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E&P Company Acquisitions: Avoid these Pitfalls
On February 16, 2015 / By William Aimone

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Exploration and Production (E&P) companies face unique data challenges when integrating newly acquired assets.  The sheer volume of land ownership, working interest, market contracts, and well information crossing multiple functions requires extra time and effort to clean up during the integration.  Therefore, many E&P companies avoid much of the needed clean-up work during integration, causing inefficiencies in processing revenue, regulatory reporting and land administration.  Oftentimes the result is material weaknesses, joint venture audit exposure, royalty owner lawsuits, excessive prior period adjustments and delays in financial reporting.

Avoid the integration exposure by planning accordingly and paying close attention to these three areas:

Revenue and Land Decks

To process revenue accurately and eliminate manual revenue calculations, land and revenue decks must have complete information. However, royalty and working interest data from the acquired company is frequently incomplete and inconsistent across various business functions. This happens when critical information is housed in different places, often in spreadsheets. The effect is exacerbated when data updates do not happen concurrently across the business, leaving a wake of inaccurate data.

Set expectations for a deck analysis and cleanup effort to ensure all interest and ownership is complete and accurate before the integration is complete. If a company makes the mistake of integrating assets with inaccurate working interest data, accounting staff will continue to build revenue calculations and maintain reports outside the system.

For example, an E&P company found a significant number of royalty interest and working interest burden discrepancies between the land and revenue decks. The company realized that the deck information set up by the legacy company was not sufficient to process revenue. The company conducted a lengthy research and reconciliation process to align working interests, which allowed the revenue process to be automated and integrated in the new company.

Take the time to understand what information is required in an acquisition. Armed with that knowledge, begin the cleanup process.

Well Master

E&P companies often find the acquired company’s well master data is incomplete or contains a mix of completions, gathering points, storage facilities and other cost centers. Moreover, the information describing each of the wells or completions may be inconsistent. Each well or completion has dozens of assigned attributes in the well master database for reporting and analysis. Attributes include spud date, production status, bottom-hole location, API number, impairment group, etc.

Depending upon the size of the acquisition, a significant well master design and cleanup effort must be included in the integration plan. Any manual processes to report and analyze well information outside the systems should be eliminated as a part of the integration process.

Well Lifecycle

Well information is stored in various systems and departmental databases within an E&P company. This includes land, revenue, production, economics, drilling, AFE, reserves and accounting. The challenge is integrating well information across each of these systems and departments when an acquisition occurs, new well comes online, changes status or is plugged and abandoned.

For example, the well lifecycle process often starts in accounting when initial expenses are allocated to the well. If property accounting assigns a cost center to a well which is not cross referenced to a well in the production system, consistent production and revenue reporting will be an issue.  Similarly, during an acquisition, the well lifecycle process begins again in the new company.

A clearly defined well life cycle process is a must, regardless of whether the sharing of well information is automated or not. The integration process should be an integral part of well lifecycle process.

Trenegy encourages companies to include the data alignment and cleanup efforts in the integration plan.  A company may state, “We will clean up the data later,” and find themselves unable to make time for cleanup afterward. These are merely a few of the issues causing significant delays in integrating assets in an E&P company.

Trenegy specializes in helping E&P companies prepare and integrate assets. Feel free to reach out to us at info@trenegy.com to learn more about how to prepare for an integration.