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From the Oil Markets to Your Family Budget

If you are anything like me, you don’t even remember what color shirt you wore last Wednesday. Let’s travel back in time and revisit the 2014 oil and gas market crash before reviewing the mistakes I see oil and gas professionals make with their personal finances.

On June 25, 2014 benchmark Brent peaked at almost $116 per barrel, the highest level in 2014. This occurred right before an enormous and relentless drop that would sink prices by more than 60% over the next several months.

Brent dropped to $86 per barrel at the end of October, $70 per barrel by the end of November, $57 per barrel by the end of December and less than $47 per barrel on Jan. 13. 2015.

On September 2, 2016, Forbes stated that more than 350,000 oil industry workers and personnel had been laid off globally.

During this downturn, I was working at a major financial institution that happened to hold the 401k plans for some of the major oil and gas companies. I had many difficult conversations with families who were concerned about not only the balances of their 401k plan, but also their job security. 

I remember clients asking me, “When do you think this is going to stop?” Unfortunately, I did not have an answer. What I realized during these hard conversations was that many these families had not done any type of financial planning to prepare for a situation like this. The lack of planning had them feeling scared and stressed out about their family’s financial well-being.

I want to make sure you do not become one of these families in the future. In this article, I will share the top 3 mistakes oil and gas professionals make and how to avoid them.

Mistake 1: Lack of Knowledge of Equity Compensation.

SOPs, SARs, RSUs, RSAs, PAs, NSOs, ISOs are all types of equity compensation and can start to look like another language after a while.

I find that many oil and gas professionals choose to ignore their equity compensation because they do not understand it. As a result, they are taking on unnecessary risk and end up paying too much in taxes.

Manage your risk

Having too much stock of a particular company in your portfolio can lead to a gambling strategy vs. an investment strategy. If you are emotionally attached to the stock, look for creative ways to lower your risk. Here are some examples of how you can do this:  

  • Invest the rest of your portfolio in sectors that historically do not follow the movement of the oil and gas market. This has the potential to reduce the volatility of your overall portfolio.
  • Use conditional stock order types. They can help protect your downside risk.
  • Use option strategies. They can help you transfer the risk to another party and potentially increase your income.  Be very careful when using options if you are not well trained in them.


Understand how you are taxed

For an example, let’s talk about incentive stock options (ISOs). ISOs are a form of compensation to employees in the form of stock rather than cash. With an ISO, the employer grants the employee the option to purchase stock in the employer's corporation.

How ISOs are taxed depends on how and when the stock is disposed. Disposition of stock is typically when the employee sells the stock, but it can also include transferring the stock to another person or donating the stock to charity.

A qualifying disposition

This means, the stock obtained through an ISO, was disposed more than two years from the grant date and more than one year after the stock was transferred to the employee (usually the exercise date).  The benefits of disposing an ISO in a qualified manner is you’ll be taxed at long-term capital gain tax rates on the difference between the selling price and the cost of the option. This can save you a lot of money.

Tax withholding

Employers are not required to withhold taxes when stock options are sold. Therefore, people who sell ISO shares may have significant tax liabilities that have not been collected via payroll tax at the end of the year. It is important to send prepayment to the IRS to avoid any penalties at the end of the year. Another option, is to increase withholdings from your paycheck.

Mistake 2: Not Managing Cash Flow Properly.

I recently met with a couple and the topic of job security came up. She is a geologist in the Denver metro area and fears she’ll have to relocate to another state if her job was eliminated. Another couple I recently spoke with wants to leave the oil and gas industry all together to pursue a more fulfilling career.

All of this reminds me of what my father would say when I was young. He would tell me, “Nestor the reason I do not want to buy a new car is because I do not want my boss to think I need this job.” As a kid, I did not have enough life experience to truly understand what this meant.

According to the average wage index circulated by the social security administration, if you make over $150,000, you are in the top 5% of earners in North America.

The reason professionals in the oil and gas industry need to have a watchful eye on cash flow, is not just to have the flexibility do something else with their life but also to be able to deal with potential job loss and the amount of time it can take to find a job with comparable income.

Avoid getting in trouble with your cash flow

When I help families with cash flow, we go over a 3-step process that involves creating a budget, setting up a simple but efficient banking structure and tracking success. 

Creating a budget  

  • Make sure you and your spouse identify the activities that bring the most joy to your life. This is the most critical part to creating a successful budget as it will drive your spending behavior and will give you the discipline to say no to impulse purchases. 
  • Look at your bank and credit card statements and identify where your money is going, do this for about three months to get a good understanding of your spending habits. 

Set up banking structure

The best thing to do is set up a banking structure into different buckets. This is a simple and effective way to manage expenditures, reduce debt, increase savings, and fund important life goals. 

Create four different bank accounts and title them:

  1. Paycheck      account
  2. Fixed expenses
  3. Discretionary      “fun” expenses
  4. Future goals      (or I like to name this one the goal      I’m most excited about)

When you get paid, deposit your check into your paycheck account. Then create three automatic transfers to fund your three remaining accounts. This will keep you from overspending and will help you to easily track where your money is going.

Check in with your spending on a quarterly basis

Put a reminder on your calendar to run a report that shows your spending trends over the past three months and reflect on where your money is going. The goal of this exercise is to identify what your total fixed expenses are and how much fun money you have left. This is especially important information should you need to take a lower paying job. Keeping your fixed expenses to a point that can be covered by a lower paying job will give you the flexibility and peace of mind to deal with the uncertainty of many jobs in the oil and gas industry. 

Mistake 3: Assuming You Will Be Employed until You’re in Your 60s.

According to a recent a survey Rigzone.com conducted, 52% percent of Rigzone’s respondents with more than 20 years of oil and gas industry experience are currently unemployed. Almost half of these people were the victim of a layoff. Yet 83% of them are still actively looking for employment in the oil and gas industry.

Many retirement plans fail because people assume they will work into their mid-60s.

Make sure you have a retirement plan that allows you to retire in your mid-50s and do not forget to account for hefty health insurance premiums you will have until you become eligible for Medicare.  

Ready to start working on your financial life?

As a financial planner, I help individuals and families develop a financial plan that supports their definition of an ideal life. At Green Mountain Planning we do this in a no product sales or minimum environment and would love to have the opportunity to partner with you. 

All of our engagements begin with a free no obligation introduction or second opinion review.

Call me at 970-620-8688

Email me at nestor@greenmountainplanning.com

Schedule your complimentary meeting

About the Author

For more than a decade, Nestor has helped his oil and gas professionals define their personal financial values to help build a plan that centers on rewarding outcomes. The journey, he believes, is every bit as important as the destination. He established Green Mountain Planning as a fee-only financial firm to avoid the pitfalls and conflicts of interest found in other agency settings. “I work for you, not any company or product.”