Factoring’s Role in Bolstering the Recovery of the Oil and Gas Industry

Just as it has done many times before, oil and gas is recovering from a difficult 2020 and is anticipating faster growth than any period since the 1970s. Factors will play a fundamental role in supporting this growth, but they need to adapt to the changing landscape to succeed.

BY: ED CLARK, VICE PRESIDENT, CHARTER CAPITAL

The oil and gas industry was experiencing a downturn before the COVID-19 pandemic hit. Crude oil dropped below $50 per barrel, the lowest seen in years, in early 2020 and then, as the pandemic pressed on, the contract futures price for West Texas Intermediate (WTI) sunk from $18 a barrel to nearly -$38 per barrel in April 2020, making history as it plummeted into the negative for the first time on record.

Companies within the oil and gas industry were quick to respond with cutbacks and consolidations, leaving no stone unturned as they attempted to weather one of the most challenging economies in recent history. While these maneuvers may well reshape the industry for the foreseeable future, they’ll also play a crucial role as the oil and gas industry bounces back in a way nobody thought was possible in April 2020.  

Coming Back on its Own Timeline

While most sources have been placing Brent estimates for 2022 at around $65 per barrel, Bank of America made headline news by predicting the mark to top $100 per barrel sometime during 2022. Giving credit to demand balances and tighter oil supply, the financial institution’s research arm said an average of $75 is more likely, with a reduction down to $65 per barrel by 2023 as production climbs again.

Meanwhile, Goldman Sachs, JPMorgan Chase and numerous other firms are anticipating around $80 per barrel for Brent even sooner, perhaps before this year concludes. While the timeline varies, experts seem to agree: The oil and gas industry is poised for a major recovery.

Enverus, which tracks more than 95% of the U.S. rig fleet, has also recently reported some promising numbers in its daily rig count. Despite having logged just 283 rigs at the start of August 2020, the organization tallied 578 at the start of August 2021, marking a 104% increase over the course of a year.

Impressive results have also been seen in the Primary Vision count of active U.S. frac spreads too. At the start of August 2020, just 70 frac spreads were counted. By the end of July 2021, the tally hit 239, marking a 241% increase in a year.

“We have every reason to be optimistic,” Gregory Brown, founder and executive manager of Charter Capital, says. “It’s possible there may be a decrease in demand, but the recovery has been amazing and the industry is doing what’s necessary to sustain it.”

Lower Headcounts and Continued Consolidation 

There is an old saying that “necessity is the mother of invention,” and the oil and gas industry has more than taken it to heart since the 2020 reductions emerged.

In addition to widespread furloughs and pay cuts, an estimated 107,000 oil and gas employees have been laid off during the pandemic. Although the industry is largely cyclical in terms of growth and employment, Deloitte predicted “About 70% of jobs lost in 2020 may not come back by the end of 2021 in a business-as-usual scenario.” Silence from the Energy Corridor speaks volumes in this respect.

Now referred to as “The Great Compression” by Deloitte analysts, consolidations abound as companies adapt to reduced consumption, low prices and reduced workforces. By the end of the year, fewer than 10 companies could own 50% of the United States’ onshore oil, according to a report from the Houston Chronicle citing Accenture analysts, with big deals by Chevron and ConocoPhillips recently closing. Meanwhile, Exxon Mobil is on the hunt for solid acquisition targets, according to S&P Global Market Intelligence reports. The agency also noted that shale, which has historically eschewed M&A, will be exploring strategic mergers, a move that would strengthen the currently fragmented industry.

Smaller Supporting Businesses Will Rise

Despite a rise in acquisitions, it’s not merely a case of big corporations getting bigger, according to Joel Rosenthal, founder and executive manager of Charter Capital.

“Contractors have been filling the gaps left behind by layoffs and furloughs, so many of the independents and smaller companies are gaining ground too,” Rosenthal says. “While it may wain to some degree as consolidation continues, organizations are working leaner and conserving in new ways, which leaves the door open for top performers to maintain their relationships going into the boom.”

Rosenthal notes that small businesses in oil and gas are grabbing up government contracts too. The Department of Defense, for example, just signed contracts with seven small businesses to help the U.S. Army Corps of Engineers build oil and gas pipelines and related structures to the tune of $349 million over a seven-year period.

Factoring’s Major Role in the Recovery

Despite the promising future and growth, small businesses supporting oil and gas are coping with new challenges, such as how to manage hiring, overhead and increased expenses at a time when the industry continues to pay invoices slowly.

“From the outside, it might be easy to think all these companies are just waiting to be acquired,” Brown says. “On the contrary, many are landing lucrative contracts and putting people back to work. They’re turning to factors for help funding these endeavors and to bridge gaps between payments as banks tighten up again.”

Factoring is still playing a role with the group of companies exploring their acquisition options too, as this form of financing gives companies the cash they need to maintain operations without taking on debt that might otherwise derail a potential deal.

Account Monitoring and Diversification

Given the current climate and consolidations, factors must shift their business models to remain successful too. Although factors have always monitored credit, they’ll need to keep a closer eye on it moving forward. In addition, while bankruptcies remain a potential risk, overextension of credit will become a greater concern as businesses ramp up to meet demand.

Another area of consideration going forward is underwriting. Good margins, lack of encumbrances against receivables and absence of legal problems and tax liabilities will become increasingly important as the landscape shifts and companies change hands. Factors may want to revisit their conditions for mergers, acquisitions and bankruptcies as well. For the sake of service and maintaining strong relationships, it’s wise to review these types of situations with clients to avoid any potential misunderstandings.

“Diversification is always essential for factors, but it’s arguably even more important today,” Rosenthal says. “Although the oil and gas industry is poised for an incredible recovery and boom, a diversified client base will ensure factors maintain their position and can continue providing their invaluable services to the oil and gas industry for years to come.”