How to Manage Credit and Collect Unpaid Bills in Today’s Oil Patch

Gray Reed
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chasing moneyEverybody from the well site to the board room has an opinion about when oil prices will “rebound”. Rather than an opinion, we have a question:  How do I collect my money while we’re waiting?

This post is a refresher for service companies and suppliers looking for money from operators, and for operators looking to non-operators.  There are many steps you can take to minimize credit risk and maximize leverage in the event extra efforts become necessary to collect.

Getting to Know You:  Dot the I’s and Cross the T’s at the Beginning

Vendors: Larger operators typically require master service agreements prior to the vendor doing work. Many of those agreements contain lien releases precluding the vendor’s ability to file a lien, or impose stringent limitations on the customer’s liability. When not negotiated, such agreements can leave the vendor vulnerable to liability. For example, indemnities and warranties can be one-sided, and warrant careful review to ensure they are fair and equitable.

Operators: Do you insist on a memorandum of operating agreement to be executed and filed in the public record so that your JOA-imposed operator’s lien can be given priority?

Of equal importance, especially with smaller customers, is investigating a potential customer’s credit.

What to Do When Things go Wrong

If the customer/non-op fails to pay, there are options prior to filing suit. For example:

  • Whatever you do, do it now. The longer you delay, the more likely the debtor will run out of money or someone will get to him first;
  • File a lien. There are time limits, and he is likely to ask you not to so that he can continue to do business unencumbered by questions of solvency.
  • Propose a payout agreement secured by an agreed judgment.
  • If the customer needs additional goods or services and you are willing to provide them, require payment before delivery;
  • If you have the leverage, negotiate for an overriding royalty.

This summary is from a longer article presented in this month’s TIPRO Target.

BB King RIP (music starts at 1:35).

*see video here

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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