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  • Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    Copyright 2013 Standard & Poors Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.

    Managing Risk In The Oil Industry: Credit

    And Supply Chain Management

    Gustavo Tella, CFA, FRM

    Head of EMEA Application Specialists

    S&P Capital IQ

    Platts Crude Oil Summit

    London, May 14, 2013

  • 2. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    How do my suppliers perform relative to each other?

    What is the credit health of my suppliers?

    Can I identify at risk suppliers?

    Can I assess the credit quality of each supplier?

    The Impact to my revenue as part of a critical factor?

    Operational dependability in terms of uniqueness and disruption

    Can I measure the operational risk to my supply chain when there are limited substitutes?

    Can I monitor suppliers for early warning signals of credit deterioration?

    Do we have a consistent and transparent framework for our supply chain?

    Best Practices For Assessing The Health Of Your Supply Chain

    Qualitative Framework

  • 3. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    Supply Chain Management

    A Major Focus

    Supplier relationships and performance management are increasingly important. Managing supply risks and

    reducing avoidable costs require close integration and visibility into suppliers operations, even more so when

    suppliers are immature or constrained..

    Source: Ernst & Youngs Supply Chain Management in Shale Environment

    The market is quick to punish companies that report supply chain disruptions. On average, affected companies

    share prices dropped 9 percent below a benchmark group during the two-day announcement period (i.e. the day

    before and the day of the announcement).

    Source: PWCs From Vulnerable to Valuable: How Integrity Can Transform a Supply Chain

    Weve moved from everybody can do their own thing in supply chain to a much more centralized or centre-led

    approach in our industrylearning from other industries [] We must keep that focus.

    Source: Head of Procurement Supply Chain at BP

    Oil and gas companies supply chains are playing an increasingly vital role [] from steel and drill bits to

    transportation and catering [it] is required to meet global oil and gas production demand.

    Source: Oil & Gass The future of the supply chain

  • 4. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    Accuracy

    Coverage

    RATED UNIVERSE

    Credit analysis driven by

    qualitative and quantitative

    inputs

    PUBLIC UNRATED UNIVERSE

    Credit analysis driven by

    fundamentals-based relative

    analysis

    Supplemented by absolute

    measures

    PRIVATE UNRATED UNIVERSE

    Credit analysis driven by user

    inputs to models

    The Problem: Analysis Beyond The Rated Universe

    The Coverage/Accuracy Tradeoff

  • 5. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    Navigating The Credit Landscape

    *From Standard & Poors Ratings Services. S&P Capital IQ, as well as its products and services are analytically and editorially

    separate and independent from other analytical areas at S&P, including S&P Credit Ratings.

    Public

    Ratings

    Hybrid Qualitative

    + Quantitative

    Model

    Peer

    Analysis Model

    Fundamental

    Probability

    of Default Model

    CDS-based

    Market Derived

    Signals

    Fundamentals (Financials)

    Market Factors

    Long Run Point-In-Time

    Standard & Poors

    Ratings Services

    credit ratings*

    Scorecards

    Credit Score

    Lower-case

    nomenclature

    Credit Health

    Panel

    Relative score

    Custom score

    Market Derived

    Signals (MDS)*

    Lower-case

    nomenclature

    Me

    as

    ure

    Proprietary daily

    risk indicators

    Market-derived

    signals based on

    credit default

    swaps

    Precalculated PD

    Companies with

    CDS coverage

    Analyst,

    committee driven

    & credit

    methodology

    driven

    Medium to long

    term metric

    Transparent

    processes,

    objective view,

    rigorous analysis

    Global coverage

    Segment-focus

    modeling

    approach

    Expert judgment

    driven

    Medium to long

    term metric

    Qualitative inputs

    and quantitative

    inputs

    Global coverage

    Fundamental-based

    scores and ratios

    Operational

    Solvency

    Liquidity

    Fundamentally

    driven (financial

    statements)

    Custom peer groups

    Listed co coverage

    Segment-focus

    modeling

    approach

    Point-in-time

    risk assessment

    Fundamental

    and observed

    defaults models

    Financial

    statements inputs

    Global coverage

    Cap

    ab

    ilit

    ies

    Fundamental

    Probability of

    default (PD)

    Lower-case

    nomenclature

    Multifactor

    based Market

    Signals

    Market Signals

    PD

    Lower-case

    nomenclature

    Proprietary daily

    risk indicators

    Based on: Equity,

    Country Risk,

    Industry Risk,

    Sovereign rating

    & sovereign CDS

    MDS

    Precalculated PD

    Listed Co

    coverage

    Quantitatively-

    Derived Credit

    Scoring Model

    CreditModel

    Credit Score

    Lower-case

    nomenclature

    Segment-focus

    modeling

    approach

    Fundamentals and

    ratings driven

    model

    Medium to long

    term metric

    Financial

    statements inputs

    Global coverage

    S&P Capital IQ Analytical Credentials

  • 6. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    Assessing Supply Chain Risk: BP Case Study

  • 7. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    Fundamentals Based Peer Analysis:

    BP European Suppliers

    Industry: Energy

    54 suppliers in Europe: 43 unrated, 11 rated by Standard & Poors Rating

    Services

    Unrated companies have limited information compared to rated, therefore

    they need to be assessed in a different manner and from a different

    perspective:

    Monitoring changes in suppliers financial strength and credit quality

    Relative peer analysis of BPs Energy suppliers

    Credit Scoring Models, Stress Testing, and Probability of Default evaluation

    highlights the level of risk in BPs supply chain

    Supplier Credit Assessment

  • 8. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    Break Down Of BPs Suppliers

    46* out of a total of 54 companies from BPs European energy suppliers have credit

    assessment score, compared to 11 companies rated by Standard & Poors Ratings

    Services

    Industry & Geographic Concentrations

    Geographic breakdown of BPs

    European Energy suppliers shows a

    large proportion are based in the U.K

    (17 companies)

    31%

    17% 9%

    43%

    U.K. Russia Norway Others

    * 8 companies are not scored due to insufficient data

    Source: S&P Capital IQ. As of 1 April 2013.

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    BP Suppliers: Rated Vs Unrated Universe

    The number of suppliers with a credit rating is limited

    Additional credit scoring models are needed to determine current credit assessment of suppliers

    Potential concentration

    risk at the lower end of

    the scale with a greater

    number of

    counterparties as non-

    investment grade

    scores.

    Source: S&P Capital IQs CreditModel. As of 1 April 2013.

  • 10. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    Relative Peer Analysis

    A Fundamental Credit Health Ranking Of BPs Suppliers

    Suppliers are ranked

    based on a number of

    Operational, Solvency

    and Liquidity metrics

    The largest group of

    companies in the lower

    quartile of BPs supply

    chain are from Oil &

    Gas Equipment &

    Services

    Depending on BPs

    exposure to these

    particular suppliers,

    further in-depth

    analysis may be

    required

    Source: S&P Capital IQs Credit Health Panel on the Global Credit Portal. As of 25 February 2013.

  • 11. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    Criticality Of Suppliers BP Supplier Example

    Important to reduce exposure to risky/volatile suppliers.

    BP can monitor performance of its suppliers and reduce deals with the most risky ones.

    Suppliers with low credit quality and high criticality pose a greater risk as they are crucial to BPs

    operations, regardless of credit quality

    Position Of Suppliers In Oil & Gas Equipment & Services Industry

    Criticality scale assesses revenue dependence and

    operational reliance from 1 (low) to 4 (High)

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    A Holistic View Of BPs Supply Chain

    Monitoring Suppliers Credit Performance

    Surveillance template enables analysis of entire portfolio of BPs suppliers

    Combine proprietary data (such as criticality), auto populate financials, and conduct

    analysis on the broad portfolio

    AGR Group ASA which was in the bottom quartile in relative analysis has seen its share

    price fall by 36% in last twelve months.

    Source: S&P Capital IQ. As of 8 May 2013.

  • 13. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    Supplier Credit Surveillance Example: AGR Group ASA

  • 14. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    AGR Group ASA

    BPs own credit score is a whereas the average credit score of its suppliers is seven

    notches below at bb-

    A deeper look at relative credit health of BPs suppliers reveals AGR group ASA as the

    lowest placed supplier

    One might want to look for suitable alternatives in case mitigation of risk associated with

    an AGR default is needed

    Probability of AGR defaulting in next twelve months

    Source: S&P Capital IQs RatingsDirect on the Global Credit Portal. As of 8 May 2013.

    Broader Picture

    End of Buyback

    Program

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    A Telling Picture: Comparing AGR Group With Global Peers

    Score AGR Peer Average

    Return on Capital (%) Bottom 3.61 10.11

    Recurring Earnings / Total Assets (%) Bottom 2.38 9.65

    Net Working Capital/Revenue (x) Bottom (0.07) 0.20

    EBITDA/Revenue (%) Bottom 8.70 22.94

    Net Working Capital / Total Assets (x) Bottom (0.06) 0.13

    Management Rate of Return* (%) Below Average 30.93 55.24

    Gross Profit / Revenue (%) Top 53.69 31.66

    Payables / Receivables (x) Top 0.91 0.54

    Peer Comparison of Profitability:

    Peer Comparison of Operational Efficiency:

    Analysis using Credit Health Panel shows that AGR was not only one of the lowest ranked suppliers when

    compared to all of BPs suppliers, it is also one of the lowest ranked amongst a group of its 41 GICS peers

    globally

    AGR Group is placed in the lowest quartile for Operational, Solvency, and Liquidity metrics

    It also utilizes more debt given its financial leverage ratio of 52% compared to the group average of 34%

    Its EBITDA interest coverage ratio is significantly lower at 3.56x compared to a mean of 50.13x

    *Management Rate of Return: EBIT / (Net Property, Plant and Equipment + Net Working Capital). Source: S&P Capital IQs Credit Health Panel on the Global Credit Portal. As of May 2nd, 2013.

    GICS: Global Industry Classification Standard

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    Quantitative Creditworthiness AGR Group

    AGRs credit score is

    most sensitive to

    Operating Margin (1st)

    and Asset Turnover (2nd)

    Changing the value of

    these ratios provides

    valuable insights into the

    resilience of this

    company

    Scenario Analysis

    Even if the Operating

    Margin and Asset

    Turnover are reduced

    by 10% each, the score

    remains at b-

    Source: S&P Capital IQs CreditModel. As of 30 September 2012.

  • 17. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

    Finding Potential Alternatives

    We shortlisted 24 Oil & Gas Equipment & Services companies operating in Norway

    AGR is at bottom quartile relative to its industry and geographic peers

    The Credit Health Panel shows that, for example,TGS-Nopec Geophysical Company ASA has a better

    quantitative CreditModel score and lower probability of default than AGR

    Norwegian Oil & Gas Equipment & Services

    For illustrative purposes only.

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    Monitoring Your Supply Chain Exposure

    Applying holistic approach to evaluate supplier exposure and pockets of risk concentrations enables risk

    managers to conduct due diligence effectively

    We look for alternatives to AGR Group based on key fundamental metrics such as debt to capital ratio and

    total assets

    Moving From Relative To Absolute Analysis

    TGS Nopec Geophysical Co. ASA, Sevan Marine ASA, and On & Offshore Holding AS are placed at the top

    of the table in terms of debt to capital ratio, total assets and operating income to revenues.

    Petroleum Geo Services ASA has the highest total assets amongst this group

    BP can use a mix of solutions to select a replacement supplier if required using relative, fundamental and

    internal assessments

    Criticality should also be assessed in the final decision making process

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    Summary And Uses Of BPs Supply Chain Risk Management

    Out of BPs 54 European Suppliers in Energy industry, only 11 are currently rated. This

    requires using other risk assessment metrics to evaluate financial strength of suppliers

    Using quantitatively driven models such as Credit Model, we extend the coverage to 46

    companies with credit scores.

    Using absolute quantitative models you can stress test financial ratios to determine how the

    creditworthiness changes in a...

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