The McManigle Company

by Drew McManigle State Bar of Texas Bankruptcy Law Section Newsletter May 2015

The oil & gas industry forecasters, experts and prognosticators are all wrong.

To find the clues to the future of oil & gas and the overall effect on the general economy you don’t look back to 2008, you need to go all the way back … to the 80’s. 2008 was an anomaly for the entire economy, not just oil & gas. To look back only seven years obfuscates the reality of what has occurred without providing clear historical perspective. The 80’s oil & gas bust and its aftermath provide the necessary historical, contextual, operational and economic framework to begin to understand what’s happening today, and what will likely happen tomorrow. As a veteran of both the O&G and restructuring industries, I can’t forget the 80’s bust; it’s where I made my bones – and I still have the scars to prove it.

Many forecasters and experts in the early 80’s made statements like this one in forecasting future oil prices for 1985: “Conservative estimates project a price of $80 a barrel, even if peace is restored to the Persian Gulf…” National Geographic, 1981. Oil then promptly dropped from roughly $40 BBL to lows in the teens, seemingly overnight.  In the heat of the chase, almost everyone forgot the principals of cyclical business segments…what goes up must (and will) come down.

Here’s how it works: Prices wobble and drop like a rock. Rigs and equipment, of all types, get stacked. Asset values decline precipitously and sometimes go to zero. Customers balk at prices. They demand, and get significant price reductions eliminating profitability as businesses “churn cash” to stay afloat. Revenue drops and cash flow dries up. Jobs, many jobs, simply evaporate. Bankers don’t lend anymore. They want more collateral, lines reduced, loans paid off…but with what? Delinquencies on everything from trucks to boats to homes and credit cards all rise. The word “default” enters into every day conversations. The business roller-coaster that was so much fun to ride up is now a terrifying free falling elevator. No one knows what’s going to happen next. Everyone has an opinion. Oil traders daily froth the markets. From the petroleum clubs to the coffee shops to the oil fields, everyone hangs on each new analysis and opinion about when oil prices will calm and rise; all seeking consolation where there is none.

In the 80’s a little known Oklahoma shopping center bank called Penn Square folds, and it is in retrospect, credited with being partly responsible for the collapse of Continental Illinois National Bank and Trust Company of Chicago which had to write-off some $500 million in loans purchased from Penn Square (mostly oil & gas). Major losses eventually occurred at other banks like Seattle First National Bank, Michigan National Bank, and Chase Manhattan Bank. The MBank system goes bankrupt along with Global Marine and scores of other businesses and “formerly wealthy” individuals. Significant industry consolidations occur. Ripples are felt throughout housing, retail and other business segments. The bust from the oil & gas industry creates a boom for bankruptcy lawyers and related professionals.

Some theorize that this cycle will be different (e.g. shorter or less severe) because there is non-bank money available from private equity, hedge funds or non-traditional lenders, allegedly all awash in cash, who will swoop in with free flowing billions to save companies and their stakeholders. But, private equity and related firms are the predatory sharks in the business sea. They are all built specifically to find targets, assess and acquire (or lend to) them at the most advantageous moment on the most advantageous terms. The consensus that someone, anyone will step-in and save the O&G industry from future trauma at this early stage of the cycle, seems to me indicative of those exhibiting the early symptoms of the seven stages of loss and grief, beginning with shock and denial heading with a bullet towards bargaining.

Free flowing money created the problems for banks in the 80’s and today is no different. Contrary to popular myth, no one has ever “drilled their way out of trouble” and no one has ever solved endemic industry issues by throwing cash at the problem. An industry bailout, by anyone, at this juncture seems at best, premature and at worst, unrealistic.

The recent oil boom was longer. The capital flowing in was greater and ironically the industry was remarkably more successful in producing hydrocarbons, albeit at greater drilling and production costs, than in decades. This oil & gas down cycle is only six months old and most, if not many, are already trying to find light at the end of the tunnel. Unfortunately, this tunnel is still being dug…

Instituting thoughtful procedures, metrics and a sustainable culture can provide a scalable template for future growth. Creating this winning formula and implementing it, the procedures, both clinical and operational with a grounded, seamless growth strategy designed to consistently drive patient care and profits is the goal and object of the exercise. The resulting high patient and employee satisfaction is a by-product of these efforts as is, being recognized as “best in class”.

1. Develop a multi-tiered communication plan to create a unified transition and anchor new cultural norms.
2. Develop a detailed project plan to assure consistent patient treatment and experience. Create a clinical project plan to integrate operations including machines, staffing levels and facility management.
3. Implement standardized performance metrics to track consistency of performance and operations.
4. Assign leaders who are accountable and motivated to on-board new staff, oversee training and interface with physicians, employees and patients across both culture and process lines to assure compliance and understanding of the “new”paradigm.
5. Develop and communicate an integrated plan for the transition, implementation and change to technical, software and related aspects post integration.

By Drew McManigle and Laurie Brunner

An old gambler’s adage — “Scared money never wins” — is as timely today as it was when it was coined in the 1940s. Only now, the phrase should be top-of-mind for CEOs and their management teams as they strive to define and implement successful strategies in today’s uncertain business environment.

The economy remains sluggish. Unemployment remains high. And stubborn challenges continue to vex nearly all business segments, with little material improvement expected anytime soon. As an executive, should you be worried about your future prospects? Absolutely.

Indeed, research conducted by MainStream Management forecasts that high unemployment will persist. While the unemployment rate has decreased from a high of 9.4 percent to 7.8 percent in January 2013, it fails to tell the whole story and its drop does not mean that economic good times are a’ rolling. First and foremost, the unemployment rate does not account for the duration or permanency of jobs being lost or gained. Nor does it reflect the impacts of production efficiencies and population growth — both long-term drivers of employment gains. But, there is some good news, as structural shifts in employment will produce a distinct group of winners based on two factors:

1. The private sector’s ability to take advantage of changing workforce demographics and technology innovations,

2. The right incentives and regulatory support from the public sector to allow private enterprise to succeed.

With full-fledged financial deleveraging occurring in the private sector, lower levels of spending and income growth at the consumer level, and government policy decisions in the balance, the appetite of business leaders to invest in growth has waned. But, after four years of streamlining operations, cutting costs, and pruning unprofitable business lines, organizations can no longer save their way to success. Moreover, waiting for the “old normal” of a robust economy is not a winning strategy, considering that any meaningful economic growth is at least several years away.

“Yikes!”

With that bleak picture before us, who can blame business leaders for feeling tempted to shiver under the covers in the morning rather than bounding out of bed to confront the many-headed monster lurking just outside the door of their company headquarters?

CEOs, leaders and stakeholders are asking themselves, “OK, the economy’s not great, there are ‘Big Hairy’ unknowable/unsolvable issues like the federal deficit, the sequester, ObamaCare costs, new regulations and similar yucks that scare the hell out of me. So, now what?”

This is where you have to remember: Scared money never wins! If you allow the fear of uncertainty to dictate your thinking and your decision making, it will choke you into hunkering down. This is a strategy that your business cannot afford.

Even rappers, Young Jeezy ft Lil Wayne, sing it right: “Scared money, don’t make no money.” Being tentative, or worst of all — doing nothing, is analogous to playing with scared money. Scared money makes suckers’ bets. Scared money gives your competitors the upper hand. Scared money retards business growth. When you come right down to it, it does mean no money.

Positive Action.

This is a time for cool-headed, growth-oriented thinking and positive, productive action. Savvy CEOs and their teams can use this challenging environment to stay ahead of the curve. Here are three suggestions toward that end.

1. Plan: Develop thoughtful short- and long-term growth strategies and begin boldly investing in those strategies now. We can hear the griping: “How can anyone realistically invest when there is so much uncertainty?” Consider Polaroid or Montgomery Ward or Bethlehem Steel or Borders Books. The former CEOs of these and other fine companies that didn’t make it likely thought the same.

The question is relevancy. How do we keep our business, our products, our operations and our people relevant through this cycle and into the next? Answer: Well thought out, broad and detailed business, operational, growth and acquisition/sale strategies that can be implemented quickly.

As an executive leader operating in challenging times, having a full quiver of pre-planned, vetted and agreed-to plans that cover just about any real contingency provides: A. the confidence to act quickly whenever necessary; B. the ability to sharply focus on what matters most and the ability to measure performance against these priorities; C. the impetus and the compass to take full advantage of opportunities or challenges that may arise; and D. the nimble capacity to adapt and make tactical adjustments in executing the plan.

After all, you don’t want to go into a knife fight with a rock, right? We prefer keeping a sharpened Ka-Bar handy. (The odds are better… but that’s just us.)

2. Improve your product capabilities and operational processes: Now may be the time to consider making thoughtful, targeted and strategic (there’s that word again) capital improvements to revenue-generating production equipment and materials. And no, we’re not suggesting going out and upgrading to the G-VIII because you think you can get a deal. But, many are sitting on squirreled-away cash that could be used to improve efficiency, performance or gain market share.

As an example, because of the depressed real estate market, perhaps it’s time to move to that larger, more efficient space with better transportation access. Or, perhaps it’s time to look at several of your ailing competitors, take advantage of their poor planning and capitalize on an acquisition that drives market share and removes competition. And, in this economy, there are deals to be had in new and used production equipment.

Yet, the best options may be the least thought of. Change your paradigm by taking an outside-in review of your operations. Working with your customer to define specifications and improve supply chain efficiencies can create significant competitive advantage. Or step back and analyze production locations. Overseas sites might have made economic sense 10 years ago, but there is a decent probability that their raison d’etre has lost the shine with higher costs of overseas labor, production lead times and “I want it now” customer demands.

Of course, all this takes a longer-term view and proactive leadership. (‘Just sayin’!)

3. Trade-up personnel: Making “people changes” is always a tough subject, especially now when we all recognize that to lose one’s job means there is no assurance that another similar opportunity will come along for a particular individual. But no one ever said leadership was
going to be all country club golf, canapés and martinis at 5 p.m. Take a real and pragmatic look at your bench from top to bottom. And, have all your direct reports and line managers do the same thing. This can all be undertaken with the care, diligence and high degree of respect it deserves.

The reality is that with high unemployment, there are great opportunities to upgrade personnel with relevant or even better skills, who are highly motivated, can bring fresh ideas and energy and, yes, may be more economical to on-board. As CEOs we’ve all had our share of “Old Bob” or “Bobbie” — you know, the guy or gal who has worked here since “The Flood.” Everyone loves him or her and customer(s) rave — or so you are told. But somehow you just can’t figure out for the life of you what they do all day. Sound familiar?

Leaders who eschew this opportunity to improve the quality and level of their team, across the board, are missing the boat. Dropping this ball shortchanges you, your team and your stakeholders.

Time to be Bold.

Unless your company is literally in the gambling industry (and if you happen to run a real casino, you know the truth about that “scared money” adage), you understand that business is not a game of chance. You’re not “betting” on the future — you’re planning, executing and
managing for growth, even though that future is fraught with uncertainties.

Every age in history has its challenges and uncertainties. And every age in history has leaders who figure out not only how to survive, but how to thrive and grow amid those challenges.

Leaders must have the forethought, diligence and nimbleness to take advantage of opportunities. They must lead the development of realistic and actionable growth strategies that incorporate business, product and operational improvements to capture market share. And, all
the while, have the courage to make the necessary changes and upgrade talent at all functional levels to meet the evolving needs of the business.

Bold leadership is never easy, and its results are never guaranteed, but — fear not — investing in success is always worthwhile.

“All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership.”

~John Kenneth Galbraith