KPMG urges North Sea firms to take action as ‘full impact’ of North Sea downturn yet to take effect

Firms need to take early action to project themselves because the full impact of cost reduction measures and the deferral or cancellation of capital projects in the North Sea is yet to be fully felt, KPMG has warned.

The company, which has the largest restructuring team in Scotland and is the only one of the major accountancy firms to maintain a permanent restructuring presence in Aberdeen, said that next six to 12 months will be critical for oilfield services companies of all sizes and those other businesses dependent upon the performance of the oil and gas sector.

It cautioned that businesses that are heavily dependent on UK operations, which are not sufficiently diversified across the life cycle, or which are highly leveraged, are likely to be exposed.

Whilst there have been relatively few UK insolvencies in the oil and gas sector since the oil price collapse at the end of 2014, there is increasing talk of distress in the market as the ripple effect of cost reduction spreads through the supply chain.

KPMG said that it is encountering increasing instances of companies experiencing stress and distress as a result of the oil price decline and has called for companies to take action to identify the potential cash flow problems that may be looming in the months ahead and to take early measures to “address matters pro-actively if they are to maintain control of their destinies”.

Geoff Jacobs, restructuring director at KPMG, said: “A low oil price has serious implications for oil exploration and production companies, where we have witnessed the majority of redundancies so far, and creates a ripple effect right through the supply chain and beyond.

“We are now really seeing the impact of the oil price decline extend down the supply chain affecting not only the immediately obvious oilfield services companies but also impacting businesses across Scotland not necessarily perceived as being within the oil and gas sector. Businesses that supply into or are dependent upon the sector are beginning to suffer as activity levels decrease generating less revenue for many businesses across the North of Scotland.

“Corporates and their stakeholders who have so far believed that their business can weather any storm should at the very least re-assess matters as early as possible to fully understand their key risks and, in particular, what counterparty risk the business has and properly plan for the downside scenarios as supplier and customer positions are regularly changing.”

A statement for KPMG said: “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 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, at the very least giving comfort to management and stakeholders that everything is being considered.”

Mr Jacobs added: “Taking positive action as early as possible, even where you may believe you are not deeply affected, typically increases the options available. Although it may not be until six months’ time that the problems surface as current contracts come to an end, the implications from the new market dynamics should be fully considered as soon as possible and kept under regular review,” said Mr Jacobs.

With major lenders now undertaking a second round of assessments of their exposure to potentially stressed businesses, taking a proactive approach to managing the challenging market conditions in the sector is particularly important.

“Companies need to manage a myriad of stakeholder relationships - including shareholders, lenders, customers and suppliers, project counterparties, pension trustees and employees – that are critical to their on-going strength and value generation,” said Mr Jacobs.

“Perceived loss of control may see financial stakeholders impose onerous conditions and information requirements, distracting management from the critical day job of running the business. If changes to financing terms, refinancing propositions or waiver requests are necessary, these will require careful preparation, supported by a credible plan underpinned by robust controls and demonstrable cash management processes. Demonstrating such actions together with managing the stakeholder positions carefully should help differentiate a business from weaker market participants and earn the time and space to implement effective strategies to manage volatility and preserve value.

“Businesses of all sizes are caught up in the on-going impact of the oil price collapse and will require a range of support to overcome the challenges that they are already experiencing or anticipate in the next six to 12 months. We are currently working with a number of businesses of all sizes covering issues such as working capital management and contingency planning” added Mr Jacobs.