“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.

So You’ve Gone Public – What’s Next?

Steve HobbsBy Steve Hobbs, Managing Director
Public Company Transformation

 

 

Once a company is public, the event is often celebrated and the organization emits a collective sigh of relief. But then the next daunting question looms: “What’s next?” Recently, I had the opportunity to discuss this very topic on a podcast with my colleague Andrea Spinelli, a director in our Business Performance Improvement practice. The key aspects of a post-IPO environment, which we discuss in more detail during the podcast, include:

  • Transition from “project” to “process.” Now that the pre-IPO scramble is in the past, companies need to focus on designing, operating or enhancing processes within the organization to meet the financial reporting and other requirements for public companies.
  • Forecast the business. Forecasting can be a fairly complicated and difficult process that is often overlooked when a company is considering its IPO readiness – but it is something public companies are expected to do competently.
  • Invest in technology. There is a higher expectation for increased capability maturity from a public company. This expectation runs throughout the organization and includes the technology automation required to manage the business. Manual processes, for example, are more prone to error and create data and other integrity risks, and technology is key to minimizing those risks.

The podcast discussion provides insight on these points and more, and is of interest to both pre- and post-IPO companies. I urge you to listen at the link below when you have time, and send us a comment if you like.

Podcast: So You’ve Gone Public – What’s Next?

 

Create IT Internal Controls as Unique as Your Startup

Steve Hobbsby Steve Hobbs
Protiviti Public Company Transformation Solution Leader and Managing Director

 

 

With all the challenges startups face just to get off the ground, is it any wonder if thoughts of compliance requirements are not top-of-mind? Nevertheless, as the board and CFO know all too well, IT controls must become a top priority as the company matures and considers an IPO. Without proper IT controls, you run the risk of hurting both the top line and the filing deadlines.

Traditional internal controls, however, can run counter to the company’s culture and competitive mindset. To satisfy control and compliance requirements without disrupting the company’s culture of independence and innovation, we suggest that startups create their own IT general controls (ITGC). Our point-of-view paper, Agile Technology Controls for Startups – a Contradiction in Terms or a Real Opportunity?, discusses these matters at length.

While setting up your unique ITGC framework, here are key items to address:IT controls graphic

  • Analyze the system environment. It’s important to focus on the necessities. Understand which systems and processes are in scope for the purpose of the compliance audit and determine if some systems can be excluded. Identify owners of each process, and eliminate unnecessary redundancies by aggregating processes under common owners when possible.
  • Identify and support key corporate data activities. Utilize existing development operations (DevOps) and agile process activities to eliminate unnecessary, unaligned and ineffective control activities. DevOps and agile process activities should be the basis for identifying and defining key ITGCs, such as test case coverage or automation of regression testing. Add additional control activities as necessary and consider alternative approaches to mitigating risk.
  • Define a future-state vision. Create a road map to envision easily how all the processes fit together. Rather than adding new manual activities, you may find that there are automated controls that can be leveraged for ITGCs to increase efficiency. Don’t forget to keep an eye on a “backlog” of improvement opportunities and initiatives that you should consider as you move toward the future.

3 “Musts” for Rapidly Growing Companies – A Conversation with Lumosity and Oracle

Steve HobbsBy Steve Hobbs, Managing Director
Protiviti’s Public Company Transformation practice

 

 

Earlier this month, I had the pleasure of sitting down with the Tyler Chapman, Director of Finance at Lumosity and Jeff Henley, Oracle’s Executive Vice Chairman, to discuss the challenges that rapidly growing companies face, and what these companies, such as Lumosity, can do to handle these challenges successfully. Our entire conversation will be available as a webinar in the fall. For now, I’d like to share with you the top 3 takeaways from our discussion:

  1. Address the finance function. When a company is experiencing fast growth, as Lumosity has in recent years, it’s pretty common for the supporting functions, such as finance, to lag behind the rest of the business. To properly address this challenge, leadership must answer these questions:
    • When do we start dedicating resources and funds to building out the finance function?
    • How do we efficiently build out the finance function so that it is effective in supporting the business now and has the ability to scale with the business in the future?
  2. Implement an effective technology solution. Companies must choose an enterprise resource planning (ERP) platform and other technology applications that will be able to scale with the growth of the business and be able to handle complex challenges. This technology must be able to work with existing systems for a streamlined approach.
  3. Prioritize and plan. There are many “make-or-break” decisions to be made throughout the growth process. It is important to logically prioritize foreseeable challenges and have a plan to address each one.

This is only a glimpse of the expertise shared in our discussion. To hear more from these experts, join us for a webinar on August 25 at 10 a.m. PST (1 p.m. EST). To learn more about future events and webinars,  subscribe to our IPO Insider newsletter.

Four Things to Know Before Your IPO

It is common sense than an uncertain global economy slows IPO activity, and yet, the IPO pipeline is at near-record levels.

In the U.S. market alone, there were more than 270 IPOs priced in 2014, up 23 percent from the prior year. And total proceeds raised reached more than $85 billion, an increase of 55 percent compared with 2013.

My colleague Steve Hobbs, managing director of Protiviti’s Public Company Transformation solution, says that 2014 was one of the strongest IPO years in the last decade, fueled by legislation such as the JOBS Act, which was enacted in 2012 to help ease regulatory burdens on emerging growth companies.

The IPO appeal is immense. But what companies don’t know about the process can drive an offering off the rails in a hurry. Last November, Protiviti held a nationwide webinar highlighting key challenges and offering tips to help companies avoid common missteps. Some highlights from the discussion:

Challenge #1 – Investor Relations: Many companies underestimate the amount and intensity of preparation required, especially regarding the growing demand for transparency from regulators and shareholders.

Just how much is required? For Barracuda Networks, provider of cloud-connected security and storage solutions, the time from IPO process launch to its first public call in January 2014 spanned eight months.

The journey to public company readiness involves a complex array of tasks, deadlines and focal points that require significant time, effort and attention throughout the organization.

Among the many tasks Barracuda tackled: scheduling organizational meetings to educate management on operational metrics; staging a “test-the-waters roadshow” to meet with prospective investors and obtain their feedback; and even holding a full mock earnings call with syndicated analysts to practice interacting with the investment community.

Challenge #2 – Tone at the Top: Setting the proper tone at the top to encourage “buy-in” is a top priority.

Public companies operate in a fishbowl of public disclosure and regulatory compliance. Finance, at the center of IPO preparations, is usually well-prepared by the end of the process, however, establishing a positive tone for compliance throughout the company is the job of executive management.

Another one of my colleagues, Gordon Tucker, managing director and leader of Protiviti’s Technology, Media and Communication Industry practice, recommends promoting compliance infrastructure not just as a system of controls, but as a tool for growth and scalability.

Challenge #3 – Documentation: Establishing documented policies and procedures is critical for expansion.

Beyond the initial buy-in, Tucker also emphasizes the importance of developing and documenting processes to ensure consistency and sustainability across the organization. If you want to be able to scale, new hires should be able to handle transactions according to well established and documented procedures.

Challenge #4 – IT Infrastructure: It is critical to properly assess the organization’s IT readiness.

An organization’s ability to conduct accurate, timely and effective financial reporting and regulatory compliance hinges on the strength of its applications and systems infrastructure. The topics that need to be addressed in this arena include selection and implementation of an ERP system and scaling of IT processes and governance. And during a time when cyberattacks routinely make headlines, it is imperative to evaluate IT security and privacy.

When Protiviti meets with pre-IPO companies’ executive teams, we ask the CFO:

  • Do you know what assets you are trying to secure?
  • Is there somebody in your organization who is responsible for securing the enterprise?
  • Would you know if you were breached? And if you were, would you be prepared to respond in a timely manner?

If the answer to any of those questions is ”No,” then it’s probably time to take a look at the IT systems from a security perspective.

The four points above underscore certain of the key challenges of successfully executing an IPO. But they also show where proper preparation can boost the odds in your favor.

And I’ve only skimmed the surface here. For a more thorough analysis, check out the online version of our November 18 webinar entitled “It’s What You Don’t Know That Can Affect Your IPO.”

Jim DeLoach