Never has corporate turnaround expert Jeff Huddleston been more needed or more dreaded.
Huddleston says he’s gotten used to being “the most hated guy” in the room over the past year as oil industry job losses topped 250,000 and companies sought ways to curb spending. Turnaround specialists like him are about to get even busier in 2016, advising companies how to keep the lights on through the ugliest oil-market downturn in decades.
"We’re like living symbols that something has gone really wrong," said Huddleston, a managing director at restructuring consultants Conway MacKenzie Inc. in Houston.
The energy industry had 26 bankruptcies last year, a larger number than in the five previous years combined and more than any other sector of the U.S. economy, according to data compiled by Bloomberg. With no market rebound on the horizon, many more producers are running out of options.
A restructuring adviser’s tool box includes layoffs, canceled contracts, drilling cutbacks, asset sales and bankruptcy. How successful they are in helping companies survive for the long run depends a lot on whether management views them as saviors or undertakers.
Huddleston likes to think of himself as a battlefield surgeon. “You don’t want to know me, but when you need to, I’m there to help,” he said.
Huddleston can tell how a client feels toward him by the work space he’s assigned. Back in 2014, one client put him in a windowless supply closet where he balanced his laptop on a small table next to the paper shredder.
Winning the confidence of management can be the hardest part of the job when restructuring is forced on a company by bankers or unhappy investors, said Seth Bullock, a managing director at Alvarez & Marsal Inc. in Houston, a turnaround firm.
Turnaround specialists “tend to have a reputation for sharp elbows," Bullock said. “Nothing could be further from the truth. The best restructuring professionals have phenomenal people skills.” A good bedside manner is vital to gaining trust and retaining top talent through a crisis, he said.
Oil and gas producers that have been able to hold on so far may now be ready to throw in the towel with no market rebound on the horizon, said Spencer Cutter, an analyst at Bloomberg Intelligence.
"A lot of people are jockeying for position and trying to get ready for what they see as a potential, eventual restructuring," Cutter said.
The U.S. corporate default rate has reached its highest level in four years, with energy companies the biggest driver of the increase. Bankruptcies have ranged from Hercules Offshore Inc., owner of the largest fleet of shallow-water rigs in the Gulf of Mexico, to offshore contractor Cal Dive International Inc. Crude has lost more than 70 percent of its value in the past 18 months, sinking below $30 a barrel this week. Many analysts predict the market will move even lower in the first half of 2016.
At today’s price levels of $30 a barrel, more than a third of the 54 exploration and production companies examined by Sanford C. Bernstein & Co. are potentially at risk of bankruptcy, Bob Brackett, an analyst at the research firm, wrote Friday in a note to investors.
The main goal is to avoid bankruptcy, said Mike Saslaw, an energy lawyer at Vinson & Elkins in Dallas. Companies and creditors will search for ways to restructure outside of bankruptcy court to avoid the costs and retain the most value in the business, he said.
Oil producers have more flexibility to sell assets than many other companies. It’s easier to sell a stand-alone oilfield than to untangle a division with factory operations that span the country. Managing those sales will help keep the turnaround professionals busy.
The turnaround specialists declined to name the clients they work for due to the sensitivity of their arrangements.
As a last resort, bankruptcy can be the best option for a company’s survival, said Saslaw, who compares the process to ripping off a Band-Aid. "You have to go through some pain, but sometimes it’s better to get out ahead of it," he said.
It took numerous "animated" meetings with the wildcatting founder of an oil company before Houston restructuring adviser Becky Roof was able to persuade him to slash his U.S. drilling program by 90 percent. It took another month of long days for Roof and her team at turnaround specialists AlixPartners LLP to talk the company through layoffs and spending cuts that reduced its budget by 40 percent.
“These are hard conversations, particularly with a founder,” Roof said. "We weren’t threatening -- we were just continually: ‘Yes, but what if?’” Without the painful steps she said she had them take, "they would’ve run out of cash by now."
David Wethe with assistance from Laura J. Keller, Bloomberg News