The oil and gas industry seems like it's in a constant state of flux, which is neither good nor bad. No matter what is driving the change at any given time, however, one thing remains constant – the need for systems that can keep pace with those dynamics, on both the accounting and operational sides.
Unfortunately, systems integration isn't always as high as it should be on the M&A due diligence food chain, an oversight that can leave leadership scrambling for answers, stakeholders grimacing, and accounting teams swimming in confusion. That's why Embark’s walking you through the systems integration process, lending some key insights and best practices as we go. So pull up a chair because smoother, more successful transactions are just around the bend.
System Integration Challenges for CFOs in Oil and Gas
When discussing consolidation in oil and gas, the conversation doesn't solely focus on the industry itself. There has also been significant consolidation in oil and gas accounting systems, posing yet another significant challenge in an integration process that was already complex.
In other words, integrating separate accounting systems and data between multiple entities was never a walk in the park to begin with, particularly in a complicated and unique industry like oil and gas. Throw rapidly evolving software solutions into the mix and it's enough to make even the most veteran CFOs contemplate early retirement.
Okay, maybe that was a smidge of hyperbole, but you get our drift. Integrating systems is rarely a straightforward process for energy companies. A lack of in-house expertise on this specific process just adds fuel to the fire, creating significant hurdles for finance leadership when time is skinny and stress is high.
The Benefits of Outside Specialists
Given Embark's expertise in such matters, you might think this is a thinly veiled advertisement for our services. And while there might be an ounce of truth to that sentiment, it doesn't make the following any less true – outside specialists bring experience and efficiency to integrations that oil and gas companies don't always have on their own.
Put another way, businesses sometimes try to tackle these complicated initiatives with teams lacking the necessary know-how, throwing new tasks and responsibilities on their already crowded plates. However, an experienced third party can be a CFO’s best friend when a critical integration is on the horizon but time is scant at best.
By partnering with the right team as early as possible, you can identify potential pitfalls and hurdles ahead of time, troubleshooting issues before they turn into outright catastrophes. Further, experts can maximize efficiencies between the systems by consolidating when possible, leveraging synergies, and reducing the number of vendors involved.
As a result, you're left with streamlined systems and intuitive interfaces that create a better user experience for your people. And speaking of your people, thanks to these efficiencies, you can often reduce the headcount working across the systems, freeing your team to work on other, more value-creating tasks.
The bottom line – if you lack the in-house experience and expertise to effectively integrate different systems, an outside team can significantly speed up the entire process, all while reducing costs and improving the business insights you provide to your decision-makers. That's what we in the business call a win-win.
Building a System Integration Strategy
Now that our preamble is out of the way, let's roll up our sleeves and get to work. And we're going to start at the strategic ground floor, following the same tactics you probably use with other initiatives in your enterprise. Specifically, we want to begin the integration process by identifying what your ideal future state looks like and, just as importantly, the time constraints involved.
Obviously, your game plan is going to depend – or at least should depend – on your exit timeline and strategy. For example, a longer-term investment into a particular oil and gas company will require a completely different integration strategy than if you were looking to quickly flip an acquisition. Whereas the quick flip scenario typically means keeping the existing systems in place, something longer-term requires significantly more planning.
No matter what your end goal might be, however, it's always in your best interest to begin building your system integration strategy early. Granted, keeping the existing systems in place doesn't require much deliberation or effort, and that's great. Still, even with minimal effort involved, early game planning can eliminate those toxic states of confusion and chaos that do nothing but stress the teams involved.
In fact, we recommend the same approach if you're just upgrading to a better system – maybe migrating from QuickBooks to an industry-specific solution – or switching to a different variable of the same platform, perhaps moving from an on-prem system to cloud-based. Needless to say, if you're integrating, switching, or upgrading your accounting systems, start planning early and make sure you have the right combination of skills and experience leading the way.
The Oil and Gas M&A Integration Timeline
Since M&A overwhelmingly drives most of the need for systems integration in oil and gas, we figured it best to use a deal timeline as our foundation. That said, we recommend looking at Embark’s Post-Merger Integration Checklist & Best Practices as a roadmap for your transaction, covering everything from accounting systems and data environments to operations and company culture.
Just remember, although our checklist will certainly be beneficial, oil and gas is a bird of a different feather. Thankfully, whether the integration stems from a merger, acquisition, or some other consolidation, data between the different entities is often pretty similar, just processed differently.
Therefore, to use a common example, it's not unusual for companies to have interest in the same natural gas wells, or wells just a stone's throw from each other. Because of this overlap, energy sector integrations should include mapping interest lineage and revenue decks to ensure clean, organized data.
Pre-Deal Integration Needs
Efficient, successful M&A in oil and gas will always hinge on due diligence, including on the systems involved. Thus, before shaking hands and signing on the dotted line, we advise taking inventory of the various systems, particularly their scalability.
As an example, if you are the acquirer in a deal, it's always a good idea to begin with a current state analysis of what you're trying to acquire, how to sync it with existing systems, and identifying the tools and abilities you'll need to integrate the two. This gives you the best chance of reaching your ideal future state and, just as importantly, in the most efficient manner.
From there, you develop high-level strategies to get you from point A to point B, including any opportunities for consolidation. For instance, are you an upstream company acquiring another upstream business? If so, there's a good chance you can consolidate some, maybe many, of the systems and processes.
Of course, that won't always be the case, so some integrations might feel like you're starting from scratch. In those cases, you'll want to better understand how well your current systems can handle the new, post-deal business needs and processes. This might entail finding new accounting software with the functionality to help you accomplish your objectives. That said, just wait until you complete the transaction before implementing a new ERP or any other critical system.
Post-Deal Integration Needs
Let's fast forward a bit in the process and assume the parties have reached a deal. Now your attention should pivot toward the agreement itself, ensuring you thoroughly understand any compliance issues as well as the deal parameters.
How much time do you have for the systems integration? What entities, assets, and systems does the transaction specifically include? These are all critical questions you must answer to optimize the integration process. As a pro tip, we recommend getting buy-off on deadlines from everyone involved before proceeding any further, including any consultants and contractors.
Process Assessment
Needless to say, it's not just accounting systems that will dictate how well the entities integrate with one another. The processes between the two are just as essential, making it vital that you understand how the two parties actually do things. Chances are, the more the processes differ, the more involved the integration will be.
Now, we’re not saying your process assessment needs to be unnecessarily granular. However, you certainly want to establish at least a broad understanding of how everyone and everything will communicate.
From an accounting perspective, how will the different data tables speak with one another? For example, if you need to import a sub-ledger, what data will you need, and how will you obtain that data? Once again, this only highlights how important a data migration plan is to the integration.
As a best practice, if you’re the acquirer, we recommend getting to know the acquiree's chart of accounts like the back of your hand, what exactly they are recording, and how that translates to your current operations’ view of things. Also, keep in mind that your operations team will want to get comfortable with such a translation.
Automation Is Your Friend
If you're already driving the digital transformation highway on the operations side – maybe dipping your toe into process control systems via PLC, HMI, DCS, and SCADA – you're no stranger to the wonders of automation. However, speaking to the accounting side, if you're still knee-deep in manual processes and endless spreadsheets, automation systems could very well become your pre-integration accounting best friend as well.
Solutions like Alteryx, for instance, can help bring even the most disparate of data and systems together in real-time, eliminating redundancies and streamlining reporting along the way. Of course, this is yet another area where a third party experienced in automation solutions can add significant value to the integration, often the entire transaction itself.
Executing Your Gameplan
Now that you've planned everything out, you want to make sure you dot every I and cross every T before going live on the integration. To that end, we've gathered several different areas to focus on at this later stage.
Ensure Inhouse Talent Is Up to the Challenge
You've put too much into the transaction at this point just to drop the ball on the administrative side of things. Remember, you still need to pay your vendors, not to mention any royalty interest owners if you're an operator. This critical point is especially important for upstream companies since your joint operating agreements (JOAs) will explicitly say how quickly you need to pay people. Likewise, when states are owners in a well – we’re looking at you, Texas – they’re notorious for requiring fast payment.
Therefore, you want to ensure your people know their way around the data and any agreements involved. Otherwise, you risk stepping on toes, angering key parties, and grinding to a halt just when the goal line is within reach. And that's no fun.
Confirm Vendor Payment Information
Building off that previous point, your team should confirm payment information before hitting send, double-checking bank information to ensure everyone gets paid and, just as importantly, you can head off any potential fraud. Sending letters-in-lieu ahead of time and asking recipients to verify such information is critical to covering your collective backside.
As a general best practice, be sure you reach out to your vendors and customers during the process, communicating what's going on so they’re informed of upcoming changes. Also, use this as an opportunity to look over your contracts and identify those where it makes more sense to simply repaper them.
Test the Systems
In a perfect world, everyone uses the same data sets and systems, and your integration just naturally falls into place. But as you know, this is not a perfect world, so don't hold your breath waiting for that particular manna from heaven. Instead, be diligent in testing the different systems and ensure you understand where they differ.
For instance, upstream companies need to make certain the different systems pay the same amount to the owners. From a distance, carrying a number out to eight versus ten decimals might not seem like such a big deal. However, in reality, these are the types of differences you need to take into consideration.
Active Risk Management
Note our use of the word active. Obviously, this implies ongoing risk management, including regular check-ins with the people involved in the integration to ensure everything is proceeding as it should. If someone on your team is unsure or confused about anything – literally – clear up that uncertainty before it causes bigger problems.
You'll also want to take your crystal ball out of storage and peer into the future, at least as best as possible, to see how these different moving parts will impact your month-end close. This is the time to address any issues you might identify before your close deadline is sitting on your shoulder like a woolly mammoth.
Also, we recommend taking a closer look at your implementation planning and timeline. Are all of the systems and processes on track to go live simultaneously, or is a staggered launch more realistic? If staggered go-live dates look probable – as they often are – be sure to fully understand the impact it would have on operations, and what you should do between those staggered dates to keep the integration on track.
Heed the Regulatory Environment
Regulators wield a particularly heavy hammer in oil and gas, making it essential to keep regulations in mind while planning, integrating, or implementing your systems. For instance, oil and gas operations need systems that can maintain ongoing communication with particular bodies like FERC, PHMSA, and others.
This is an area companies can easily overlook given the scope and volume of everything involved in an integration. To prevent this particular issue, just be sure to factor such communication into your system's design.
Gauge Your Need for Outside Help
To revisit our ongoing theme, take advantage of this late-in-the-game opportunity to see if outside specialists can help your integration finish on a high note. Depending on how your needs change throughout the process, the right outside teams can scale and flex to those changes, ramping up when things get intense, or shrinking when your team has a good handle on things.
Specialists with expertise in systems integrations might be worth their weight in gold if they can create automated data migration scripts for you. Rather than resorting to old-school, outdated habits of manually shifting data to and from – a tedious, error-prone process if there ever was one – automated scripts would be infinitely faster while also preserving data integrity. Needless to say, these types of efficiencies would make your data and systems testing so much more manageable.
Going Live
Honestly, at this point in the process, the heavy lifting is already behind you. Still, no matter how diligent you've been so far, there’s a good chance unforeseen surprises still pop up and sideswipe you. Thus, we recommend installing checkpoints after going live, simply to ensure everyone and everything is a-okay and heading in the right direction.
The Bottom Line: You’re Not Alone
Hopefully, you've been able to navigate these seriously complicated waters, and your systems integration has gone off smoothly. However, just looking at what's involved, there are countless places for your integration to go sideways on you, serving as yet another reminder of how an outside party could be such a game changer.
If you ultimately decide to head in that direction, our advice is to choose a group that understands the industry, its terminology, and the specific needs of an oil and gas integration. In other words, decks, flows, nominations, compressors, and control system integrators should sound familiar to them, not random tiles in a petrochemical-themed game of Scrabble.
Thankfully, with years of experience under our collective belt, our team at Embark understands what an integration means in the oil and gas industry, and we can't wait to help you succeed. So let's talk.
