“Carpe Diem”: Oilfield Services Companies Eye the IPO Market

 

 

By Tyler Chase, Managing Director
Energy and Utilities Industry Leader

and Steve Hobbs, Managing Director
Public Company Transformation

 

Despite the recent downward trend in oil prices, the oil and gas industry overall is feeling optimistic, as evidenced by increased rig counts and production levels. Both are signs that the industry is on the rebound after a downturn that has persisted for well over two years. Renewed confidence and optimism about future growth have many companies in the sector thinking about pursuing an initial public offering (IPO). Among them: fast-growing and capital-hungry oilfield services providers.

These service businesses play an important role in supporting the oil and gas industry. They provide innovative technology, manufacturing of critical equipment, and services that allow oil and gas companies to enhance their existing infrastructure and processes so they can produce more at less cost.

The recent volatility in the oil and gas market hit oilfield services providers hard. In 2015 and 2016, many were burdened with significant debt and selling their services at a discount just to survive; several companies ended up filing for bankruptcy.

Now, less than a year after that dark period, oilfield services providers are driving IPO activity in the energy sector — outpacing exploration and production companies. Many of these private equity-backed companies have been waiting for conditions in the industry and capital markets to improve so they can execute an IPO as their forward strategy. Others are looking to an IPO as a way to raise much needed capital fast, to fuel growth and innovation.

What many oilfield services providers learn in exploring the IPO idea is that they simply aren’t prepared to make the leap. One reason is that these firms lack maturity in their business processes, and have limited alignment with GAAP accounting and insufficient infrastructure and personnel to support expansion. They are, essentially, startups. And like any startup or other fast-growing private company in any other sector, oilfield services providers must achieve a certain level of “readiness” before attempting to go public.

These firms are also at risk of making a mistake common among other businesses with IPO aspirations: underestimating the amount of time and personnel required to address the demands of a public company transformation. These pre-public companies must address six primary infrastructure elements on their journey to IPO readiness, including:

  • Corporate policies: These include governance, financial reporting and company policies, such as human resource and marketing policies. Like most startups, oilfield services providers are so focused on delivering their technology and services and trying to grow their market that they don’t spend enough time on essential back-office infrastructure for the business, such as creating formal policies. Structure and documentation are needed not only for compliance purposes, but also to help the company communicate to everyone, from investors to current employees and potential hires, how it operates, what its values are, and more — a basic expectation from an IPO candidate.
  • Corporate processes: Financial reporting processes are just one example of corporate processes that many oilfield services providers will need to upgrade substantially and standardize before going public. For instance, documentation about business agreements is likely inadequate because of the informality with which these service companies often approach deals — confirming terms with perhaps little more than a handshake. So, firms preparing to go public need to start moving now to formalize their agreements with business partners and create an appropriate paper trail. Many accounting and financial planning and analysis forecasting processes will also need to be augmented and automated because manual practices are error-prone and time-consuming.
  • People and organization: Any company that wants to go public needs a well-structured and experienced leadership team. The IPO process places huge demands on senior executives — especially the CEO and CFO, who will need to spend much of their time on the road meeting with analysts and potential investors. Once the IPO ball starts rolling, these executives won’t be able to focus much on everyday business needs. There needs to be a strong team in place, especially in the accounting/finance organization, to help guide the company in their absence, address external auditor considerations, and meet SEC filing deadlines on time.
  • Systems and data: Pre-IPO companies frequently report that their IT departments are a major area of focus during their readiness effort. IT general controls that pertain to Sarbanes-Oxley Act compliance and data security and privacy strategies and policies are just two key areas within IT that oilfield services providers will need to pay special attention to as they lay the groundwork for a public offering. A critical risk within the realm of IT system compliance is addressing the organization’s lack of segregation of duties (SoD) and the need for comprehensive monitoring of access for all critical business IT systems. It’s imperative for management to be directly involved in the SoD design process to clearly shape the roles and duties of personnel within the company prior to an IPO. Data security and privacy can be particularly wide in scope, including everything from cybersecurity policies to business continuity management planning.
  • Management reports (e.g., on internal control over financial reporting) and methodologies (e.g., for the offering price, for financial controls, significant accounting estimates) round out the six primary elements. Oilfield services providers must ensure they have them covered — and implement a sustainable infrastructure and strong organizational capabilities as well — before pursuing an IPO.

Addressing all the above is a complex and resource-intensive endeavor, and likely will require expert assistance on many fronts. This fact is not to dissuade oilfield services companies from seizing opportunities in the current oil and gas market.  But seizing the opportunity is one thing; managing the newly public company in the weeks and months following the IPO in a manner that is consistent with the expectations of regulators and shareholders and the company’s own executives’ vision is quite another. At issue here is sustaining confidence with regulators and shareholders. According to our experience across a wide variety of sectors, covering the six elements of infrastructure above in a thoughtful, proactive manner is a vital process in moving to the next stage successfully.

PCAOB White Paper Calls Attention to the Risk of Material Weaknesses at Emerging Growth Companies

Last week, the Public Company Accounting Oversight Board (PCAOB) released its semi-annual white paper providing general information about certain characteristics of emerging growth companies (EGCs). The PCAOB’s white paper provides a number of observations regarding EGCs, which we summarize in a just-released Flash Report published on Protiviti’s website. In our Flash Report, we also review the implications for EGCs that report material weaknesses in their internal control over financial reporting and offer guidance to affected organizations to help them avoid or overcome such findings.

Is Your Company Private? The SEC Still Has Advice for You.

Steve HobbsBy Steve Hobbs
Managing Director, Public Company Transformation

 

 

 

At Protiviti, we routinely counsel private companies that a good governance and control structure is a sound business strategy for any company, and particularly for fast-growth companies with outside investors. If you don’t believe us, just ask the Securities and Exchange Commission (SEC).

Recently, SEC chair Mary Jo White gave a speech at Stanford University, directly addressing private companies. “Being a private company comes with serious obligations to investors and the markets,” White said. “For the new and evolving markets to be successful, all investors need confidence that they are being treated fairly and that the full range of risks are transparently disclosed.”

She went on to say, “Some of the principles that characterize public companies – transparency with investors, controls on financial reporting, strong corporate governance – have applicability and relevance to private companies, especially those pre-IPO companies that aspire to go public, and should not be overlooked or avoided, whether or not mandated by federal law or a SEC regulation.”

So, what are those pre-IPO “musts” that private companies should do now to create good governance and control structure? It comes down to two key pieces of advice:

  • Start early. Understanding the timeline of events and transformation in an IPO process is key. We recommend certain tasks be done prior to an IPO. Such tasks include evaluating the internal control and governance environments and identifying areas of risk as well as areas for improvement.
  • Know the potential issues before they arise. There are a number of issues that companies typically face during the first year of being public. If you plan properly, you can address most of these issues prior to the IPO, and then identify and address the rest as they evolve. Examples include lack of internal buy-in or understanding of the importance of proper controls, minimally documented policies and procedures, and internal control gaps.

Finally, I blogged not long ago about our latest Guide to Public Company Transformation. It contains a wealth of information, in a helpful Q&A format. It’s a good way to take care of the second point I make here – knowing the issues. The early start, that’s up to you.

Guide to Public Company Transformation Answers What You Always Wanted to Know About the IPO and Beyond

Steve Hobbs 2

By Steve Hobbs
Managing Director, Public Company Transformation

 

 

 

If you’re preparing to take your company public, you surely know you have a lot of new reporting and legal requirements to meet, and that your organization will require a number of changes. You may also know that you will need help in this process, or at least some good guidance.

The latest edition of Protiviti’s Guide to Public Company Transformation: Frequently Asked Questions, released last month, offers just such guidance. It’s a comprehensive and helpfully organized 55-page reference that organizations can use to find an answer to just about every question during the exhilarating and exhausting time surrounding an initial public offering (IPO) – from when is the best time to go public to how to make sure transformation efforts, including Sarbanes-Oxley (SOX) compliance, are maintained in the post-IPO period.

An IPO frequently requires a complete company transformation. Newly public companies may need to upgrade their financial reporting processes, information technology (IT) environments, as well as their governance, risk and compliance (GRC) capabilities. They will need to meet and maintain compliance with SOX and other financial reporting requirements, none of which are easy or straightforward.

While ringing the bell is perhaps the most exciting moment in an IPO journey, the actual transformation work behind the scenes is just beginning. Once listed on the exchange, the company needs to continue to evolve its functions, transforming itself into a business that meets and reports on an entirely different set of public and regulatory expectations. It’s a lengthy, complicated process, and mistakes can be time-consuming and costly.

To lessen the burden and increase the chance of success during this transformation, the new edition of the guide places a greater focus on the post-IPO period – in other words, we look beyond the IPO itself to ensure that companies know what’s needed to become – and stay – scalable and fully compliant in the future. This change in focus is reflected throughout the guide, as well as in the guide’s title − we’ve replaced the word “readiness” with “transformation” to indicate what an IPO truly is.

Other new or updated areas in the third edition of the FAQ guide include:

  • A section on developing an executable strategy and action plan prioritization map; this replaces prioritization maps used in previous editions.
  • Updated information on current laws, including the Jumpstart Our Business Startups (JOBS) Act and the Fixing America’s Surface Transportation (FAST) Act.
  • Updates about revenue recognition, including updated accounting standards from the Financial Accounting Standards Board (FASB). That includes a specific update, Revenue from Contracts with Customers, and the FASB’s recently issued new standard on accounting for leases.
  • A discussion about accurate forecasting and budgeting.
  • Updates on IT policy and process-related evaluations and activities.
  • A discussion about data security and privacy strategies and policies.
  • An update on the costs of becoming a public company, and an overview of the largest cost components.

Last but not least, it’s been our goal to make this guide as user-friendly as possible so that executives and managers can continue to consult it at every step of the process – let us know what you think in the comments.

And we will continue this conversation on April 26, in a webinar on the challenges faced by growing companies. You can register here.

FAST Act Paves the Road for Streamlining IPOs

Steve Hobbs 2By Steve Hobbs
Managing Director, Public Company Transformation

 

 

 

Good news for small companies considering an IPO. On December 4, 2015, President Obama signed the Fixing America’s Surface Transportation Act (the FAST Act). Aside from directing transportation spending, this act includes provisions relevant to startup companies and companies seeking to pursue the IPO path. Below, I’ve outlined the major ways in which this act affects so-called “emerging growth companies,” or EGCs – defined as companies with revenues of less than $1 billion in their most recent fiscal year – by potentially reducing the costs related to initial filings and allowing them to keep their information confidential longer.

  1. Longer confidentiality period. Under the JOBS Act, which created the EGC category, a company that meets that definition needs to publicly file a registration statement for its IPO no fewer than 21 days before the start of its roadshow. Under the FAST Act, this time period has been reduced to 15 calendar days.
  2. Maintaining EGC status longer. In some cases, companies that have started the IPO process as EGCs have lost that status – for example, if the SEC review process continued past the end of the fiscal year in which the issuer crossed over the $1 billion revenue threshold. Under the FAST Act, such a company would remain an EGC through the earlier of either its IPO date or the 1-year anniversary of it otherwise losing EGC status. By retaining this status, the company is entitled to reduced regulatory and reporting requirements under the Securities Act and the Exchange Act.
  3. Reduced disclosure requirements. The FAST Act permits EGCs to omit historical financial information from their initial confidential submission or public filing of the IPO registration statement if this historical financial information would not be required in a registration statement (S-1 or F-1) at the time of the road show.For example, EGCs are currently required to include 2 years of audited financial statements in their public IPO filings. For some issuers, the timing of the IPO process may be such that the fiscal year would complete while the review process is still going on, and therefore the company would need to add audited financial statements for that most recent year. Under the FAST act, in a situation like that, financial statements for the earlier year would not be required in the registration statement. Instead of going through the expense and effort to audit and include financial statements from that prior year, the issuer could simply omit that year from the initial and subsequent filings.

These provisions do not free small companies of the onerous task of preparing and filing their IPO-related financial statements but they do provide some relief, including a longer confidentiality period.