Factoring & Asset Based Lending

We all know what has transpired over the last year – energy prices have taken a nosedive for a variety of reasons which we will not delve into for purposes of this post.

In the record breaking run up over the last several years, banks, hedge funds, factors and asset based lenders swarmed to throw capital into an industry that seemed to be unstoppable. But as we know, the boom and bust cycle is here again.

Tweet: Factoring and Asset Based Lending = The Difference Between Life and Death via @FarWestCap http://bit.ly/1LshbTw At Far West Capital, having gone through a few of these cycles (we have the battle scars to prove it) in our career, we’ve held firm on our verification and notification policies. Hence, our structures were not that appealing to borrowers, and we have not won many oil field relationships over the last few years. That being said, the clients we won are now very grateful for our tighter structures, specifically because they are avoiding some of the problems their industry peers are currently facing.

After much reflection, we’ve created a list of some of the problems we have seen, and how lenders and oil field services firms (OFS) can mitigate their risks by keeping a thoughtful factoring company or asset based lender in their corner.

Our Master Service Agreement (MSA) is as good as gold.

During the run up, money was flying fast, and that works until it does not. When price declines came, we saw many O&G companies suddenly becoming very picky, having inserted many subtle but important nuanced audit-able clauses into their MSAs, such as (i) reporting KPIs (ii) tight performance standards, etc.

We helped our clients by making sure they proved they were in 100% compliance with their MSA prior to funding. We had several audits of our clients and they were all in compliance and still getting paid 100% and on time. Most O&G companies were not strictly enforcing certain provisions prior to the meltdown, which lulled many to sleep.

Our Signed Field Ticket is Golden Verification

Over the years, O&G companies have learned about factoring (mostly from lawsuits), and because of the many provisions in their MSAs, a company who signs off on a ticket does not always equal a guaranty that an OFS company will get paid. We have figured out a way to get all of the parties what they need, which we call a “Master Verification.” I won’t go into all the details, but we have helped our clients with funding and have helped the debtor by not having to call on every single invoice. This is just one of the ways we have used innovative approaches to help mitigate risks.

We are in a fundamental shift in the O&G business from a growth business to a more mature industry. In this shift, there will continue to be massive amounts of shakeup and we don’t believe we’ve “hit bottom.” In Texas throughout 2015, many O&G businesses were hedged successfully and many projects were fulfilled. Many of those hedges will come off in 2016, and most producers cannot make money under $60 per barrel. Therefore, if prices don’t substantially rise to that level fairly quickly, we will see bigger slow downs in 2016.

This is a tricky area to finance but can be done successfully. If you know of deals in this sector we should be speaking with, please let us know.

  • Rick Dowling

    Nice article, Sam…..

    Best regards…

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.