From North Dakota’s Bakken to the Permian Basin in West Texas, times are tough for the oil business.
After more than four years of explosive growth, plummeting oil prices put the brakes on shale drilling in 2015. At the end of the year, the number of oil rigs operating in North Dakota dropped to 62, which is 71% fewer than the number of active rigs at the same time in 2014. Nationwide, the number of inland oil rigs totalled 684 at the end of December 2015, a 62% decline from 2014.
Oil exploration companies and their vendors have cut thousands of oilfield services jobs. More rigs will be shut down and more jobs will be lost in the coming months. Experts predict oil prices will remain around $40 per barrel for the next several months.
Your company may have felt the effects of this downturn in the oil market. You might even wonder how your business will survive if drilling does not rebound quickly. Below are eight steps you can take to protect your company from the decline. Adopting most of these measures can also position your company for better, sustainable growth when oil prices rise again.
Oil, as they say, is a boom or bust business. These steps will help you make the best of both ends of that cycle:
Devise a Backup Plan
Veteran drillers who lived through a few cycles in the oil business know that the good times do not last forever. To protect your company and your employees, you need a Plan B that you can put into action during the lean times. What kind of work can your people and equipment perform when the oil rigs are shut down?
If you operate a fleet hauling sand or water for the rigs, one solution is to shift your resources to different trucking modes. The trucking market is tight, with shippers moving more freight tonnage and a national shortage of 48,000 drivers. Those market conditions translate into very favorable load rates for truckload and less-than-truckload carriers. You may need to spend some money on new equipment for your fleets. However, serving other trucking modes can create a new revenue stream for your company while putting your drivers and power units back to work.
Analyze Your Cash Flow
You need to know how much money moves through your company and if that cash flow is going to be enough to sustain it. Do you have any money left over after paying your bills and one-time expenses? If your company is not yet profitable, know your break-even point. Your company is breaking even when revenue equals all of your fixed and variable costs. You need to determine a profit margin that funds your company while also allowing you to put some money away to get through the lean times. For more information about financial statements and cash flow, read our guide, Financial Management for Trucking Companies.
Set Realistic Revenue Goals
One mistake some business owners made during the oil boom was trying to grow too fast. Today, some of those businesses are cutting jobs or closing their doors. If your company is still new to oilfield services, study your market and develop some revenue goals that are ambitious but achievable. Have a plan for how you will handle that growth through available cash, headcount and assets. Likewise, plan to have some cash on hand when new business opportunities dry up. Growth is good, but it will initially drain cash and other assets. Be careful when planning your company’s growth.
Stay Liquid
When times are good, it is tempting to pump all of your profits into buying new equipment and adding headcount to your company. The smarter play is to put a portion of that money into investments that can be liquidated when your company needs the cash. Work with a certified public accountant (CPA) or a financial planner to build a portfolio of stocks, bonds and mutual funds where your money will grow until you need it. Another approach is to invest some earnings into real estate, though it is not as liquid as the stock market. Volatility in the real estate market might mean you have to cash out when your holdings have lost some of their value.
Reduce Costs
Now is a good time to explore areas where you can cut spending without damaging your business. Take a critical eye to fixed costs like office space, payroll, equipment agreements and service providers. Can you lease less-expensive office space? Can you outsource some of your back-office functions to companies that specialize in that work? Even something as simple as switching telecom providers can potentially save your company hundreds of dollars per month.
Consider doing away with anything that is not essential to your business, from the copier you never use to the break room coffee machine. For contracts that are up for renewal, try renegotiating terms that are more favorable. Finally, as an alternative to layoffs, consider implementing a temporary, across-the-board salary reduction. Your employees will appreciate your keeping them on the payroll. That goodwill may pay off for your business when the market improves.
Know When You Need Financing
The right time to seek outside funding is before the point when your company desperately needs it. Avoid the mistake that many business owners make by waiting too long to get financing.
Understanding your company’s strengths and weaknesses, your available cash flow and your market are essential. Do you need capital to survive a downturn or to purchase equipment and trucks? Different stages in your company’s life can call for different forms of financing. Factoring, which is sometimes called "accounts receivable financing", may be a good fit because you incur no debt and there are no limits to the amount of funding.
At other times, you may be willing to take on debt to fuel your company’s growth. It is important to plan your debt so that it follows the life of the asset it is financing. For example, taking out a five-year loan for equipment that fully depreciates in three years is a bad financing strategy.
Manage Risks
Calculate the benefits of financing for your company (growth, sustainability) against the risks (debt, default). Can your company afford to take on debt? How much should you borrow? Are you comfortable putting property, equipment or even your own home up as collateral? Could your company survive if you default? Explore all your financing options, from alternative lenders to banks, to find the right fit.
Also, take a strategic approach to managing your assets. Does your company really need brand-new acid pumps, kill trucks or other equipment to operate effectively? New equipment often requires big down-payments and interest that can eat up your cash flow. Equipment lease agreements are more flexible and require less capital, as this story on leasing illustrates.
Seek Advice from Reliable Sources
Building a first-rate company that endures ups and downs in the oil market will require some outside expertise. You need to assemble a team of advisors who know your industry and have more than just a monetary interest in your company’s growth. This team can include bankers, CPAs, financial planners, legal counsel and other lenders like a factoring company.
Not all of your advisors need to come from the legal or financial community. In the close-knit world of oilfield services, you can benefit from friendships with other business owners who are veterans in the industry. Seek out mentors and consider forming an advisory board of entrepreneurs. You will need some outside help in building a business that will last in the challenging oilfield services sector.
Sources: Entrepreneur.com, SBA.gov, OpenForum.com, FleetOwner.com, The New York Times, Bakken.com