Energy Industry Bankruptcy Is Soaring. Are You Prepared For Increasing Risk?
Extreme financial turbulence in the troubled energy industry has crippled many energy companies, and threatens to sink even more. As always, the shockwaves from each new business failure are felt by a long list of counterparties.
As the financial storm in energy markets seems likely to worsen before the clouds disappear, now is definitely not the time for a ‘business as usual’ approach to credit risk. Being proactive is a must, to keep your company out of harm's way.
Energy Firms Failing In Record Numbers
Oil market turbulence and excess leverage has caused one business failure after another, and there’s no quick fix in sight. Energy firms continue to fall like dominoes.
- According to Haynes and Boone's Oil Patch Bankruptcy Monitor, a total of 102 North American oil and gas producers have filed for bankruptcy since 2015, 58 of which occurred in 2016 alone. This figure is on the rise, as more businesses fail with each passing month.
- Global defaults have risen to levels last seen in 2009, according to S&P Global Market Intelligence, with oil and gas companies accounting for around 25 percent of the total.
- A look at the FRISK® Stress Index also spells more trouble ahead for energy firms. The October 2016 index for domestic oil and gas extraction, for instance, is +394% higher than before the last financial crisis. Public company bankruptcy risk in the sector now exceeds the level just prior to the Great Recession.
- Whether creditors will ever see the money they’re owed is another uncertainty, as recoveries are well below the historical average.
Forewarned Is forearmed: Are You Prepared?
There's a famous expression: “Forewarned is forearmed. To be prepared is half the victory”.
While these words ring true in many contexts, they’re particularly appropriate for credit managers in this very troubled industry. Given the market’s instability, you have your work cut out for you, to detect risk proactively.
Our subscribers -- your peers -- tell us of one instance after another where a once-strong customer would suddenly get in a tight spot, putting them at risk unexpectedly. In many cases, they nearly failed to dodge the bullet. But, armed with the right tools to detect growing financial stress, large losses were avoided.
Strategies to Fight Credit Risk: Visibility and Agility
Bill Danner, President of CreditRiskMonitor, has said: “Usually a public company failure is a train wreck in slow motion. There are lots of signs, and plenty of time to deal with the situation.”
With this thought in mind, here are 4 strategies that can help you to effectively manage bankruptcy risk and reduce exposure:
- Identify which customers are most at risk, out of the thousands of customers that make up your A/R. For instance, by contributing your trade files, you can drill down into those customers experiencing financial stress and most in need of monitoring.
- Monitor changing financial risk levels, to pre-empt future problems. A reliable financial risk score like the FRISK® score can sound the alarm bells when a customer’s financial health is declining, giving you time to get out or take other action.
- Learn to spot the most common reasons for public company business failure. There's a clear pattern of public company financial distress, readily apparent from financial reports, SEC filings, and capital markets. To learn more, read the checklist 19 Red Flags That Reveal Energy Company Financial Distress.
- Automate your process to monitor changing conditions related to your portfolio companies. Using a notification service like CreditRiskMonitor’s news alerts ensures that you have timely warnings in time to act.
Bottom line? Business failures don’t just come out of the blue … they are predictable, and can be anticipated and planned for.
The right toolkit alerts you to changing business conditions on a timely basis. This will empower you to make the right decisions at the right time, to minimize risk and avoid financial loss.
Do you know where risk is hiding in your credit portfolio? Learn how CreditRiskMonitor can help you target your high-risk customers, and alert you to financial distress.
Read the Ultra Petroleum Corp. bankruptcy case study
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.