This spring, the consulting and research firm Deloitte produced a report that revealed a shocking statistic: As many as one-third of all oil and gas producing companies are at risk for bankruptcy in the coming year.1 Analysts at Reuters explained that although oil producing companies have been able to weather the downturn thus far, most are now reporting huge losses and dealing with large sums of debt.2
The Deloitte study did contain some positive news: Oil field service companies that provide staff and equipment for oil producers are at lower risk and filing fewer bankruptcies than the companies they serve because they carry less debt and have lower capital costs than oil companies. Unfortunately, the trickle-down effect will certainly affect the fortunes of service organizations, too, as oil companies continue to make cuts.
If you or your customers participate in the oil and gas industry directly or indirectly, you know the affects lower gas prices are having just as well as all players in the field do. Customer bankruptcies don’t come out of the blue; they arise from situations such as this very downturn. Regardless, a bankruptcy can be a nasty shock to your company if you’re caught unpaid.
Savvy credit managers are already watching for the fallout. Proactively protecting your company from losses in cases of customer bankruptcies is well-worth your energy. Here are a few ideas to help you protect your money and company before a customer’s situation becomes serious:
- Set up clear credit terms and stay on top of payments. Don’t be afraid to remind customers of your terms as soon as you invoice them, and follow up with frequent reminders.
- Watch for payments that used to be on time and are getting behind. If you have a customer who is falling ever further behind, take steps to get payments caught up before the customer hits the point of not paying at all.
- Regularly check credit reports. Don’t assume that checking a customer’s credit once when you set up the account is good enough. Review customer credit periodically and note and address any issues before your customer reaches the point of bankruptcy.
If you’ve already been caught off guard by a customer bankruptcy, here are some key points to remember:
- Stop all collections activities. The law provides protection to companies in bankruptcy, so you must stop trying to collect from a business that has claimed that protection; contacting the business in any way can give its lawyers grounds on which to sue — and you will be unable to collect in the end.
- Do a cost analysis. Is the sum of money owed worth fighting for? It may be more cost-effective to simply write off the debt and move on.
- Understand the type of bankruptcy. Is the company reorganizing or going out of business? The type of bankruptcy the company files — Chapter 7, Chapter 11, or Chapter 13 — will determine the process for filing a claim for payment.
- File proof of claim. Read the bankruptcy filing notice to see when your proof of claim must be submitted. Doing so will serve as a notice to the court that you are owned money and put you on the list of creditors to be paid when any assets are divided. Failure to do so within the allotted time will eliminate you from any future payment.
- Attend the creditors meeting. To stake your claim, attend the “341” creditors meeting to have a say in the repayment plan.
- Review the repayment plan. To put a repayment plan in place, the court auditor needs to have approval from more than 50% of the creditors covering more than two-thirds of the total debt. If you all approve, the repayment plan will be put into place. If not, a new plan will be devised.
Although the oil and gas industry is the group making headlines for its bankruptcy risk these days, no company is completely immune. These best practices will help you see — and head off — trouble before it happens with any of your creditors.
1 Deloitte. 2016. “The crude downturn for exploration and production companies.” http://www2.deloitte.com/us/en/pages/energy-and-resources/articles/the-crude-downturn-for-exploration-and-production-companies.html
2 Scheyder, Ernest. 2016. “High risk of bankruptcy for one-third of oil firms: Deloitte.” Reuters, February 16. http://www.reuters.com/article/us-usa-shale-bankruptcy-idUSKCN0VP0O6