There is no downside in contingency planning

THE impact from the downturn in the oil price continues to reverberate around the economy of Aberdeen and the North-east of Scotland with businesses inside and outside the energy sector operating in an environment of financial uncertainty.

This has led to many experiencing degrees of stress and distress.

While businesses within the oilfield services sector have borne the brunt of the fallout thus far, recent months have witnessed an increasing number of casualties in other sectors, including bars, restaurants and hotels, all of whom have been hit by reduced spending in and around the city.

Writing in June last year, we cautioned of the likely ripple effect that would flow from the reduction in jobs, activity and capital investment across the upstream oil and gas industry, in the UK and internationally.

Oil & Gas UK predicts that 120,000 UK jobs will have been lost by the end of this year and companies ranging from operators to SMEs have fallen prey to the turmoil that the industry has experienced in the past two and half years.

It is absolutely clear that the impact of substantially reduced capital expenditure has flowed through the supply chain affecting both the immediately obvious oilfield services companies in Aberdeen and businesses across Scotland not necessarily perceived as being within the oil and gas sector.

The result has been higher levels of insolvencies in Aberdeen and across the north of Scotland than has been experienced in many years with a total of 166 administrations, receiverships and liquidations in 2013/14, compared with 226 in 2015/16.

Over the past three years, administrations and receiverships have increased from six in 2013/14 to 20 in 2014/15 and 36 in 2015/16.

It is therefore worth highlighting some notable observations from recent experience.

Firstly, several insolvencies that occurred rapidly without prior warning have been of businesses with invoice financing facilities.

Such businesses survived the initial downturn by obtaining advances on their sales invoices, an understandable option.

However, as invoicing slowed down an immediate funding gap appeared and, in the absence of a pre-prepared contingency plan, resulted in the one outcome we want to avoid.

Secondly, businesses continue to leave it too late to properly explore their options in the hope that things will get better and that the business value will increase again - like the good old days.

Holding on in hope without exploring options and having a plan that can be quickly executed if needed all too often reduces the rescue options.

This can result in huge reductions in the business’ enterprise value and can, at the extreme end, result in an insolvency process losing value for many parties.

My final observation is that a number of businesses have entered administration throughout the summer months, a time of year usually associated with relatively high activity levels, which raises some concern for the leaner winter months ahead.

On a relatively positive note, businesses with financial challenges that have sought early engagement have benefitted from cash and profit improvement measures.

We can implement rescue plans that both preserved jobs and achieved sales of businesses as going concerns.

However, as time and cash depletes in a stressed business, so the number of options available to it dwindle.

Early action is essential, including contingency planning for businesses that have thus far escaped the worst of the storm.

There is no downside in having a plan in place.

Corporates and their stakeholders should at the very least re-assess matters as early as possible to fully understand their key risks.

Deeper and more sustainable methods for improving efficiency, streamlining operations and entities, reducing costs, improving cash and working capital processes and devising contingency plans should all be considered.

Independent challenge processes looking at the business with an objective and clear lens can help ensure that business, turnaround and contingency plans are robust. This at the very least gives comfort to management and stakeholders that everything is being considered to help navigate the uncertain times ahead.

Indeed, the only certainty we have at present is that there are numerous uncertain macro-economic factors facing us including a volatile oil price, lack of capital expenditure and exploration activity, Brexit, the policies of the new US President elect to name a few.

Nonetheless, citing uncertainty as an excuse for delaying action and simply sitting and waiting for a sustained market upturn is not a sensible option - explore all options as early as possible to protect your value and mitigate against downside risk.