With oil prices the lowest they’ve ever been in recent memory, business owners and financial analysts are predicting either an economic downturn, or possibly another recession in oil producing states. Bad news for oil and gas companies? Maybe not… Recently, I spoke with several Houston area bankers and learned that there seems to be a general focus on how banks are restructuring troubled loans in the oil and gas industry rather than forcing these companies into a workout situation as in previous downturns. This particularly applies to those companies who were more financially fragile going into the crisis back in July 2014.
Banks are Restructuring Troubled Loans
According to a recent Wall Street Journal article, some analysts and investors say, “The time of reckoning has been pushed back several months as banks prove reluctant to turn off the taps.” Despite being in the 15th month since the peak of oil prices in July 2014, banks “have kept flowing, helping the [oil and gas] industry weather the market’s collapse.”
If you’re in any oil producing state or country, you’ve probably already felt the pinch. Unfortunately for some, the price of oil is predicted to stay at $40 for the next 9-21 months, extending the “crisis” to 24-36 months.
One of the questions that we’re dealing with today is to what extent this crisis will spill over to other markets. Companies adjacent to the oil and gas industry will likely be feeling the pain in the near future. The good news is that banks aren’t pressuring companies outside of the oil and gas industry to restructure their loans just yet.
(Questions that your banker wants to know the answers to… Click here to read more about it)
What Can I Do Now?
The key is DON’T PANIC! There are steps you can take, so it’s time to put on your thinking cap and be the trusted advisor your organization needs.
Three things are key in protecting yourself in an unstable market:
- Be proactive
- Cut sooner and cut deeper
If your company is on the “edge” of the oil and gas industry, be proactive! Since we’re in the 15th month and are expecting it to last up to 36 months, it’s vital that you start preparing now.
First, calculate the how long your company can lose money without running out of cash. If you haven’t acted yet (especially if you’re in the 5% closest to the oil and gas industry), you’ll most likely discover that you’ll run out of cash before this crisis is projected to end.
Start analyzing how your market is functioning, how your company is operating, etc. List all of the operating functions that are not necessary or could be dramatically improved. Ask yourself: what are you spending the preciously small amount of cash that you have on?
The advantage of acting now is to prevent panic (i.e. cutting thousands of jobs, angering stock holders, breaking debt covenants, etc.). If you’re trained, armed, and ready, then you have a much better chance of surviving this crisis than a company who walks on the battlefield completely unprepared.
Cut Sooner And Cut Deeper
Oftentimes in this twilight zone of a crisis, soft cuts are ideal because they don’t hurt as much. This results in further cuts happening down the line when you find yourself scrambling to find a solution.
When we say “cut,” we don’t always mean cut people. Put on your thinking cap and re-engineer your company. Just because you’ve done things a certain way for 20 years doesn’t mean it should stay that way for the next 20. Times change and so should your company.
Years ago, I had a client who was spending upwards of a quarter of a million dollars on advertising in Yellow Pages. He found himself in a pickle despite the fact that the market was ideal for his company. Even though it hurt, he cut his marketing from $250,000 to $50,000 and allocated the $200,000 to other more vital places within the company. Because of this reallocation of resources, he was able to save his employees and the company.
Reallocate your resources from the old company to the new.
There are two sides to restructuring: either the bank restructures the loan or the company restructures its operations. In simple terms, restructuring is when significant changes are made in the operations, structure, or debt of a company to avoid financial harm and improve the business. This should provide greater efficiency, if done correctly.
The strength of your operations can either cause your ship to sink, or deliver you safely to the shore. Managing your cash flow is of the utmost importance. Prioritize what is necessary to continue operations. Analyze what can be and needs to be cut. Improve productivity. Project your cash flows. Manage your cash flows from there.
Debt restructuring essentially provides two options: continue operations or liquidate. If you are able to maintain and increase cash flow while reducing expenses, then continue operations. The goal is to at least break even.
Ultimately, the company needs to make a decision about when to jump ship. If after researching and analyzing operations, structure, and debt you find that you cannot make $1 profit, then the best case scenario would be to liquidate.
It’s not every day that you’re given the opportunity to restructure your company to have higher productivity and higher efficiency, thereby a higher net income. Be proactive, make the necessary cuts now, and live to fight another day.
Reference: Wall Street Journal’s “Oil Sinks Below $40 Amid New Signs of Glut”
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