The roles of chief financial officers at energy companies are shifting rapidly, with plenty of administrative and management duties added to the traditional finance responsibilities.
At Oil and Gas Investor’s recent Energy Capital Conference held in Houston, a CFO roundtable brought together executives to discuss top-of-mind concerns such as risk management, recruitment and retention, and capital-raising strategies.
Moderated by Oracle regional manager Bill Arend, the panel included CFOs Victor M. Perez, Glori Energy Inc.; Mike Aldridge, Saratoga Resources Inc.; Richard Robert, Vanguard Natural Resources LLC; and George Passela, Momentum/M3 Midstream LLC.
Glori, which recently filed an S-1 to go public, is a clean technology energy company that uses biotechnology to release oil in fields after conventional and traditional waterflooding have been exhausted. It has about 30 projects under way in the U.S. and internationally.
M3 is the third iteration built and backed by private-equity funder Yorktown Energy Partners, focused on the midstream. “Our business plan is to identify areas of high organic activity,” said Passela, who has been involved in three midstream companies and one upstream company built during the past decade. Today, Momentum’s assets are in the Marcellus and Utica shales. “We do a lot of work on understanding the resource, identifying the core of the play, seeing who the producers are and going after them to sign them to long-term contracts,” he said.
The company buys rights-of-way and builds gathering, processing and fractionation facilities. “Once the companies are up and running with cash flow, we take them to market and sell to MLPs who don’t want to put in capital but want the cash flow. We’ve been successful with our first two midstream companies and we hope to make this third a success as well,” he said.
Vanguard’s Robert noted the company went public in 2007 with an enterprise value of $200 million; it closed transactions just days before the Energy Capital conference that boosted its value to $2.4 billion. “We are an upstream MLP structured as an LLC with a simple model”, he said. “We buy mature assets, maintain cash flow, reduce commodity risk and seek to increase distributions over time.” Recent deals involved the Woodford and Fayetteville shales. “We drill to maintain cash flow, and acquire to increase cash flow. Our drilling inventory is our insurance policy to pay distributions regardless of commodity prices.”
Saratoga’s Aldridge also has a track record of building companies. He joined the company in October 2011. It has legacy assets in the Louisiana and Gulf Coast transition zones with stacked pay, as well as exposure to the shallow-water ultradeep play. It operates and owns its assets 100%, allowing it to maintain a lot of control. The plan is to grow to $1 billion based on its existing assets. “The challenge is to keep our capital structure commensurate with our risk profile,” he said. (For more on Saratoga’s evolution, see Oil and Gas Investor, June 2012.)
How has the role of CFO changed? Passela, who has been with public companies and now, a private company, said he wears a lot of hats, participating in corporate governance, risk management, policies and planning, codes of conduct, and more. “Today you have to manage private companies as if they were public, in terms of risk management and governance,” he said.
He noted that six years ago the principal challenge was raising money. At that time, raising $200 million took six separate capital raises. With the next company, $260 million was accessed in just two raises; the current M3 raised $510 million in one shot.
“Capital raising has gotten easier; what is more time consuming is financial reporting, budgeting, and what I call making sure the trains run on time.”
Robert noted that as a company grows, it’s no longer possible to manage it in as detailed a way. “You have to delegate, and the role changes more to managing relationships. When I started, I had two banks. With our recent redetermination, we have 22 banks and they all want a piece of your time,” he said.
Aldridge said that while the CFO has traditionally been viewed as a financial position, his role has become more important in capital allocation. “I am directly providing input on wells to drill, reserve additions, finding and development costs, and more. It’s great, because it’s not reactionary; rather, it’s being proactively involved in capital allocation.”
The panelists agreed on the importance of being prepared for growth by raising capital before it is needed, and having the infrastructure in place to grow.
Retention and recruiting are increasingly difficult for today’s energy companies, and the CFOs noted the importance of creating the right culture, as well as payment structure. Some have instituted equity sharing to give employees a greater sense of ownership in the company. At Glori Energy, every employee is an equity owner and will participate when the company is sold after three or four years. Saratoga is adopting a formal 2012 bonus and incentive plan with metrics. Some companies have found it is more effective to issue live checks for distributions to employees in the field rather than through direct deposit, which sometimes isn’t noticed.
Risk management via hedging and other methods is a common theme in the world of CFOs. “You have to keep your balance sheet in a defensive posture and your capital structure conservative to weather the storms,” said Vanguard’s Robert. “Risk assessment and risk mitigation are key.”
Passela noted that M3 negotiates contracts with producers so it doesn’t have the commodity price risk. He also emphasized the importance of thoroughly understanding insurance contracts and other risks. “You have to be disciplined in environmental, health and safety practices to avoid mistakes,” he said.
The CFOs develop risk matrixes and devote time to managing them from strategic, operations and compliance angles. Glori Energy management spends half a day once a month offsite on risk topics.
For its part, Vanguard takes a 10% discount on projected production from July through October, for example, to build tolerance for risks such as hurricanes.