Processes, technologies essential for weathering the M&A boom

Dee Houchen, Infor

There’s no denying that the US oil and gas market is experiencing a roller-coaster like period of change and uncertainty. The exploitation of unconventional resources has resulted in a sea change in the way upstream oil and gas companies are maximizing value. The midsize independent operators who mastered the development of these long-lived, prolific resources are grappling with soaring costs and growing regulatory strictures. At the same time, they enjoy the best opportunity in generations to dramatically grow their asset base. This makes them strong candidates for mergers and acquisitions, joint ventures, and other means of raising capital to compete in the next oil and gas boom. Add to this the bottoming out of natural gas prices, the backdrop of a national election, an economic slump, and on-going debates over whether/how US energy independence can be achieved, and you could make an argument that the industry has never before experienced the same level of change – or the same degree of opportunity.

These market conditions mean that CFOs of oil and gas E&Ps are finding themselves in increasingly high profile roles, and they must be able to manage a highly complex set of requirements. Having the right processes and technologies in place has therefore become essential to positioning these companies for success in a rapidly changing environment. The following are some of the key issues that CFOs now face, along with strategies for managing them successfully.

Cost control
Containing costs is critical for E&P providers but particularly for those operating in the natural gas space. As prices continue their precipitous decline, these players must work aggressively to monitor and contain costs so that profitability can be maximized.

Cost control strategies come into play across all areas of the business, from asset and risk management to insurance, litigation, and regulatory compliance. Technology has a critical role to play; however, there is often a lack of understanding of the impact – both positive and negative – that core financial management systems can have. Too often, these solutions cannot be easily adapted to meet changing needs, resulting in manual processes, high rates of errors, and reduced transparency across the business. Flexibility is the key. Capabilities like being able to run reports and maintain/customize your system without relying on IT and automatically enforce policies will put you in a position to more effectively keep costs under control – and to minimize the not insignificant costs of running the finance department itself.

Asset management
E&P providers must constantly balance the need to increase the availability and reliability of exploration assets while also maintaining a stellar compliance record in the area of health and safety. The ability to manage asset lifecycles using a service-centric approach that both maximizes uptime and takes into account cost and compliance concerns is essential to protecting profitability and minimizing risk – and also to putting the organization in a position of strength when it comes to a merger or acquisition.

Increasingly, E&P providers are finding that technology is an ally that can provide an edge when it comes to managing this highly complex process. Capabilities like built-in predictive maintenance, performance monitoring, and alerting can help increase operational and safety performance, while the inclusion of energy consumption and efficiency can positively impact the environmental side. When evaluating solutions, look for technology that can control 80% or more of operating and maintenance expenses, rather than settling for the 25% to 30% that’s typical for most solutions. You’ll be able to dramatically increase the visibility and control of both energy usage and costs, allowing you to uncover hidden cost-saving opportunities and adjust maintenance and energy control strategies to maximize the value of your assets.

Risk management
When it comes to positioning your company for a merger or acquisition, the question of risk is a critical one, as a single incident can wipe millions of dollars off a company’s value in one fell swoop. The issue is both complex and multi-faceted for E&P providers. There are health and safety risks that must be managed using many of the asset management strategies outlined above; however, there are also risks from the financial management side.  Dynamic regulatory and legislative conditions, along with the collaborative environment of E&P where working with partners and subcontractors is commonplace, can result in increased risk of both fraud and non-compliance.

Automation and controls are therefore essential to keeping risk under control. One category of technology that can be a major asset to risk management efforts and that is consistently shown to deliver measurable ROI is Continuous Monitoring. This technology allows you to automate monitoring of system access and identify potentially fraudulent activity. It can also lead to reduced audit costs, increased audit success, and improved transparency. Look for a solution that can monitor all systems, all business units, and all four levels of security, including access, configuration, transactions, and master data.

Multinational financial management
Finally, the international nature of the oil and gas E&P business means that financial executives must be able to manage changing and complex multinational financial management requirements. These requirements range from reporting in multiple formats like local standards, GAAP, and IFRS to consolidating processes and establishing controls across diverse geographies with cultural differences and varying levels of financial and technical expertise. Achieving full control and visibility of these operations is essential to establishing a position of strength in any M&A negotiation.

Multinational partnerships or expansion is an area where technology can severely limit growth unless the right financial systems are in place. Some key capabilities to look for include the ability to create multiple accounting reporting standards from a single set of accounts without the use of Excel, the ability to easily manage diverse tax requirements, the ability to accommodate multi-company/independent locale, and of course, robust multi-currency and language capabilities. Having this type of functionality in place will decrease risk and increase controls while also reducing the time and resources required to manage this very complex aspect of your business.

The unconventional drilling surge isn’t just a boom in the old sense of boom-and-bust cycles but a true revolution in the business of exploiting oil and gas resources. And the holders to the key that drives this revolution are generally the independent oil and gas companies—both private and public—that have long been the true drivers of oil and gas exploration and development since the earliest wildcatter days. Success hinges on many factors. Some, like elections and the state of the economy, are beyond the CFO’s control. But others, like mitigating risk, ensuring compliance, and taking steps to maximize profitability, are opportunities for CFOs to make a strategic contribution to the future of their businesses. By putting the right processes in place and ensuring that technology is an asset – not an obstacle, financial executives of E&P providers can effectively chart their course through this highly complex but exciting period.

About the author
Dee Houchen is Director of Product Marketing for Financials and related products at Infor. She has worked within the industry for more than 17 years, including roles in product marketing, product management, development, and sales.

 

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