Until the last quarter of 2008, Austrian integrated oil company OMV experienced five highly acquisitive and investment-focused years, which had substantially increased its scale. For CFO David Davies, this was a busy, productive time.
"We quadrupled our upstream production, doubled our refining capacity, doubled the scale of our gas business and doubled the market share that we had with our petrol stations," he says. "We invested substantially during the commodity price upswing, particularly in the Czech Republic, Romania, Bulgaria and Turkey, which are some of Europe’s strongest growing markets."
Then the company was hit with the year-end collapse of commodity prices that transformed the market, notably through access to credit from banks and other institutions. OMV responded by reducing its dividend by 20% and delaying investment of several projects, cutting two others entirely.
However, OMV is in no rush to cut its €2.4bn debt and equity share with five other partners in the 2,000-mile Nabucco natural gas pipeline that extends from Turkey to Austria. Running through Bulgaria, Romania and Hungary, the project is expected to be given the green light later this year.
"We don't have excess cash as such," says Davies. "But we have the liquidity to invest where we need to. We also have a net debt as a group of around €2.5bn."
OMV's balance sheet was considerably strengthened this spring with the sale to Russia of its controversial 20% stake in Hungarian oil company Mol. While OMV's revenues in its Eastern European markets have been holding up well in 2009, they have been declining in Germany and Austria for some time. Davies believes this was initially due to high prices, but also attributes it to a slump in demand.
"Freight and haulage businesses have been badly affected, which has substantially impacted the demand for diesel," he says.
"In addition, there are fewer people taking flights, which has reduced the demand for jet fuel, a significant part of our business. These are the areas that have been most dramatically affected, as has the petrochemicals sector, which has suffered quite significantly, not least because of the increased use of plastics in motor vehicles."
Another major challenge has been daily liquidity management. "The financial management and reporting mindset, and the IT infrastructure supporting it, were not connected," says Davies. "This had not been an issue in the past because companies had been able to rely on general cash generation and freely functioning money markets. However, by the last quarter of 2008, the money markets weren't functioning perfectly and the things that we had comfortably come to rely on in the past were simply no longer available and that caused a change in mindset."
It was not, according to Davies, a question of waving a magic wand and trying to reinvent SAP, but rather of putting parallel processes around the existing infrastructure to make it more efficient.
"In my 25 years in financial management, I have never worked in a company that could accurately forecast how much capital it was going to invest on a cash basis," he notes. "And over the last few years in this industry, when you had quarter-on-quarter oil price increases, this was a lack of certainty one could comfortably manage."
However, when the oil price went into free fall and the credit markets were displaying 'Closed for Business' signs, OMV applied what Davies describes as 'shock tactics'. The company sought to establish where the liquidity was, reinforce capital discipline in regards to long-term cash forecasting, and examine which projects needed to be re-prioritised to reduce 2009 capex from €3bn to €2bn in the face of a range of different market trends.
"When you start having that kind of dialogue with an entirely different sense of priority, it really wakes people up," Davies says. "In businesses, you have to think several steps ahead and think about what changing circumstances might mean for your customers in terms of credit risk."
Meet the challenge
Davies looks back at the sobering realities of 2008 as a time when companies were forced to evaluate their market position.
"It was not the best of times," he says. "There were questions being asked about whether the world was going to survive. Like a lot of companies, OMV learnt a lot about itself during that difficult time."
Davies admits that one of most challenging areas has been Days Sales Outstanding. "The environment hasn’t been benign," he notes. "We’ve had no significant credit write-offs, although there have been plenty of cases where we’ve had to be prudent in terms of the credit limit we apply."
Davies also admits to being shocked at the sum total of the credit limits negotiated by OMV’s sales people. Among these lines was several billions of unused credit which still sat on the balance sheet. The finance function identified customers who had not used their credit for six months and cut the lines.
"We took the view that this is not the environment to be winning market share," he says. "Of course, I don’t mean we turned our back on business. But turning towards businesses which are only coming your way because the customer cannot get credit anywhere else was not the right strategy."
Davies emphasises that OMV was not looking to tell its customers it wasn’t interested in doing business with them.
"There were certain cases where we felt that the customer’s industry was at the front line of the challenges we’re all facing now, especially when we looked for parent company guarantees," he comments. "If that was refused then we simply walked away from that business," he says.
Though OMV runs shared services for collections, the primary interface with customers is through the business finance function.
"There's really only one division that has a substantial portfolio of third-party customers and that's the refining and marketing business," Davies says. "The upstream business sells all its oil through the trading business. Their primary interface is either the refineries that we operate or the external trading market. The credit limits are established by the corporate risk management team, but again the cash collection is a responsibility of the local business division. The rest of the sales are the industrial accounts with small operators and the super-majors – the BPs and Totals of this world – and again the collections are managed within the refining and marketing business."
For Davies, the uncertainties of the market and volatility of oil prices has seen OMV focus intently on cash management.
"Clearly, the sale of the Mol shares was heaven-sent," he says. "Frankly, even the week before, we were not planning on that transaction. It came together very quickly and has consequently transformed our overall liquidity position. What we had been planning on and had executed successfully during the first four months of the year was an extension of the maturity profile of our debt."