February 2015

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February 2015 | Construction Equipment Distribution | www.cedmag.com | 21 >> MONEY$$$MAN GARRY BARTECKI What Happens to You If Oil Prices Remain Soft – Indefinitely? Plan for all contingencies, and guard against oil-customer credit risks. W hat happens in our industry now that oil pricing is at $50 a barrel with a distinct possibility of going lower and staying there? More bad than good. Historical oil price swings followed the traditional demand-supply commodity cycles – once demand slowed, production slowed to support prices, and eventually demand increased. And when supply was low, prices would again pick up until the next cycle turned the market lower once again. is time may be different. Mohamed El-Erian in Bloomberg Insider states that because of the change in the supply model the oil markets may be in for a long-term change. Whereas in the past Saudi Arabia cut production when demand soened, they are no longer doing that because they figured out it is tougher to get back market share, especially since the increase in U.S. produc- tion. It will now be up to the natural markets to correct the problem by shutting down unprofitable sites, cease building new sites and increasing the demand for oil. In short, a long-term process. To make matters worse, a significant number of oil produces in the U.S. leveraged up to fund the land purchase and well devel- opment using junk bonds, made possible because of QE and cheap money. If oil prices remain depressed it is likely many of these junk bond issues will go bust along with the related issuers. We are now at the crux of the problem. Equipment dealers providing equipment, rentals and services into the oil fields need to take action now to protect their cash posi- tions and solvency. ere is no secret there is a problem and I am sure dealers are hearing it will be a short-term phenomenon – but what if that is not the case? It would be entirely prudent to update every "oil" customers' credit availability. Current financial statements should be part of the package along with an audit report that spells out financing arrangements, so the credit department can inquire about the customer's ability to meet debt service requirements. In short, it is risk on until the dealer gets a handle on each customer in the patch. Dealers should also review their purchase commitments and other contracts, personnel levels, transportation equipment and rental units in the field rented to questionable customers. Receivable balances should also be reviewed and liens perfected where collection is in doubt. Last but not least, a dealer should prepare cash flow projections assuming oil prices remain so for an extended period. It is easy to spend when customers take up 100 percent of your resources, but similar to a rental unit, a small reduction in utilization can produce extensive cash flow reductions. In summary, extended so oil prices will impact new and used equipment markets, prices, lower time and dollar utilization on rental units, and, in general, a recession (at some level) in the construction equipment business probably throughout the entire U.S. market. On the other hand, so oil prices increase consumer spending and make the U.S. more attractive to manufacturing, which may increase demand for new or upgraded manu- facturing facilities, ports, warehousing and infrastructure – which of course increases construction demand and equipment usage. What do you need to do? Prepare to ride out so oil prices – no matter how long they continue. Be around for the construction upswing. GARRY BARTECKI (gbartecki@comcast.net), founder of Dealer-Rental Success LLC, is a financial consultant to the equipment industry. He can be reached at 708-347-9109. Equipment dealers providing equipment, rentals and services into the oil fields need to take action now to protect their cash positions and solvency.

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