Oil & Gas Companies Face "Draconian Efforts" To Survive Price Decline: HSSK

Marc Schwartz
Marc Schwartz
HOUSTON - March 28, 2015 - PRLog -- Oil and gas companies facing a prolonged price decline must act now to avoid bankruptcy, according to leading financial reorganization consultant Marc Schwartz, Managing Director of HSSK LLC.
“Companies must begin managing now as if a bankruptcy petition will be filed next week,” Schwartz said in an interview for the KUHF “Bauer Business Focus" program in Houston.  “It takes a Draconian effort that most managers are not in a position to do, mentally or emotionally."
The management steps needed immediately, according to frequently appointed bankruptcy trustee Schwartz, include:
•    Very proactive cutting costs and justifying every expenditure.
•    Conserve cash by finding the assets that are not core to the business and geting rid of them.
•    Finding activities that are not generating cash and eliminate them.
•    Justifying every salary.
•    Minimizing cash outflows to maximize cash flow.
“Without these steps, companies will not survive," said Schwartz. “It seems we never learn the lessons of history. It's very difficult for companies that are operating and doing well to recognize the problem and take the steps necessary to cut the losses."
The oil and gas industry's difficulties are focused on mid-size exploration and production companies and service companies, according to Schwartz, with the current debt-to-equity ratios at 15- to 20-percent while many middle market companies have debt-to-equity ratios of 100% or 150%. The oil and gas companies that have filed bankruptcy already in this cycle – CalDive International, BPZ Resources, and Dune Energy – had debt-to-equity ratios over 100%, he noted.
Management Actions
“The increasing numbers of oil and gas workforce layoffs and capital budget cutbacks are signs that managements are beginning to take the steps needed for survival, but they are nowhere near the level of ruthless efficiency that will be required for most companies to survive," Schwartz said.
HSSK's analysis pinpoints ten primary elements of the management strategy most oil and gas companies can put in-place almost immediately to have the best survival potential:
1. Do an overall evaluation of everything that could be a potential source of short term cash for the company. Determine how much cash can be made available how soon, and then do it. Include every job position in the company -- an open job position saves cash.
2. Identify non-core assets and begin to divest those assets. The priorities should be industry segment focus, geographical focus, and earnings focus. Think of a company as an engine; then discard anything that stresses the engine, such as the air conditioning, power windows or stereo.
3. Cut cash outlays. Every expenditure must pass one simple test: will it lead to more cash coming in the door in the near term? If the answer to that question is not yes, don't spend the money unless required to by law.
4. Review every aspect of staffing to ensure that only the personnel necessary to keep the operation going are retained; all others must be let go.
5. Scour the entire operation to locate points of cash leakage and sources of immediate cash. For example, leaks occur when trucks making long haul deliveries don't have loads for the return leg, or purchases larger than immediately needed quantities are made to get quantity price savings. Inventory reduction and sales of scrap can rank high as sources of cash.
6. Aggressively work old accounts receivable, discounting as much as needed to get the cash in. Take the Attila the Hun approach to problem A/R: get what is available and move on fast.
7. Grow the cash position and manage it. The CFO should report the company's cash position every day to reinforce the urgency of the situation and understand the cash impacts of every decision.
8. Fight the battles that can be won and avoid the battles that are likely to be lost. Although fighting for contracts is worthwhile, fighting with customers over contracts may have very negative impacts after prices recover.
9. Get in front of the company's lenders early and often. Information and negotiations are the keys to those relationships. Lenders across the energy sector have already taken the position that they want to work with borrowers through this downturn.
10. Take a hard look at the workforce. In the recent high price environment, companies have neglected the usual workforce pruning to remove lower performers and problem cases. Now is the time to perform that pruning. Start evaluating across the board pay reductions and if necessary, implement them.
“Taking these steps will not only correct the false positive impressions managers may have of their financial positions, but it will also move their operational focus from production to cash, where it should remain for the duration," Schwartz said.
The HSSK LLC business valuation, litigation & financial reorganization consulting firm (hssk.com) is a leader in providing analysis and expert testimony on issues involving the current and future value of assets in the oil and gas, real estate and other industries, often in highly contentious litigation and international arbitration situations.
A transcript of the complete KUHF/Bauer Business Report interview is available at http://hssk.com/events/how-to-keep-your-company-out-of-ba.... The recorded interview is at http://www.houstonpublicmedia.org/news/w-marc-schwartz-on....

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Tags:Avoiding Bankruptcy, Oil Gas, Financial Reorganization
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