While it is devastating to see raging wildfires, strong hurricanes, and other changing weather patterns, it is equally devastating to see human suffering due to energy insecurity.  We are on the verge of destroying the fragile path of those who are already struggling to climb out of poverty to a more sustainable livelihood. These are the same people who have also been beat up emotionally and economically by the ongoing pandemic.  Over 200 people died in February from what the media says was a “climate change” induced cold wave in Texas, but I am here to tell you as a Texan that we saw similar cold waves in 1983 and 1990 that brought colder temperatures for much longer without the causalities.   What was the difference between then and now?  We had a sufficient and reliable energy infrastructure that provided uninterrupted power to keep people from freezing and prevent massive damage to houses, and commercial and industrial infrastructure.

A couple of weeks ago, it was announced that the highly-anticipated movie in the James Bond series, ‘No Time to Die’, would be delayed until 2021. Several movie theater chains, such as Regal Entertainment Group and Cineworld (United Kingdom), decided to close or reduce operating hours at many of their theaters because of the delay.  However, their competitor, AMC Theaters, decided to stay open. Each of these companies likely conducted some form of competitor analysis to arrive at their decision.

To say that 2020 has been a tough year for the Energy Industry would be an understatement. The recent leg down in oil prices has wreaked further havoc on an industry that was already struggling to adapt to the current realities of over-supply, technology innovation, and business model advances. The year has been riddled with massive layoffs and early retirement packages, and the industry's personnel exodus is just beginning. In past downturns, layoffs were painful but tolerated because almost everyone affected expected to return when energy prices would bounce back. They were dedicated to the industry and would return to work during the upturns frantically trying to ramp up to meet demand. The Energy Industry has always required a significant amount of specialized skills and knowledge, and also provided a rewarding career for many.  However, with this downturn, many people with the necessary skills and knowledge now consider the Energy Industry unstable, low-tech, and antiquated. The industry's ultra-conservative nature, coupled with its instability and the general unpopularity of the sector, will make it difficult for many companies to attract talent once economics rebound. The inability to operate effectively without critical knowledge and skills is yet another crisis on the horizon for management teams.

Design specifications and countless industry standards have guided the oil industry for years. However, the details of many project implementations often reside only on the hard drives of engineers and managers. In cases where essential data has been collected and archived, the ability to retrieve, interpret, and display the data has been ad-hoc and requires specialized personnel. Furthermore, information management systems have become unwieldy and cumbersome to interpret anything useful from the massive amounts of loosely structured data. Because of this, it is common for companies to need project-specific technical or management personnel to find and analyze data from past projects.

What can energy companies do to help minimize knowledge loss due to brain drain as they lose access to employees with critical knowledge? Enter AI. Artificial Intelligence (AI) is not yet capable of replacing employees with specialized design and implementation skills. However, it is a useful tool to analyze large data sets, perceive and react to those data sets, and even learn from those data sets. The time to implement an AI-driven data retrieval and analysis solution is now. Energy companies still have the knowledge needed to help train the AI, but time is running out.

It will be increasingly challenging to find new hires with technical skills as the tech-savvy move onto more stable technology-driven industries. A significant first step in retaining the value of your legacy information is investing in an AI-based information management solution. It doesn't matter if your company still relies on finding information on individual hard drives or if your company has already generated a massive data lake of underutilized information, now is the time to start your program to train machines to search, perceive and analyze your information.

1. Understand the capabilities that are most critical to your business once upturn takes root.

2. Identify where you stand today in terms of data captured, and capabilities still retained.

3. Develop a sense of emerging knowledge gaps that are priority to address.

4. Catalog AI solutions, especially those that are coming from the start-up space.

5. Go through a rigorous evaluation and selection process of these AI solutions, realizing that no one solution is the silver bullet.

Protect your company from critical knowledge loss while you have the ability to do so.  

Would you like to discuss some AI solution options for your company? Let’s connect. Our digital strategist, Rob Lewis, has spent his career focused on providing customer centric software and data driven products and solutions.

If you invested $1.00 in the stock market 10 years ago, you would have $2.60 in your pocket today. However, if you invested that $1.00 in the Oilfield Services (OFS) sector, you would have $0.15 in your pocket today. I started my career in oil and gas, following my dad who spent his career in the industry. My dad started when oil was discovered on the North Slope, and his career marked the pinnacle of our industry. Where we are now is at the opposite end of the spectrum. I am deeply troubled that the industry I have dedicated my career to hasn’t created shareholder value. Despite my occasional tirades about the industry screw-ups that in part led us here, I am thoroughly committed to this industry.  

It’s not easy fixing an industry that has its cards stacked against it. However, there are some key positives. Every day globally, over 1.4 billion cars are on the road, of which 99% consume gasoline, and most electric vehicles have their energy derived from natural gas. Nearly 4 trillion cubic meters of natural gas are consumed globally, and demand growth has been higher than global GDP. We need an Energy Industry for the United States to be energy secure and for the world to prosper. While there is increasing scrutiny to be cleaner, the good news is that there are technologies to help the industry get there and be the beacon for environmental sustainability. The energy sector is needed and can play a leadership role in the clean energy transition. Like any other industry, the Energy Industry needs the OFS sector, relying on a supply chain of equipment, services, and technologies.

As digital continues to drive rapid advancement in the way we do business, very little escapes change. Product development, product delivery, and product support models continue to evolve at a breakneck pace. As once flagship product lines become commodities, many companies now ponder what digital is all about and what it means to their company. As addressed in the previous paper, Survival of the Fittest, digital in a business context can be viewed merely as advancing multiple technologies that work together to allow companies to rethink their products, manufacturing, and services in ways that were not previously possible. One frequently asked question is “where to start?” Whether you are a startup or a Fortune 500 company, one way to begin your digital journey is to redefine the current popular focus on the Three P’s of Management: People, Process, and Product.  A more digital-friendly focus of Management is a mix of People, Process, and Platform.

According to Harvard Business Review, between 70 and 90 percent of mergers and acquisitions fail. Many companies in the Energy Industry are considering mergers or acquisitions as they grapple with the current reality of lower commodity prices and the uncertain path to market recovery. The Energy Industry is used to the waves of consolidation as it has gone through a series of mergers and acquisitions from upstream to downstream, including producers to service and equipment providers over the decades. While oil companies sought to consolidate, the oilfield service sector largely did two things: they consolidated smaller, regional players into larger players, and expanded through horizontal integration. The horizontal integration attempted to bring together traditionally separately procured equipment and services to further save costs and bring new solutions. Across the industry, there are both success and heartbreak stories in all of these types of mergers and acquisitions. Integration through significant mergers and acquisitions can either make or break a company.

No integration will be perfect, and many are inherently messy and complicated. For example, one that got a lot of bad press was the United-Continental merger which went through the public ringer. However, the company successfully integrated to get to the other side and ultimately delivered on the promise of cost efficiencies, capacity discipline, a consistent brand image, and a harmonized organization. An integration either succeeds and delivers the intended value, or otherwise causes the organization to meander through suboptimal performance as the merged company heads towards value destruction. There is really no middle result. It is all or nothing. This is why a well planned and executed integration is critical. Although, if the strategic rationale, including acquisition cost, is faulty to begin with, there is little that can be done to make the integrated company successful. Even with the best strategic rationale, a bad integration can derail success. Therefore, it is imperative that an integration is well planned and executed and is a top priority for the C-suite, especially the CEO.

I debated on how to present my learnings from past experiences. I thought of sharing tips from some of the best integrations I have experienced, but I decided that sharing where integrations have fallen short would be the most helpful. By avoiding these pitfalls, I believe an integration will be better planned and executed to ultimately deliver a successful merger.

There are many reasons for integration short comings, but I summarized the following pitfalls in a Top 10 David Letterman style “Why My Integration Fell Short” list:

10. Failure to consider all of the alternatives and become enamored with the “one”:  There is a feeling that the “one” target will get away, so a false sense of urgency is created. This results in a failure to recognize and plan for what is truly required for a successful integration.

9. Improper due diligence to uncover the skeletons in the closet: There is a fear that the skeletons might scuttle the deal. However, it is better to expose the skeletons and form a plan to address them during an integration. Most people consider obvious financial risks, but other skeletons should be identified and assessed including the potential for operational disruption, critical departures, and customer retention risk. Other important but non-tangible possibilities include the risk of missed deliveries, loss of customer loyalty, and brand dilution.

8. Insufficient scenario planning and stress testing through different macro-economic situations:  It is difficult to complete an integration when a new company is suddenly lurched into financial distress. Executives need to address the following questions:

Remember the Arby’s “Different is Good” campaign from the 90s? I remember deeply analyzing that slogan. The campaign rolled out around my middle school years when life was all about trying NOT to be different.  Middle school was all about fitting in with everyone else. But thankfully, middle school isn’t forever. After working with several companies as a marketing consultant, I know that being different is crucial for a company because what makes them unique is a huge part of their marketing strategy.  It doesn’t work for companies to just “be better”, they have to be different in a relevant and valuable way too.  Different is necessary.

The energy industry is a passion of mine and most of my career has been spent working in the industry, following in my father’s footsteps.  I have experienced the highs and lows, and nothing can pull me away.  Energy has fueled our global economy, provided our country with energy security, and it has provided my family opportunities beyond what we could have ever imagined.  The perspectives in this article are meant to provide some insights but also provide inspiration and spark a discussion that we hope can help us see past the immediate industry crisis and pull together to re-create a vibrant sector again. 

It’s Structural, Not Cyclical

This is a gut-wrenching time from the executive suite to the employees extending to their families and communities.   It’s not yet clear when the COVID-19 smoke clears what exactly will happen to energy prices.  But what is clear is the industry, even prior to COVID-19, needs to make radical changes in order to survive the chaos that often strikes commodities.  Commodity prices, no matter what commodity, go through 15 to 20 year structural shifts.  The over-supply often does not go away easily; it takes time for demand to again outstrip supply, and the process is messy.  As an industry, we often use temporary strength in oil prices to rapidly ramp up investments. This is very similar to the phenomenon that occurred in the mid-80s.  At the time, the industry went through a sudden supply side surge driven by Saudi Arabia which caused a collapse in oil prices.  For several years, the industry responded by making significant cost improvements.  However, in the early 90s, with higher energy prices during the Gulf War, the industry believed that oil would once again become permanently short.  Capex spending was ramped up and organizations grew during the time.  However, the war was short-lived, and oil supply came back with a vengeance coinciding with a recession.   This structural over-supply would not improve for another ten years, leaving a broken industry that required several rounds of re-structuring and mergers.  I was a reservoir engineer at the time, and I was told my job was likely to be eliminated by the end of the week. With only two years of experience in an industry flooded with people that were far more experienced, I felt a sense of hopelessness.  I wasn’t the only one.

Be Bold and Different

Companies can succeed, even in a structurally challenged environment.  People forget in times of stress that companies can emerge as leaders with different business models, and for people this success can be a source of pride and joy.  Being different starts at the top.  As a strategist and avid investor across many industries, I have seen many companies rise to the top in the most difficult conditions. In our industry, look at EOG which emerged from the ashes of Enron.  My alma mater is Vastar Resources, whose leadership team made the structural changes necessary to emerge as one of the best returning energy companies in the 1990s despite declining oil prices during the same period.   In times of stress, those companies that make profound changes and innovate their business models find that they can set themselves apart, even more so than they can during good times.   In fact, Harvard Business Review, in analyzing those companies that emerged stronger out of the Great Recession than their peers’ states, “These companies reduce costs selectively by focusing more on operational efficiency than their rivals do, even as they invest relatively comprehensively in the future by spending on marketing, R&D, and new assets.” (HBR, March 2010, Roaring Out of a Recession).

Emerge Stronger

People globally are adjusting to less travel, working at home, and climate change is top of mind.  We don’t know what demand growth after COVID-19 looks like, and supply wars will likely continue.  It takes a shift in mindset and courage to be bold and different.  Do it for your shareholders, and also for your company and your people.  Play offense to emerge stronger.  Here are 14 ways I believe Energy Leaders can help their companies survive now and thrive later.

1. Assess, streamline, and change your leadership teams as necessary.  Performance and expertise need to be reviewed against the ability to make profound change.  And publicly traded boards should consider eliminating protection for C-suite officers, where large payouts sometimes happen even upon severance or bankruptcies.  This will go a long way to help bring investors back into our industry.  We need to demonstrate credibility to investors once again so that they can believe sustainable returns are possible.

2. Be clear, transparent and honest about the situation and challenges to your organization and investors.

3. Don’t just make a lot of incremental changes. Rather, you need to clean sheet your business model and ask the question, “How can I deliver shareholder returns under a set of several different scenarios?”

4. Maintain conservative cost and investment practices.  We know our industry condition can change without warning and these changes are out of our control.  However, we can be better prepared for adverse conditions if we exercise cost conservatism during the good times.  When I joined an Oilfield Service Company from a large consulting firm, I moved from my downtown luxury office into a fabricated office building in front of a manufacturing plant.  The CEO took me to lunch that day to a food trailer that would come to our parking lot.  He told me he lived through the 80s and despite the company doing well right now, preserving cost consciousness was top of his mind.   This is the mind set we need in our industry again.   

5. We need capital discipline.  Utilize the diagnostics that are out there, invest in science, leverage the technical expertise of your people, and pinpoint those sweet parts in your field that can make good returns at low prices.   The cost of science and understanding is far less than the cost of drilling and completing.  This means embracing new technologies and setting up a dedicated budget, even during tough times.  It also means engaging with suppliers to share what insights you need and challenging them to help deliver those insights to you. 

6. For each producing asset, look at the business streams for each part of the operation. Know the bare minimum required to keep the field producing.   Use the latest technologies to surveil your wells.  Determine what activities need to be done locally, and what can be centralized.  Develop ways to maintain and grow production cheaply and minimize downtime.  Figure out ways to conduct pro-active maintenance at a much lower cost.  Look for opportunities to up your game on workovers, e.g. any workover that brings in new barrels for less than $10 per barrel lifting cost.

7. Determine the necessary functions that can be centralized and leveraged across the organization. Eliminate unnecessary and low value processes.  Automate the processes that are routine.  

8. Examine your cost structure to be mean and lean. Draw upon your experts, engage them, and challenge them to come up with cost reductions that get your organization to be fighting machines at low oil prices.  Look for ways to continuously innovate and challenge your cost structure so you can achieve year-over-year efficiency improvements. 

9. Leverage digital technologies to lower the cost to operate and maintain. Digital includes drones, data transmission and processing, and artificial intelligence.  This will reduce safety incidents and streamline operations.  Digital technologies are not speedy to implement.  It takes time to pilot, scale, de-bug, and move forward.  You need to start now but make sure your team has a purpose and clear objectives which is critical given the vast digital landscape.    

10. Strengthen your competitive advantages. Look for ways to scale where you have differentiated capabilities.

11. Rebalance your portfolio via swaps. If possible, don’t sell assets at distressed prices. Rather, use your assets for currency for swapping into something that is strategic for you.  Build a low-cost, efficient position where you have a competitive advantage and leveraged knowledge of the subsurface.    Drive consolidation and build local basin level scale where you have a distinct competitive advantage.

12. Make your suppliers partners. Offer incentives that bring your suppliers into your game, not cost reductions that they can’t sustain.  If you treat them right, firmly and fairly, they will thrive as well.  Suppliers can bring new insights and solutions to your organization that will drive significant value; they need the encouragement and space to do so.  This is a win-win scenario.

13. Embrace start-ups. Make it easier for start-ups to help your organization understand the potential value of their technologies for your operations.   While intentions are good, start-ups have to navigate the silos and long processes of energy companies.

14. Emerge as a Leader in New Energy. We are best positioned to invest in the new fuels for a cleaner environment.   It starts with natural gas, and natural gas today provides over a third of our nation’s energy.   Natural gas is also an area of relative strength as the associated “free” gas from the oil shale plays are reduced.     

Yes, It Can Be Done. 

In the late nineties, there were times when oil was less than $10 per barrel, and yet some players emerged as leaders.  There was a period of structural change with mergers and consolidation across plays.   This will happen again.  Put yourself on the winning side of the equation and make your organization and shareholders proud of you for being bold and different.

It is a fascinating time to be working in the era of digital Darwinism, when technology and society are evolving faster than businesses can naturally adapt. With all of the technological changes over the last decade, software and data tools have evolved significantly.  Many companies realize that the game has shifted, and they need a robust digital strategy to compete in the current business climate. However, trying to cope without a thorough understanding of the digital space and how it affects business can threaten even the most successful companies.  All of the technological advancements, especially in the last 20 years, are changing the competitive dynamics across all industries. With business leaders recognizing the seismic shift in technology and sensing a new set of business rules, they fear falling behind their traditional competitors as well as new players entering their space. Companies are now scrambling to adapt their offerings, sometimes without clarity of what they need to do to evolve their current business model. These businesses are operating like a bike rider looking directly in front of their bike to avoid potholes while heading off a cliff. Although, these businesses need to avoid the potholes, they also need a clear, forward-looking vision to avoid the cliff ahead.  This vision should be rooted in a deep understanding of the immense possibilities and designed for speed, so that the competition does not accelerate ahead.

Our world turned upside down in a matter of days.  Suddenly, quarantine and social distancing became a part of our daily vocabulary, and toilet paper was a hot commodity.  We had 24 hour access to a crisis unfolding before us, and we all struggled to make sense of our new "normal".

Before COVID-19, we were working on building Evolve.  We realized from our past experiences there was a need for a consulting firm that developed customized approaches and solutions with a team that would obsess over the success of a project and company as if they were the Founder or CEO.  We didn't want to be a typical consulting firm.  We wanted Evolve to be so much more.  After lots of planning, we started putting our plans for Evolve into action.

Playing Offense 

And then COVID-19 hit.  It was hard not to imagine the worst case scenario.  There were a lot of "what-ifs", and we felt overwhelmed by the amount of people hurting.  We were facing a global humanitarian crisis unlike anything we have ever seen before.  We stayed focused and committed to our client work, but we were unsure how to move forward with Evolve. 

Then we read an article by Nick Wignall, and he writes, “We can face up to the challenges in front of us courageously, proactively, and rationally. We can refuse to roll over and sit around fretting, imagining the worst, or merely hoping for something better.  And instead, we can ask ourselves:

• How can I be useful or helpful in a difficult time?
• How can I grow and become better in the face of challenge and uncertainty?
• Even though every bone in my body is telling me to shrink back and play defense, can I redouble my efforts and go on the offensive?

Playing offense means meeting our challenges head on, proactively, and with courage. It means continuing to live and grow as best we can despite our current constraints and difficulties.  Let’s see if we can use this challenge not just to survive but to thrive.”

We realized we should move forward with our plans for Evolve.  I think we are all a little scared right now.  And there is still so much confusion from the mixed messages and headlines.  But we made the decision to play offense, and we got our heads back in the game.  

We are officially launching Evolve today.  Playing offense also means helping our clients navigate the current situation, prepare for better days ahead, and emerge stronger than ever before.  There is still so much uncertainty, but now more than ever, people and companies need help, and we are ready to help them. 

Let's play offense together.

All the best,

Sanjay and Becky