This opinion piece presents the opinions of the authors.
With oil prices having fallen nearly 70 percent during the past 18 months, oil and gas companies are hunkering down and significantly revising strategies and business plans in an effort to adapt to the new reality. Oil and gas is inherently cyclical, and many companies will survive the current downturn. Some will even thrive, leveraging disruption to their advantage. But others, despite their best efforts, will not make it.
A recent report by Deloitte found nearly 35 percent of pure-play exploration and production (E&P) companies listed worldwide – approximately 175 companies – to be at risk for bankruptcy in 2016, in large part due to the nearly $150 billion of debt carried on their collective balance sheets.1 The sizable number of enterprises in this situation means that many of the industry’s stakeholders should give thought to their response should the possibility of bankruptcy appear.
With bankruptcy, the default inclination is to think in terms of capital and physical assets. But there is a significant talent component as well that can easily be overlooked. Based on the experience of the Egon Zehnder Energy Practice in advising companies through multiple business cycles on senior executive recruiting, leadership succession and board composition and performance, we offer these suggestions to various stakeholders who may find themselves potentially involved in a bankruptcy scenario.
Creditors that own fulcrum securities will undertake a thorough due diligence in order to determine the best strategy for the company they now own – including whether or not they want to continue to own it. That due diligence must include an examination of the team they are inheriting. After all, the extent to which the team’s experience, competencies and potential are aligned with the requirements of the investment thesis greatly affects the risk associated with that thesis.
A deep-dive talent assessment should evaluate each leadership team member’s strategic orientation and operational discipline, as well as his or her ability to adapt to and lead through change. The team must also be evaluated collectively against the thesis so that any critical gaps can be identified and addressed. This gap analysis is critical because many current teams were assembled around a growth-oriented “acquire and explore” mandate that is out of step with the present environment.
Boards of Directors
Whether a company must actually undergo bankruptcy or merely steer clear of it during tumultuous times, it is the board of directors that must make the tough calls involving capital structure, asset sales and critical other matters. But a board’s decision-making acumen can be undercut by issues within the board’s structure and culture that are obscured during boom times.
We spoke with the chairman of a $3 billion oilfield services company who noted, “It was relatively easy to mask the limitations of the board when the industry was expanding, but now, in a protracted downturn, tough times call for tough changes. We need a board that is decisive and nimble and that values edge over consensus in order to stretch and challenge assumptions.”
Boards can gain insight into areas where their performance can be optimized through board effectiveness reviews in which experienced facilitators gather information through one-on-one interviews. For example, collegiality might be masking a reluctance to fully debate difficult questions. A highly engaged board may have the side effect of making it hard for the CEO to fully take ownership of the direction of the company. A board effectiveness review identifies undercurrents such as these and provides actionable suggestions to the board chair and the chair of the governance committee.
Having the right mix of backgrounds and experience on the board is an essential requirement for high performance. In particular, many companies are led by younger management teams that can benefit from the advice and counsel of a strategically composed board. Boards can provide a steadying voice to ensure that mistakes from previous downturns are not repeated, such as the “lost generation” that resulted from the gutting of leadership pipelines during the headcount reductions of the 1980s. Indeed, maintaining investment in talent management, including mid-level and senior-level succession planning, is a central message all boards need to be giving to their CEO.
CEOs and CHROs
While it is important for boards to keep talent management and succession planning on the agenda, it falls to the CEO and the chief human resources officer (CHRO) to make that an imperative even when staffing cuts and layoffs dominate the headlines. Focusing on talent may seem like a luxury if the company is fighting for survival, but consider that the current downturn is accelerating the retirement of many senior managers. It would be shortsighted to dodge immediate threats only to be hampered soon thereafter by an acute leadership shortage. So it is that forward-thinking organizations use downturns as opportunities to help emerging leaders gain skills that will make them more valuable in the long term. For example, some oilfield services and agreement companies are taking advantage of the sluggish (and thus low-risk) sales environment by rotating high performers into sales roles to provide customer-facing experience earlier in their development.
“The thing that keeps me up at night is whether we are retaining the right people, the high performers. It’s just too easy to get caught up in the cost reduction treadmill and eliminate top talent three to four levels deep in the organization, forgetting the longer term talent strategy,” noted a CHRO of a global E&P company. “It’s imperative that we develop the next wave of leadership or we will wake up in seven years to find we have lost another generation.”
Communication is an essential part of retention, especially during periods of uncertainty when employees take their cues from company leadership. Despite the number of issues demanding their attention, CEOs and CHROs should ensure that their level of communication is ramped up to meet the needs of their audience. It will be time well spent.
Understandably, deep turbulence in the business environment creates significant stress among employees. For example, one Eagle Ford driller – typical of some E&P companies active in US shale plays – reported that the number of active rigs run by his asset team dropped from 15 in 2014 to just one 18 months later.
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