3 Collections Tips for Oilfield Services Creditors in a Down Market

We see this scenario all too often – invoices were marked “net 30 days” and, for the entire shale boom, they were always paid timely or at least within the next month. But now your customers are asking for net 60, 90, even 120 day schedules, which your company simply cannot float.

With some customers, you may have been forced to negotiate COD payment arrangements. With others, they have simply disappeared and left you holding a half million dollars in accounts receivable.

This is the reality for many creditors with customers in the oilfield services industry today. However, not all is lost!  There is still money out there, just waiting to be collected – if you take the right steps.

1. Have a plan that incorporates realistic recovery economics.

An effective collection starts with all parties being on the same page – this includes those both company and outside personnel (like lawyers). Within the company, an initial collections strategy should be formulated incorporating multiple levels of personnel, from financial and operations leaders down through the accounts receivable and collections departments.

The plan should begin with prioritizing the collections, based on the size and age of the debts. Obviously, the economics of a large debt collection allow for more resources to be allocated toward it.  An older debt demands a different sense of urgency.  Due to statute of limitations issues, it might be wise to consult with legal counsel at this early stage for older debts.

Additionally, the plan should incorporate a realistic sense of collectability in relation to the size of the debt. A small debt with a low percentage of collectability might be one that simply gets written off.  As the saying goes, often it is not worth sending “good money after bad.”

The location of the debtor should also be taken into account. A debtor in a foreign jurisdiction might be harder to obtain a judgment against, but more importantly, even if a judgment can be taken in Harris County, Texas (for example) it most certainly will be more expensive to enforce it in a foreign jurisdiction.  Your attorney can help you better understand the economics of collections outside of the state.

None of the above are meant to say to creditors: “Stop. Just give up.  It’s hopeless.”  On the contrary, these planning tips can actually help you secure an overall more fruitful recovery than with a simple all-out collections strategy.

2. Prepare to take action now – your customers might not be around if you wait longer.

As in every boom economy, there were basically three types of companies that in dealt oilfield services during the shale boom:

(1) companies that took reasonable steps to insulate themselves from the inevitable down times, to the extent possible;

(2) companies (usually LLCs) designed to ramp up as quickly as possible, work as many jobs as possible, but always expecting that they would shut down and disappear the minute the money stopped rolling in; and

(3) companies with good people that worked hard but, for one reason or another – including the plunging prices of oil and gas – simply couldn’t make enough money to pay their bills.

With a predicted continued slide in the energy markets, some of your customers are undoubtedly closing up shop, especially those in the latter two categories. Each customer that closes its doors before your company makes a bona fide collections effort represents a lost recovery opportunity.

In time, and if the market dips as far south as some predict, even the best companies in the first category above might be forced to shutter.

But I do not mean to say “the end is near!” Not at all.  Collections are consistently made from companies who yesterday said: “I just can’t pay you,” or “I’ll pay you when my customers pay me.”  Those kinds of collections success stories are written every day.

That said, even the most resourceful creditor’s attorney will have trouble collecting from a customer that is closed. So, prepare to take action now.

3. Keep great records.

In the fast-paced oilfield services industry, it is sometimes impossible to keep a perfect record of transactions – but lawyers don’t always need a perfect record in order to win a collections judgment.

What lawyers do need are the documents that “tell the story” of the debt:

• How the debt was created and by whom? What were the communications at the outset of the deal? Were promises made?
• What other documents reflect the transaction? Purchase orders and invoices?
• What documents show that the goods were delivered and received? Packing slips and delivery receipts?
• Are there any terms and conditions that affect how debt collections should be made? Are these in the fine print on the back side of a document?
• Finally, what were the initial in-house debt collections and the responses from the customer?

Putting together a strong story is the key to winning a creditor’s collections dispute (either through a favorable pre-suit resolution, settlement or judgment). The more compelling and complete the story, as told through your company’s business records and communications, the more likely the victory.

I hope these few, basic tips will assist you in engaging in realistic and effective collections efforts. If your collections efforts are currently unproductive, there is no better time than the present to turn that around.

Demetri Economou is an associate in Kane Russell’s Energy Practice Group, based in Houston. Should you have any questions about the collections or litigation, or would like to talk about any accounts receivable issues, please contact Demetri at deconomou@krcl.com.

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