With the ebbs and flows of the oil and gas industry, it is important to have a reliable financial partner. We sat down with Commercial Funding Inc. (CFI) regional sales managers to explore the economic and financial challenges oil and gas companies face and to discuss how accounts receivable financing and factoring can help these companies with their cash flow challenges.
Question: What is your experience in the oil and gas industry?
Ryan: I'm in Texas. I've owned two oil and gas factoring companies and have approximately 10 years of experience in the oil patch.
Caleb: I'm in Oklahoma where oil and gas play a big part in the economy. I’ve worked in trucking for the oil and gas industry.
Question: What type of oil field businesses does CFI work with?
Ryan: We're not on the commodity side of the oil and gas equation. We're on the servicing side—for example, haulers and suppliers. We also work with some of the other types of services in the oilfield, i.e., roustabout crews, fencing rental companies, pipe suppliers, crude suppliers, chemical suppliers, flow hand services, and any type of fabrication shop or machine shop that's tied to oil and gas.
Question: What are some of the most common financial challenges for these businesses?
Ryan: The tools and resources needed to provide just about any services in oil and gas are typically expensive so expansion can create cash flow problems.
The general volatility of pricing makes running a business in this industry challenging.
Additionally, there’s been a lot of consolidation on the midstream and operator side. This means there could be service companies that could lose customers because the customers got purchased. It also means the big companies get bigger which puts more power in their hands, enabling them to take longer to pay their service providers or put downward pressure on service pricing. Having a diversified customer base is helpful to long-term success.
All of the above can negatively affect cash flow but accounts receivable financing and factoring can help improve cash flow.
Question: What are the challenges with factoring in the oil and gas industry?
Ryan: Because of the ebbs and flows of the oil and gas industry, many of the companies servicing the industry, I’d say up to 90%, could benefit from factoring.
However, a lot of service providers make the common mistake of becoming concentrated in who they work for. This can happen through consolidation or simply by taking more jobs from existing customers. Often a service provider can get larger jobs with one specific operator because they perform well. It can be difficult to diversify. But many factoring companies don’t like high customer, or debtor, concentration which can make it difficult to obtain a factoring line.
Caleb: Unfortunately, some companies simply don’t understand how factoring works, or they have incorrect preconceived notions that factoring is expensive. Because of this, they often don’t even consider it as an option. But they should consider it!
Question: Do the following factors influence the challenges oil and gas businesses face?
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New technology such as clean energy
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Evolving policies and regulations
Caleb: Environmental, social, and corporate governance (ESG) scores in oil and gas are interesting because you're essentially playing a game that puts your specific product and service out of business, which is kind of weird. But these large, publicly traded companies are trying to improve their ESG scores. If a service company can provide its service with electric or solar, it can improve its chances of being selected as a vendor. A customer I know was building heat exchangers that go out on pipelines to separate the product that comes out of the ground. They were trying to figure out a way to run that equipment off electricity or solar. Their potential customer told them that “if you could utilize equipment that runs on clean energy, we will buy from you”. Those orders could keep them busy for three to five years so being able to acquire the equipment and skilled employees to manufacture and install that equipment is important.
Ryan: There is a lot of environmental remediation that must be performed at drilling sites, and ongoing environmental sensitivities that are constantly monitored. Oil and gas overall is extremely climate-conscious because of the regulations that are in effect.
For example, regulations, created pursuant to the Inflation Reduction Act that addresses methane emissions, which impact oil and gas operations, specifically based on emission intensity thresholds. Companies that are operating in environmental remediation and/or measuring environmental impact have a great opportunity to really grow their businesses right now.
Question: What is the role of an independent (non-bank) lender in the oil and gas industry?
Ryan: Non-bank lenders are very necessary in this industry because there aren't many banks willing to lend to the companies servicing oil and gas. The banks will lend to the large operators and producers, but not the servicing companies. Companies like CFI are essential to helping these service providers get paid faster and improve cash flow.
Question: What are CFI’s major competitive advantages as a financial service provider in this space?
Caleb: We're not purely transactional. We are relationship-focused. The expectation should be that communication goes both ways and builds trust with the customer. Additionally, we’ve been providing accounts receivable financing in the oil and gas industry for decades. We’ve built relationships with large and small companies in this space and have a wealth of information regarding how these companies pay their service providers. That can be very helpful for a company looking to take on new customers. We can help them vet their new customers.
