Oil and Gas Deals Highlight Need for Accounting Best Practices

Amid the uncertainties and risks that deal makers face in the oil and gas industry, the back office grapples with the intricate rules and regulations surrounding the accounting and reporting aspects of oil and gas deals. After closing a transaction, a new set of complexities emerges.

If not addressed effectively, these complexities can disrupt operational efficiency, compromise accounting accuracy, and potentially impact the overall transaction value.

While the number of deals may have been less in 2023 than in the prior year, we can see a growing differential between larger and smaller players where smaller entities are struggling to find the capital for a merger or acquisition. This will likely spur another round of consolidation within the industry, with larger players buying up smaller players.

Several historic deals have occurred in the past year. ExxonMobil Corp. announced a $60 billion merger with Pioneer Natural Resources Co., ChevronCorp. acquired Hess in an all-stock transaction valued at $53 billion, and Chesapeake Energy Corp. and Southwestern Energy conducted a $7 billion merger.

Considering the expected increase in deals, we highlight common reporting challenges that may arise in your back office as well as best practices to fully realize the potential of your own acquisition.

Transition Services Agreement

The transition services agreement can either be a saving grace or a significant pain point in the process of business acquisitions. The absence of a well-documented and thought-out TSA can lead to substantial challenges for both the acquiring team and the accounting department.

Vague wording in TSAs is common and sometimes deliberately included by the seller to avoid additional work. In our experience, sellers often view the TSA as an opportunity to hasten its conclusion and may consider the acquiring team a hindrance.

To mitigate such issues, we recommend steering clear of long-term TSAs. Even a seemingly manageable 18-month TSA can create friction between the seller’s and buyer’s employees after only a few months.

Exiting the arrangement ahead of schedule is recommended. By doing so, you increase the likelihood of receiving the necessary support and cooperation before the seller enforces minimal engagement from their employees.

From an account reconciliation standpoint, a TSA can be instrumental in obtaining reconciliations. While some buyers may withhold their accounting workpapers, if they are under a TSA, any account reconciliations conducted post-acquisition date belong to the acquiring team.

These reconciliations are typically created by rolling forward historical reconciliations, providing a valuable snapshot of the historical account reconciliation process. While this may not address issues related to missing or poorly executed account reconciliations, it does offer a potential solution within the broader scope of post-acquisition accounting challenges.

Accounting Processes

Transitioning accounting processes and software requires meticulous attention to detail and effective integration strategies. When merging two organizations, it’s important not to assume that one possesses all the best processes and procedures. Instead, be open to the possibility that the optimal path forward may involve a combination of both entities’ approaches. The key is to ensure alignment across the board.

In many cases, the software used for managing the assets being acquired may differ significantly from the buyer’s existing system. Companies in this situation will need to extract data from the seller’s accounting system, transforming it as necessary, and then integrating it into the buyer’s enterprise resource planning system.

This process is susceptible to human error, making communication and meticulous verification essential. “Trust but verify” should be the motto, and the right team members should confirm the accuracy of the data. For instance, although IT professionals may excel at data manipulation, revenue experts should be involved in verifying the setup of revenue decks to ensure a smooth initial revenue run.

Additionally, business leaders should understand the revenue processing lag, as different companies may operate on varying timelines. Ensuring that revenue payment schedules align with agreements will help avoid any unexpected financial challenges. In this phase, securing the right resources, both in terms of software and additional team members, can facilitate seamless integration.

Multiple Transactions

When dealing with multiple transactions occurring simultaneously, your team should assess whether these transactions should be accounted for separately or combined.

If you decide to combine them, several additional considerations arise, including the implications for significance testing, financial statement requirements, and financial reporting. These factors need to be carefully weighed and addressed to ensure accurate and compliant accounting practices in the complex landscape of multiple concurrent transactions.

Lack of Visibility

During an acquisition, the lack of visibility into past company performance, decisions, and actions can cause challenges—particularly in areas such as revenue, including understanding previous deck changes, the suspense account, and the status of escheatment.

These revenue-related challenges become the responsibility of the acquiring team, even if they originated prior to the acquisition. The lack of historical context can lead to a surge in owner relations inquiries, leaving the team ill-equipped to address them adequately.

Additionally, accounting teams often find themselves in a guessing game when dealing with accounts that lack clear reconciliations. Balances may be carried over at book value for fair value purposes, but the lack of understanding about these balances can lead to indefinite delays or eventual write-offs.

Ideally, all account reconciliations would be complete and accurate, smoothly transitioning from the seller to the buyer. However, reality often falls short of this, and obtaining this data can be a challenge.

To address this, deal makers and buyers’ executive teams should actively seek to obtain as much data as possible from the seller during the acquisition process. While success isn’t guaranteed, making the effort to secure this critical information is essential.

Successfully completing accounting and reporting during an acquisition requires careful planning, strategic integration, and diligent information gathering. Engagement of third parties can provide expertise and independent perspectives to surmount challenges related to integration, helping companies to realize the most value from their acquisitions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Keri Johnson is director at Stout and has over 16 years of accounting and reporting experience with both public and private companies.

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