An effective working capital strategy is vital in the energy industry given the capital-intensive nature of operations and dependence on cash-flow management. Yet it goes further than that, with a working capital strategy touching virtually every facet of energy industry activity. 听
With the energy industry prone to unpredictability, energy companies are building resilience to protect operations and navigate economic instability, according to research from SAP. [1]
Optimal management of working capital can deliver operational efficiencies and mitigate risks. Factoring in spend management further strengthens a working capital strategy, with supply chain resilience and sustainability being key considerations in revenue growth objectives by energy businesses.
The importance of cash flow for energy businesses
In energy, significant capital expenditure is needed to cover operations and maintenance of large-scale projects, as well as day-to-day activities, and expansions to drive further growth. Without reliable cash flow, a business will likely face difficulties meeting financial obligations, causing instability, and restricting growth plans.
Faster access to cash provides businesses with a competitive edge. High oil and gas prices may ensure there is more cash for companies involved in these areas to invest in business expansion and pay invoices early. However, contingencies must be in place to accommodate any fall in prices to ensure funds are available to pay invoices.
Increasing incremental revenue to protect against economic headwinds is a considerable challenge. Raising prices alone is not a simple option and there can be unintended negative consequences.
Meanwhile, other areas in the energy sector, such as renewables, face tighter margins and must optimize capital as much as possible. Greater control over working capital and the flexibility to adapt to changing circumstances provide a considerable advantage.听
Then there are the increasing sustainability aspects, with environmental, social and governance (ESG) requirements often integral to investment decisions. In terms of the biggest challenge for ESG in energy and utilities, 62% of business leaders say it is coordinating investments, according to PwC research compiled by Taulia. [1]
The first step in devising a working capital strategy must be to determine goals, along with a commitment to continuous improvement. Working capital planning must be conducted to ensure that there is access to sufficient funds to afford objectives and operations over the short, medium, and long term. Furthermore, it is advisable to regularly review strategies to ensure that everything is heading in the right direction, with the flexibility to deploy different options as and when required. The ability to withstand unforeseen cash flow disruptors in a rapidly changing environmental landscape remains a competitive advantage.
Particularly in oil and gas, companies are exposed to the volatility of commodity markets, which directly impacts earnings and day-to-day spending. Having a strong working capital strategy helps protect against price volatility while maintaining liquidity throughout downturns, alongside providing the ability to respond to competitive pressures.
Capex in the energy industry
There are signs of growing confidence in the energy industry as the spikes of global crises from recent years start to subside and emerging solutions begin to deliver on their promise. In October and November 2023, a poll was carried out by GlobalData to determine the industry sentiment on the oil and gas capital expenditure outlook for 2024 compared with 2023. [2]
In the survey, 50% of respondents confirmed a positive outlook for the year ahead, suggesting a crucial increase in capex for 2024. To deliver on this optimism, energy firms must refine their working capital strategies to remain competitive.
However, oil and gas businesses must increasingly also factor in ESG considerations into their future planning. 鈥淭he ESG framework is a necessity and a key enabler for the oil and gas industry to align itself with climate goals and thus transform global energy dynamics,鈥� says David Kurtz, head of energy at GlobalData. Therefore, smart platforms that can connect suppliers based on ESG credentials are a particular benefit.
The short, medium, and long-term must be a permanent consideration for an enterprise working capital strategy. Oil and gas projects typically provide higher returns in the short term than low-carbon projects thanks to commodity trading. Yet renewables are considered a more stable option for the longer term as governments around the world target decarbonization over the next 25 years. Therefore, a diversified energy portfolio can help to better insulate against disruption for working capital rather than being dependent on sub-sectors more susceptible to global events.
Increasingly, energy businesses are turning their attention to alternative fuels, which have a far lower carbon impact. There are two key advantages here. Firstly, renewable assets are used to produce these fuels instead of that energy potentially going unused by the grid. Secondly, the production of alternative fuels enables the trading of commodities. Crucially, clean fuels can often be dropped into existing engines without any modifications.
In terms of renewable refineries, North America is the leading location for capex on new build development and expansion wording worldwide. The region is forecast to spend $48.4bn within the next four years, according to GlobalData鈥檚 report, Global Capacity and Capital Expenditure Outlook for Renewable Refineries 2024鈥�2028. [3] This is more than double the capex in Europe and Asia for renewable refineries, which have an expected $17.0bn and $10.5bn respectively.
In terms of countries, the US has the highest total new build and expansion capex for renewable refineries in development, amounting to $40.7bn for the period analysed, followed by Canada with $7.7bn.
Optimism in the energy sector
Despite the challenges and changing industry landscape, there is optimism in the energy industry about the future and the solutions to achieve progress.
In an energy industry survey by Taulia, 59.1% of respondents were very optimistic about the year ahead. The next highest response was somewhat optimistic at 22.7%. In contrast, 0% of respondents answered that they were feeling somewhat or very pessimistic. [4]
Another question in the same Taulia survey was on the reasons for taking early payment, with 56% answering that it was due to working capital needs. Meanwhile, 44% answered that the reason for taking early payments was to address a cash flow gap. In addition, 22% answered that they’d take early payment to reduce the days sales outstanding (DSO) metric used to measure the efficiency rate that a business collects funds owed for credit purchases.
As borrowing costs increase due to higher interest rates and inflation persists, cash is funding more of day-to-day operations. Yet the survey revealed that energy businesses are largely relaxed about their financial options and invoices being paid on time. When asked the average of when customers paid their invoices, 36.4% were on time and 4.5% were early 鈥� making up 40.9%. The majority were between one and 45 days late, with 22.7% recorded invoices being paid 45 days after the due date.
A possible explanation for this lack of urgency is tools such as the Dynamic Discounting solution from Taulia, which has allowed energy suppliers to receive bills on time without taking on any extra borrowing or experiencing delays in payments.
Accelerating cash flow for energy businesses
A key enabler for energy industry businesses to manage working capital management is Taulia鈥檚 . This allows energy businesses to optimize cash flow and yield, as well as help identify areas to unlock further capital. The platform can handle all company payments, receipts and inventory finance to manage group liquidity, providing complete visibility of the working capital across all business operations in real-time.
What further strengthens financial options is the and Multifunder capability. Given the need for borrowing to fund long-term business goals, the solutions can quickly and seamlessly connect energy companies with a trusted network of lenders, suppliers, and buyers to obtain third-party funding to pay suppliers without disrupting operations. Connecting through this dedicated ecosystem saves substantial time for a business to secure the necessary liquidity for operations, while adding resilience to working capital.
Given growing ESG considerations, the Cash Flow Acceleration platform can enhance the transparency of the suppliers鈥� sustainability credentials of suppliers, which also opens options to access cost-effective funding that supports their growth. The liquidity of ESG-qualified suppliers can be tracked and connected with internal planning. 听
Taulia solutions enable fast and secure access. Alongside this, Taulia’s Dynamic Discounting offers suppliers an option to be paid early with a discount to save vital costs on goods and services. Taking this option can relieve some of the pressure on working capital in times of economic uncertainty.
have allowed oil and gas businesses to pay bills on time without taking on any extra borrowing or experiencing delays in payments.
In just four months, the discounts delivered allowed a major US energy company to break even on the initial investment of using the Taulia platform. Then there are the operational efficiencies. The previous solution used by a regional US company took a total of 11 years to onboard 70% of suppliers. In contrast, the Taulia solution delivered 70% in only nine months.
These advanced tools are strengthening working capital strategies and ensuring that energy industry businesses can adapt more quickly to changing circumstances, optimising operations and liquidity in a changing world.
To learn how businesses are deploying tech solutions to meet new financial challenges, download the document below.
References:听
[1] Taulia and SAP: Cash Flow Optimization for Energy and Utilities
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[4] Taulia Supplier Survey
