June 2017
A Message from Ted Gavin
Happy summer, everybody - I mean, unless you're one of the many travelers trapped in Phoenix because it's been too hot for regional jets to take off there. But for those of us not consigned to living in a desert hellscape, we hope your summer is off to a good start. We've been busy since our last edition - we've worked on some new cases, we've written some new articles for you, and we've played some new tunes. Yes, I'm happy to report that the Indubitable Equivalents, the house band of the American Bankruptcy Institute, returned to the stage and a touring rotation starting on June 9th at the ABI 24th Annual Central States Bankruptcy Workshop. Look for the @Indubies next rocking the stage at the ABI Southwest Bankruptcy Conference's Tequila Tasting reception benefiting the Anthony H.N. Schnelling Endowment on September 7th in San Diego.

On topics more serious, this edition holds interesting content for you in a quick read. ABI Editor at Large Bill Rochelle grabbed me for an impromptu interview at this year's ABI Annual Spring Meeting. We talked bankruptcy, what the lack of old-fashioned restructurings means for troubled companies, and other lite fare. Take a look at Ross Waetzman's prognostication on a bright turn for U.S. oil producers, and Joe Solmonese talks crisis management. If you haven't been glued to CNN all day every day, apparently, there was some sort of kerfuffle with the former FBI Director! Lots of photos from where we've been and what we've been doing with you, our friends.

Object Lessons in Crisis Management
by Joe Solmonese
I'm beginning to think we are suffering a crisis of crisis management in politics and in business. Painfully obvious case in point: President Trump's firing of James Comey. Trump has every right to fire the FBI director, but the fatally flawed execution added a new chapter to the dominant "White House in disarray" narrative and turned up the volume on the investigation of Russian interference in the 2016 election, rather than making it go away, as Trump expected. 

What would I have recommended? Well, once a decision is made, it's time to get everyone on the same page. Trump kept his plan to fire Comey within a very tight circle, then failed to widen that circle before the news broke. Senior White House aides found out the same way as Comey: on TV. The time to loop people in and agree on a strategy is before you tell the public, not after. 

And, as you brief people internally, be clear about what's happening and who is in charge of the message. The Trump White House offered multiple rationales for firing Comey and assigned multiple messengers to deliver the news. It was a full-on debacle that did lasting damage to Trump's already shaky credibility and the GOP policy agenda.

A corporate analogue to this is United Airlines' bungled defense of its treatment of a passenger who did not want to give up his seat. United CEO Oscar Munoz went with his first impulse, which was to defend United employees and blame the customer, Dr. David Dao. He took the view that if police ask you to get off the plane, you should comply, not fight back.

But planes are full of beleaguered passengers armed with smartphones. And Dao's fellow travelers could see that he was not being unruly or drinking too much. He simply did not want to give up the seat he had paid for, and they identified more with him than with United or the police. Finally, physically harming Dao, who suffered a broken nose and teeth and a concussion, was far worse than his refusal to deplane. Munoz corrected course, but not soon enough to avoid inflicting significant damage to United's reputation and brand.

It's easy in moments of crisis to panic and close ranks. But staying calm is essential to controlling the narrative. President Trump has not yet grasped that he's no longer the CEO of a family business or the host of a reality TV show; he thinks he can be as freewheeling as before. United lost sight of the fact that they are still in service to their customers, not themselves, and there is a limit to what even airline passengers are willing to accept.
No matter who you are, losing sight of those to whom you are accountable - passengers, customers, the American people, Congress - can inflict long-term damage to your public image. Decide on a unified message, accept responsibility, and meticulously follow a set of procedures, and you can minimize or even avoid harm and ride out the storm.

Joe Solmonese leads the Gavin/Solmonese Corporate Engagement practice, helping organizations break down problems and find actionable solutions. Prior to forming Gavin/Solmonese, he was president of the Human Rights Campaign and CEO of EMILY's List.

U.S. Oil Producers Poised to Benefit from Global Conditions
by Ross Waetzman, Director, Corporate Recovery
Last year, while speaking on an American Bankruptcy Institute panel, I predicted the West Texas Intermediate (WTI) oil prices would not rise above $50 per barrel (bbl) for any sustained period. A year later, my forecasts have not only held true, but increasingly seem bullish. Current conditions indicated that $40 per bbl is the new ceiling. Low-cost United States producers who can weather these prices should do well over the longer horizon. High-cost producers are trapped in a death spiral, moving ever closer toward an oil-based black hole from which there is likely no return. 

The short answer for these conditions is that global markets face a severe oil supply overhang. While demand has typically grown by 1.0 million barrels per day (mbpd), daily supply has historically been within 0.2 mbpd, with stabilizing support from OPEC (Organization of the Petroleum Exporting Countries). This pattern materially changed in 2010.

As the globe recovered from the 2008 financial crisis, demand for oil accelerated by 70% to an annual pace of 1.7 mbpd. Daily demand sometimes exceeded supply by 1.5 mbpd. Prices quickly rose above $100 per bbl. The fracking revolution took off as producers struggled to meet this new demand.

Higher prices attracted new fracking participants. By 2014, shortages of labor, housing, and general infrastructure plagued many fracking markets. Then oil stores grew. By mid-2014, supply exceeded demand by an average 1.0 mbpd. WTI prices plummeted below $50 per bbl; a general break-even price for many U.S. fracking wells. 
U.S. producers shut-in wells, temporarily halting production and stemming costs on a rotational basis. This practice spared producers the cost of permanently plugging wells. This reduced supply, but allowed producers to increase production as prices improved. As prices rose above break-even levels, supply came online pressuring prices lower. These conditions set the stage for a $50 per bbl ceiling.

But break-even prices kept falling. Producers improved well designs, employed multi-pad drilling, and lengthened lateral drillings among other enhancements. The next revolution may involve replacing water extraction with CO2, further reducing production costs.

Outside of the U.S., many countries face significantly higher break-even prices and in some cases are also heavily reliant on oil exports. Oil-dependent Nigeria, Russia, and Venezuela, have break-even prices exceeding $80 to $100 per bbl. Their hope for higher prices hinges on reducing global supply. 
During 2017, a consortium of both OPEC members and non-members targeted a reduction in production of 1.8 mbpd. The result: the consortium managed to reduce production by 1.2 mbpd in the first quarter. 
American producers-not bound by the OPEC led production cuts-have unsurprisingly increased production. U.S. rig counts hit two-year highs. The United States, once dependent on foreign oil, is quickly becoming oil independent. Further, the United States is strategically acting as an energy exporter (starting with Liquefied Natural Gas (LNG)), minimizing scope for countries like Russia to use energy as a political weapon. 
OPEC's plan to reduce production is suffering fissures of its own. In its May report, the cartel's production rose by 1% off of increased production from Iran, Libya, and Nigeria. In the U.S., expected seasonal oil stockpiles fell 1.0 million barrels less than expected, while gasoline inventories rose by 2.1 million barrels.

As prices continue to fall, high-cost producers will reduce capital expenditures, exacerbating their situation. Canada will reduce capex by 50% in 2017. This is unsustainable, leaving such producers with a smaller footprint in the global markets. U.S. producers, among the most efficient in the world, should benefit both domestically and with increased share of global exports.

In summary, oil will continue to be plagued by supply problems. Efficient U.S. producers benefit over the long-term. However, in the shorter term, expect the dying salvo of higher-cost producers to drive oil down to $40 per bbl - and even the mid-$30s per bbl.

Ross Waetzman has over 20 years of professional service experience advising companies as well as their lenders and equity holders on matters of financial and strategic significance, both out-of-court and in bankruptcy. He is a Certified Insolvency & Restructuring Advisor and has been awarded the Certification in Distressed Business Valuation.

Our Gallery
ABI 24th Annual Central States Bankruptcy Workshop
Indubitable Equivalents

Ted Gavin, Tom Salerno, Jack Esher, Mitch Ryan, Michael Richman, George Kelakos, Steven Rhodes

2017 ABI Annual Spring Meeting: Gavin/Solmonese Dinner Celebration at the Hay-Adams, Washington, DC
Scott Williams, Reggie Jackson, Jim Markus, Jordan Kroop

Kara Casteel, Brigette McGrath, Jeff Waxman, Gary Underdahl

Jeana Goosmann,
Ted Gavin

Gavin/Solmonese | (302) 655-8997 | |
919 Market Street, Suite 600, Wilmington, DE 19801
© 2017 Gavin/Solmonese. All rights reserved.