Economic crises are common occurrences in Oil & Gas. When a downturn comes again, how will you immediately reduce SG&A expenses to stay profitable? If you can’t say for sure, then you’ve got work to do. This quick read breaks down how to ensure you’re prepared.
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, what you’ve done to prepare will determine your fate when the dust settles.
BE READY TO ACT
When crises hit, quickness counts. 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 ahead of time. Every moment spent weighing them after the fact means more cash bled and increasingly lower survival odds. You 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, one’s 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 in your business and examine them in the context of crisis.
1. PAYROLL AND BENEFITS
– Savings in this area can go a long way. While it’s likely not something you want to do, you must be ready to cut your payroll (even by half, if necessary) or, in some cases, to furlough employees. Questions that inform how this would happen include:
- Do we know via performance reviews who our top performers are and who makes up the bottom tier? Who is 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?
– 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.
– 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, you can renegotiate an entire line of ABL credit. However, consider these points:
- A forbearance route may be required as part of the renegotiation. In essence, this renegotiates the debt for a defined period to provide you relief.
- Some cases call for a move toward a pre-packaged bankruptcy. If planned properly, your company can emerge stronger and more resilient. However, waiting to the last minute will force you to the back seat of what happens with your company and its assets.
– 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 one’s 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.
WE’RE HERE TO 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 multi-layered plan for reducing fixed costs when conditions compel them to do so.
Reach out and we’ll schedule a call to learn more about your company and see how we can help.