COVID-19 and the Energy Industry
Oil markets have experienced extreme volatility amid rising concerns over the economic impacts of COVID-19. Oversupply, exacerbated by the recent price war between Russia and Saudi Arabia, has driven commodity prices to fall nearly 70% since the beginning of the year, slumping to their lowest levels since the Great Depression.
As the lingering effects from the oil price war and the challenges imposed by the coronavirus pandemic continue to be felt, it is becoming increasingly clear that the energy industry will likely face substantial headwinds in 2020. As a result, many companies will be forced to restructure, whether through out-of-court negotiations or a Chapter 11 proceeding.
Key focus areas
The following priorities are fundamental for effective crisis management and business continuity planning:
Focus on near-term liquidity and access to cash
Update and stress-test liquidity forecast
Evaluate financial covenants and engage with lenders
Consider alternative sources of available credit
Reduce operating costs
Look for opportunities to temporarily reduce costs
Create new performance metrics and reporting to monitor and manage operational efficiencies
Focus on risk management and ensure environmental, health, and safety procedures are not compromised
Bankruptcy protection
In severe cases (such as failed negotiations with lenders), consider Chapter 11 bankruptcy protection
Safety Procedures
Ensure the health and wellbeing of employees, customers, and vendors by modifying work and safety procedures
Limit cash outflows and reduce liabilities
Reduce discretionary capital expenditures
Analyze impact of nondiscretionary capital expenditures and associated costs of noncompliance
Discuss with governmental and state agencies to defer remediation expenditures and temporarily decreased royalties
Renegotiate and extend payment terms on mandatory expenditures, if possible
Access Liquidity
Access liquidity by selling non-core or underperforming businesses, segments, profit centers, or assets
Negotiations with Lenders
Restructure debt with out-of-court negotiations with lenders or eliminate service burden
