The Barnett Shale in North Texas hit a historic mark on April 25: Its rig count fell to zero. Two hundred rigs once harvested the 40 trillion cubic feet of natural gas in this massive basin, stretching beneath 17 Texas counties. Today, nothing.
This dramatic silence in North America’s second-largest shale field is echoing across the continent. Oil and gas rig counts have fallen by 540 over the past year. It is a stark reminder that credit risk management is growing in importance as the commodity price downtrend continues.
That echo is heard not just in the oilfield, but in the boardrooms of every oil and gas producer, services firm, pipeline and storage company – and all the other strands in the web of relationships that bring energy to market. The enthusiasm to invest as America became a net exporter of hydrocarbons amidst an unprecedented boom in shale oil and gas recovery has transformed into a single question: What’s our counterparty credit exposure?
Oil patch bankruptcies spiked nearly 400 percent last year and the outlook isn’t improving much as oil gropes for a stable price floor around $40. The prolonged commodity price tumble exacerbates credit risk: Firms that may have been able to hang on through a short downturn now face tough financial decisions that can have a direct, potentially severe impact on their counterparties.
This leaves companies across the energy market rapidly calculating what the industry’s shifting economic picture means to their bottom line and – more importantly – who’s next.
The ability to make those rapid calculations can be hampered or enhanced by technology. Speed and accuracy are the two chief stumbling blocks for companies calculating the credit risk of their counterparties. Many have relied on spreadsheets and other systems that either struggle with the volume of data or take several days to generate an answer. What seemed a reasonable turnaround time during the boom can have a material impact on a company’s financial health in the current climate.
Finding answers, fast
But the myriad and complex reasons companies exposed to commodity prices falter are quantifiable. If that data can be gathered, digested and transformed into credit risk metrics and credit scores quickly enough, companies can react effectively to changes in the fiscal health of their counterparties, partners and suppliers. One crucial aspect of this calculation is the ability to roll up siloed exposures from every business unit, commodity trading system and geography across your organization to see your consolidated credit exposure.
Modernizing your approach to credit risk management makes these goals achievable. Adopting the analytics, visualization and best practices that enable you to see the full picture can give companies the answers they need, in the time they need, to navigate pitfalls as the rigs fall quiet.
We’ll talk about how that gets done in our next installment. In the meantime, learn more about SAS' commodity credit risk management approach.