Three Things Not to Tell Your Banker (From a Former Bank CEO) .

1. Nothing.

Silence can be deadly. While conversations about challenging markets, disappointing results and murky forecasts may not make your banker’s day, they produce far better outcomes than leaving a vacuum to be filled with fear and presumption of the worst. In OFS, enough parties are reporting sea change results that credit officers and regulators are already asking your banker for answers. You want them to look apprised, be up to date and be able to say “yes, I am talking with them”. Communication can build trust, and trust matters.

2. This doesn’t impact us because…

Remaining optimistic and forward looking can be a great attribute. Doing it while ignoring the systemic impact of the current E&P capital cycle is at best, risky. In the past, service providers point to the special nature of their equipment / offering, the strength of their customers, or the particulars of their geography to cite why they are different and a lender should not worry. Today’s environment has lenders disregarding these former comforts given the recent experience of political shifts, capital plans, and technology adoption.

Source: Baker Hughes, CapIQ

3. Don’t worry, you have plenty of collateral.

Borrowers often get too comfortable in the borrowing base as defined at the outset of their capital relationship. The credit worthiness and collectability of receivables, the underlying value of iron and the ability to rely on take-or-pay contracts have all been negatively impacted enough to create a crisis of confidence in these metrics. Expect more with the current season of redetermination upon us. Collateral reliance is the best of a worst outcome and not soothing.

Redetermination: The recalculation of the borrowing base as a result of a change in value of the collateral used to determine the original borrowing amount. Source: Haynes & Boone LLP; Survey of 221 market executives

Challenging market conditions and tight capital for anything oilfield related makes how you manage your bank and capital provider relationships absolutely critical to steering through challenge to execute on opportunity. As a general rule, we recommend communicating early and often, and if there is a perceived potential for capital crisis, begin the planning and restructuring now - not when conversations are about the 7th and 11th Chapter in the book. Those Chapters come with significant cost, that often times can be avoided with proper communication and alternative approaches.

Haynes & Boone LLP
Source: Fitch Ratings

Early planning affords more optionality both operationally and from a capital perspective. Time and planning buys an enterprise some runway even in the toughest of markets. Too often we get the call for help too late, and the time to effect an alternative, too short. Often times, the process of seeking alternatives will alone buy time with capital providers - it is seen as a proactive lender friendly action by the borrower. Markets that we see now, there is a flight to safety but too few perches often mean that day to day operations negate the time to plan and communicate. We believe even the best teams in daily combat require a battleplan and plans need to reflect the market realities of the battlefield defined by current capital market realities... Taking time to plan and communicate needs to be made a priority - this is where value in these markets is imagined and then seized.

Industria Partners offers services to help companies challenged in the current OFS capital drought. We work to integrate capital planning with simultaneous exploration of capital options and discussions with existing banks and capital providers. Alternatives may include new sources of capital, renegotiated bank terms, divestitures of noncore assets, cashless mergers to achieve scale or reduce cost, and other nontraditional arrangements to achieve positioning for long term success.

What value does a strategic advisor like Industria deliver?

  • A wider perspective on what others in your industry are already doing to prepare for difficult conversations with capital providers, vendors, and even customers;
  • The ability to be “the bad guy” at critical points in what are likely to be challenging discussions with stakeholders; and
  • Not just creative ideas, but detailed and supportive strategic and financial analysis supporting value maximizing outcomes.

During the last cycle downturn, Industria advised clients in their divestitures of non-core assets, strategic alternatives discovery as well as restructuring of their balance sheets with existing capital providers. Often many of these alternatives are pursued simultaneously to allow the best option to be executed and afford some time for all capital parties to make the best rational forward looking decisions for stakeholders.

About the Author

Chris Osborn is a co-founder and partner at Industria with over $3 billion of transaction experience as an advisor and investor. Chris grew up in an early family held oilfield supplier and as the former CEO of a $2.5 billion regional bank, has financed many oilfield businesses.

We hope you found this piece insightful – please feel free to contact anyone on the Industria team – we would welcome the opportunity to discuss our viewpoint.

About the Firm

Industria Partners provides focused strategic advisory services to energy and industrial companies at every point across the business cycle. Through industry connectivity, transaction experience, and expert execution, Industria delivers superior outcomes to its clients.