Calgary鈥� In one of his recent newsletters, David Yager, national leader of accounting firm MNP鈥檚 oilfield services group, put it pretty bluntly. 鈥淭here鈥檚 just no cash.鈥�
He wrote, 鈥溾�楾here鈥檚 just no cash.鈥� That鈥檚 the Coles Notes from a senior banker describing the book of oil service loans he manages for one of Alberta鈥檚 leading lenders. There鈥檚 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鈥檛 happen soon enough. More of the same won鈥檛 work.鈥�
Pipeline Newsspoke to Yager on Oct. 8th, asking him about the cash situation and the downturn in the industry.
Yager said, 鈥淭here鈥檚 three stages. The first is shock and awe, 鈥極h my God, what is going on?鈥�
鈥淭he second is denial. 鈥楾he clients are just out to grind me.鈥�
鈥淭he third stage is a sort of realism. In the end, the oil companies don鈥檛 have any money, either. It鈥檚 not that they鈥檙e 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鈥檛 drill and replace reserves is, in fact, going out of business.鈥�
Finding a way to replace reserves at the lowest economic cost is a matter of economic survival.
鈥淭here are a lot of guys in the service business who think 鈥楾hey鈥檙e just beating me up because they can.鈥�
鈥淣o, they鈥檙e beating you up because they have to. There鈥檚 no other choice,鈥� he said.
鈥淥nce you get to the reality phase, you look in the mirror and say, 鈥楬ave I done everything I can to run my business as efficiently as possible so I can make a profit, or at least break even?鈥�
Over a year into this downturn, have business鈥� and personal capital reserves been stretched to the limit?
鈥淭he 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鈥檚 at the stage right now where pretty much everyone鈥檚 run out of everything. The hedges have expired and you can鈥檛 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,鈥� he said.
Yager said one has to look at all the costs in their company, from wages and rent to company benefits and headcount. 鈥淲ages got kinda silly here, in the last few years,鈥� he noted.
In the oilsands, the fly-in, fly-out workforce is being phased out. Retention and signing bonuses are also going. 鈥淒o you want a job or a company car? There you go.
鈥淗as 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鈥檓 talking about, unpleasant, almost unthinkable reductions in cost to keep the company going and preserve shareholders鈥� equity.鈥�
Beyond cut, cut, cut, he noted oil companies have realized they鈥檝e got what they can out of their suppliers. 鈥淚t鈥檚 now time to look at the way they do their business,鈥� he said.
It could be better scheduling in the operational execution side to minimize any standby time. 鈥淭hat鈥檚 not cutting cost, that鈥檚 cutting waste,鈥� 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.
鈥淲e 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鈥檚 no evidence of that.鈥�
Oil companies have been reluctant to take advice, he said, but the situation is so dire now, it鈥檚 all hands on deck, so to speak. 鈥淚f oil companies don鈥檛 get back to drilling, and replace reserves, they鈥檙e going out of business. The service industry is not going to be well-served by having their customers go broke,鈥� Yager said.
All told, Yager said, 鈥淚t鈥檚 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.鈥�
鈥淚s the glass half-full, or half empty? I say, for this community, it鈥檚 half-full. For Estevan, activity will pick up with the oil price,鈥� Yager concluded. 聽
