2016 IECA Conference: 4 Key Insights To Navigate Energy Industry Risks Ahead
As the proverb goes, “knowledge is power”.
We couldn’t agree more, and recently, we joined the global energy credit community in Austin, Texas for the International Energy Credit Association (IECA) Conference, to swap knowledge and experience.
On our return, we wanted to share some of the event’s most valuable insights with our readers, to help you navigate a turbulent time for the industry. So, here are four big takeaways you should be thinking about today.
1. Most oil and gas companies face borrowing base redetermination in Q4 2016
On day one of the conference, we were told that most oil and gas companies would go through borrowing base redetermination during the final quarter of 2016. Why is this significant? Because it could see lenders slash the amount of cash your customers can access.
Borrowing base redetermination sees lenders reassess how much capital they will lend to oil and gas companies, based on the value of their reserves, assets, and other factors. According to a Haynes and Boone survey of executives across financial and oil and gas firms, 41 percent expect borrowers to see their borrowing base cut. Ouch.
What can you do?
This could heighten the financial distress your customers are already experiencing, so what can you do to reduce your risk exposure? Here are two important steps for starters.
- Watch the financial risk score for each of your customers, for advance notice of deficiency. Our FRISK® score is a reliable early warning sign that a public company’s financial health is deteriorated and bankruptcy risk has increased.
- Tighten up on your credit risk monitoring, using company news alerts to track changing financial conditions.
2. Patterns can help us predict energy company financial distress
One other big reminder was how patterns can help us to predict and avoid deteriorating credit for public companies. If you needed any evidence of why this is essential, consider the following statistic.
S&P reports that global defaults have risen to levels not seen since 2009, and oil and gas companies account for 25 percent of the total.
Sadly, we can’t see into the future, but by looking back in time at past business failures in the industry, you can spot the red flags that signal an energy company in distress. By applying these patterns to your credit risk monitoring framework, you gain something close to a crystal ball for spotting trouble within your portfolio.
Conveniently, we recently published a blog outlining the pattern of energy company financial distress. Here’s a teaser of danger signs to watch for:
- Unfavorable performance ratios such as declining operating margins for successive quarters
- Equity issuances as the company explores other financing options
- A sharp drop in stock market capitalization over the course of a year, adjusted for dividends
It’s wise to know the full range of early warning signs, so you can proactively manage risk and sidestep loss at the first sign of trouble. Click here to read the blog post, Oil & Gas Bankruptcy, Strategies to See it Coming.
3. Teamwork has never been more important to credit management
We also heard how, in such a volatile sector, close collaboration between credit managers and the legal department is more important than ever.
Credit guides the creation of agreements based on what they know about the customer, the risk they pose, and the organization’s own appetite for risk; the legal team then ensures the final agreement is completely watertight in the face of trouble.
Stressing the close collaboration between legal and credit as a backdrop, the presenters offered a helpful series of questions to ask, in the event of a counterpart’s deteriorating financial health:
- Is my counterpart already in default?
- If not, can we take action to accelerate?
- Can we demand adequate assurance or further collateral?
- Can we net payments or withhold payment?
- What happens to the trading book if positions are terminated? Can steps be taken to mitigate early?
- Are there low risk commercial opportunities that might be attractive to counterpart?
- Are there accounting or other implications to terminating?
It's counterintuitive, but sometimes the best course of action is working closely with a distressed company’s management, and building an even stronger relationship, which can lead to greater business opportunity once the company emerges from bankruptcy.
4. Qualitative and quantitative signals are fundamental to mitigating risk
Every IECA Conference session -- whether focused on credit analysis, default, bankruptcy, recovery, or other credit challenges -- reminded us of the importance of having the most up-to-date information at your fingertips, and using both quantitative and qualitative data.
And with so many numbers out there to crunch, it’s easy to lean on algorithms too heavily, which can mean you overlook the nuggets of evidence that are hidden in the news.
That’s why we provide real-time updates for every portfolio company, from a variety of sources -- agency ratings, SEC filings, financial statements, market information, financial risk scores, and more. With timely warnings, you can have confidence that your credit determinations haven’t missed an important new signal.
There were plenty more valuable insights shared during the four-day IECA Conference. Thank you to all the presenters, who generously shared their knowledge to help the energy credit community navigate the risks ahead in today’s tricky energy sector.
Learn how to detect credit deterioration for your energy company counterparties:
Download the checklist, 19 Red Flags That Reveal Energy Company Financial Distress
CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of more than 56,000 global public companies.
At the core of CreditRiskMonitor’s service is its 96%-accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z”-Score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $140 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.