Leading a company through market cycles

Those of us who work in business or are business owners should be well aware of the economy’s natural bear and bull cycles.

It can be argued that in today’s modern economy, with its built-in fail-safes and government oversight, the large boom and bust periods of previous centuries are a thing of the past.  However, as Brian Domitrovic writes in a wonderful Forbes article and as evidenced by the Great Recession, the modern economic era is still susceptible to market cycles.  That means that it remains pretty important for company leaders and business owners to intelligently plan ahead for when markets pull back and demand weakens.

I work in the offshore oil and gas industry and lead an energy services company that provides experienced engineers and personnel to oil and gas producers.  The oil and gas industry is one industry that in particular experiences boom and bust periods.  In fact, many will argue that with the drop in oil prices experienced over the past several months, the oil and gas industry is currently in a bust-type market.

There is little doubt that the lower oil and gas prices have had its effect on a range of oil and gas producers, particularly when it comes to revenue expectations coming into 2015.

(Tangentially, there’s a reason why I think the current price climate is for the short-term, as I explain in a recent article “Current Slump in Oil Prices a Short-Term Situation, Says WESI’s Blair MacDougall”.)

However, the point is that successful leaders, regardless if we’re speaking about the oil and gas industry or some other market, must financially plan ahead for when economic conditions become more challenging.  It’s an essential part of smart business management.  Companies which survive downturns in the economy can emerge much stronger on the other side.

In my line of work, when a challenging price environment begins, one of the most difficult things to do is parse out the emotions surrounding the change in economic condition versus the reality.  As has been the case in bear markets in the past, there’s a difference between reactionary emotions and what’s really happening in the industry.

For example, after experiencing a number of market cycles over the past twenty years in the oil and gas industry, it’s evident that when most large oil and gas producers begin exploration or production projects, they map these projects out under long-term time tables.  Given these producers’ fairly large financial resources and given the long-term timeline of their projects, a momentary drop in price is a consideration, but not necessarily a condemnation, on a long-term project path.

That’s not to say that mid to smaller oil and gas producers are not affected by a drop in oil and gas prices – of course they are.  But, headlines that exaggerate and make it appear that all or most oil production will stop until prices rise once more are false.

One other thing I like to keep in mind, and again this is specific to my industry but hopefully it can translate to other markets, is the fact that technology has made enormous strides in allowing oil and gas operators to do more for less.  Compared to ten or even five years ago, our ability to discover and successfully drill offshore oil patches for equal or less cost has improved dramatically.  This is evidenced in part with the oversupply currently being seen.

One of the more imaginative offshore drilling technologies that I’ve read about over the past several years is a development called a reservoir robot or resbot for short.  Those who work in the offshore industry know that one of the more difficult and costly things to do is manage an oil reservoir.  What’s even more difficult is accurately measuring reservoir conditions and what may be causing damage to it.

Nano technology has moved into a wide range of industries.  Reservoir robots are Nano-sized robots that can enter the rock pores of a reservoir and measure the reservoir’s conditions.  The technology is being produced by Saudi Aramco and I really look forward to seeing what will happen in the future with these resbots.

Either way, maintaining an eye on technology and how it can positively affect production and budget costs is in my mind essential.

In the end, from my experience, being able to adequately prepare a business for economic downturns comes from a deep understanding of the fundamentals of one’s industry and, moreover, an ability to separate media commentary from what’s really happening on the ground.