FREE MEMBERSHIP Includes » ABL Advisor eNews + iData Blasts | JOIN NOW ABLAdvisor Gray ABLAdvisor Blue
Skip Navigation LinksHome / Blogs / Read Blog


Recovering From the Boom, Planning for 2016

December 01, 2015, 07:00 AM

It’s that time of the year again … budgeting, goal setting and yes, planning. With everything that has transpired in the last year, the collective push to focus on oilfield services has fallen off a cliff to say it mildly. But, before we talk about the future, let’s take a look back over the past year… what happened?

Sales Declined. Oil prices dropped, fluctuated and then ultimately dropped again. The amount of fracking work alone fell about 40% from the prior year, if not more. Blame whoever you want or subscribe to one of the many conspiracy theories out there. No matter the cause, the resulting impact on the industry was significant as illustrated by an increase in the number of bankruptcy filings in this sector. Declining sales and price fluctuations certainly had a major impact on asset-based lending and factoring clients alike, along with their customers (the account debtors).

Debtor Credit Deteriorated. This past year, you probably experienced longer payment times, higher disputes related to rejected paperwork or other reasons, and non-payment from customers due to insolvency, especially with respect to smaller account debtors. However, even the larger oil companies have delayed payments and required more accurate billing processes to approve invoices for payment.  As such, even if you were fortunate enough to have clients that primarily service large debtors, it is unlikely you escaped these issues altogether.

Too Much Debt. It was not too long ago that the oil industry was booming. Many of those in the oil patch used that opportunity to gear up with more equipment. They planned for continued, sustained growth. Not unlike many other companies in a boom industry, they bought more “stuff,” even airplanes (never a good sign), just because times were good. Then, after the interest-only periods lapsed at about the same time sales slumped, or took a nose dive if you prefer, these companies realized they had taken on too much. Their business models could no longer support the mounting debt. For some companies, the solution was to sell and hope for a turnaround. Other businesses began stretching their payables, searching for more money to survive. Ultimately, some companies survived, perhaps because they were able to successfully diversify, while for others, bankruptcy was the only option.

Offsets for Payables. Yes, there is more! Statutory lien claimants are quite common in this segment of the market. Your client may not have ever experienced these offsets in the past. But, that is just that: the past. If your client goes out of business, these vendors can frustrate or delay your efforts to collect on the receivables, regardless of whether you are a traditional ABL lender or a factor who bought the invoice. Because statutory lien claimants may have months to file a lien claim, account debtors may insist on withholding some or all of the receivables as security for unknown lien claims. This, of course, delays if not decreases your ultimate recovery.

Also, with so many service companies closing their doors, account debtors in the oil industry, especially the larger account debtors, are becoming more reliant on the few disposal and other smaller service companies that are left out there. As such, when your client service company goes out of business, the Halliburton, Devon and other large debtors of the world may go to extreme lengths to find out if there are any unpaid subcontractors of your client that might have potential lien claims. As the contract between your client and the account debtor likely authorizes the account debtor to withhold payment pending satisfactory evidence that all potential lien claimants have been paid, and also to reduce payment in order to pay these claims, it may be some time before you collect your receivable. Moreover, your ultimate recovery may be less than face value.

Soooo … not a good year for such a highly sought after industry back in 2013-2014. With all of that (hopefully not expensive) education, what did we learn?

  • Monitor debtor credit. Stay on top of payment and industry trends, which will be critical for funding companies in the oil industry. Whatever tracking mechanisms you can use or add to your toolbox – from sophisticated credit reporting to monitoring Google alerts – do that.
  • Get the paper. For factors, and even for ABL lenders, be sure to obtain invoices and backup. Your client could close its doors and walk away, and if you need to resubmit invoices for payment, you will need all of this information to do it. As such, even though it could be thousands of invoices and lots of paperwork, it is best to obtain the backup.
  • Track payables and know about hidden liens. And, while you are looking through those field tickets, look for additional tickets from vendors. Are those the same names that are on the payables? Are those vendors being paid? Track payables and know about hidden liens and what impact they could have on your collateral. If you have not already done so, you may want to become educated on hidden liens before you have to suffer through an expensive degree... Trust me, it will not be a fun process.

With advance rates higher than they used to be due to increased competition among lenders and factors, there is little margin for error should a collection or liquidation occur. Take a look at the oilfield service companies in your portfolio and identify your exit strategy. If you had to collect out tomorrow – and I mean literally tomorrow - how would you do it?

When looking at a new prospect, be sure to understand where the prospect is today and where it projects to be over the next year. Of course, in an environment filled with volatility and risk, there will always be opportunities. The trick is to tread carefully, structure accordingly and monitor the… well… monitor it fully.

We need to watch the industry. Next year will be telling for sure. Unless oil prices increase, next year will likely look a lot like this past year if not worse. And even if oil prices increase in late 2016, it will take time to work through the system, possibly through 2017. The point being that, even if oil prices rebound next year, it will likely be some time, with a lot more debt and a lot more bankruptcies, before the industry experiences a sustained recovery.

Going back to planning for 2016, I think our plan for next year will focus more on industries other than oil. Last year was enough education to last a while, or at least until the next boom!

Gen Merritt-Parikh
President | Haversine Funding
Gen Merritt-Parikh is the President of Haversine Funding. With more than 25 years of experience in commercial finance, she is responsible for originations, underwriting, investment analysis, and management and asset allocation strategy. In 2018, as President of Allied Affiliated Funding, she led the company to a successful sale to a nationally chartered bank. Previously, Gen worked in the factoring and asset-based lending space with companies including Liquid Capital, Comresco Capital and Guaranty Business Credit. She holds a Bachelor of Arts degree in Business and Economics from the University of Texas at Dallas, serves on the Factoring Committee for the Secured Finance Network (SFNet) and holds the Subject Matter Expert designation by the International Factoring Association, having helped develop the first factoring certification program for the industry.
Comments From Our Members

You must be an ABL Advisor member to post comments. Login or Join Now.