Taking Inventory – In the Oilfield

Most companies track inventory as a regular part of operations – and many work hard to find the right balance. Too little inventory could mean lost sales, while too much ties up valuable cash that could be used elsewhere.

Oil and gas companies face the same dilemma. But: how do they measure the thousands of barrels of crude oil & products moving through complex production, refining, pipeline and marketing systems? And: how much inventory is the “right” amount to have?

Yearend 2018 inventory values for selected integrated oil companies show wide variability:

Of course, these raw values may not mean much – a larger or more dispersed company might need more inventory to manage more diverse or complex operations. However, normalizing these inventory levels to total revenue or net income before tax yields a similarly wide set of results:

The numbers reveal meaningful opportunities for potential improvement. For example, if BP were to reduce its hydrocarbon inventory level to that of Chevron on a relative revenue basis, it would free up $8 billion in cash. BP could use that to fund nearly half of its annual capital expenditure budget, or perhaps opt instead to return more than $2.00/share to its shareholders.

Each of these leading oil companies is unique, with wide differences in integration levels, international footprint, operational situation and historical factors, among other factors. However, besides indicating that Chevron is relatively efficient in its use of inventory compared to the other companies, it’s clear that all the oil companies struggle to understand: how much hydrocarbon inventory is enough, and how much is too much?

Bottom line: oil companies have billions of dollars tied up in inventory that could be better used in the business or returned to investors. Figuring out how much inventory they should be carrying is an ongoing challenge.