Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
The demand, pricing and terms for oil and natural gas services provided by us are largely dependent upon the level of activity for the U.S. oil and natural gas industry. Industry conditions are influenced by numerous factors over which we have no control, including, but not limited to: the supply of and demand for oil and natural gas; the level of prices, and expectations about future prices of oil and natural gas; the cost of exploring for, developing, producing and delivering oil and natural gas; the expected rates of declining current production; the discovery rates of new oil and natural gas reserves; available pipeline and other transportation capacity; weather conditions; domestic and worldwide economic conditions; political instability in oil‑producing countries; environmental regulations; technical advances affecting energy consumption; the price and availability of alternative fuels; the ability of oil and natural gas producers to raise equity capital and debt financing; and merger and divestiture activity among oil and natural gas producers.
Interest Rate Risk
We are exposed to interest rate risk, primarily associated with our Credit Facility and Financing Agreement. As of December 31, 2020, we had $7.5 million and $17.7 million outstanding under our Credit Facility and Financing Agreement, respectively. For the year ended December 31, 2020, the Credit Facility and Financing Agreement had weighted average interest rates of 3.2% and 9.5%, respectively. A hypothetical 1.0% increase or decrease in the weighted average interest rates would cause our interest expense to fluctuate by approximately $0.3 million annually. We do not currently hedge our interest rate exposure.
During 2017, policymakers announced that LIBOR will cease subsequent to 2021 and alternative reference rates (“ARRs”) are being developed to replace current LIBOR. In the United States, the Alternative Rates Committee selected the Secured Overnight Financing Rate (“SOFR”) as the preferred alternative reference rate to the US dollar LIBOR. ARRs are structured differently than LIBOR rates, as they are a backward-looking overnight rate. Additionally, SOFR will be based on overnight Treasury General Collateral repossession rates, whereas LIBOR is based on unsecured transactions. We will monitor the continuous emergence of SOFR, as it could adversely impact our interest rate risk and therefore the amount of interest we pay on certain of our liabilities currently measured at LIBOR.
Credit Risk
The majority of our trade receivables have payment terms of 30 days or less. As of December 31, 2020, the top three trade receivable balances represented 19%, 11% and 10%, respectively, of consolidated accounts receivable. Within our High Specification Rig segment, the top three trade receivable balances represented 32%, 8% and 7%, respectively, of total High Specification Rig accounts receivable. Within our Completion and Other Services segment, the top three trade receivable balances represented 25%, 17% and 14%, respectively, of total Completion Services accounts receivable. Within our Processing Solutions segment, the top three trade receivable balances represented 62%, 28% and 18%, respectively, of total Processing Solutions accounts receivable. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers.
Commodity Price Risk
The market for our services is indirectly exposed to fluctuations in the prices of oil and natural gas to the extent such fluctuations impact the activity levels of our E&P customers. Any prolonged substantial reduction in oil and natural gas prices would likely affect oil and natural gas production levels and therefore affect demand for our services. We do not currently intend to hedge our indirect exposure to commodity price risk.
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