Winning in Acquisitions and Divestitures: Advice to Young Professionals in a Changing Company Landscape
Andy Rogers, vice president of business development at Encana, shares his thoughts on the current state of the industry and provides career advice to young professionals amid the acquisitions and divestitures (A&D) landscape.
The low commodity prices of 2015 have left some companies financially challenged and others with opportunities for business growth by means of A&Ds. For young professionals working in the industry, this can mean many things, such as the opportunity to work in a new asset or technology area, changing career streams, and even the opportunity to return to school.
Professionals are always looking to “work the right asset.” One does not necessarily want to be working an asset that might be divested by a company. Conversely, one does not necessarily want to work at a company that might be acquired by another company. What are some indicators that the asset on which one is working may be acquired or divested?
At the working level, you are probably not in tune with the strategic decisions that executive level managers are making. However, if you pay attention to the company’s strategic messages, you can potentially identify the direction in which the company is headed.
For example if your company has sent out a strategic plan to “balance their strategic mix,” it is a good indicator that the company is trying to be oilier or gassier, depending on its current portfolio. If the company is trying to become oilier, it does not take a genius to figure out that the company has to sell its gassier assets and/or aggressively develop or buy more oil assets. That is one of the more obvious scenarios one can identify.
Alternatively, keeping up with the headlines allows you to identify whether or not a company is financially stressed. Clearly, there have to be some changes in order for that company to continue to survive. In that situation, likely the company will have to sell some assets to sure up their balance sheet.
Can there be winners and losers when it comes to A&D?
There is only one case where there is a clear winner and loser. In a majority of cases, the goal is a win-win scenario for both the divesting and acquiring company. If you think about why people sell assets, there are probably three or four reasons to engage in a mergers and acquisitions (M&A) transaction.
The first reason is because they have to. This is the situation you do not want to be in. The company is in financial distress. It is no different from a personal financial crisis. If you found yourself in debt trouble and you had to sell your house, you are a victim to the market. In other words, it is a buyer’s market. Whatever the buyer is willing to pay, you have to accept, which is not the situation in which you want to be. You would like to be in a place where you can consider whether an offer is fair and if it is not up to your expectations, you do not have to accept it. This is the win-lose scenario in which you are forced to sell for some financial reason.
The second reason is to be opportunistic. This strategy is more common with private equity-backed companies rather than public companies. For example, if a company enters an asset when prices are low or if they have made considerable profit and want to crystalize their gains, they become an opportunistic seller. In other words, they have already made money on their asset and they want to sell. This situation is similar to the realtor who flips houses. The “house flipper” will buy a house, complete the necessary repairs and renovations, and sell the house for a profit. From the buyer’s standpoint, they envision further developing the asset to make it better and get increased returns. These M&A proceedings can be seen as a win-win situation.
Another reason why companies sell is for strategic purposes. A company may decide to change its strategic direction by getting out of unconventional and going into conventional, from oil to gas, or from offshore to onshore, and vice versa. In every environment, there are always companies who have “opposing” strategies who would like to purchase an asset that another company is selling. These situations can also be seen as a win for both parties.
The fourth reason as to why companies would sell is to clean up their portfolio. Through the course of an oil and gas company’s history, they will acquire “odds and sods” that are not a part of their core assets. These may be entire assets or an operating percentage that is no longer needed. But as the saying goes, “one man’s trash is another man’s treasure.” These M&A scenarios can also be a win-win situation.
How difficult is it for the two parties to come to an agreement when looking at the long-term future value of a project?
The fundamental art of A&D is determining the value of the asset that is being bought or sold. Just like putting a fresh coat of paint on a house you are planning to sell, the seller will showcase the asset in its best light. Of course, there are rules and laws that have to be followed.
In the first phase of an A&D transaction, a basic set of technical and financial data is given to the potential buyer which allows them to accurately evaluate the property. Just as you cannot withhold information about the presence of a crack in the foundation or asbestos in a home being sold, withholding data in an M&A transaction is illegal. Additionally, there are confidentiality agreements that are signed for the purpose of the transaction. Should the buyer and seller agree on the value of the asset, the parties begin the second phase of the transaction, termed “due diligence.” This is similar to a buyer calling an inspector to examine the property being sold. The buyer gets a more thorough look into the environmental records, contracts associated with the asset, and any additional details that may be associated with the asset.
The A&D process can take several months and there is a lot of technical work that needs to be done on both sides to determine the worth of an asset. The hope is that both parties can see eye-to-eye on the asset and the transaction can be completed.
In a 2012 Forbes article titled, “Mergers and Acquisitions are Not Strategies. They Are Tactics,” the chief executive officer of Imation, Mark Lucas, says you cannot “acquire your way to health,” but you can “use acquisition as a tactic to implement strategy.” What does he mean by this statement, and do you agree?
I would probably agree with his comment in some respects. As you try to reposition a company based on a new strategy, it generally suggests that you do not have the assets in your current portfolio to achieve the new strategic direction. If you did, you probably would not attempt to implement a radical change in strategy in the first place.
Repositioning can also result from current operational conditions that are a result of politics and economics. A&Ds can help you accelerate the strategic transition. Once again, we can use the example of trying to balance your commodity mix and becoming oilier. You are probably going to have to sell some gas assets regardless. However, to achieve the goal, you can do one of two things. You can take a grassroots approach and start doing some exploration and buy some land, which make take 5 or so years to become profitable, if you are successful. On the other hand, you can acquire known oil production fields, thereby accelerating your strategic transition.
Even though exploration is cheaper than acquisition, there is the inherent risk associated with exploration. It is like buying the fancy move-in ready house vs. the fixer-upper. Ideally, you would like to do both acquisition and exploration. You do not always like to spend the money on the move-in ready house, but you may not want to risk running into unforeseen problems while renovating the fixer-upper.
Is increased or decreased M&A activity an indicator of the overall health of a company?
Healthy M&A activity is part of a healthy company. Strategies change with commodity prices, new technology, and new assets. You should be constantly looking at your portfolio and how it fits with the strategic direction and where your strengths are as a company. However, when a company is forced to sell an asset, particularly its most important or highest-quality asset, it could indicate that the company is in financial stress. This is the one scenario in which M&A is a telltale sign of a company’s health, or lack thereof.
What can young professionals do to brace/prepare for a merger or acquisition that their company may face?
The key is to embrace the company that you are with rather than the asset on which you are specifically working. As we all know, the oil and gas industry goes through ebbs and flows, booms and busts. It is a cyclical business that constantly comes face-to-face with strategic changes based on the political and economic environment. In North America, within the past 5 years, more and more conventional, overseas, and offshore assets have been put out of favor by many companies in light of the unconventional resource movement. Up until recently, there has been a focus on liquids rather than gas.
Doing the best you can in your assignment gives you the best job security. If you are doing a good job, whether your asset remains with the company or not, there will still be opportunities for you.
What is the most important thing that young professionals looking to work in A&D should know?
I think the key to working in A&D is to be well-rounded. It is probably not something one gets into right after school. Most of the folks that have been successful in A&D have spent 5–10 years in different parts of the organization in various technical roles, gaining experience in different assets and different types of assets. At the end of the day, being experienced in different positions, whether it is reservoir engineering, geology, production engineering, or finance, is important before you get into A&D. That being said, an MBA is always helpful.
You started out in a technical role and have a technical background. Tell us about how you transitioned to the business side.
I guess I still consider myself a bit of a technical guy. My background is in geological engineering and I developed my technical chops at the beginning of my career with Mobil Oil. At some of the larger companies, you get exposed to so many different disciplines and assets, from conventional to unconventional, onshore to offshore. The model at larger companies is to move people around every couple of years, which makes major companies great training grounds for the oil and gas industry.
About 8–10 years into my career, I pursued my MBA, which was very helpful. While I had a few business assignments at Mobil, the gap in my résumé was A&D. Obtaining the MBA created an opportunity for me in another sector of the oil and gas industry, investment banking. I did that for almost 10 years in Canada and the US, navigating transactions across North and South America. The combination of having technical knowledge of the assets that you are selling to potential buyers and the business acumen from the MBA proved to be extremely valuable.
I think having work experience in engineering or geosciences is the key to success in oil and gas A&D. It allows you to talk with potential buyers who have a technical background. They appreciate that you have been in their shoes, and you develop an automatic and trusted connection with them.
What were your motivations for pursuing higher education in business?
I think the MBA was one of those things that I always had an inkling to do, even after I finished my undergraduate degree. I am very glad I waited because business school was a whole different experience after working for 8–10 years in the industry. I had seen a lot of things happen in the industry, which gave me real-life experiences upon which to draw. This made a lot of the things I learned in business school make more sense than if I had just read it out of a textbook as an undergraduate who had not worked yet.
My motivation for pursing the MBA was to further my skill set. I think I have always wanted to get to the next level and step out of the technical roles and into a management or executive roles. I felt that the MBA would be helpful in that pursuit and believe that it has been. While I was pursuing the MBA, I did not think about the possibility of going into investment banking, but when the opportunity came up, I took advantage of it.
Would you say that an MBA is a requirement for those wanting to pursue a leadership role?
While gaining the business perspective via business school is useful, this perspective can be gained through other means. An MBA can help, but I do not think it is necessarily a requirement to work in A&D or management roles.
That being said, an MBA opens a lot of doors to opportunities that you may not have on your radar. Having more things on your résumé that demonstrate the diversity of your skill set can be a differentiator. Ultimately, your career path is about you and your ability to showcase what you bring to the table, regardless of the degrees and accolades on your résumé.
Andy Rogers is the vice president of business development at Encana Corporation. Before joining Encana, Rogers completed several oil and gas transactions across North America with the global investment banking firm Jefferies. Earlier to that, Rogers spent 13 years in management and engineering roles in the exploration and production sector in Canada and the US.
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23 April 2018