What a private energy company board should do in the first ninety days after the commodity price breaks, in the order it should do it

The meeting was in the third week after the price broke, and the agenda had six items on it. We got through four. The chief executive opened with the price deck, which everyone had already seen, and the chief financial officer followed with a revised forecast that assumed the price would recover in two quarters, which nobody had seen and nobody believed. The room spent forty minutes on whether two quarters was the right number. Item five was the revolving credit facility, whose next redetermination was seven weeks out. Item six was the customer list. We ran out of time before either. That is the meeting I think about whenever a price breaks, because the two items we skipped were the only two that mattered, and the forty minutes we spent were on a question no one in the room could answer.

I have sat through the first ninety days of a downturn more times than I would like, in the chair and in the seat beside it, and the sequence of what a private company board should do in those days has become, for me, close to fixed. It runs in calendar order, and it does not begin with the forecast.

Days one to ten: find out what is already true

The first job is to establish facts, and the facts that matter are the ones the price has already changed. What is the cash balance today. What is drawn on the facility and what is the next test date. Which customers have called, and what did they say. Which contracts have a price reopener, a termination for convenience or a volume floor. Which crews are on jobs that end inside thirty days. None of this requires a view about where the price is going. All of it can be assembled in a week by a competent finance function, and a board that asks for it on day one and gets it by day ten has done more than most.

The reason to start here is that the price break has usually already changed the company’s position more than management has yet noticed. A customer who stopped calling in the second week has already decided something. A facility with a redetermination in seven weeks is already on a clock. The forecast argument feels like the urgent thing because it is the one on the screen, and it is the least urgent thing in the room.

Days ten to thirty: settle the facility before it settles you

The credit facility is the item that decides whether the company gets to make its own choices. A borrowing base that gets cut at the redetermination without any preparation becomes a demand for cash at the worst possible moment. So the second job, once the facts are in hand, is to open the conversation with the lender early, on the company’s initiative, with a number the company has calculated rather than waiting to be told one. A lender who hears from the borrower in week three, with a clear picture and a proposal, treats that borrower differently from one who goes quiet until the notice arrives. I have watched both, and the difference in outcome is not small.

This is also the window in which to look at every date in every agreement. Maturities, covenant tests, reporting deadlines, options that expire. A downturn is a sequence of dates, and a board that has them on one page can plan. A board that discovers them one at a time cannot.

Days thirty to sixty: cut what the customers have already cut

By the second month the customer list has told you what it is going to tell you, and the company has to match its cost to the work that actually exists rather than to the work it hopes to get back. This is where the hard decisions on people and equipment sit, and I will say plainly that a board should push management to make them in this window rather than in the fourth month. The instinct to wait one more quarter for the recovery is the most expensive instinct in the business. Every week of waiting spends cash that will not come back, and the cash spent waiting is the cash the company will need when the work does return.

The cut has to be built from the customer list, not from a percentage. A ten percent cut across every department is a decision not to decide. A cut that follows the contracts, keeping the crews on the work that survived and releasing the crews on the work that left, is a decision, and it is the only kind that leaves the company able to serve the customers it still has.

Days sixty to ninety: the position an experienced director will argue with

Here is the part of the sequence that draws the most disagreement. In the third month, after the facility is settled and the cost has been matched to the work, I think the board should turn to the question of what the company wants to be when the price recovers, and I think it should do so before it turns to the question of when. Most boards do the reverse. They spend the third month refining the recovery forecast and defer the strategic question until the forecast tells them it is safe to ask it.

My objection is that the forecast will never tell them. Nobody in the room knows when the price will recover, and a board that waits for that knowledge is waiting for something that does not exist. What the board can know is which customers, which basins and which service lines the company is best at, and a downturn is the one time when the answer to that question is visible in the numbers, because the marginal work has fallen away and what remains is what the company actually does well. A board that reads the third month’s numbers for that answer, and sizes the company to it, comes out of the downturn with a business. A board that spends the third month on the price deck comes out of it with a smaller version of whatever it was before.

Where this breaks

The sequence breaks when the facts in the first ten days turn out to be worse than anyone knew, and I have been in that room too. If the cash is already short and the facility is already in default, the calendar collapses and everything has to happen at once, and the sequence above becomes a description of what should have been done in the previous downturn. It also breaks when the board and the owner disagree about whether the company should survive in its present form at all. I have argued for a sale in the second month and been overruled by a founder who had been right before, and he was right again, and I have argued for a sale and been overruled by a founder who was not. The sequence assumes a board that can act. It does not create one.

And I have gotten the third month wrong myself, more than once, by mistaking the work that survived for the work the company was best at, when it was only the work whose contracts happened to run longest. The customer list can mislead in that direction, and the correction is to read the contracts, not the revenue.

The price is the one thing in the room nobody controls, and it should be the last thing on the agenda, not the first.