Successful value capture in upstream oil & gas deals

Early integration planning is key to realizing deal value in upstream oil and gas

Despite constrained energy prices, upstream oil and gas asset deals continued at a strong pace in 2019, with transactions across North America. But if past experience holds, many of these deals may fail to deliver expected returns—because buyers didn’t focus early enough, or intensely enough, on post-deal integration.

Integrating the assets themselves is rarely the problem: oil and gas companies are very good at valuing reserves and producing assets and incorporating them into their own operations. Where upstream companies fail to capture value is in back-office integration.

Combining the back-office operations of a buyer and its target can result in tremendous efficiencies and significant value. IT systems and applications can be rationalized. Best practices can be adopted across the combined entity. The transaction can serve as the catalyst for technology upgrades. Processes can be streamlined across the business. But these efficiencies and their related value can only be achieved if the integration effort is well planned and well executed.

Unfortunately, like most acquirers, many upstream oil and gas companies focus mainly on getting the deal over the line—and only begin to think about the details of integrating the acquisition once the transaction has closed. Unfortunately, by that point it can be too late, and deal value can already be slipping away. In response, companies often end up taking hasty, knee-jerk actions in an attempt to secure some value and justify the deal. Cuts are announced and headcounts are reduced—steps that may in fact hinder the company’s long-term growth plans.

So how can upstream oil and gas companies realize more of the value from their transactions? In exploring this issue in our recent paper, Successful value capture in upstream oil & gas deals, we combined our own on-the-ground experience in the industry with the perspectives of a number of C-suite executives from independent U.S. upstream oil and gas firms.

We found that there’s a strong correlation between having a disciplined integration process and realizing deal value, and companies that successfully integrate operations tend to see more overall deal success. These companies devote time and resources to plan the integration well before the deal itself closes, focusing and prioritizing integration efforts to achieve the greatest impact, and put in place a team to manage the integration across the business. 

This integration team takes time to develop a clear understanding of the risks, dependencies and impacts across the combined enterprise, from exploration, drilling, and completions to production operations, midstream, marketing, IT, and other back-office functions. The team drives the integration process, keeps people focused, and coordinates synergy opportunities in order to effectively realize deal value.

Successful deal integration is the result of thoughtful, thorough, and early planning. Combining our experience working with upstream clients with the insights of the industry executives we surveyed, we identified five key steps that can help upstream oil and gas leaders greatly increase their odds of success:

  1. Use due diligence to plan integration – Buyers can use the due diligence process to identify potential integration risks and get a jump on integration planning. Taking the time early to dig into IT, back-office, supply chain, and commercial issues can pay off later.
  2. Don’t skimp on transition services – If the target or asset is a carve-out from a larger organization, you may require transition services, where the selling “parent” organization agrees to provide shared services for the business or asset being sold. Make sure you understand what this entails and ensure there’s clarity around service levels, duration, key contacts, pricing, and issue resolution.
  3. Get executives involved in integration – Don’t treat integration lightly. The CEO should drive home the importance of a smooth integration to the entire organization. C-suite executives should work with the integration steering committee, receive regular updates, and be involved in key decisions.
  4. Take control early – Have a Day One plan in place to take control of the acquired business or asset. This plan should clearly communicate to all relevant stakeholders such things as reporting structures, delegation of authority, and bank account signatories.
  5. Hit the ground running – Closing a deal isn’t the end; it’s just the beginning. It’s important to keep moving and not lose your integration momentum. The best way to hit the ground running is to establish a team once the deal is first signed so that integration planning can begin right away.

Even the smartest transaction can fail to realize its value if execution of the integration itself is flawed. To learn more about how value is created and lost in upstream oil and gas transactions—and how to capture the most value from your deal—read Successful value capture in upstream oil & gas deals.