Due to the precipitous drop in oil and prices and the sustained lower price environment that has followed, the landscape of the oil and gas industry has become more complicated. The significant number of bankruptcies and restructurings, the re-valuation of oil and gas reserves, and the risk of further downside has given oil and gas investors and management teams reason for increased scrutiny as they evaluate their investments and businesses. This scrutiny is particularly focused during financing deals, mergers, and acquisitions.
Given the increased complexity of the industry and the extra care paid to transactions, transaction advisory services have become more necessary. The scope of these services covers the gamut from basic proper due diligence, quality of earnings review, cash flow analyses, settlement statement review, and even forensic reviews.
As an investor looking to deploy capital or as a manager involved in a merger or acquisition, prudent investigative work is advisable. First, a due diligence clause should be included in the agreement. Next, the decision must be made whether to use existing in-house resources or to hire a consulting team to provide transaction advisory services. Four reasons to hire a transaction advisor are:
The complexity of the work may be beyond the capabilities of your existing team
The lower price environment, the wave of bankruptcies and restructurings, and the need for reserve and company revaluations have complicated industry dynamics. There are many aspects of a transactional review, for example, to determine the value of an enterprise or certain assets, to trace the financial statements to the underlying cash flows, or to transact with a company that is currently in or has been through a restructuring. Whatever the case, a transaction advisor will know where to look, which questions to ask and, how to best get the supporting data. The advisor’s experience is invaluable when trying to close a deal with expediency and/or transacting with a difficult counterparty.
Further, you will most likely encounter issues that require special expertise. An experienced oil and gas transaction advisory consultant can navigate these issues including complex accounting rules, nuances of bankruptcy court, and/ or valuation techniques. Any of these pitfalls will most likely stall out the efforts of a small team. With a consultancy firm, these issues can be dealt with professionally by the relevant experts.
Transactional expertise and knowledge of recent deals will enhance the diligence effort
Every deal is unique, but given the volume of activity over the past few years, common practices can be seen across the industry and a transactional review methodology has been developed. A tried-and-true approach is critical to completing the effort not only timely, but comprehensively. Some of the areas covered will include revenue, lease operating expense, general and administrative expense, and oil and gas interests, to name a few. Also included will be areas that are sometimes overlooked, but ripe for hidden surprises, such as revenue suspense, plugging and abandonment obligations, and revenue and/or expense interests.
Besides a broad methodology, familiarity with deal nuances can be useful to your investigation. Again, every deal is unique, but knowledge of how certain exceptions or irregularities have been handled can inform your own due diligence effort. Precedent examples are incredibly useful for any unknown territory encountered by your company. Transaction advisors are even more useful when trying to support a decision or stance that the counterparty may disagree with.
Lastly, the experience of a consulting firm will be useful for scoping the project. Based upon the perceived risk and following an assessment, the established methodology should be adjusted to be as penetrative as necessary, from the financial statements all the way down to a single check.
Established common practices, experience with deal nuance, and the ability to scope properly are all benefits that a forensic accountancy firm will bring to the table.
Your existing team may not have the resources
Giant excel files and stacks of revenue checks, vendor payments, and revenue and working interest listings. These are all reminiscent of a due diligence effort, which requires a very large amount of data to sort through and supporting documentation to analyze. The data management piece of a transactional review is a task of its own and, given an imminent deal, can be overwhelming to in-house staff working overtime to support the needs of the transaction. Hiring a transaction advisory firm will take the burden off of staff so they can focus on performing their day-to-day tasks and supporting the deal.
It may be beneficial to have an intermediary should contentious issues arise
A successful transactional assessment will often result in significant findings, some of which may have a direct monetary impact to the deal. This has the possibility of causing contention between parties. It may not be best to use your own team to present and argue these findings, as they may need to have continued interaction with the counterparty going forward and an amicable relationship is preferable. A third-party consulting firm can bear any push-back that may arise from the due diligence findings, thus shielding your own team.