Managing Oil and Gas Firms During Downturns

In FWinc.‘s Spring 2016 issue, RCO’s partner-in-charge, audit department, Jay Shellum, provides insight on how oil and gas clients can prepare for a downturn and weather the storm when it hits.

Managing Oil and Gas Firms During Downturns
Forecasting, communication, taking advantage of opportunity, patience are key.
BY JAY SHELLUM
Rylander, Clay & Opitz, LLP

With every boom comes a bust, and with oil prices below $30 per barrel, oil is at its lowest price since 2004. As a result, businesses in the oil and gas sector have to plan differently than before.

Forecast revenue and cash flow
One difference between well-managed companies and those who have struggled during the downturn is the approach they take to forecasting. Companies should project revenues at different price scenarios to plan how they will adjust expenses under different economic scenarios in order to maintain adequate cash flow. Running these scenarios before economic conditions worsen allows companies to make smarter decisions about when and how to make adjustments to their operations.

Communication is key
Companies should also keep open lines of communication with investors, employees and creditors. Investors want to know their capital is being used wisely during changing market conditions and that the company has a plan to weather the low price environment and remain financially healthy. Employees may be concerned about job security and will appreciate any assurance companies can provide that they are doing everything possible to navigate these difficult times. Creditors will also be very interested in how companies will maintain their ability to service their debt and maintain borrowing covenants.

Take advantage of opportunities 
While many companies will have to face the reality of needing to sell properties to generate necessary cash flow during the market downturn, a company sitting on un-deployed capital reserves may be able to acquire additional assets at a very reasonable cost. Once oil and gas prices recover, those companies will be well-positioned to make a quick return to profitability. “When companies position themselves conservatively, when they proactively manage the markets based on long-term price trends, those companies can be extremely successful,” Shellum said.

History repeats itself
What history tells us is that oil and gas prices will recover, and the industry will return to profitability again. Companies that have been patient in their approach to acquiring and developing their oil and gas assets, as well as anticipating and planning for volatility in the markets, increase their chances to survive a downturn, and position themselves to emerge even stronger. “In the end, the oil and gas companies that have the greatest chance for longterm success are the ones that are disciplined and patient, looking for the right deals at the right price, at the right time,” Shellum said.

 

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