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The Fixer Is In With Oil/NatGas Balance Sheet Home Truths

During the shale boom, companies jumped into the oil/gas patch because there was money to be made. Now it seems that there are more lessons to be learned than dollars earned.

Jonathan Collura's Dallas-based 1836 Capital LLC recently launched Texas Oil Capital LLC, targeting consulting services to oil and natural gas field operators who might be long on industry expertise but short on the business savvy necessary to make it through a depressed commodities cycle. When money was flying in the door, things like balance sheets, forecasting and managing investor expectations weren't that important for many, Collura told NGI's Shale Daily. They are now.

"The focus of my business is on the field companies that are impacted most by this," he said. "Obviously, you've got the bigger companies...that tend to have deeper pockets...It's the independent operators who don't necessarily have the experience to be able to make it through a down cycle in business."

Collura has lately worked with a pipe hauler and some frack sand haulers. He's looking for clients that were successful during the boom days but need to know what to do now that the easy money has dried up.

"I'm looking for groups or companies that have had success but who with the collapse really need to get down to the nuts and bolts and business basics to be able to figure out how to manage through the downturn and also figure out how they can essentially manage the balance sheet," he said. "What I've found with most of my clients is that they don't understand the balance sheet. Really, I think that's where it all begins."

Many smaller companies didn't pay much mind to balance sheets and other business basics because they didn't have to when times were good, Collura said. He recalled one company with nearly $4 million in annual sales. "They did their financials just by looking at bank statements."

For those struggling to make it through the energy patch lean times, the first rule is "Do not expect that it's coming back anytime soon," Collura said, referring to higher oil and natural gas prices. Prices are depressed and probably will remain so through at least most of next year, he said. "I find that to be a huge mistake that a lot of the operators are making right now. They're saying, 'If we can only hold on until it comes back.' They need to manage to the now and build a plan based on existing expectations."

The second rule is to realize that new capital isn't always the answer. "It can be a patch. Often it's just exchanging one debt for another. A lot of these operators don't understand that if they go and get an investor, that is also a liability on the balance sheet."

The third rule involves having a business plan and a contingency plan, understanding the difference between finance and accounting. It's also important for companies to know what metrics are considered reasonable in their business, what an asset test should look like, etc, Collura said.

Seeking help sooner rather than later is key, Collura said. So is talking to one's financial backers and not hiding from reality. "Most of them put their head in the sand. The operators assume that if they're not communicating with the bank, the bank isn't going to assume that there's an issue there," he said. "I've spent quite a bit of time with banks, and what I always found was that the clients that communicated were the ones that got the leniency and also got the help that they needed.

"Silence is the worst thing you can do because they will absolutely assume the worst."

While some companies were neglectful of their balance sheets, some bankers also showed a lack of restraint when times were good, Collura said. "We saw equipment [loans] going up to even 100% of cost at times on the lending side," he said. "It's really easy to make a pro forma that looks good, but you can't assume it's always going to be going in an upward direction. Just as we have operators who haven't been through multiple [commodity/business] cycles, we have lenders that haven't been through multiple cycles."

He said lenders were unrealistic, too.

"What I think is going to happen here, not just on the gas side but also on the oil side, in Q1 the regulators are going to come in and start looking at potentially doing mark to market [accounting]. That's why it's absolutely essential to have a plan in place to be able to show the financial partner...because those will be the last companies that they'll look at because they'll feel that they're taking the positive steps. It's the companies that bury their head in the sand that will have the first wave of the issues."

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