The drastic collapse in oil prices precipitated by global oversupply and exacerbated by the COVID-19 crisis has shaken the financial and operational foundations for companies across multiple sectors of the energy industry. With new pressures that accelerated in the latter half of the first quarter, the first quarter earnings announcements will be much different – and more mission critical – than perhaps ever before. In the face of unpredictable and in some cases irrational pricing metrics, companies must navigate through the noise and clearly articulate the current execution and future prospects of their companies.
The recent Senior Energy Executive Discussion Series (SEEDS) webinar on energy earnings announcements brought together communications, IR and legal perspectives. The full webinar can be found HERE, and below are five highlights from our discussion.
- Design remarks with a broader set of audiences in mind
Recent dislocations in the industry have had dire implications for employees, vendors, customers, regulators and other audiences that are more likely to tune in to Q1 earnings announcements in addition to investors and analysts. This in turn should shape the tone of prepared remarks to be more empathetic and human, and the content to describe in more detail the actions being taken as well as potential future impacts the crisis may have on audiences outside of financial stakeholders.
- Switch from guidance to insights
While specific financial guidance is simply infeasible for most companies, investors will be looking for insight nonetheless. Provide color as to how various factors are currently affecting operations, supply chain, pricing, curtailments, etc. and offer qualitative statements that provide forward-looking insight.
Some companies outside of energy have offered if-then scenarios. While investors and the SEC have pressed for quantitative analysis, we see little upside in undertaking this type of speculation at this time. Given the fluidity in energy markets at the moment, we suggest that there is too much gray area within each scenario to effectively outline all potential scenarios, much less their implications for earnings. We also caution companies not to offer a timeline for when it will resume providing guidance. Companies can, however, offer thoughts on what factors would need to exist in order to again offer guidance.
- Expand the balance sheet discussion
Questions of liquidity will be top of mind. Move the balance sheet discussion to higher up in the remarks. Expand on near-term expectations for capital needs, the extent and timing of cost cuts made to date, and current access to capital.
Offer more context on the attributes of the company’s assets or strategy that differentiate it or position it to endure such challenging circumstances. This could be diversity of revenues, operational flexibility, or a management team that has navigated other downturns. For companies with less stability, offer analysis encompassing the need for capital, access to capital, and the cost containment levers available. Avoid a laundry list of actions taken and instead seek to tell a story of action, responsiveness and leadership. Highlight key actions to paint that picture.
- Shift the discussion of capital allocation
Energy companies are in survival and preservation mode now, putting dividends at risk for many companies in the near term. While a dividend cut would have spelled more trouble in prior quarters, we think most investors will appreciate the capital preservation and recognize this as a short-term change. Nonetheless, companies with significant yield-oriented investors should expect some further shifts in the shareholder base if they cut the dividend.
For companies that have the balance sheet to be opportunistic in the near-term, it’s prudent to carefully signal that the company’s eyes are always open for M&A or other opportunities. Now is not the time for surprises. This discussion should be supported with messages about financial strength, resiliency and capital discipline.
- Spend more time on Q&A preparation
Preparing for Q&A should be an expanded process this quarter, and most likely the rest of the year. Investors will want to know about additional sources of liquidity, expectations for equity issuance, potential changes in strategy, insight into the future, ability to service debt, access to capital markets, and importantly, for eligible companies the prospect for government support. The polite deflection to having a long-term value creation mindset are insufficient this time around for energy companies.
Management should practice as many tough questions as possible, and include attorneys more closely in the preparation since many of these newer issues will need to be reflected in the company’s Risk Factors, too. Conducting the call with speakers in different locations also presents challenges. Have a plan for who will answer which questions to make the Q&A smoother, and lean on the IR leader to virtually quarterback the Q&A by email or a separate private muted video call where the speakers can maintain eye contact. Make sure each executive has a print out of the key messages document to refer back to in Q&A. For more logistical considerations, see this piece.
We often say that in a crisis, a company must address the most immediate questions before any more of the message will be heard. This quarter, it’s about nuts and bolts and focusing on the near-term so that companies can then refocus the discussion on long-term value creation.