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
Polish Risk Association
Warsaw, June 4, 2014
Gustavo Tella, CFA, FRM
Head of EMEA Business Development
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 © 2014 by Standard & Poor’s Financial Services LLC (S&P). All rights reserved.
Topics
• Best Practices For Assessing The Health Of Your Supply Chain
• Assessing Supply Chain Risk: PKN Case Study
• Supplier Credit Surveillance
• Finding potential substitutes
– Example: TOTAL Nigeria PLC
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.
2
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?
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.
3
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
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.
4The Problem: Analysis Beyond The Rated Universe
The Coverage/Accuracy Tradeoff
RATED UNIVERSE
• Credit analysis driven by
qualitative and quantitative
inputs
PUBLIC UNRATED UNIVERSE
• Credit analysis driven by Accuracy
fundamentals-based relative
analysis Coverage
• Supplemented by absolute
measures
PRIVATE UNRATED UNIVERSE
• Credit analysis driven by user
inputs to models
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.
5Assessing Supply Chain Risk: PKN Case Study
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.
6Fundamentals Based Peer Analysis:
Supplier Credit Assessment
PKN Suppliers
Industry: Oil and Gas Refining
• 54 suppliers globally: 47 unrated, 7 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 prospective:
– Monitoring changes in suppliers’ financial strength and credit quality
– Relative peer analysis of PKN’s suppliers
– Credit Scoring Models, Stress Testing, and Probability of Default evaluation highlights the level
of risk in PKN’s supply chain
For illustrative purposes only.
S&P Capital IQ, as well as its products and services are analytically and editorially separate and independent from Standard & Poor’s Ratings Services
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.
7Break Down Of PKN’s Suppliers
Industry & Geographic Concentrations
• 29* out of a total of 54 companies from PKN’s suppliers have a probability of default and a
score, compared to 7 companies rated by Standard & Poor’s Ratings Services
• Geographic breakdown of PKN’s suppliers
shows a large proportion are based in the
Poland (16 companies)
* 8 companies are not scored due to insufficient data. Source: S&P Capital IQ. As of 1 April 2013.
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.
8PKN’s 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 PD Fundamental. As of 15 May 2014.
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.
9Criticality Of Suppliers – PKN Supplier Example
Position Of Suppliers In Oil & Gas Equipment & Services Industry
• Important to reduce exposure to risky/volatile suppliers.
• PKN 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 PKN’s operations, regardless of credit quality
Criticality scale assesses revenue dependence and
operational reliance from 1 (low) to 4 (High)
Source: S&P Capital IQ. Both graphs are for illustrative purposes only.
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.
10Relative Peer Analysis For Critical Suppliers
A Fundamental Credit Health Ranking Of PKN’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 PKN’s supply chain are from Oil & Gas
Equipment & Services
•Depending on PKN’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 13 May 2014.
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.
11A Holistic View Of PKN’s Supply Chain
Monitoring Suppliers Credit Performance
• Surveillance template enables analysis of entire portfolio of PKN’s suppliers
• Combine proprietary data (such as criticality), auto populate financials, and conduct analysis
on the broad portfolio
Source: S&P Capital IQ. As of 15 May 2014.
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.
12Supplier Credit Surveillance
Example: TOTAL Nigeria PLC
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13A Telling Picture: Comparing TOTAL Nigeria PLC
GICS: Global Industry Classification Standard
• Analysis using Credit Health Panel shows that TOTAL Nigeria PLC was not only one of the lowest ranked suppliers
when compared to all of PKN’s suppliers, it is also one of the lowest ranked amongst a group of its 41 GICS peers
globally
• TOTAL Nigeria PLC is placed in the 3rd lowest quartile when ranked against global peers
• It also utilizes more debt given its financial leverage ratio of 52% compared to the group average of 34%
• Its Current Ratio is also the bottom quartile (0.89x) against its global peer group average of 1.41x
*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 14nd, 2014.
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.
14PD Fundamental
A Quantitative Creditworthiness Assessment – TOTAL Nigeria PLC
• TOTAL Nigeria PLC is in the
bottom quartile in terms of
its PD (Fundamental)
• It has been in the in the
bottom quartile since the
end of 2009
Source: S&P Capital IQ’s Fundamental PD. As of 14 May 2014.. For illustration purposes only.
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.
15Finding Potential Alternatives
African Oil & Gas Refining
• We shortlisted 14 Oil & Gas Refining & Marketing companies operating in Africa by:
– Screening for companies in Africa within the O&G Refining and Marketing industry with Total Assets > 0
• TOTAL Nigeria PLC is still at the below average quartile relative to its industry/geographic peers
• Credit Health Panel shows that, for example, Engen Botswana Ltd. has a better quantitative score and its
placed at the top of the this peer group
Source: S&P Capital IQ. As of May 14th, 2014. For illustrative purposes only.
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.
16Monitoring 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 more effectively
• We look for alternatives to TOTAL Nigeria PLC based on key fundamental metrics such as interest coverage
and Operating Income/Revenue
• Engen Botswana Ltd. is at the top of the table in terms operating income to revenues and the second highest
interest coverage ratios of the group
• Societe Anonyme Marocaine de I’Industr has the highest total assets amongst this group, but the lowest
operating income/revenue and interest coverage. It’s gearing is 79%
• Criticality Factor should also be assessed in the final decision making process
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.
17Summary And Uses Of PKN’s Supply Chain Risk Management
• Out of PKN’s 54 Global Suppliers, only 7 are currently rated. This requires using
other risk assessment metrics to evaluate financial strength of suppliers
• Using quantitatively driven models such as Fundamental Probability of Default, we
extend the coverage to 29 companies with quantitative credit metrics.
• Relative peer analysis identifies TOTAL Nigeria PLC which is placed at the bottom
of PKN’s suppliers and below average within its own global industry group
• For this case example, we assume that Total Nigeria PLC is a critical supplier for
PKN’s Supply Chain Operations.
• Looking for potential alternatives, we shortlisted 14 African Oil & Gas Refining &
Marketing companies and focus on top quadrant in relative analysis, before we
perform an absolute analysis.
• We identify Engen Botswana Ltd as a potential replacement for TOTAL Nigeria PLC
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.
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