The double whammy of a pandemic and depressed oil prices has been sudden and unexpected, but the industry has answered boldly and swiftly. There have been production cuts, rapid assessments of short-term strategies and portfolios, and unprecedented cuts in operating spend and capital outlays. Yet, a key question—one of the elephants in the room—remains: Will these measures be sufficient for oil and gas companies to survive if the COVID-19 crisis persists?
The simple answer is that it depends on both the duration of the crisis and on whether companies will pull additional levers, such as ramping up portfolio evaluations and targeted M&A. The need for companies to rebalance their portfolios, create scale efficiencies and improve capital access will compel some players to pursue M&A. In these disruptive and volatile times, the industry should focus on acquirees that will add synergies, can be captured immediately and can create sustained value.
Historically, value creation from deals typically peaks about two years after an acquisition, and most of that value is driven by synergies. For optimized results, these companies will need to focus their investment strategy squarely on scale and synergies. CFOs across industries are now focused on capturing synergies more quickly—ideally within one year of the deal. The 2020 M&A Integration Survey serves as a wake-up call for dealmakers, management and boards, as it shows that companies haven’t necessarily mastered all the critical elements of a successful integration.
Today, with public markets exerting ever-increasing pressure on companies to exercise prudence in capital allocation, oil and gas companies need to look for ways to carry out due diligence, mitigate risk and accelerate value realization. In light of the current circumstances, companies should strive to capture more synergies sooner by leveraging a zero-based budgeting approach.
This approach to accelerating synergy capture is based on four imperatives:
Front-load synergy evaluation and capture work. Bring the planning and validation process, realization schedules and properly framed synergy-related execution into the deal lifecycle.
Define a synergy workflow. Benchmark the target business among peers. Assess the profit and loss (P&L) categories that can be assigned to appropriate executive ownership. Finally, set synergy targets, conduct functional-level planning (e.g., use detailed benchmarks) and develop business cases.
Involve and engage cross-functional leaders. Synergy teams should include leaders with the requisite operational knowledge to understand all the moving parts required to capture synergies. Leaders should be empowered to own specific initiatives surrounding synergy realization, and they should be able to account for that realization and be offered incentives tied to achieved synergies.
Establish a clean room, leverage disruptive technologies and institute operational cadence early in the process. Ensure that data required for analysis is identified early during diligence and is available when needed. Also use available technologies (e.g., bots, visualization tools) to clean room and data room analysis and generate appropriate intelligence that’s required.
Focusing on the right levers and conducting a holistic evaluation of the operational landscape may reveal further opportunities for value creation and provide better linkage between the deal thesis and eventual execution. Ideally, synergy planning should start during due diligence instead of post-deal, which is the convention.
A properly structured and focused approach to synergy capture offers numerous benefits:
Launching synergy teams early in the deal lifecycle (ideally during due diligence) and rigorously estimating preliminary synergies can help avert unreasonable premiums on the purchase price.
Drafting synergy plans early in the process allows for alignment among target synergy initiatives, functional integration plans and operating model targets.
Engaging individuals with a thorough understanding of operations during synergy planning ensures reasonable synergy projections, which also favorably and directly impacts valuation.
Understanding the various moving parts and risks associated with realizing the synergy plan mitigates potential loss of value and leads to actionable plans for execution.
Committing early to synergy targets and business cases allows for acceleration of quick wins and near-term opportunities at close—in effect, realizing a higher percentage of value creation in the near term.
Commencing synergy due diligence early in the process provides ample time to conduct the appropriate level of reviews and validation to ensure that identified synergies are feasible, can be achieved quickly and are sustainable.
Accelerating synergy capture can also come with pitfalls. Common examples include a potential loss of confidentiality by involving more people during diligence, constrained deal resources and a tendency to “hedge” synergy estimates or present unrealistically favorable realization timelines.
Acquirers should follow strategies to avoid such shortcomings, which can erode deal value. One way to do this is to embed a center-led Value Capture Office with a lean team and the right functional experience and skills to support collaboration, engagement and consistency. This team can help conduct individual challenge sessions to help teams improve their estimates, as well as ensuring the consistency of guidelines, integration strategy and general assumptions.
As part of mitigating strategies, buyers should leverage technology accelerators to further enable synergy analysis, accelerate the speed of value creation and eliminate inefficiencies in traditional synergy-capture processes. Digital tools and automation can also help mitigate issues with traditional data capture, consolidation and reporting, while also limiting the number of people required to have access to the clean room, protecting confidentiality and freeing up staff in the process. Nine out of 10 companies now use digital tools as part of their integration processes, and adoption is accelerating as a result of the crisis.
Involving the right people and culture can also move the needle considerably. A few considerations include installing dedicated teams empowered for—and accountable to—synergy realization, offering incentives that are tied to synergy realization, identifying key people at the target who have the knowledge and are willing to drive change post-close, tactfully tweaking employee-related deal communications due to new work-from-home policies and ensuring your organization is nimble enough to swiftly adopt change—especially change resulting from the current pandemic and oil crisis.
Partner, PwC US
Partner, PwC US
Energy Deals Leader, PwC US