A system that measures, monitors, and manages is no longer a Wall Street extravagance, but an industry essential.
Marty Makulski is director of the energy trading and risk management consulting practice at Sirius Solutions. Contact Makulski at firstname.lastname@example.org.
Fifteen years ago, you couldn’t fill a small room with energy CEOs interested in discussing how credit risk affects their companies’ bottom lines. But a recent series of contract defaults, bankruptcies, Sarbanes-Oxley controls, and merger-and-acquisition activity has placed credit-risk management squarely on the industry’s radar.
Energy and utility companies are doing business with long-time customers who have seen their credit ratings drop to the brink of junk status. Based on the huge disparity among credit scores, it’s a real case of the “credit haves” doing business with the “credit have-nots.” In other words, it’s an accident waiting to happen. According to a June 2005 study, energy firms continue to “exhibit very high risk levels,” and out of the 20 riskiest companies in the S&P 500, five were energy companies.
While credit risk is nothing new in the risk-savvy environs of banking, manufacturing, and finance, credit risk management has struggled to find a foothold in the energy industry because of a lack of dedicated focus and funding. As a result, it is commonplace to find inconsistent credit-risk methodologies, poor technology implementation processes, and a lack of integrated, robust risk systems interfacing with internal accounts receivable/payable information and timely, industry-specific external credit data.