Oil & Gas Business Focus – Planning for Rapid SG&A Expense Reduction
Oil & Gas vets can likely recall where they were in 2015 when oil prices plummeted from $125 to $40 and in 2020 when prices went negative, dropping from $40 all the way down to -$40. Big swings like these are all too familiar in the Oilfield Services (OFS) space and drive daggers into some companies while, on the other hand, others are able to weather the storms. When the next drop comes, advance preparation will determine your fate when the dust settles.
Be Ready to Act
When crises hit, speed counts and much must be done. SG&A expenses must be reduced immediately. Fixed costs (as many as possible) must be removed. Payroll must be cut. Leases and debts need to be renegotiated. Fleet equipment must be sold or idled. But what expenses? Which fixed costs? What and how much payroll? Which leases and debts? What fleet equipment?
To emerge from a crisis in the best possible position, these questions must be assessed and answered well ahead of time. Every moment spent weighing them after the fact means more cash burn and increasingly lower survival odds. Decisions cannot wait.
Develop a prioritized expense reduction plan now that you can quickly act on when conditions call for it.
Understand the Elements of SG&A Expense Reduction
In Oilfield Services, the SG&A expense profile is largely shaped by four line items – payroll and benefits, leases, debt, and fleet. Understand the specifics of these expense drivers and examine them in the context of crisis.
- Payroll and Benefits – Payroll and benefits typically comprise 50-75% of SG&A expenses, Savings in this area can go a long way. Cutting payroll is difficult but you must be ready to cut your payroll (even by half, if necessary) or alternatively, in some cases, to furlough employees. Questions that inform how this would happen include:
- Is it clear via performance reviews who thetop performers are and who makes up the bottom tier? What positions are critical to maintain core business functions?
- To preserve some positions, could across the board salaries be cut (i.e., by a percentage) instead?
- Can benefits be reorganized in a more cost-effective structure at the next renewal?
- Leases – Leases normally make up 15-30% of SG&A expenses for OFS companies. In a downturn, especially when a local economy is dependent on the sector’s success, it’s almost always in the best interest of the company and landlord(s) to renegotiate lease terms, at least temporarily. Even a 6-month reduction can lessen disruption or stave off bankruptcy. Know too that landlords need cashflow to service their debts. Vacant space doesn’t help them which is a factor in your favor.
- Debt – Debt service normally represents 10-30% of SG&A expenses. When crises constrict a company, the risk of blowing debt covenants rises. No matter what, never be caught in a position that forces your business into bankruptcy. In better times when debt costs are low, an entire line of ABL credit can be renegotiated. However, consider these points:
- A forbearance route may be required as part of the renegotiation. In essence, this renegotiates debt for a defined period to provide relief.
- Some debt negotiations may push the company toward a pre-packaged bankruptcy. If planned properly, the company can emerge stronger and more resilient from this – however, waiting to the last minute will force the company to the back seatin negotiations.. Evaluate your options before you are forced to.
- Fleet – Fleet (especially fleet maintenance) drives 15-30% of SG&A expenses in OFS companies. Get control of fleet maintenance by either taking it in house or negotiating exclusive subcontracts. Fleet expense reductions come from actions such as immediately idling or selling the least reliable vehicles and/or investigating lease back structures with alternative vendors. The latter can be a huge cash flow savings if done right and sometimes even include embedded maintenance contracts. Investigate these options before you need them.
How We Help
Understanding the drivers of SG&A expense reduction is one thing, but putting a ready-to-roll plan in place to make them happen is quite another. Our finance experts delve into these drivers with OFS companies to create comprehensive models and contingency plans that spell out what steps to take, when to take them, and under what conditions.
SG&A expenses tend to be more fixed in nature. Focus must be placed on these fixed costs to maximize the impact of expense reduction efforts. Disproportionate attention to negotiating material costs that rise and fall daily won’t get you where you need to be. To ensure sustained success, every OFS company should have a multilayered plan for reducing fixed costs when conditions compel them to do so.
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Does your oilfield services firm have a solid plan in place to rapidly reduce expenses and reset operations when the market compels it? Our industry experts can work with you to design your optimal contingency plan. As a bonus, any inefficiencies identified in the process can be acted on today for better real time optimization and profitability. Request a Free Consultation today. We’ve partnered with more than 5,000 businesses in our 27 years and would love to put our knowledge and experience to work for you.
