Energy companies face a challenging environment of overcapacity, unpredictable oil prices, protectionism, geopolitical tensions, high debt-to-GDP ratios, winding down of national stimulus initiatives, unemployment and fluctuating currencies. To add value to shareholders, it is vital that utilities achieve excellence in financial and risk management through improved working capital management practices and greater focus on free cash flow generation.
New analysis from Frost & Sullivan reveals that oil and gas production as well as electric distribution companies exhibited the highest profitability. Grid distribution and multi-utilities, in particular, saw heightened activity.
Other segments covered in the research include electric power transmission and control, natural gas transmission, oil and gas equipment, rig and service, and oil rig service companies.
Frost & Sullivan conducted a ratio analysis to rank the companies in the power sector on the basis of different financial and risk management parameters. The ratios of the leading companies ranked within the top 33 percent, indicating that sound financial management plays a key role in the success of a business.
Successful utilities use commodity derivatives to hedge raw material risks, and also reduce currency exchange fluctuation liabilities through local production. In addition, they employ derivative-based hedging to mitigate the risks of converting receivables and liabilities, as well as purchases and sales, in foreign currencies.
To ensure profitability, companies must consolidate their presence in new geographies and invest in renewable energy, though the renewable sector is becoming highly competitive as it shifts to cost-based business models. Entrants need to rely on their own capital, as financing is limited for project developers, and technology developers can partner with existing research labs.
Visionaries will look to quickly grow into grid distribution and multi-utilities by identifying appropriate targets and valuation metrics for the same.