Estevan – Simply put, oilfield companies aren’t making enough money to replace their equipment when the times comes, according to an accountant whose specialty is the oilfield.
David Hammermeister, a chartered professional accountant and chartered accountant with MNP LLP, has been working in oilfield accounting for the better part of 25 years. Working with oilfield services companies, some privately owned oil production companies, and some royalty companies, he has a broad understanding of the numbers that underlie the oilfield business in southeast Saskatchewan.
He can’t talk about specifics of clients, or specific clients, but in general he’s seen very little in the way of recapitalization. Hammermeister spoke to Pipeline News on Sept. 14.
Observing the trends in southeast Saskatchewan, Hammermeister said, “Obviously, with the decline in oil price, drilling activity is down, which leads to lower revenues for a lot of operators in the industry, oilfield service companies. You see it on the production side, too, with oil at a third of what it was at its peak. That’s a third of the revenue they used to be generating.
“Declining activity, declining revenues, declining levels of employment, declining levels of income. More often than not, we’re not talking income; it’s how big the loss is, and what can you do to make the loss smaller?”
He agreed with Pipeline News’observations that most oilfield services companies’ employment levels dropped by half compared to 2014, and that on average, most of those still with jobs took a 20 per cent cut in pay. “Or more,” Hammermeister said.
“It’s not uncommon that there’s probably been a 20 per cent reduction in their hourly rate, but the other impact is the number of hours they’re getting are way down. Whether it’s a year-end bonus or Christmas bonus, I shouldn’t say they’re non-existent, but they’re pretty rare and far more modest compared than what they used to be.”
From the business perspective, he said there’s a lot less discretionary spending. Monetary support for community organizations and events is down. “The days of spending $7,000 for a hockey jersey to support the (Estevan) Bruins, that hasn’t happened for a few years,” he noted.
The days of handing out tens of thousands of dollars on shirts, hats and coats is are largely reduced if not stopped completely. There’s less money being spent wining and dining customers as well. There’s a lot less in the way of taking people to NHL games, for instance.
On capital expenditures, he said, “It’s not even the expansion capital, like who’s expanding and getting bigger, or picking up real estate; it’s pretty rare. It’s a good time to be buying real estate, because there’s lots of it available and I think the price is pretty negotiable. But even the maintenance capital, for guys to be spending enough money, reinvesting in their equipment, to maintain their same level of capability, it’s not happening.”
On a broad basis, he hasn’t seen much in the way of new iron. He has noted some “resurrected” businesses, with people getting back into the business at the conclusion of a non-compete agreement, are getting going with newer equipment. He’s seen very little new heavy equipment or new semis.
“Some consultants who live in their trucks are replacing them every few years. I mean, the guys who are still working, are replacing, but that’s not a particularly discretionary. The truck has to work.”
Until recently, privately owned oil companies haven’t seen much drilling activity, either, but some have started drilling again.
The companies he’s familiar with are not spending anything significant on capital purchases. “They are not maintaining their capacity from three years ago, that’s for sure.”
Clients will generally consider buying new equipment if they are getting more work, or a different kind of work, or their current equipment isn’t capable of doing a new job. That’s pretty rare, these days, Hammermeister finds, saying, “The decline is dramatic. It stopped. Anybody with a 2016/2017 year end, there’s no more than the absolute minimum requirement by way of capital expenditures.”
Where you going to get it?
He went on, “That leads into a few other issues that go along with it. Now, it’s going to be availability. When you do need to replace it, where are you going to get it? Most of the premium used iron has been gobbled up already. The Ritchie Brothers auctions with the big equipment that was selling for maybe 50 cents on the dollar, but had only 10 per cent of its life used up – that stuff isn’t available anymore. So there’s guys starting to anticipate the day they’re going to have to start spending more money. But a lot aren’t generating enough cashflow to save up money to replace their equipment anyhow.
“In anticipation of some improvement in activity levels and pricing so they can build some cash up, they’re worried where they’re going to get the equipment from,” he said.
For instance, a new tri-drive semi now may have a waiting time of eight months to a year.
One small benefit is that the U.S. to Canada dollar exchange rate has improved, so they now get a some more bang for their buck for buying equipment, most of which comes from the U.S. But when the exchange rate was much more favourable to Americans, it was an opportunity for them to snatch up equipment at Canadian auctions and send it south. Thus, there’s not a lot of good, used equipment available.
The financing end of it has become a recurring topic among MNP’s oilfield specialists when they confer amongst themselves.
“The banks aren’t nearly as cooperative as they had been, particularly in regards to used equipment,” Hammermeister said. “You can kind of understand their position, that they’ve probably been burned and don’t understand the value of some of the used stuff.”
This especially the case of anyone exposed to drilling. He noted a company found some premium used equipment for a significant discount to the new price, but the bank wouldn’t lend to support a purchase. It would, however, finance a new buy.
“By and large, I think the banks have been extraordinarily patient for the last few years. If you were in a bind, as long as you were communicating well with your bank, doing what you said what you were going to do, or trying to do what you said you could do, I think the banks have been very understanding. But with some it, it’s like, ‘No. We’re not going to call your loans, but no new loans. Wherever you’re at, that’s your limit. And after you make your next monthly payment, your limit just went down by whatever the principal was.’
“It’s going to be a real problem when people need to replace equipment in finding it, and being able to pay for it,” Hammermeister said.
He did note a one-off case where another lender came in when a client’s first bank refused.
“As tough as things have been, most people have continued to make their payments. Their debt has gone down, significantly, but they’ve also had some pretty significant losses. Their equity has also disappeared in their businesses.”
Laying it on the line
“If people had surplus savings, or surplus cash, it’s gone. They’ve injected personal monies as much as they can, or are capable of. I’ll say, that’s one thing, generally speaking – the level of commitment a lot of owners have to their business in this area is extraordinary. You start having conversations with guys to creditor-proof or limit their losses in case their business goes down – at least we can do some things to put you second in line to the bank, ahead of your trade payable creditors. There’s almost no uptake. If my company goes down, I’m going to go broke, too. I’m going to do everything I can to pay off all my suppliers, with maybe a couple exceptions to that rule.”
Asked if anyone has any reserves left, he responded that it varies from business-to-business, and some people have deeper pockets.
“I’m just trying to think of a single person who had a business operating five years ago that I would say the value of their business, or their investment in their business, has increased from five years ago,” he said.
“There’s not very much accounting goodwill out there anymore. Businesses are often not profitable at all, let alone being significantly profitable to justify goodwill.”
For those who had been considering exiting the business, they’ve kind of missed the boat, and may have to wait for the next cycle. For intergenerational transfers, it’s probably a lot easier from an income tax perspective because values are so much lower now.
On top of all this, the proposed tax changes the federal government has out for discussion right now on corporate taxation are some of the biggest since 1972, when capital gains became taxable, he noted. “What they’re proposing are very significant changes, from a policy perspective and dollar amount, that’s going to affect almost every private company in Canada,” he said.
MNP is working hard to be an advocate for its clients in this regard, he noted.
It all comes back to the price of oil. Hammermeister said, “You can’t fault the oil companies for grinding people on margins when they’re facing their own liquidity issues and cash crunch. A lot of them borrowed too much money and are no doubt facing pressure from their bankers as well. It’s only natural for them to be pushing that down as much as they can.
“That would be the quick, easy global fix, is for the price of oil to come up. Hoping for the price of oil to come up is not a very good business plan. So what do you need to do instead of that? If you think lower for longer is the way it’s going to be … They need to be doing some of the things they’ve already been doing. For a lot of the oilfield services guys, one of the biggest line items is wages and benefits. So what are you doing? Your guys aren’t getting paid as much as they used to, they’re not getting the hours they used to,” Hammermeister said.
That also means cutting discretionary spending, like community support and advertising. Not replacing equipment, which is likely not getting as much use anyhow, is another. Knowing your margins and focussing on relationships are also tactics to use.
