Gavel to Gavel: This too shall pass
The Journal Record
Bloomberg Business recently ran a story baring the headline, “Half of U.S. fracking companies will be dead or sold this year.” The story contained numerous quotes from industry players and experts.
While we hope it doesn’t get that bad, recent declines in oil prices have clearly hurt the industry. Consolidations, asset sales and bankruptcies are likely in the coming months. The immediate effect will probably fall upon smaller, private independent producers and service companies, companies more likely to be reliant on a local lender than the public markets for credit. In the bankruptcy context, these types of cases can prove challenging.
From the perspective of the small producer or service company, it is essential to be proactive when signs of trouble emerge. First, the troubled company should give particular care and attention to accounts receivable, collections and cash flow.
As someone smarter than me once said, “Cash flow solves all problems, without it you are dead.”
Never be in a position where payroll is due tomorrow and no money is in the account today. Second, the company should seek assistance early. In my experience, smaller family-owned businesses often delay to the point that a successful reorganization is no longer a viable option. Finally, the troubled company must maintain an open and honest dialogue with its lender and critical vendors. While most creditors want their debtor to succeed and pay them what they are owed, they need their debtors to be truthful and realistic. The troubled company should never overcommit; don’t promise payments that can’t be made. Show the creditors, through reliable financial information, that payment can be achieved at some point in the future.
From the perspective of the creditor of a troubled small producer or service company three things are important: good information, trust and patience. Good information allows the creditor to make an informed decision regarding the financial viability of the debtor. Once a creditor sees there is a reasonable prospect of repayment it must decide whether it trusts management to use their best efforts to get them paid. As long as there is a flow of information, trust and an improving financial picture, the creditor should be patient.
We’re in for a little turbulence across the oil and gas industry but this, too, shall pass.
Stephen J. Moriarty is a bankruptcy attorney with Fellers Snider.