Oil & gas suppliers getting squeezed on payments
We are all aware of the Oil price decline hitting profitability of EPCs, E&P Companies and Operators. These get the bulk of the headline news. But the effects it is having on equipment & service suppliers in the sector is often more severe: these SMEs have less of a buffer to weather the storm.
There is no place which we can see this more clearly that increased cash flow issues by these suppliers. At DeepStream we run a number of industry focus groups with suppliers helping us develop our platform, and this pain point keeps coming up.
David and Goliath
Trading with larger buyers, SMEs have a weak negotiating position and one way buyers are dealing with lower profits is to squeeze suppliers on payment terms. What is the result of this? Some suppliers are dropping out of the bidding process. Not because of price, or quality, or ability — but because they cannot live with 90+ day payment terms which means they are cash flow negative before receiving payment. Ask for shorter payment terms? Buyers have the upper hand and will get their equipment from another supplier.
Ultimately, the effect this has is not only an increased rate of bankruptcy for suppliers, but less choice and competition between suppliers in an already static and narrow supplier base. In the medium to long term, this is only going to increase the cost base of oil production. There may be a lag, but eventually it will hurt buyers and the industry as a whole.
A game changer for negative cash flows?
There are few people better placed to comment on this than Martin Morrin, who has been advising DeepStream and former head and MD of RBS Invoice Financing (one of the largest European invoice financing providers) and Chairman of the UK Asset Based Finance Association. According to him, “Invoice Finance is ideally suited to businesses supplying goods and services to the oil & gas industry. At a time when oil prices are low and profitability is under pressure, buyers extending payment terms is not unusual and an invoice finance facility can convert invoices into cash within 24 hours. Having an invoice finance facility can also give businesses the confidence they need to tender for new contracts as they know they have the right funding solution in place to generate the cashflow required”.
As recently reported in Bloomberg, this is why DeepStream is focussed on using its digital platform to provide suppliers with immediate access to invoice financing. After transacting through the platform, an invoice is generated and suppliers can get paid immediately. Having access to a digital trail of the entire transaction (something banks normally do not have, or only have after conducting an audit investigation) allows DeepStream to provide better credit to suppliers. John Jeffery, a credit expert at Apax Partners, notes that “DeepStream will be a game changer in terms of supply chain finance for the Oil Industry… DeepStream allows lenders and banks to see the whole supply chain, giving them more confidence to lend.”
Access to invoice financing can ultimately lead to the difference between being able to quote or not. Unless the industry is willing to break the move towards worsening payment terms, it should embrace third part financiers to grease the cogs of the already inefficient procurement process in Oil & Gas.