The First 100 Days
In today’s world of technology and investment into best practices, it is surprising how unique each oil and gas asset transaction can be. Companies spend countless hours and investment into standardizing a process for bringing on or offloading assets in a given time frame. This article addresses not only the unique requirements of an oil and gas transaction, but also the variables associated with the integration of hardware and software systems, all while adhering to strict implementation deadlines.
Project management and timing are critical to successful asset integration. There is a laundry list of activities that need to be accomplished correctly and within a set timeframe to ensure a smooth transition from negotiating and drafting a purchase and sale agreement (PSA) to post-acquisition activities, such as management and staffing. Here are the primary elements that directly impact the complexity of the cut-over:
- (Stage/life cycle) Start-up vs. existing organization;
- Location of assets relative to existing portfolio;
- Transition services agreement (TSA); and
- Software and hardware.
Representative Upstream Oil & Gas Transaction
(Source: Opportune LLP)
Start-Up vs. Existing Organization
The biggest challenges are typically limited systems and minimal staffing for a start-up company. There is usually a strong case to outsource back-office functions such as land administration, operational accounting and financial reporting. The case to outsource is especially compelling if management’s goal is a quick exit in three to five years.
If management determines that outsourcing is not the model it wants to take, the next question should be: “Is the seller allowing staff to transition with the assets?” If critical roles are made available to the buyer, then the systems and processes become the next focus.
There are many back-office systems available; most have a base configuration that works for 80% of the business cases. There is often the thought that if one keeps the systems the seller is using, the conversion will be easier. This is usually not the case. Whether outsourcing or hiring, the reporting requirements to external stakeholders should be a central focus for the software configuration regardless of what vendor is chosen.
Key decisions related to successful asset integration are different for an existing company with systems and processes in place and the necessary internal controls already defined. Typically, a review of the processes and controls to determine any necessary enhancements is sufficient. The question then becomes: “Can this acquisition be absorbed and, if not, how quickly can we hire?” And again: “Is the seller allowing any critical back-office positions to move with the sale?”
TSA And cut-over
The TSA defines the type of services the seller will perform to support the asset integration, and the period those services will be provided before they are transitioned to the buyer. Timing of cut-over is a key consideration concerning the TSA because of the inherent lag between production and accounting. Generally, this lag is about 30 days for oil and 60 days for gas. For example, assume the TSA indicates the buyer will take over accounting and support processes in January. In January, the buyer will be accounting for December oil production and November gas and NGL production. Cut-over can be driven by either production month or accounting month; however, accounting month will result in a more aggressive timeline.
TSAs are often extremely detailed about the services the seller will provide and, of course, they cover the associated fees with those services and available timeline. The cut-over type, however, is not typically described in the TSA and often will be interpreted as “calendar month.” Therefore, it is important that the buyer and seller work together as soon as a purchase agreement is executed in order to define exactly how the transfer of services will occur.
Hardware and software
It is often the case that insufficient time is allotted to transition or procure new hardware and software. Inevitably, buyers do not want to spend money on resources prior to the transaction’s closing date. This means a significant amount of work needs to be performed post-closing. Even when the seller is including all the hardware in the field, items such as email transfers and corporate cell phones take longer than expected.
In addition to hardware, if a company is using a third-party IT provider, it is important to engage a firm familiar with the needs of an oil and gas company. For example, a company that helped set up an office for a law firm may understand laptops and servers and email, but it is not going to be familiar with radio towers and supervisory control and data acquisition (SCADA) meters and all the oil and gas-specific hardware and software required.
Beyond hardware, a buyer must consider the software needed. From the SCADA feeds and reservoir systems to the financial reports, every module needs to be part of the asset integration plan. This
doesn’t necessarily mean a comprehensive automated solution needs to be in place on day one, but a plan for the critical modules and then a timeline to implement the rest soon thereafter is critical. Ultimately, every module is going to require some sort of data conversion and testing activity.
Systems Considerations - High Level Example
(Source: Opportune LLP)
The first priority of all asset transactions is to ensure there are no interruptions in operations. When the TSA window is tight (such as three months or shorter), there is not going to be a strong business case for switching any of the software that the field personnel may be using (i.e., field data capture, production,
drilling and well data, etc.).
When pressed for time, buyers often think, “Let’s just implement exactly what the seller did.” In theory, this sounds like the perfect plan and the path of least resistance for everyone. Additionally, software vendors often tout the ease of a “lift and shift” where, in a perfect scenario, the seller data would be upgraded to the latest software version and all the configurations and reports will already be in place. This type of effort can be successful on reservoir systems, well and drilling data systems, but for the back-office modules, it is never that simple.
Consideration and planning for these complexities will reduce several risks to the integration timeline. Even the simplest of transactions often have limited timelines and unique requirements. Engaging third parties—due diligence, project management, IT, etc.—familiar with both the oil and gas space and complexities associated with asset transactions will lead to a smoother overall process.
About the Authors:
Amy Stutzman is a managing director in Opportune LLP’s upstream transactional advisory group. She leads teams that support executive management in understanding the structure and implications of complex transactions such as IPOs and acquisitions.
Byrony Coan is a director in Opportune’s upstream transactional advisory group. She has 18 years of experience in project management, oil and gas software, product management, process consulting and change management.