Why a failure to act can be an act of failure

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Article written by Max Fawcett of Alberta Oil Magazine (November 10, 2015)

As Kenny Rogers once said, you’ve got to know when to hold them and know when to fold them. But when it comes to energy service companies making a key decision about the future of their business right now, holding and folding could end up being the exact same thing.

That’s one of the things that First West Capital’s regional director for northern Alberta, George Coon, has learned during his 25 years in the business of financing oil and gas companies. “A non-decision is still a decision,” he says. “You’re going down a path with making that decision, because you’re choosing inaction. Even if the action is wrong, at least you did something.” That isn’t to suggest that companies ought to act rashly or without due diligence, but he says deferring the difficult decisions can often just make them even harder in the end. “They’re saying, ‘we’ll wait and see what happens.’ But most times the decision is too late, or it’s a much harder decision with a much bigger impact on the business.”

It’s far better, he says, to act decisively and be a little bit wrong than act passively and be a little bit right. In the current operating environment, it’s about minimizing the downside, not maximizing the upside, and those who cling to the latter tend to be more exposed to the former. “The size of the pie is one aspect of it. As the pie is shrinking, you might have a bigger piece – but the pie is getting smaller.” In other words, control isn’t necessarily worth hanging onto if it means what you’re controlling isn’t going anywhere. Conversely, management teams that are willing to settle for a smaller slice of a bigger pie – a decision that’s usually made at the bottom of a cycle – can often end up being very well fed. “I’ve seen many businesses be really successful when they sell a portion of it, because the pie gets bigger and they get access to better advisors and management. So they actually drive their business to a level they never even thought possible.”

There are no easy or obvious answers in the current environment, Coon says. But being willing to cut losses and reconfigure the business in a way that makes it viable going forward, and to do it before it’s too late, is generally the right thing do. “When you have lay people off or you have to cut costs, it’s a decision that nobody wants to make. At the end of the day, nobody really enjoys it – and if somebody enjoys it, that’s pretty scary. But you still have to make those decisions, because it’s all about the survival of the business and the survival of others in the business.” Here’s the silver lining: the management teams that make those sorts of hard decisions, Coon says, are usually the ones who will get supported by capital providers. That’s doubly true of the ones who are using the current downturn to position themselves for the inevitable ride back up. “Sometimes the challenge as we go back up on this curve is they still have trouble accessing capital – there’s usually a lag in support. We see opportunities in those spaces, but it’s about having conversations with them now, and being ready as it turns. Because when it turns, they might not be able to move fast enough otherwise.”