As we move into our 7th month of economic distress due to COVID and the recent drop in oil prices, many firms are facing difficult headwinds. For some, the solution lies in cutting costs quickly enough to regain profitability. Those are the lucky ones. Other firms are at a critical juncture where they are considering some sort of restructuring or turnaround strategy. And while restructuring consultants are adept at navigating the legal angles, finding bridge or DIP financing, and ensuring that court filings happen on time, distressed firms can also leverage consultants with deep industry performance expertise. In addition to simply understanding the operating business better, these consultants can use their strong networks to bring together joint and collaborative investment potential for additional value creation. This is especially true in upstream oil & gas, midstream and oil field services where industry complexities require specific expertise.
Regardless of industry, the restructuring playbook has a few common functions:
- Obtain DIP financing
- Run the business through the process
- Ensure that the extensive court filings are complete and delivered on time
These are all vital steps and ensuring they happen on time and on budget is essential to any restructuring. But in both 2015 and in 2020, we’ve seen companies augment this common playbook with an enhanced approach to restructuring to capture additional value. Here are a few of the missing pieces:
- Staging cost-cutting related to field costs, labor utilization, and 3rd party vendor costs
- Cash acceleration
- Long– and short–term strategies around asset optimization utilizing decision tree scenarios
- Developing long and short–term investment strategies
- Variablization of the workforce to improve labor utilization and costs
Let’s take each of these in turn.
Cutting costs during restructuring is clearly essential. But timing matters. It requires cost analytics by cost element and analyzing the timing of source spend on 365 day and 52–week cycles. This type of analysis allows the organization to identify what moves costs, the source inside the organization triggering the costs, and the organizational buying patterns.
Cash acceleration is also vital. Simple approaches like asking vendors to pay more quickly can be difficult after filing. Cash acceleration can be improved by understanding the core areas that slow cash down as it moves through the business such as: commercial contracting, field operations, settlement and invoicing, and collection.
Points 3 and 4 are about having the right people on the restructuring team. Taking the upstream space as an example, the right mix of assets for the restructured company is vital. This not only involves selling properties but potentially buying them as well. Getting this piece right takes different skill sets than those deployed by typical restructuring consultants. Value gets unlocked by deploying a multi-disciplined team with prior successful experiences to enhance strategy and identify potential opportunities.
Finally, both in the restructuring process and on a go-forward basis, companies can gain significant value by variabilizing their workforce. Most companies hew to traditional corporate structure where nearly everything is in–house with committed salary-based structures. Properly transforming labor utilization requires a desk output model scheduled on 365 daily cycles and 52 weekly cycles tied to the volume of work. These daily and weekly models identify work produced and allow the organization to eliminate non-productive employee time that creates idle cost. Through these data analytics, the organization gains the information needed to modify roles and leverage a gig economy or a just-in-time, agile workforce, reducing expensive static labor. Firms can also identify what is invested and what is produced for that investment, allowing the organization to assess the value of the output. We’ve found that upwards of 35% of the field operations, finance, accounting, land, and IT functions can successfully be variablized in restructuring and turnaround situations.
With COVID-19 and weakness in the oil markets, we’re seeing a huge uptick in companies under duress. However, more focus on new operating models can unlock value. Restructuring is hard. It’s hard on employees, hard on bondholders, and hard on management. But we’ve found that enhancing your restructuring playbook with:
- Strong field asset analytics
- Accurate and timely financial data
- Workforce productivity analyses
- Constant focus on capital allocation and structuring
provides the missing piece that aligns the turnaround and the growth strategy, generating significant added value through the restructuring process.
Brian Spector, Chief Development Officer – Sirius Solutions, L.L.L.P.
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