Eric Eissler: What accounting and financial reporting methods can oil and gas companies apply to help manage future business decisions?
Chad Valentine: Adopting the PCC GAAP alternative for goodwill can alleviate pressures related to goodwill impairment and simplify business combination accounting as consolidations of companies continue to increase in the industry. While no one is recommending early adoption of ASC 842 – Leases, the new pronouncement is coming soon. Companies should prepare by making schedules of all identified leases and begin to comb through repetitive monthly expenses to see if leases exist under the new guidance.
EE: How should oil and gas companies monitor and maximize lease royalties?
CV: Companies should ensure that they have good title on all leases and do thorough due diligence for titles on purchases to ensure they get their money’s worth. Additionally, companies should monitor lease lives and drilling requirements to ensure they don’t lose leases unnecessarily. Lastly, companies should monitor costs by their operators to make sure they are in line with estimates and that they do not indicate overspending or improper well management. In certain cases, a JIB audit may be the proper step to fixing or identifying any issues.
EE: What are some key tax considerations energy companies can apply to reduce liabilities?
CV: There are three common areas we help our clients with each year to help them save on taxes. Sales tax charged incorrectly by vendors to operators is one of the most common savings opportunities, and companies can look back multiple years for additional savings. Property tax renditions should be monitored each year as volatile oil and gas prices can change a property’s worth and there are chances to save money in situations where the state assessed a value too high. Lastly, there are other state and local tax issues, as well as federal tax savings, that can be had in certain situations that are available to operators. These include franchise taxes, manufacturer’s credits, and research and development credits, just to name a few. Taxes will always exist, which means there is probably a way for companies to reduce their burden if the right experts are involved.
EE: How should oil and gas companies structure a buy/sell agreement?
CV: Companies on the buy or sell side should consider having due diligence experts conduct buy/sell side due diligence to ensure you are getting what you pay for. Protecting your investment dollars doesn’t begin with the purchase, it begins with the budgeting phase, which should include some form of research and analysis of what the company intends to buy or sell. Furthermore, due diligence reports can help a seller move assets quicker as they show potential buyers a level of confidence and organization that other companies may not have. Additionally, a buyer can express its interest and seriousness through buy side due diligence, which could give a company the edge in a bidding war. Due diligence should always be considered in a buy/sell transaction by management teams to show investors you are keeping their dollars safe and sound.