Are You Making Money or Just Oil & Gas?
Are You Making Money or Just Oil & Gas?
by Carolyn Pumphrey, CPA, CGA
In the past year, everyone in the world has taken on roles they never expected. Parents became teachers, dining room tables became offices, and pets became our co-workers.
Taking on additional roles is no stranger to those of us in oil & gas. While it used to be the engineer’s job to keep the volumes flowing and the accountant’s job to keep the dollars accounted for, lines have long since become blurred while everyone works to ensure the best financial and operational performance. Keeping production on and maximized is a thing of the past – we need to make money, not just oil & gas.
Focusing on financial, as well as operational, performance ensures your company survives and thrives in tough economic conditions. Best of all, you don’t need to be an Accountant to quickly find opportunities to make an impact on your organizations bottom line. With limited time and resources, VERDAZO enables users to:
- Assess how your area is performing financially over time and relative to its peers;
- Identify and prioritize the assets to target to improve your areas financial performance; and
- Identify where to target efforts to improve financial performance.
Assess How Your Area is Performing Financially (or “Is Your Area the Heavy Weight You Think It Is?”)
Your assets might be the best producers in your organization: there’s no downtime, they’re all boomer wells, and the field runs like a well-oiled pump jack. But is it contributing towards the company’s bottom line?
A look at your organizations Financial Summary over time quickly tells you how your area measures up against others in the company. You may find your area is doing well but is not a top performer financially. So what’s going on?
Figure 1: Financial Summary for the organization Grouped By Team provides insight as to how each Team is performing relative to its peers.
Figure 2: Look at key metrics on a $ and $/BOE basis as they can tell very different stories. The same Team that’s performing better than its peers on a Netback $ basis appears less performant on a $/BOE basis.
Assess How Your Area is Performing Financially Over Time (or “Am I Gaining or Losing Muscle?”)
Once you know how your area is performing against others in the organization, it’s time to assess its financial performance over time. This will allow you to identify any positive or negative trends or changes. In this case Revenue is slowly decreasing, Opex looks on trend, Netback is slowly decreasing but nothing jumps out as a huge cause for alarm. So how can you identify how to improve your areas overall financial performance when everything seems to be performing relatively well?
Figure 3: Reviewing key metrics for an area provides valuable insights regarding performance over time.
Tip: Expand the date range to multiple years to allow for the identification of trends over time.
Identify and Prioritize What Specific Assets Can Improve Your Areas Financial Performance (or “Who Needs to Go to the Gym?”)
Just because an area is performing well financially doesn’t mean there isn’t room for improvement. In tough times good is not good enough; performance of every area needs to be great. No engineer or accountant has time to look at a Lease Ops for every cost center in their area. Reviewing Netback Distribution is one of the best ways to quickly see how each asset (or cost center) in an area is performing both individually and relative to others in the area. Focusing on cost centers with lower or negative Netback can provide Netback improvements for the area as a whole.
Figure 4: Binning by Netback $ allows for categorization of cost centers, identifies outliers, and allows for prioritization of investigation efforts.
Tip: Ensure an appropriate date range is selected and considers annual costs, accruals and other aspects that may affect financial performance.
Figure 5: Using the Bubble By feature highlights on the map where the highest and lowest Netback cost centers fall geographically.
Tip: Import custom shapefiles to assess Netback vs proximity to batteries and main terminals.
Identify How to Improve the Financial Performance of Specific Assets (or “What Am I Targeting in My Work Out?”)
Once you’ve identified which assets/cost centers are performing the best and worst, you can prioritize the material outliers (circled in Figure 4).
Reviewing the Financial Summary and Opex Breakdown for these outliers allows you to quickly assess performance over time and identify specific areas to investigate, such as poor realized pricing or high Opex drivers. Alternatively, run a Financial Summary on a group to focus on a collection of cost centers.
The Opex $/BOE Breakdown below is for the “orange” group of cost centers whose Netback is between $-500,000 and $0. Determining why these cost centers are losing money and targeting high cost categories for improvement can improve Netback and help make them profitable again. Alternatively, determining that some cost centers can no longer operate at a profit in current conditions allows for important shut-in decisions to be made.
Figure 6: Expanding the date range for Charts provides greater insight into cost trends over time as well as the opportunity to identify possible targets for cost-saving initiatives.
As you assess each individual cost centers performance, some things to look for are:
- Revenue and volumes -> Was there a booking error with respect to revenue or volumes? Are all revenue and volumes accounted for? Are facility revenues properly accounted for and/or missing?
- Opex -> Are cost centers carrying an inaccurate amount of Opex? Are costs being incurred that can be reduced or eliminated? Are variable costs being booked to wells with no production? Are well costs being booked to facility cost centers? Is shutting in the well or facility an option?
- Royalties -> Are royalty rates consistent over time? Are they consistent with other wells in the same area? Are royalties being booked to cost centers with no production?
Figure 7: Don’t forget to look at “super star” cost centers. These assets may have things to teach less performant assets or may have been allocated too much revenue or too few costs as in the case of this top performing well.
Whether you’re an Engineer or an Accountant, using VERDAZO to focus on both financial and operational performance will help create a mindset that will allow your team and organization to survive and thrive no matter the economic conditions.
Related blogs/knowledge articles of interest:
VISAGE Diagnostic Workflows: Optimizing Financial Performance: https://verdazo.com/blog/visage-diagnostic-workflows-optimizing-financial-performance/
Analytics Checklist – Surviving Low Commodity Prices: https://verdazo.com/blog/analytics-checklist-surviving-low-commodity-prices/
VERDAZO allows for speedy and informed decisions. The examples provided in this blog are only an example of workflows and analysis methods aimed to drive confidence in decisions, collaboration between technical professionals and transparency through data governance. The depth and breadth of data available requires a versatile tool with imbedded industry expertise to drive better decisions quickly.
Contact firstname.lastname@example.org for information on the newest release, best practices and data integration opportunities.