Turmoil in the oil & gas business has triggered a new wave of M&A activity—including private equity firms looking for bargains. But even at attractive valuations, oil & gas assets can come with unexpected risks and high costs.
Big, unpleasant surprises can lurk in the IT department. Maintaining a smooth IT operation can be difficult in any business, but changes in ownership often create unique complexities in oil & gas, such as managing the details of leases and royalty payments. A robust and up-to-date IT system is also essential for smoothly managing environmental assessments, title defects, drilling permits and taxes.
Legacy infrastructure for field operations, security and back-office operations often consume much more time and money than acquirers expect. And some of the most dangerous pitfalls include the complexities of point interest and royalties such as land management, production and regulatory production, joint interest billing and revenue payments.
Buyers who don’t understand how to keep critical IT systems operating have been known to miss royalty payments and be forced to liquidate. Legal troubles can quickly destroy value: while a roughneck might cost $50,000 a year, a first-rate litigator could bill that much in a week.
Smart acquirers work to avoid IT pitfalls before Day 1, gaining control of the IT TSA to understand constraints, structure, managing charges and other costs. The M&A team determines how to work with the business and prepare IT TSA exit plans. Given the wide array and gravity of the risks, the team may need to make significant investments to understand the details and their implications.
In our experience, an acquisition is far more likely to deliver value if detailed Day-1 plans shorten the TSA period. Chances of success are also improved when there is a clear plan to stand up back-office functions including HR, geology, engineering, finance and supply chain.
We recommend establishing a SWAT team to during the TSA period to ensure critical activities are carried out, including adding and subtracting application access, developing dual feeds between buyer and seller, and developing minimum viable product operational, financial, health, safety and environment (HSE) and regulatory reporting.
Despite record low valuations, most oil & gas acquisitions today offer fewer synergies and take longer to deliver value. Some of the challenges arise from the complexity of the technology landscape, misalignment between business and IT requirements, and the difficulties of integrating the target’s technology. Increasing regulatory scrutiny of technology solutions can also cause costly interruptions, and security risks are rising, including intellectual property theft and malware attacks.
KPMG has the industry and IT expertise to help clients meet all of these challenges, identify and significantly reduce risk and deliver more value:
- Industry knowledge: Our transaction-focused practitioners have deep oil & gas and technology experience. They bring proven deal methodology, oil & gas and transaction-focused tools, and integration accelerators and playbooks.
- Pre-sign diligence: During the pre-sign period, we bring our deal experience to help clients understand material technology risks to the deal, IT costs and TSA support needs, and synergy opportunities—all to support negotiations.
- Sign-to-close planning: We help lay the foundation for a successful post-deal technology environment during the sign-to-close period. We help clients define a target state operating model that aligns with deal imperatives and delivers agile and scalable IT platforms.
- Post-close integration: The value of every deal emerges in execution after the close, of course, but competing priorities and business-as-usual activities can distract managers from meeting deal objectives. We help clients develop detailed plans to exit TSAs, achieve desired end states and realize IT synergies while enabling business objectives.
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