Since the downturn in oil prices back in 2014, the E&P industry has been shifting its capital investment priorities away from the high-reward, long-cycle investments often referred to as megaprojects. Now that oil prices are leveling off in the mid-$70s, owner companies are instead investing a growing proportion of their overall capital spend on small- and medium-sized plans known as short-cycle projects.
For large oil and gas companies, short-cycle projects are necessary to sustain existing site production and operations because they help maintain business cash flow. Although the larger players might use them to keep shareholders happy, short-cycle projects are critical for the financial survival of smaller owner companies—making up nearly 40% of the capital spend of these organizations.
As a result of the shift to smaller, more frequent projects, it has become imperative for E&P operators to accurately analyze the return on these short-cycle investments and reduce the time and effort it takes to conduct business closing cycles.
The Cost of Inefficient Closing Cycles
When E&P operators struggle to efficiently report project costs and predict future outcomes, they’re far more susceptible to cost overruns. Unfortunately, numerous obstacles make efficient reporting an elusive goal. Accurate analysis tools are few and far between, and antiquated legacy software platforms continue to dominate the accounting departments of many organizations.
If accounting teams are unwilling or unable to develop new strategies and tools, they’re not likely to accomplish the necessary closing tasks in an expedient manner. The results are lower production levels, ineffective capital spending on short-cycle projects and a cash flow-starved E&P business that struggles to stay afloat.
Even when businesses make a concerted effort to reduce the time it takes to complete their closing processes, poor-quality data, manually processed recurring entries, delayed allocations and delayed receivables and payables due to late transactions hinder the reporting process. In addition to the manual processes, dependency on Excel workbooks and inadequate financial systems all contribute to drawn-out closing processes.
Although an inefficient and long closing cycle can hurt a company’s margins, inaccurate reporting is even more costly. Without reliable information, management ends up making decisions based on outdated or incorrect financial and operational data.
How to Reduce Closing Cycles
In a short-cycle environment, projects come at you fast—and your profits depend on how quickly your closing team can process them. To improve the speed and quality of the closing cycle, E&P businesses can take the following four steps:
1. Overhaul legacy systems
By consolidating disparate solutions and upgrading legacy accounting systems, your business can tap into the immediate benefits that stem from more efficient systems and more complete analyses. Timely account or subledger reconciliations, consolidated financials and built-in workflow and process management functionalities will help you track each step of the closing process while overcoming bottlenecks and obstacles. In addition, you can lean on enterprise resource planning solutions to quickly inform your team’s decisions.
2. Prioritize significant costs
Many smaller owner companies mistakenly think that more granular and in-depth processes will help them identify unnecessary expenses. The reality is that excessive time researching and reconciling nonconsequential costs is itself an unnecessary expense—and the value saved by eliminating these efforts is an easy win for your business. Only prioritize account adjustments when costs truly impact the bottom line.
3. Forget about flagship projects
Each project is unique, and particularly the smaller short-cycle ones. Focus on the metrics that make sense for your specific project instead of trying to make the metrics used for flagship projects fit in a vastly different environment. It’s also a good idea to cross-train personnel to ensure several people are equipped to perform the necessary roles in a short-cycle project with slimmer margins. In this kind of unit, employees will need to do a better job of communicating to ensure the right boxes are being checked.
4. Follow accounting best practices
Allocate costs on a regular basis so they’re reflected at the lowest levels for better analysis. To accomplish this, use an accounting system that allows for costs to be billed to the corporation and reflected in the general ledger automatically (or as often as needed during the month). You also should delay entering accruals until the monthly close processes have been completed. Above all, turn to concise reporting tools that can run financial statements immediately upon the conclusion of the close process.
The entire oil and gas industry is in a period of dynamic change, and E&P operators have had to stay nimble to simply survive the rapidly fluctuating price cycles. A closing cycle that drags on for weeks costs additional money, but it also sabotages future projects with low-quality data before they’ve even begun. Innovation will help both small and large owner companies weather the storm by keeping managers informed with real-time data, helping them make the most of that data and leveraging smart reporting metrics.
By overcoming some of the persistent obstacles and upgrading both business practices and analytical tools, you can save time and money while successfully moving to a short-cycle close process. The companies that embrace this approach and complete their closing cycles in a matter of days will free up their accounting and financial departments to analyze results and help management improve decision-making on the next key project. By embracing the accounting and reporting practices above, it’s possible for your company to thrive on short-cycle projects.
Carol Creech is the conversion business manager at Enertia Software, which provides enterprise resource planning software designed specifically for the needs of the energy industry.
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