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The energy industry is undergoing some of the most challenging times in its history. Oil and gas prices are at near all-time lows, and while in the past there have been ups and downs, this lower-for-longer price appears to be the new norm going forward.
Additionally, energy companies are facing fundamental disruptions to their margins, growth, and profitability. Some of these disruptions include uncertainty with the global economy, trade wars, geopolitical conflicts, Brexit, fluctuating demand for carbon based fuels, and COVID-19.2 Even the utilities sector, a once predictable and reliable investment, is now becoming highly uncertain due to new competition, stronger regulations, and natural disaster risks. The question is—how do energy companies make money in this new reality?
The answer lies in digital transformation. Digitally transforming the sales and pricing processes is the only way energy companies can improve margins and productivity while reducing costs. This includes getting much closer to customers to understand their wants and preferences better in order to more optimally price and sell the way their customers want to buy. It’s all about using data and science to figure out the optimal price/margin based on customer demand and willingness-to-pay, detecting opportunities, maximizing wins on long-term contracts, and making the buying experience far better.
This paper explores the challenges faced by oil field service, downstream, upstream, and utility companies. It then discusses the new rules of digital commerce and how this approach enables energy companies to win on the new competitive front— the customer buying experience. Finally, the paper discusses how PROS AI-enabled pricing and selling solutions, founded on data science and over 35 years of deep industry insights, enable energy companies to increase growth in sales and margin.
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A Turning Point with COVID-19
The pandemic has accelerated what was already shaping up to be the one of the industry’s most transformative moments—the shift in buyer expectations.
The industry is rapidly moving toward an era of intense competition, technology-heavy strategies, and continually fluctuating demand.4 Energy companies could likely face potential bankruptcies and supply chain failures as vendors and suppliers themselves face operational and financial struggles.
The coronavirus outbreak and the Russia-OPEC price war has also dampened consumer demand for oil, resulting in plummeting oil prices and production declines. The pandemic and resulting oil price crash are set to wipe out as much as $1.8 trillion in revenue of exploration and production companies (E&P).5 This has placed many companies at risk of not being able to refinance debt or meet existing debt, further emphasizing how vital it is to accelerate the adoption of digital technologies that improve profitability and resilience.
This period marks an unquestionable turning point in the energy industry by highlighting the need to integrate third-party and digital solutions. According to a study conducted by PWC on 200+ oil and gas companies, only 7% identified themselves as digital champions, or having a “clear position in the marketplace with complex and tailored internal, partner, and customer solutions offered via multi-level interaction.”
Additionally, according to a recent study of O&G companies, industry leaders anticipate companies with digital applications will deliver an average 10% increase in revenue over the next five years. Businesses should also reimagine traditional operating models and place an emphasis on becoming cost competitive through emerging pricing technologies.
The Alarming New Landscape for Oil Field Service Companies
The $100+/barrel days appear to be mostly gone, and oil prices have settled below the $65/barrel range.9 Consequently, producers have learned to be efficient and cut costs, which has created price pressures on oil field Service (OFS) companies.
This, in turn, has depressed returns on investment of OFS companies to historical lows. Schlumberger led the OFS sector on ROI at around 3% in the third quarter of 2018, while exploration and production (E&P) companies were showing returns of 10% or more on average during the same period. This is reflected in their stock prices: Halliburton and Schlumberger, the industry leaders, have seen their stocks plummet by 65% and 76%, respectively, from 2014 numbers.
In the past, E&P companies hired more and increased the number of rigs they used when producing more barrels. Today, they are reducing the need for rigs and workers. This has resulted in over a 20% drop in revenues for the OFS sector from 2014. As the chart below demonstrates, while production increased by 45% since June 24, the number of drilling rigs used has dropped by 49%—nearly half.
In a highly fragmented industry sector, such drop in demand only amplifies already existing intense competition. So far, the response to this by OFS companies has been to slash costs in the hopes of continuing to win business and that oil prices will go up sometime in the future.
To continue to pursue new opportunities and grow their market share, sales, and margins while navigating through such disruption to their core business, OFS companies must digitally transform their sales and pricing processes. To start, they must adopt a solution that enables them to manage and optimize pricing for parts, products, and services using competitive, market, and customer data. They also need to equip their sales teams with real-time information on who to sell to, what to sell, and at what price. Finally, OFS companies must provide an optimal and digital omnichannel buying experience that allows customers to do business with them whenever and however they want.