Big Questions For The Oil And Gas Industry

John T. Young Jr. is senior managing director of Conway MacKenzie's Houston, Dallas and Los Angeles offices and is a member of the board of directors. Young oversees Conway MacKenzie's energy advisory services.

The last two months have been enormously rocky for the U.S. oil and gas industry. The recent and ongoing commodities price collapse, which came as a surprise to most, will undoubtedly change the U.S. and International oil and gas landscape forever. As we look at how to chart a course in an uncertain future with so many unanswered questions about how this all will play out, it is important for us to start with what we know.

First, oil and gas debt is over $100 billion and is moving quickly toward $200 billion. This is a staggering figure that that is a huge looming problem for industry and a challenged for the overall economy.

During the first half of the year, the service sector, already hit by a massive decline in orders, will face enormous pressure as revenues dry up and companies are left with huge equipment inventories resulting in the being doubly squeezed.  Exploration and production companies are already requiring 20% to 30% discounts as their 2015 budgets continue to be slashed.

Upstream companies will feel the pain at different times and magnitudes based on their production costs and their hedging strategy. Low cost producers will feel less pain as will those that have placed hedges that will protect them in the short term. By year’s end, even the shrewdest hedgers will be hit if commodity prices don’t recover.

In the end, there will likely be liquidation and consolidation on a very broad scale as service companies become insolvent and assets are acquired by stronger competitors or creditors. The same holds true for producers, with the ones with the deepest pockets and lower costs of production acquiring the entities or assets of the weaker ones.

Do’s and Don’ts

During these tough times, it is easy to be hasty and to make mistakes. While we all have our theories and opinions, we don’t know when and where the bottom of this fall will be. Uncertainty is very difficult and can be unnerving. It is important to know what to do and what not to do. Below are some tips we provide our clients:

  • Monitor and preserve cash. Burn rates are really hard to get down – but they are your lifeline. Put limits on your spending options. Monitor cash flow on a weekly or even daily basis.
  • Prioritize what you spend. Rank your capital projects. Make a list what can you afford. What do you need to keep your business alive? What creates cash flow?
  • Communicate with your bank early and often. Don’t surprise them. They are expecting the call. Provide them good news or bad news, whatever it may be. If you aren’t upfront and transparent with you they can’t help you.
  • Don’t ignore the crisis. It’s likely not going away by itself and, if proactively and properly addressed, vendors, customers, and other stakeholders are more likely to collaborate with you
  • Know what you have. Understand your assets thoroughly. What is producing? What has potential? What are your decline curves? This data is critical to your survival. Make sure that you have it and that it is accurate.
  • Develop a solid cash flow forecast. It should be between 13 weeks and 26 weeks at least and include  rue cash receipts and disbursements, no accrued expenses or amortization of non-cash items
  • Spend the time and resources, or money, to update short term and long-term projections for business viability planning. This should be done professionally. And third parties are recommended.
  • Have a plan in place. Whether it’s a liquidity crisis, pending or actual covenant default, operational issues or a combination of factors. Make sure it is defendable. Have a realistic plan and be prepared to clearly communicate it to stakeholders.
  • Give up obvious excess G&A items – the share of the private jet, club memberships, large amounts of unused office space. These all drain cash and credibility when dealing with lenders and creditors.
  • Strategically communicate with employees.  It’s not going to be a secret that the company is struggling and. even if it’s not, lack of communication can create unnecessary anxiety.
  • Don’t ignore the crisis. It’s likely not going away by itself and, if proactively and properly addressed, vendors, customers, and other stakeholders are more likely to collaborate with you
  • Don’t depend too heavily on one transaction solution. Multiple options are needed and a solid contingency plan needs to be ready if the transaction doesn’t close.
  • Don’t make promises to pay vendors if you don’t have the cash. This is not a sustainable strategy.
  • Don’t wait too long to involve outside professionals. This can close off options and damage credibility with stakeholders

There is no doubt that over the next few months we will be on a rocky road. It is important that we keep our heads, understand and admit our limits, and seek professional help and advice when it is needed. In the meantime we will focus on some broader questions:

  1. Where and when will we hit the bottom?
  2. What is the impact of domestic supply and production?
  3. What is the impact of global supply and production?
  4. What role are decline curves playing?
  5. How quickly will falling exploration dollars impact supply and price?
  6. Who is best positioned and what will their strategy be?
  7. What will the new marketplace look like?
  8. How will oil and gas exports and new infrastructure play a role?

Over the next few months we will explore these questions and how they are impacting energy producers and service companies and your company in particular.

John T. Young Jr. can be reached at: https://twitter.com/JYoungEnergy and https://www.linkedin.com/pub/john-t-young-jr/3/424/9a9

Conway MacKenzie Energy Advisory Services is the global leader in providing financial, operational and strategic services tailored to the needs of at-risk companies in the energy sector. Conway MacKenzie has offices worldwide, including Atlanta, Chicago, Dallas, Dayton, Detroit, Houston, Los Angeles, New York, London and Frankfurt. For additional information, please visit us at www.ConwayMacKenzie.com or call 713.650.0500.