Portfolio Growth (Inorganic): Importance of Development Engineering in Value Creation : Part II
Updated: Nov 27, 2020
BY Tariq Siddiqui: May 22, 2018
Mergers & Acquisition (M&A) provides critical growth of oil company portfolios through inorganic means (thru acquisitions rather than exploration). With markets becoming increasingly competitive, the traditional Financial Engineering methods of creating value through multiple expansion and arbitrage are becoming increasingly difficult, more and more deal teams are relying on operational partners to create value.
In Part-I of this article, we focused on how the development engineering team helps the exploration team in creating value during the entire value chain of exploration process; from regional studies till discovery. In the Part-2, here, we focus on the role of Development Engineers and support team's role during the inorganic portfolio growth through Mergers & Acquisitions. M&A team (more generally, New Business Development or NBD team) spans through ‘Opportunity Identification’ and ‘Deal Delivery’. The M&A support team (Development engineers) play critical role in both phases. There are many similarities in the roles and responsibilities between Exploration support team and M&A support team but there are significant differences.
First, the inorganic growth through discovered opportunities entails significantly more data, therefore size of M&A support team is comparatively larger. This also involves substantial amount of data review in the real or virtual data rooms. The available data set size may vary, depending on the maturity of the asset; from a small data set for stranded discovered onshore resource with few wells and no production to multi-field, multiplatform offshore brown field with large production with hundreds of wells. Accordingly, team size and effort are scalable depending on data availability, headline size and the complexity of opportunity.
Secondly, the volume of data allows appreciably more detailed analysis to assess the value proposition of the opportunity (due diligence). The size and scope of multi-disciplinary development support team is much broader; workflows are more detailed and evaluation tools are much more sophisticated. The use of 3D geological and simulation models and history matching of data prior to forecasting is not entirely unknown for a field with a sizeable production history. Analogues and benchmarks still play an important role but more for reliability check then to provide the missing data in a sparsely explored basin. Accuracy in cost (CAPEX/OPEX) and schedule estimates are level higher and risk assessment more comprehensive. Furthermore, discovered asset may have several associated projects that need assessment for the development such as; appraisal wells, infill development, near-field exploration prospects, cluster projects and late life compression to mention a few.
Third, the integration between ‘Development support’ team and ‘Deal Delivery’ team is critical. Development Manger not only integrates all the development/technical functions, but also actively works with deal team in commercial negotiations with the vendors in understanding the commercial drivers and developing the value proposition. In larger deals (headline size > USD $100 Million), the development support team acts as operational improvement team, and serves as a critical link between deal delivery team that is focused on financial, legal and taxation issues and the portfolio team (asset team) focused on the portfolio issues. This dialogue driven process between the Development team (in operational improvement role) and portfolio team goes much beyond decision review board meetings and helps portfolio team with solutions to the challenges faced by them allowing deal delivery team to focus on more important strategy issues.
Fourth, unlike the exploration team that deals only with undiscovered volumes, the development support team in M&A is responsible for sizeable contingent resources and reserves evaluation of discovered and undiscovered volumes. This requires development team to organize integrated technical/commercial reviews and reserve assurance review requiring significant stakeholder management and ability to influence key stakeholders without formal authority and manage significant risk and uncertainty.
Finally, in contrast to exploration support team, that plays no role after successful lease acquisition or a discovery, the development support team actively works with portfolio team after the acquisition and during the transition of project from New Business Development organization (or Deal delivery team) to the development organization. The team organizes strategy framing workshops, helps prepare 100 day plans, long-term road maps, stakeholder and risk management plans. Similar to exploration, the large companies with a sizable M&A portfolio, have a dedicated development engineering team that is embedded and co-located with NBD team and helps in developing the value proposition of the opportunity.
For the inorganic growth in identify phase, the ‘NBD team is in the driving seat and responsible for opportunity identification, negotiations and deal delivery. The ‘Development support’ (or operational improvement) team provides equally critical support in developing a value creation and value protection. Without development support, a credible binding bid cannot be made; there is a risk of loss in hundreds of millions of dollars!