Part 2 – A Lever to Uplift Your Margins
As land leaders think about the strategies needed to navigate the complexities of today and tomorrow, multiple business priorities are top of mind, including how to maximize asset base, drive data-driven decisions, and contain G&A costs. Technology thought leader and CEO of ThoughtTrace, Nick Vandivere, has teamed up with W Energy Software to provide his valuable perspective on the tough challenges facing the land department and how to future proof energy companies with artificial intelligence, automation, and a single version of the truth, increasing business agility, reducing costs, and improving free cash flow.
By Nick Vandivere, CEO at ThoughtTrace
Non-ops and mineral owners are well aware that operators sometimes underpay for a variety of reasons, including inaccurate decimals, deductions, and payout conversion. What everyone needs to understand is just how overwhelmed operators are in managing massive leaseholds, which is why payments here and there fall through the cracks. Except for a very small number of bad actors out there, no operator wants to underpay their interest owners. In fact, I have worked with operators who preferred to overpay their owners by eating all production costs rather than miss an obligation, maintaining their social license to operate. However, armed with the right asset optimization strategy and tech, these operators gained the confidence needed to stick to their agreements and pass costs back to owners, instantly uplifting their margins.
That’s what I’d like to talk about in this blog – areas in your land department where a clear and current view of obligations can yield rapid results and drop more revenue to your bottom line. If you are just now tuning in to my series on modernizing the land department, I encourage you to read the first blog where I outlined why energy companies need to evolve and look different going forward. My last two blogs will show you how to increase business performance without adding headcount and confidently navigate the evolving energy mix.
Ownership split from inheritance, bolt-on acquisitions, lease renegotiations, cost-free provisions – these are just a few of the complexities that make understanding royalty obligations a daily challenge. To accurately pay interest owners, operators must carefully track a large number of royalty provisions that pass on certain production costs, such as dehydration, compression, and marketing, underscoring the need to decipher legal language and pay owners based on specific provisions and market conditions. As in my opening example, some operators choose the path of least resistance and leave money on the table.
Land departments have a “big reading” problem with the daily crunch to keep up with their royalty provisions. Just a few years ago, this was an impossible feat, but technology has turned the tide, enabling entire filing rooms to be searched with ease, provisions classified, and answers delivered at the speed of business. With a current and intimate understanding of royalty language and other conditions, your team gains a valuable lever to directly raise revenue and improve profitability.
Given the shift in Wall Street sentiment toward returning shareholder value via better free cash flow vs. reinvesting for double-digit production growth, E&Ps must have a more nuanced and strategic approach to drilling. The tip of the spear is your drilling obligations. Oil & gas teams must have a clear line of sight at all times into drilling inventory and the time constraints to make the most out of rig placement. The calculus can be complex. For example, if you have a budget to run 5 rigs simultaneously over 12 months, then your team can drill about 30 wells. Assuming you have 500 or so leaseholds, your land department must sift constantly shifting obligations to pinpoint the leases that have an in pay penalty or lose acreage in advance of the drill bit.
Again, technology is your best friend, enabling your team to rapidly mine drilling obligations for termination clauses around payment and get the answers you need in seconds not weeks. The old way of reviewing one lease at a time even with multiple analysts is simply no longer viable given the scale and complexity that most E&Ps face, which puts your team in a constant state of reacting. Indeed, according to recent research, IT organizations have been stripped of up to 50% of their capital expenditures needed for digital transformation and business automation initiatives, leading companies to settle for the status quo (see McKinsey’s A New Mandate for the Oil and Gas Chief Information Officer). By proactively managing leases with tech that understands land and legal documents, contextualizes, and makes it instantly available for answers, you can place rigs with surgical precision, stop reacting, and get into lean planning mode.
Acquisitions and Divestitures
A&D is part and parcel of the oil & gas business, but as an industry, we continue to struggle with the large volumes of well and land files that accompany a deal. Ironic in the digital oilfield, this data pervasively takes the form of boxes filled with documents at worst and thumb drives full of PDFs at best. Pre-acquisition or post, your team must make rapid sense to assess deal quality and risks.
If getting a clear and current view into royalty and drilling obligations can uplift your margins, doing the same for acquisitions and divestitures can have a 7X or 8X bigger impact on your bottom line.
Faced with A&D leaseholds with thousands of documents, most oil & gas teams resort to sampling to acquire prime acreage ahead of competitors. What if instead, you could simply ask questions of the entire population of documents just as easily as searching on Amazon?
in an acquisition scenario, this capability gives the buyer an asymmetric advantage in pre-acquisition due diligence by not only moving fast but acting on all of the information available. And when it comes to selling your assets, being able to instantly mine land records for reliable answers will make divestitures more marketable by giving the buyer clearer justification into asset price and bolstering confidence in what you are representing.
I hope you are finding my blog series a valuable guide to modernizing the land department with ideas and insights you can put to use. In my next post I’ll bring you up to speed on the tools you need to automate, integrate, and accelerate lease administration workflows so you can grow your business without growing your G&A.
Headquartered in Tulsa, Oklahoma, W Energy Software offers the oil & gas industry’s only unified ERP solution built for the cloud that is relied on by more than 130 upstream and midstream companies to accelerate business performance, improve operational efficiency, and drive costs down. W Energy Software combines precision-built software in one extendable cloud-based workspace with an intimate understanding of the oil & gas business to deliver solutions that offer flexibility, affordability, and continuous upgrades. Unlike other ERP software that loosely ties together a mix of legacy solutions and fragmented technologies, W Energy Software designed a unified upstream and midstream ERP platform to seamlessly track oil, gas, and NGL from the wellhead through transportation and marketing, eliminating data silos as well as the burden and costs of maintaining multiple systems. With W Energy Software, oil & gas companies stay lean and agile with the tools they need to adapt to market changes and meet evolving customer needs head-on, all while gaining the confidence that their business is running on the latest technology. To learn more visit: www.wenergysoftware.com