The Examiners: Remain Thoughtful About Oil and Gas Investments

How much stress can we expect to see for oil and gas producers and related companies as a result of the current low prices? And what special issues does this industry face when it’s time to restructure or file for bankruptcy?

Commodity-related businesses have always faced unique challenges, as the struggle for financial stability amid extreme price fluctuations can test nerves of even the most skilled managers. Today’s uncertainty in the energy sector is certainly punctuating this truth while revealing some of stresses that are likely to affect oil- and gas-producing businesses for years to come.

There’s significant overcapacity in the energy sector, which will likely give rise to further irrational market movements. This overcapacity is also likely to drive consolidation, just as we’ve seen in other industries where there has been enormous investment.

While there may be a temptation to quickly “get in on the action,” it would be prudent for investors to remain thoughtful in their approach to restructuring. After all, it’s still very early in the current market cycle. And unlike in other industries, the energy market can be greatly impacted by non-economic factors such as geopolitical events.

A company’s restructuring needs will hinge on whether the trouble is related mostly to financial solvency or to the business model. The current market is presenting some distressed debt opportunities to help troubled oil- and gas-producers improve their balance sheets so they can weather price volatility in the short-term. But if energy prices remain low for a prolonged period, financing options will need to be accompanied by robust operational solutions that rationalize their cost structure to account for the lower revenues.

Of course, mounting pressures for producers will create even more acute stress for product- and service-providers since oil- and gas-producers look to right their balance sheets by reducing costs.

Marc Leder, co-chief executive of Sun Capital Partners Inc. of Boca Raton, Fla., has been engaged in leveraged buyouts, investment banking and business operations for more than 25 years.