Volatility: Thy Name is Energy

bankruptcy

Yes, this is another article about the “state of the industry”. Because of my work representing oil & gas service providers to maximize their recoveries in the bankruptcy sector, I was asked to provide some practical points on the subject. Fair warning to the reader: You will love some of this, and you will almost certainly hate some.

Bankruptcy Activity: As of this writing, crude oil remains barely over $40/Bbl. There are not many domestic producing wells or drilling prospects that are economic at that product price. The best minds in the business believe prices will remain somewhat flat but with swings in volatility due to almost anything. As a result, the expectation is that bankruptcies will continue to occur to the E&P customer and will likely expand even more into the services provider. This opinion is not new to you, of course. As companies exhaust their current funds and industry activity levels remain depressed, there is little to be optimistic about. 

M&A Activity: Today, there are investor companies interested in strategic acquisitions even as they are withholding dollars to their current portfolio companies who are starving for operating cash. As recently reported by one financial advisor firm: “Energy service and equipment M&A activity decreased by transaction count and value in the second quarter of 2020, totaling 16 transactions and $104.2 million, down from 28 transactions and $584.7 million in the first quarter of 2020”. [See: Stout; Energy Industry Update Q2 2020 by Todd Parsapour& Nickolas Dreps.] The biggest reason for this reduction is concern of the supply-demand cycle of oil & gas production, which has severely reduced energy consumption and economic activity worldwide, and with it, product prices. The current expectation is private equity-backed groups may continue to hold off in acquisitions, which leaves room for those strategic acquirers who are quieter and abhor the media spotlight.

Become a Strategic Target: So, can your company take steps to become considered as an acquisition candidate or perhaps a company that should be given funds to acquire others? There are measures to move your company into this league. Target companies are preferably in high growth business mode. Consider reliance on the most recent uptick in the rig count and build a list of your clients and referral sources as a demonstration of future growth expectations. Build financial models to show profitability projections. Include detail about capital investment requirements to meet these projections, and information about your competitors. Consider engaging a financial advisor to assist in this effort, because most of us are  more familiar with turning a pipe wrench or reading a gas meter chart. 

My suggestion is for you to create best management practices in your product lines. Ditch your paper field-delivery tickets and move to an electronic system. Take advantage of the Covid-19 era for e-ticketing because your customers want to avoid person-to-person contact. This can remove days from your order-to-cash system. Make efficiency a priority in every aspect of your business and your pay cycle. Be ready, however, because your customer will not have a faster way to reject invoices, so you need to have the collection tools to timely handle this. Be able to demonstrate you really have a  culture of safety, and not merely lip service. Be able to demonstrate the insurance savings that you have realized due to your safety programs. Be able to show how these business practices have placed your company into a better future position than your direct competitors. Have a good communication plan in place, internally and externally. Take serious and painful steps to review your liquidity levels. This effort requires as much work and self-analysis as it took for you to prepare a business plan for your first bank loan. Most importantly, create your own plan to seek a target buyer or acquisition who is complementary to your company, your employee team, and your corporate culture.

Diversify your Customer Base: In the previous downturns of 2010-2011 and 2015-2016, we watched as some service companies took extraordinary steps to expand their customer base and move into unusual areas. It may be time for another long-game approach. BP, Shell, ExxonMobil, and Chevron are majors who are taking steps to respond to public pressures to: (i) reduce methane leakage despite the political delays in regulatory change, (ii) push for an increased role in natural gas and alternative energy, (iii) consider the effect on climate change, and (iv) raise industry safety standards. The major company approach is a management of risk. Similarly, we are aware of one company’s effort to market its oilfield location mats to municipalities, governmental agencies, Corps of Engineer projects, and other work in the heavy construction industry. Another expanded its drone technology from solely pipeline construction to multiple other industries. Still another has created a new entity with a name that does not include “ABC Energy Services” to appeal to a different customer base. This may be the time for your company to include similar discussions in your strategic planning to position your company to survive and thrive without regard to economic cycles.

The OFS sector is down but far from out. Despite the news cycles and the depressed industry activity levels, this could be a time for reflection, planning, and strategic thinking. We know our world will be dependent on oil and gas for its energy needs for a very long time. Some of the best minds are in the business of energy. It may be time to concentrate that intellectual power on strategic plans for the future. 

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