Managing Risk In The Oil Industry: Credit And Supply Chain Management
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Managing Risk In The Oil Industry: Credit And Supply Chain Management Platts Crude Oil Summit London, May 14, 2013 Gustavo Tella, CFA, FRM Head of EMEA Application Specialists S&P Capital IQ 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 & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
Best Practices For Assessing The Health Of Your Supply Chain
Qualitative Framework
• 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?
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.
Supply Chain Management
A Major Focus
―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: PWC‘s ―From Vulnerable to Valuable: How Integrity Can Transform a Supply Chain‖
―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 & Gas‘s ―The future of the supply chain‖
―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 & Young‘s ―Supply Chain Management in Shale Environment‖
―We‘ve moved from everybody can do their own thing in supply chain to a much more centralized or centre-led
approach in our industry—learning from other industries […] We must keep that focus.‖
Source: Head of Procurement Supply Chain at BP
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.The Problem: Analysis Beyond The Rated Universe
The Coverage/Accuracy Tradeoff
RATED UNIVERSE
• Credit analysis driven by
qualitative and quantitative
inputs
PUBLIC UNRATED UNIVERSE
Accuracy
• Credit analysis driven by
fundamentals-based relative
analysis Coverage
• Supplemented by absolute
measures
PRIVATE UNRATED UNIVERSE
• Credit analysis driven by user
inputs to models
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.Navigating The Credit Landscape
S&P Capital IQ Analytical Credentials
Hybrid Qualitative Quantitatively- Fundamental CDS-based Multifactor
Public Peer
+ Quantitative Derived Credit Probability Market Derived based Market
Ratings Analysis Model
Model Scoring Model of Default Model Signals Signals
• Standard & Poor’s • Scorecards • CreditModel • Fundamental • Credit Health • Market Derived • Market Signals
Measure
Ratings Services • Credit Score • Credit Score Probability of Panel Signals (MDS)* PD
credit ratings* • Lower-case • Lower-case default (PD) • Relative score • Lower-case • Lower-case
nomenclature nomenclature • Lower-case • Custom score nomenclature nomenclature
nomenclature
• Analyst, • Segment-focus • Segment-focus • Segment-focus • Fundamental-based • Proprietary daily • Proprietary daily
committee driven modeling modeling modeling scores and ratios risk indicators risk indicators
& credit approach approach approach – Operational • Market-derived • Based on: Equity,
Capabilities
methodology • Expert judgment • Fundamentals and • Point-in-time – Solvency signals based on Country Risk,
driven driven ratings driven risk assessment – Liquidity credit default Industry Risk,
• Medium to long • Medium to long model • Fundamental • Fundamentally swaps Sovereign rating
term metric term metric • Medium to long and observed driven (financial • Precalculated PD & sovereign CDS
• Transparent term metric defaults models statements) MDS
• Qualitative inputs • Companies with
processes, and quantitative • Financial • Financial • Custom peer groups CDS coverage • Precalculated PD
objective view, inputs statements inputs statements inputs • Listed co coverage • Listed Co
rigorous analysis coverage
• Global coverage • Global coverage • Global coverage
• Global coverage
Fundamentals (Financials)
Market Factors
Long Run
*From Standard & Poor’s Ratings Services. S&P Capital IQ, as well as its products and services are analytically and editorially Point-In-Time
separate and independent from other analytical areas at S&P, including S&P Credit Ratings.
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.Assessing Supply Chain Risk: BP Case Study 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.
Fundamentals Based Peer Analysis:
Supplier Credit Assessment
BP European Suppliers
Industry: Energy
• 54 suppliers in Europe: 43 unrated, 11 rated by Standard & Poor‘s 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 BP’s Energy suppliers
– Credit Scoring Models, Stress Testing, and Probability of Default evaluation
highlights the level of risk in BP’s supply chain
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.Break Down Of BP‘s Suppliers
Industry & Geographic Concentrations
• 46* out of a total of 54 companies from BP‘s European energy suppliers have credit
assessment score, compared to 11 companies rated by Standard & Poor‘s Ratings
Services
U.K. Russia Norway Others
31%
• Geographic breakdown of BP‘s 43%
European Energy suppliers shows a
large proportion are based in the U.K 17%
9%
(17 companies)
* 8 companies are not scored due to insufficient data
Source: S&P Capital IQ. As of 1 April 2013.
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.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 IQ’s CreditModel. As of 1 April 2013.
9. 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 BP‘s Suppliers
• Suppliers are ranked
based on a number of
Operational, Solvency
and Liquidity metrics
• The largest group of
companies in the lower
quartile of BP’s supply
chain are from Oil &
Gas Equipment &
Services
• Depending on BP’s
exposure to these
particular suppliers,
further in-depth
analysis may be
required
Source: S&P Capital IQ’s Credit Health Panel on the Global Credit Portal. As of 25 February 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.Criticality Of Suppliers – BP Supplier Example
Position Of Suppliers In Oil & Gas Equipment & Services Industry
– 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 BP‘s
operations, regardless of credit quality
Criticality scale assesses revenue dependence and
operational reliance from 1 (low) to 4 (High)
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.A Holistic View Of BP‘s Supply Chain
Monitoring Suppliers Credit Performance
• Surveillance template enables analysis of entire portfolio of BP‘s 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.
12. 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
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.AGR Group ASA
Broader Picture
• BP‘s 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 BP‘s 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
End of Buyback
Program
Source: S&P Capital IQ’s RatingsDirect on the Global Credit Portal. As of 8 May 2013.
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.A Telling Picture: Comparing AGR Group With Global Peers
GICS: Global Industry Classification Standard
• Analysis using Credit Health Panel shows that AGR was not only one of the lowest ranked suppliers when
compared to all of BP’s suppliers, it is also one of the lowest ranked amongst a group of its 41 GICS peers
globally
Peer Comparison of Profitability:
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
Peer Comparison of Operational Efficiency:
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
• 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 IQ’s Credit Health Panel on the Global Credit Portal. As of May 2 nd, 2013.
15. 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.Quantitative Creditworthiness – AGR Group
Scenario Analysis
• AGR‘s credit score is
most sensitive to
Operating Margin (1st)
and Asset Turnover (2nd)
• Changing the value of
these ratio‘s provides
valuable insights into the
resilience of this
company
• Even if the Operating
Margin and Asset
Turnover are reduced
by 10% each, the score
remains at ‗b-‘
Source: S&P Capital IQ’s CreditModel. As of 30 September 2012.
16. 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
Norwegian Oil & Gas Equipment & Services
• 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
For illustrative purposes only.
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.Monitoring Your Supply Chain Exposure
Moving From Relative To Absolute Analysis
• 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
• 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
18. 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.Summary And Uses Of BP‘s Supply Chain Risk Management
• Out of BP‘s 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 ratio‘s to determine how the
creditworthiness changes in an adverse scenario
• Relative peer analysis identifies AGR group, which is placed at the lower end of BP‘s
suppliers and within its own industry
• Looking for potential alternatives, we shortlisted Norwegian Oil & Gas Equipment & Services
companies and focus on top quadrant in relative analysis, before we perform an absolute
analysis.
• TGS-Nopec, Sevan Marine, On & Offshore Holding and Petroleum Geo Services can be
potential alternatives to AGR Group based on industry, geography and fundamentals
19. 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.Contact Us
If you have any questions or would like more information about
S&P Capital IQ solutions, please contact us:
Gustavo Tella, CFA, FRM
Head of EMEA Application Specialists
gustavo.tella@spcapitaliq.com
General Enquiries
emea-marketing@spcapitaliq.com
www.spcapitaliq.com
20. 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.www.spcapitaliq.com
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