets, so when it comes to a crisis, it is very difficult to get a real number,” said Benny Koh, Managing Director, Global Treasury Advisory Services, Southeast Asia, Deloitte.

5 http://www.mprc.gov.my/who-we-are/about-mprc

6 http://www.tradingeconomics.com/united-states/currency (Nov 2013 to Nov 2016)

7 http://www.macrotrends.net/1329/us-dollar-index-historical-chart

There is also a growing realisation that local players need to create synergies by combining together. “We need consolidation to get the local industry to integrate,” said Mr. Yahya, who said that although there is a reduction in projects, there are still opportunities especially in brownfield projects. More consolidation, he said, will be the game changer for the local industry, as there will be potentially less players, but even more companies offering a wider range of integrated and

value-added services. This will ensure the sustainability of the business and strengthen the strategic positioning of Malaysia as a regional hub for oil and gas services.

There is strong government support for this wide-ranging drive to improve the standing of local oil and gas players. The Malaysia Petroleum Resources Corporation (MPRC) is an agency that reports to the Prime Minister’s Department and is working towards an objective to make Malaysia the top oil and gas hub in Asia by 20175.

“From a national perspective, we are working to make sure that our economy is robust,” said Ir. Dr. Shahreen Zainooreen Madros, Executive Director at MPRC. “We want to move our dependency on natural resources by growing the services sector so that its contribution to GDP goes down.”

Managing volatility

In addition to these macroeconomic considerations, a corporate treasurer needs to understand a range of financial issues in order to successfully fulfil their responsibilities – such as global interest rates, risk management, and currency fluctuations. For the energy sector, where commodities are typically priced in US dollars, the recent rise in the greenback is an important topic.

two payment methods, it is leapfrogging everything from the most basic form of payment to the most advanced in a very short period of time.”

“We are not only going to see corporate payments for things like hotels, we are going to see business to business flows that currently aren’t being captured but will be done electronically in the future,” he said.

Along with assessing processes, and adopting automation, implementing new forms of payment is just one of the ways that treasurers can modernise their day-to-day activities. The downturn is therefore an opportunity to challenge the structures in place, and tough decisions made now could result in a treasury that is leaner, more efficient, and more effective.

“This is an opportunity for us to improve. In the long run, things will get better,” said Mr. Andrada. “Companies that don’t do anything now, might miss the boat.”

8 https://www2.deloitte.com/uk/en/pages/risk/articles/2016-global-foreign-

exchange-survey.html9 http://www.ey.com/gl/en/industries/oil---gas/ey-spotlight-on-oil-and-gas-

megaprojects#.WA3K4OB96Uk

The consultancy’s 2016 Global Foreign Exchange Survey found that the FX exposure identification process is a manual process, using a spreadsheet, for 36% of respondents8 .The result is that many treasurers and chief financial officers are not completely confident when they report FX exposure or working capital to the board.

Automated processes can provide a higher degree of clarity; but they come at a cost, and during a sectoral downturn it can be difficult to get a commitment from the board for a technology investment. Furthermore, it is a mistake to consider technology on its own as a complete solution to a treasurer’s concerns.

“Technology needs processes,” said HSBC’s Mr. Andrada. “You can buy technology, but if you don’t bolt it in with the right processes, it can be very inefficient.”

So before a treasurer reaches for a technological solution, it is worthwhile to do a stock take of all the processes that are under their control. Are certain activities performed twice by different people in the same region? Can different processes be merged to create synergies? Does it make sense for treasury to collaborate with different arms of the business? A treasury for example, might work with the procurement department to increase working capital by improving the cash conversion cycle.

The oil and gas industry in particular needs to become more efficient. Research by EY that tracked the performance of 365 large projects in the sector found that 64% are facing cost overruns, while 73% are reporting schedule delays . By rethinking and streamlining processes a treasurer can make a valuable contribution to the company’s overall performance.

An Asia-specific factor that could potentially improve a treasury’s performance is the rapid rise of electronic payments in the region. “Asia has gone straight to digital from cash,” said Philip Glickman, Regional Head, Commercial Payments Solutions, Asia Pacific Region, Mastercard. “It is not only leapfrogging one or

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