CASE STUDY #1 – “NO TIME TO HANDLE MARKETING?”

Several years ago, Phoenix was called in by the management of a publicly-traded junior producer that had grown to approximately 10,000 boe/day during the preceding five years.  What we found was that the company was still behaving as if it was still a micro-producer.  The responsibility for marketing was primarily with the Supervisor of Production & Revenue Accounting, who was not only “handling” marketing and a full-time production accounting desk, but supervising a number of recent production accounting staff additions.  Other aspects of marketing, such as contract administration, resided with the Land Department and the Engineering Department.  The bottom line was that there was no focal point of responsibility and accountability for the results of the Company’s marketing activities.

The Supervisor of Production & Revenue Accounting was so overworked and deadline focused on the production accounting side that the time allotted to marketing was minimal.  Instead, the “marketing strategy” was more of a “time-management strategy”, in that the bulk of the day-to-day marketing activities was outsourced to a single natural gas marketing company and a single crude oil marketing company.  The Supervisor entrusted her contacts at these two companies to take care of maximizing the Company’s netbacks, even though the marketing agreements did not provide an incentive mechanism for the marketing firms to do so, nor an audit clause to check and see if they did treat the Company as a fiduciary responsibility or Principal-Agent relationship.

Once Phoenix reviewed the current marketing operations, a number of netback enhancing changes were quickly identified and implemented.  In one specific situation, a change in delivery point, on a volume of 2,400 m3/month of heavy oil, resulted in an increase in cash flow of up to $30,000 per month, or over $2.00/bbl.

CASE STUDY #2 – “NEED A COMPETITIVE A&D ADVANTAGE?”

The Canadian junior oil and gas E&P industry is well known for its business model of building an asset base from scratch and then selling the company to a larger producer or trust company within a 2-5 year timeframe.  Often, a key step in this model is to make an acquisition of a smaller company or producing asset to gain a toehold in an area that the producer wishes to focus its efforts.
In the process of making an acquisition, due diligence is done on the asset or company by a team composed of land, legal, engineering, finance/accounting and environmental specialists.  Very rarely do producers think to include a marketing specialist on the due diligence team to look for hidden upside and/or liabilities associated with the marketing contracts.  The marketing component of the review is often left to the land, legal or engineering specialists to handle, time permitting of course!  Even if and when the company does include a marketing specialist on the due diligence team, the scope of the marketing review is often limited to a superficial currently active marketing and transportation contracts, in order to minimize the cost.
Recently, Phoenix was asked by a trust company to review a $100,000+ claim made by a marketing company that gas reserves dedicated to long-term contract had, in fact, not been delivered and sold to the marketing company.  The gas purchase contract in question had expired two (2) years prior to the trust company acquiring the producer, but the trust company’s team of lawyers, land, accounting and engineering specialists had not identified this issue during the due diligence process.  Now, you might consider a $100,000+ liability to be immaterial, however, the fact remains that it was not discovered during due diligence and could just as easily had been a $1 million, $10 million or $100 million dollar mistake!!
The flip side to this topic is the opportunity to find hidden upside in the value of the asset’s or company’s marketing arrangements, which allows the prospective buyer to bid a higher price and win the prize.  Competition for quality assets is fierce and it makes sense to look for every possible advantage in the bidding war.
In late 2000, a Phoenix client acquired a producer that had, as part of its marketing portfolio, purchased out-of-the-money AECO gas call options for Summer, 2001, as a credit margin call hedge against physical fixed price gas sales obligations.  The call options were so out-of-the-money, they were worthless and, in fact, were a liability as they had not yet been paid for!  During the historical spike in gas prices later in the year (“California Energy Crisis”), Phoenix identified and executed a strategy to monetize these unpaid call options by selling them for over $2 million. 
While it would have been impossible to accurately predict such an outcome during due diligence and price it into the deal, these examples illustrate how much impact a knowledgeable and creative marketing specialist can have on the M&A (pre- and post-closing) activities of a producer.
“Caveat Emptor”- Let the Buyer Beware!

CASE STUDY #3 – “HAVE UNDER UTILIZED G&P ASSETS?”

If you asked the average oil & gas executive about what a marketer does, 99% of the time the response will be something like “makes arrangements for the transportation and sale of crude oil, natural gas and NGL’s.”  Phoenix believes that this job description is far too narrow in scope and that a marketer or marketing department should be marketing all of the company’s assets, including unused processing capacity.  Some would suggest that this is the responsibility of the joint venture representative; however, these individuals are often swamped with day-to-day contract administration.

Phoenix’s blend of marketing and midstream knowledge, skills and abilities provided one producer with the ability to proactively market unused capacity for an extremely lengthy and newly installed gas gathering system in central Alberta. 

Phoenix used a 4-step approach to the project by first identifying the adjacent gas gathering systems that were potential competitors to the client’s facilities and researching the availability of capacity and fees. 

Next, a “target capture radius” was established around the client’s gas gathering system. 

Thirdly, a “marketing package” was developed that included a fee & service structure, pro forma agreement, tie-in specs, etc. 

Lastly, Phoenix researched, identified and contacted shut-in gas well and/or lease owners within the target capture radius to make them aware of the capacity that was available and collect information on these producers’ plans to tie-in or further develop their land holdings.

CASE STUDY #4 – “DO YOU HAVE CORPORATE GOVERNANCE COVERED?”

As a result of several high profile corporate governance failures (Worldcom, Tyco, Enron, etc), the spotlight is being increasingly focused on corporate governance issues. As such, companies listed on major exchanges will be expected to adopt much more stringent practices in a host of areas, one of which is risk management.
 
Broadly speaking, Boards of Directors of publicly traded companies will have the responsibility of identifying all risks inherent in their business. Furthermore, they will have to ensure the implementation of systems to manage these risks. These risks include:

In particular, Boards following “Best Practices” will be expected to:

• Establish appropriate board committees, including a Risk Committee (RC)
• Discuss guidelines that govern how senior management and the RC assess and manage risks
• Understand the company’s risk management objectives and risk tolerances
• Discuss a risk policy that establishes a framework for risk management
• Establish frequency and scope of management reporting to the Board

Risk Committees will be expected to:

• Review and approve the company’s risk policy
• Review and approve risk management programs, ensuring they comply with established guidelines
• Require and review regular risk reports
• Hold and document regular meetings

The company’s risk policy should identify the company's risks and establish processes and practices to manage them.

Note that these requirements do not mean that a company has to adopt a formal hedging strategy. After identifying and quantifying commodity price risks, a company can choose to "manage" price risks by leaving them unhedged. That is an acceptable strategy provided it fits with the company's business objectives and risk tolerance.

Also note that a company's risk assessment and policies should be reviewed annually by the Board of Directors.

CASE STUDY #5 - "ARE YOU TIRED OF GETTING RIPPED OFF?"

Tired of getting ripped off?  All junior oil & gas exploration and production companies have extensive knowledge, skills and abilities within their core capabilities of acquiring, finding and producing natural gas, crude oil and natural gas liquids (NGL’s), but not marketing.  When it comes to optimization of top line revenue, most junior producers also do not have sufficient production to justify the expense of having internal marketing expertise on staff.  What do they do?  Many turn to niche marketing companies (“NMC’s”) to “just take care of it”. 

Here are a few ways NMC’s take care of you…

A simple, low risk way for a NMC to make a pile of money is to contract gas supply from small producers whose production is connected to a gas plant that is dually connected to both the TransCanada Alberta System (“NGTL”) and the Alliance Pipeline in northern Alberta.  The NMC offers the producer a one-year contract with a netback price based on the delivery of the gas onto the NGTL system.  If the producer accepts the “bait”, the NMC then “switches” the delivery of as much gas as it can onto the Alliance Pipeline, where the market price is typically significantly better.

A somewhat riskier variation on the foregoing occurs at NGTL meter stations that are not dually connected to Alliance, but are located very close to a large Alberta industrial consumer.  Again, the NMC offers the producer a one-year contract with a netback price based on the delivery of the gas to AECO/NIT, less 100% of the tolls and fuel gas charge.  Unbeknownst to the producer, the NMC contracts for one year “Points-to-Point” (FT-P) transportation, allowing it to ship the gas directly to a nearby industrial consumer at a discounted toll and for a 50% reduction in the fuel gas charge.

There is an old saying “know which side your bread is buttered on”, which means knowing where your interests lie and where your advantage and/or income comes from.  Certain NMCs and “independent” consultants may offer their services to their clients (i.e. – gas and oil producers) free of charge in order to attract them.  Who wouldn’t want something valuable given to them free of charge?  So, if the services are provided to the producer free of charge, how does the NMC or independent consultant make its money?  Well, unless they are already independently wealthy and just working for the “intrinsic satisfaction”, it is probably coming from the company on the other side of the table, specifically, the company buying the production.
“Out of sight, out of mind” = “Out of (Your) Pocket”.

Even the simplest of oil and gas sales transactions has enough complexity to provide opportunities for incorrect charges.  For example, something as simple as a deduction for pipeline fuel gas can be manipulated or miscalculated to put less money in the producer’s account and provide the NMC with the money it wants in return for providing its “free services”.  Phoenix has seen statements from NMCs charging back 1.0% for TransCanada Alberta System fuel gas, while the actual fuel gas charge for the month was 0.8%.  The difference of 0.2% when valued at $8.00/GJ, represents a marketing fee of $0.016/GJ, often 2-3 times more than what would have been charged by a larger, more creditworthy and reputable purchaser.