Calgary– In one of his recent newsletters, David Yager, national leader of accounting firm MNP’s oilfield services group, put it pretty bluntly. “There’s just no cash.”
He wrote, “‘There’s just no cash.’ That’s the Coles Notes from a senior banker describing the book of oil service loans he manages for one of Alberta’s leading lenders. There’s simply not enough cash flow to support current levels of debt. Bankers and borrowers have kicked the can down the road about as far as they can as more oilfield service (OFS) and exploration and production (E&P) companies default on their loans and seek more relief on lending covenants. While a significant oil price increase to lift all the sinking boats will surely come, it won’t happen soon enough. More of the same won’t work.”
Pipeline Newsspoke to Yager on Oct. 8th, asking him about the cash situation and the downturn in the industry.
Yager said, “There’s three stages. The first is shock and awe, ‘Oh my God, what is going on?’
“The second is denial. ‘The clients are just out to grind me.’
“The third stage is a sort of realism. In the end, the oil companies don’t have any money, either. It’s not that they’re deliberately persecuting their vendors. The reality is the product price minus the operating cost has left them with the slimmest of margins. An oil company that produces oil but doesn’t drill and replace reserves is, in fact, going out of business.”
Finding a way to replace reserves at the lowest economic cost is a matter of economic survival.
“There are a lot of guys in the service business who think ‘They’re just beating me up because they can.’
“No, they’re beating you up because they have to. There’s no other choice,” he said.
“Once you get to the reality phase, you look in the mirror and say, ‘Have I done everything I can to run my business as efficiently as possible so I can make a profit, or at least break even?”
Over a year into this downturn, have business’ and personal capital reserves been stretched to the limit?
“The oil companies have been living on hedges. They pre-sold some of their production at higher prices a year ago which has disguised the adjustment. The guys who have been laid off are living off their severances and employment insurance. The service companies have been living off their balance sheet. It’s at the stage right now where pretty much everyone’s run out of everything. The hedges have expired and you can’t lock in at a higher price. The service companies that decided to keep their structures intact and decided to just bleed for a while have probably lost as much money as they care to. The workers are, out of necessity, trying to find employment in other industries,” he said.
Yager said one has to look at all the costs in their company, from wages and rent to company benefits and headcount. “Wages got kinda silly here, in the last few years,” he noted.
In the oilsands, the fly-in, fly-out workforce is being phased out. Retention and signing bonuses are also going. “Do you want a job or a company car? There you go.
“Has the owner taken a pay cut? I know in 2009, taking our company (Yager is former CEO of HSE Integrated) through the slump, I took a 20 per cent cut in base pay and no bonus. I took a 50 per cent pay cut. In my years as an entrepreneur in the 1980s, I would go a year at a time without a paycheck to preserve my equity in the business. Those are the kind of things I’m talking about, unpleasant, almost unthinkable reductions in cost to keep the company going and preserve shareholders’ equity.”
Beyond cut, cut, cut, he noted oil companies have realized they’ve got what they can out of their suppliers. “It’s now time to look at the way they do their business,” he said.
It could be better scheduling in the operational execution side to minimize any standby time. “That’s not cutting cost, that’s cutting waste,” he said.
Another opportunity is for oil companies to sit down and talk about operations with their suppliers to reduce the total cost. The auto business did this the hard way, and invented just-in-time supply chains as a result, he noted.
“We never had to do that in the oil industry. The oil company knows all, and knows everything that needs to be known and is an expert of logistics and execution. In fact, there’s no evidence of that.”
Oil companies have been reluctant to take advice, he said, but the situation is so dire now, it’s all hands on deck, so to speak. “If oil companies don’t get back to drilling, and replace reserves, they’re going out of business. The service industry is not going to be well-served by having their customers go broke,” Yager said.
All told, Yager said, “It’s not that bad. The last half of the 1980s were just brutal. This is not the worst downturn, by any means. There are still 196 rigs drilling and production is going up in the oilsands.”
“Is the glass half-full, or half empty? I say, for this community, it’s half-full. For Estevan, activity will pick up with the oil price,” Yager concluded.
