For most of us, June is marking the month in which we start to reemerge into the outside world after months of lockdown. For sure, the world has changed – whatever we all did three months ago is likely to be done differently now, but for those of us working in the various energy sectors we are starting to re-imagine many aspects of our industry.
We have started to see an uptick in bankruptcy filings by US E&P and oilfield services companies, it is almost inevitable that this will continue through the remainder of 2020 and into 2021. Balance sheets structured for different assumptions of commodity prices, utilization rates or capital spend will increasingly need to be rebuilt through various methods from forbearance and foreclosure to debt equitization and asset sales.
Our firm and its Partners have a long track record of supporting the energy and infrastructure sectors. This includes experience of providing support during market downturns and contractions, not just through the growth of our clients’ businesses, but in all cases our role is fundamentally the same: the provision of advice and a service to secure human capital to augment the capability of an organization.
Competency Evaluation and Organizational Design
The most responsive and resilient companies are continually evaluating their competencies and adapting their organizational structures accordingly. This does not need to mean a complete overhaul of an organization, but when faced with such a dramatic change in existential factors as we have today, significant changes may be required to deliver on a modified business plan.
The review of organizational design and competency will begin in the ranks of senior leaders – whether managerial or technical experts – in order to provide the leadership to navigate through the challenges ahead. Reductions in force may be happening alongside such redesigns. Redeployment of staff may provide a solution to some issues, but ultimately new talent may be required to complement existing capability within the organization.
From our experience of working with our clients to design and refresh their organizations, whether it is in response to the successful delivery against a plan or in more challenging circumstances when external headwinds prompt a new strategy, this requires us to bring a genuine understanding of a client’s business along with the economic context and competitive landscape in which it operates, and an ability to thoroughly evaluate the competencies of individuals in an organization.
Many challenges facing our clients today require decisions to be taken with incomplete information. Where leaders lack experience of stressed situations a cost-effective solution can be the addition of seasoned executives on an interim basis to compliment and boost the existing experience and skill sets in the organization. This should be considered where the management of numerous external advisors such as law firms and financial restructuring advisors is reducing executive bandwidth (indeed, one of the requirements for interim leaders may be to effectively manage these advisors as well as other stakeholders, such as creditors and joint venture partners).
During the 2015 downturn in the oil and gas industry, we witnessed a rapid increase in the demand for senior leaders to join companies across the industry. This was particularly prevalent in private equity portfolio companies where there was interest to add judgment to bolster sound decision-making around the boardroom table, including the appointment of more executive chairs to drive action in a proactive and hands on manner. In some cases, there was also a subtext to this with investors keen to create succession planning optionality creating someone inside the business ready to immediately parachute into the Chief Executive Officer or Chief Financial Officer seats, should the need arise.
However, such interim talent may also be required in specific areas of the business – to reinvigorate or refocus a particular business unit or asset team, or to augment a function, such as human resources or finance, which may be facing significant challenge or change ahead.
Changing Needs of Changing Shareholders
An inevitable outcome of the current situation will be the equitization of the tremendous amount of debt that was raised to develop assets in the oil and gas sector over the recent past. In the previous downturn, the fulcrum security was often held by bondholders, rather than commercial banks, but there is growing evidence that things are likely to be different this time around. In reality, where a company and its creditors and stakeholders are facing the equitization of debt it commonly creates a very fluid situation. The trading of debt, with some investors pursuing a loan to own strategy, can leave Boards having to adapt to changing strategies and demands of their shareholders, or future shareholders, at short notice.
In addition to taking Board seats in the company, the new shareholders may want to overhaul the ranks of senior leaders, despite the best efforts and endeavors of Boards and executives. In the same way that interim leadership may be important to prepare a company as it goes into stressed situations, there is equal importance for a focus on new leadership for companies preparing to exit.
The shorter investment horizon for shareholders that arises in these situations can lead to a fundamentally different dynamic between shareholders and management and achieving alignment will be paramount. There will continue to be a requirement for management to have operational excellence, but with a laser-focus on cost and a drive to divest assets or sell the business in order to maximize return (or minimize loss).
Superior Human Capital
Thanks to changes made after the last industry downtown, many Boards and senior leadership teams are more balanced and better equipped than in 2015, but significant challenges remain for many companies. In a time of restructuring, superior human capital can make all the difference.
Ducatus Partners can provide advice to all parties in these situations – from the identification of competencies within an organization and any redesign or refocusing of the organization to deliver a modified business plan, to the identification of new talent, whether on an interim basis to add to existing personnel, or the replacement of leadership teams to meet the changing needs of new shareholders.