KPMG cautions northern businesses against overlooking contingency plans

Businesses across the north of Scotland should continue to focus on their contingency plans amid the financial uncertainty that has flowed from the prolonged oil and gas downturn, according to professional services firm KPMG.

The impact from the downturn in the oil price continues to reverberate around the economy of Aberdeen and the north 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.

In June last year, KPMG 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.

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.

On a relatively positive note, businesses with financial challenges that have sought early engagement have benefitted from cash and profit improvement measures, according to KPMG. Rescue plans have been implemented that both preserved jobs and achieved sales of businesses as going concerns.

Geoff Jacobs, restructuring director with KPMG, said: “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.”

However, Mr Jacobs said that businesses could learn from the experiences of others in the current climate.

Mr Jacobs said: “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,” said Mr Jacobs.

Mr Jacobs concluded: “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, and 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. There is no downside in having a plan in place.”