Crude oil prices have been stagnant at historic lows in recent months, with prices averaging around $45 a barrel. With the industry in the middle of a flux, upstream and downstream operations are considering financial restructuring to head off any ill effects. Restructuring downstream operations can be a tricky business, but when done effectively, it can save your company valuable resources.
Pressure From the Banks
Typically, upstream and downstream operations depend on reserve-based revolving loan financing combined with unsecured bonds to fund their activities. RBLs function on semiannual redeterminations for funds. In the wake of the industry’s flux, RBL lenders and their agents have tightened their reins, lowering the amount of available liquidity to those companies that are already feeling strain from market lows.
RBL agents are becoming increasingly reluctant to work with the oil and gas industry thanks to increasing regulatory pressure from U.S. banks. The Federal Reserve has advised banks to limit their exposure to riskier oil and gas enterprises, which has translated to borrowing base reductions to oil and gas entities—an approximate 9% overall decrease according to the Wall Street Journal.
Available Options for Improving Liquidity
Oil and gas companies have been scrambling to free up assets to keep their businesses afloat. Strategies vary, but they can include taking a second or third lien on loans, buying back notes at a discount, selling non-core assets, and establishing joint ventures. Once companies have exhausted these resources, they may find themselves at a loss as to what to do next.
Next Steps: Restructuring Your Oil Business
With the lack of available liquidity, oil and gas companies are forced to consider other options to keep their businesses in the black. Cost-cutting measures are often not enough to keep companies afloat. Left with little of other choice, many are considering restructuring. This comes in a couple of different forms:
- Non-ratable debt exchange. This is a process by which unsecured noteholders are provided with the opportunity to exchange their unsecured debt for secured debt (or sometimes, cash). In essence, the company can decrease its overall indebtedness because the secured debt has a lower principal. It’s advantageous because the process can be quick and private, as they aren’t subject to tender offer regulations. However, for the same reason, they can leave you vulnerable to litigation from noteholders who don’t get a chance to participate in the conversation before the exchange has been made.
- The reverse Dutch auction. This exchange structure is popular with some companies depending on their overall goals and the current climate. A reverse Dutch auction allows the enterprise to buy back its debt for the lowest market-clearing price. Since it’s governed by tender offer regulations, the process can be time-consuming and complicated. On the flipside, it’s a less risky option, as all noteholders may have the opportunity to participate—especially if the company registers through the SEC.
Conducting a Restructuring: What You Need to Know
When considering a financial restructuring, directors need to be familiar with the term “fiduciary duty.” Simply put, you must act in a way that’s beneficial to your company and your shareholders. Your strategic plan should include the involvement of the board of directors and possibly a special committee that works with advisers to come up with the best plan for your unique circumstances. Consider several possible scenarios before choosing the financial restructuring plan that best suits your enterprise.
Your company’s structure likely shields the directors from personal liability, but there are exceptions. Talk to your business adviser for more information and to ensure your personal assets remain protected in the event of a financial restructuring.
