Credit Risk Management

Crisis Benchmarks: DSO Industry Benchmarks To Watch In 2012

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Sunoco Logistics Partners' DSO increased 239% from 2008 to 2009. The company's dock transfer pipelines in Port Arthur, TX are shown above.

As our economy worsens towards possibly another recession, CreditPulse looks back at the industries that endured the highest DSO increases during the last recession spawned by the credit crisis of 2008. 

From 2008 to 2009, days sales outstanding (DSO) benchmarks increased in 50 of the 70 industries included in the Credit Standards Index (CSI), a ranking of over 2,000 publicly-traded companies around the world based on bad debt allowance, DSO, operating cash flow, current ratio and debts-to-assets. 

The high number of industries experiencing DSO increases is a clear indication of the effects the credit crisis, which began in June 2008, had on a company's revenue and the timliness in collecting its accounts receivable as measured by the all-important DSO figure -- a liquidity and effeciency ratio that is calculated by dividing revenue for a specific period by the accounts receivable and then multiplying by the period of days for which you are calculating. 

As expected, commodities-based industries such as oil and gas, semiconductor, and aluminum and copper saw their DSO averages skyrocket as the result of both rapid decreases in revenue and rapid increases in accounts receivable.  The construction industry came to a virtual stand still and as a result saw its DSO benchmark average increase 45.8 percent (see chart).

The oil and gas sector had the highest increases in DSO from 2008 to 2009 with three of its four industry groups represented in the top ten (see accompanying chart).  Oil & gas equipment and services was the only one of the four not in the top ten and its DSO average actually decreased by 4.1 percent.

The DSO industry benchmark for the Oil & Gas Pipeline industry increased from 27.29 days in 2008 to 43.37 days in 2009 for an increase of 58.9 percent, the largest of any industry in the CSI.  Research Services was next increasing from 64.39 days to 97.11 days for a 50.8 percent hike.  Oil & Gas - Independent, the seventh largest industry group in the index with 70 companies, saw its DSO benchnmark increase from 37.09 days in 2008 to 55.63 days in 2009.

The dramatic increases in the Oil & Gas Pipeline industry DSO benchmark were driven by a combination of severe year-to-year revenue drops and accounts receivables increases.  No company in the industry exemplified this phenomena more than Sunoco Logistics Partners LP as its DSO went from 26.31 days in 2008 to 89.26 days in 2009 for an increase of 239 percent.

Sunoco Logistics owns and operates 41 storage terminals and 2,200 miles of pipeline that transports refined crude oil from refineries in the northeast, midwest and southeastern United States to markets in New York, New Jersey, Pennsylvania, Ohio, Michigan and Texas.  But the pipelines were largely dry in 2009 as revenue dropped to $5.4 billion from $10.1 billion in 2008, a decrease of 47 percent.  Meanwhile, the company's accounts receivable increased from $730.5 million to $1.3 billion during the same time frame respectively.  In it's 2009 annual report, Sunoco said "lower crude oil prices were a key driver in the overall total decrease in total revenue."

But the industry's highest rated company, Magellan Midstream Partners LP, based in Tulsa, Oklahoma, experienced the same volatility in revenue and receivables although not nearly to the effect of Sunoco.  Magellan's DSO rose from 21.52 days in 2008 to 40.57 days in 2009 for an increase of 132.6 percent.  DCP Midstream Partners LP had the industry's second highest increase at 158.8 percent and Plains All American Pipeline LP had the third largest at 139.8 percent.

Some of the most severe DSO increases occurred in the independent oil & gas industry group even though the industry came in second in volatility percentage because it has more companies, 70, compared with only 21 for oil & gas pipelines.  BreitBurn Energy Partners LP, a $205 million oil and gas explorer and developer based in Los Angeles, California, saw its DSO skyrocket from 21.48 days in 2008 to 85.36 days in 2009, an increase of 297 percent.  The DSO increased as the result of BreitBurn's revenue plunging to one quarter of its 2008 level of $804 million.

Linn Energy LLC, an oil and gas independent based in Houston, Texas, had one of the greatest revenue plunges of any company anywhere after the crisis as its annual sales fell a staggering 424 percent from $1.43 billion in 2008 to $273 million in 2009.  The accounts receivable, meanwhile, decreased only $30 million.  As a result, the company's DSO soared 296 percent from a very respectable 36.85 days to 146.07.  Linn Energy's 2009 market capitalization was $2.2 billion.