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We’ve all heard the expression “grow or die,” but how are financial executives thinking about their own companies’ growth? A joint report by FEI Canada and Grant Thornton LLP that seeks to answer this …

We’ve all heard the expression “grow or die,” but how are financial executives thinking about their own companies’ growth? A joint report by FEI Canada and Grant Thornton LLP that seeks to answer this question.

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  • 1. GRANT THORNTON LLP SURVEY OF UPSTREAM U.S. ENERGY COMPANIES 2012The state of the industry—An engine for U.S. growth
  • 2. Table of contents 3 A view from the top 6 Major findings 8 2011 Economic year in review1 0 Prices and spending1 1 Enterprise risk management— Risk in the spotlight 13 E&P industry—Key M&A transaction risks 15 Employment1 6 Industry issues and opportunities1 Global use of IFRS—When, not whether 8  21 Implications 22 Demographics
  • 3. A view from the topWe are living in a world of uncertainty, with We also completed two private placements ofdownward price pressures caused by both the common stock, bringing in more than $35 million ofEuropean debt crisis and slower economic growth new equity, some of which has come from Europe.in non-Organization for Economic Cooperation As a result, we have reduced our total debt byand Development (OECD) countries being offset $18 million, extended the maturity of our debtby continued unrest and turmoil in the oil-producing facilities to 2016, and substantially strengthened ourregions of the Middle East and North Africa. cash position and shareholders’ equity. Our move toAs Winston Churchill once said, “Without the NYSE Amex has had a tangible positive effect ona measureless and perpetual uncertainty, the our company and has opened our universe to manydrama of human life would be destroyed.” potential investors for whom a listing on a national The energy sector is booming and is one of the exchange is a prerequisite.few areas of job growth. Major oil companies seem tobe switching their focus to the United States not only Across the industry, new issuances of leveragedto achieve production growth, but also to position loans were down drastically in 2011, and deal spreadsthemselves for a longer-term investment in natural were higher than in 2010. In contrast, private equitygas. Companies with more of an international flavor financing appears to be up, mostly targeting capital-might see domestic acquisitions of shale players as an intensive shale plays. The end of 2011 saw a moveentrée into more lucrative overseas opportunities in towards new public offerings for energy stocks withEastern Europe, China and India, where higher gas up to 20 IPOs being considered.prices can be achieved. J. Paul Getty said that without M&A activity was slow at the beginning of thethe element of uncertainty, the bringing off of even year but picked up in the latter half. Depressedthe greatest business triumph would be dull, routine prices have caused smaller operators to sell to largerand eminently unsatisfying. We are perhaps starting companies, although many seem to favor jointto see the opening moves of a paradigm shift toward ventures as an entry point into key unconventionalnatural gas, even though higher gas prices are still a plays. Obviously most of the industry’s attention hasfew years away. been on unconventional plays during the last several The United States is an attractive place for equity years, and most M&A activity has been concentratedinvestors, especially for Europeans. We have already in this sector. But instability in the markets has ledseen European majors make significant investmentsin this country. The European debt crisis and its to a widening of the gap between buyers’ and sellers’implications for global financial stability have led to expectations. Oil is being valued higher than naturalnervousness among debt investors. High-yield debt gas—but not as markedly as in 2010, and there are amarkets were fairly buoyant in the first half of 2011 growing number of gas-weighted acquisitions.but have dried up since. Saratoga Resources Inc. was We are also seeing the start of consolidation in thefortunate to raise $127.5 million in a high-yield bond natural gas sector. There is further consolidationoffering in July before the markets tightened. coming among shale players. Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012 3
  • 4. Unconventional has become the new Currently, over 60% of our production isconventional, and a handful of companies such weighted toward oil versus gas. We like to say thatas Saratoga are taking advantage of positions in we are oilier than many of our peers, but we like toopportunity-rich conventional plays with multiple maintain a balanced approach to oil and gas, and westacked pays and large held by production (HBP) are bullish on natural gas for the longer term. Havinglease positions, not to mention premium pricing for multiple stacked pay sands and HBP positions withcrude oil. Saratoga has been receiving a $15–30/barrel 100% working interest enables us to develop thesepremium over West Texas Intermediate (WTI) for gas reserves when it makes sense.Light Louisiana Sweet (LLS) and Heavy Louisiana Some of the most attractive features of shaleSweet (HLS) crude since early 2011 although this plays are the long-lived nature of the reserves, thespread has tightened at year end. We like to say repeatability, the high probability of success and largewe are pursuing good old-fashioned oil and gas, and lease positions. Saratoga sees the same attributes in itswe are happy to be receiving close to Brent pricing conventional South Louisiana assets. Our Grand Bayfor crude oil. Field has never had a dry hole drilled in its confines. Crude oil prices will likely remain volatile. The field has had more than 70 years of productiveUncertainty lies in how non-OECD growth will life, with production of over 250 million barrels of oiloffset OECD stagnation and its effect on oil demand. since 1938 from over 64 stacked pay sands, yet it stillDomestic crude oil production is likely to increase offers tremendous potential, both shallow and deep.in 2012 because of renewed activity in liquid-rich We have low decline rates in our wells, notshale plays like Bakken and Eagle Ford. Many the sharp declines typical of resource plays.independents are emphasizing their move to liquids, We have several wells whose commercial productionand clearly project economics are improved by the dates from the 1940s. One well has over 50 yearsmore liquid-rich portions of the unconventional plays. of production from the same sand, and it is still Natural gas prices are expected to remain fairly producing at over 20 barrels of oil per day (BOPD)flat and experience downward pressure in 2012, today. We just completed a well in Main Pass 46driven by increased supply from unconventionals, with 13 pay sands, only six of which were provedcoupled with slower growth and lower demand. undeveloped reserves (PUDs); completed the wellHenry Hub natural gas spot prices will likely average in a sand that was categorized pre-drill as probable;lower than they did in 2010. The rate of growth in and found six pay sands that were never previouslydomestic natural gas production is expected to slow booked. We call that lagniappe and have lots of thatin 2012. Gas supply will probably grow because of in our assets.increased drilling to preserve lease positions. We are skeptical about the commerciality of most Saratoga can still make good money below shale plays, given the current gas prices. This is due$3/Mcf (thousand cubic feet) gas with respect to to (1) the sharp decline in initial production (IP)our conventional gas assets and do not have lease rates, (2) outrageously high leasing costs, (3) the highexpiration issues because most of our leases are HBP costs to fracture, and (4) the likely need to refractureleases. An important metric that drives rig count, specific wells to sustain production. Technologicalwhich in turn puts downward pressure breakthroughs in horizontal drilling and hydraulicon gas pricing, is lease expirations in shale plays. fracturing have improved shale economics, butThe domestic rig count is up substantially in 2011, uncertainty remains regarding well productivitiesdespite lower prices and reduced demand, and is and recoveries.expected to grow by 10% in 2012. There are not Like many of our peer companies, we will fundenough rigs available to drill beyond the initial terms all capital spending from existing cash flows and cashof the leases, so new rigs are under construction. on the balance sheet. We expect to have additional Some companies are consolidating positions in liquidity through a revolver in the near future.the shallow-water Gulf of Mexico, while assets are Saratoga is currently focused on development drillingdiscounted in response to permit delays. There is also and converting its PUD properties. Some of oura lot of anticipation of McMoRan Exploration Co.’s development wells have an exploratory tail whereDavy Jones testing in the shallow Gulf ultra-deep we are looking for a little more upside, and our deepplay, where a number of deep and ultra-deep wildcats prospects have shallower low-risk bailouts, but wehave been drilled during the year. are essentially a low-risk development company4 Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012
  • 5. at this stage of our growth, with a serious eye on LLS/HLS premiums over WTI . In addition, we havemanaged risk exploration in the future. With the tremendous upside—including shallow explorationaddition of liquidity from our improved operating targets above 5,000 feet with 50 Bcf of potential, pluscash flows and equity infusions, we have substantially deep exploration targets with 10 Tcf of potential, allincreased our development budget; we spent among our large HBP leaseholdings.$28 million in 2011, up considerably from the last We have gained momentum on numerous fronts,three years, with just over half this amount being achieving several long-standing objectives, and wedevoted to drilling and completion. Our criteria for feel we are now positioned to realize what we believeapproving projects are internal rate of return and time is the great untapped value of our resource portfolio.to payout. Almost all of our projects have a payout In addition to improving our operations, we havetime of less than twelve months. Saratoga’s capital made great strides in strengthening our balance sheet.budget for 2012 is expected to be close to $50 million. Moving forward, we fully expect our program of We find it a very cooperative regulatory recompletions and workovers, together with ourenvironment in Louisiana, with no permit delays. infrastructure projects and development drillingIt is a pleasure working with Gov. Bobby Jindal program, to increasingly contribute to meaningfuland Department of Natural Resources Secretary production growth as production levels from shut-inScott Angelle. We love the operating environment and curtailed wells are brought to capacity and newin Southern Louisiana. The state ranks fourth in the wells are brought online.United States in crude oil production and fifth if Mark Twain said, “We are discreet sheep; wethe Gulf of Mexico is included. Saratoga currently wait to see how the drove is going, and then go withranks 18th in terms of oil producers in the state. the drove.” Saratoga is not following the drove. Saratoga has strong institutional and retail We see where they are headed, but in common withparticipation in its equity and a growing market a handful of our peers, we like our current pastures.capitalization. We have attractive conventional assetslocated in state and parish lands of Louisiana, withan abundance of low-risk development opportunities.We are converting our reserves with an activedevelopment drilling program. And we are weighted Andy C. Clifford President, Saratoga Resources, Inc.toward oil in our current production with
  • 6. Major findingsUpstream U.S. energy companies are no strangers to price volatility, but even themost grizzled industry veterans had to acknowledge that 2011 was a wild ride.Grant Thornton LLP’s 10th Survey of Upstream U.S. Energy Companies revealeda continued broad range of predictions for natural gas and crude oil prices. Still, our respondents are not letting the uncertainty affect their expansionplans. The survey reveals increasing expectations that employment will pickup in the months ahead, after the sector contributed a significant boost to theU.S. labor market in 2011. Capital spending plans remain relatively unchanged,with a majority still expecting to spend more than they did the year before.More than three-quarters are optimistic that new shale reserves will put thecountry in a position to address its dependence on foreign oil.Price expectations 77%• Our survey respondents expect the spot price of • Forty-one percent anticipate the price of crude Henry Hub natural gas to average $3.91 per Mcf will be high enough to support more than a in 2012, $4.30 in 2013, and $4.69 in 2014. 20% increase in drilling activity this year, down• Sixteen percent predict the price of natural gas from 55% a year ago. believe new will be high enough to support more than a • Expectations for the spot price of natural gas reserves found in 20% increase in drilling activity in 2012, in 2014 range from $3 to $8 per Mcf; oil price shale will play a up from 8% in 2011. forecasts for the same period range from factor in changing• Respondents expect the price of West Texas $75 to $150 per barrel. the nation’s Intermediate crude oil to average $93.14 per barrel • Uncertain natural gas and crude oil prices remain dependence on in 2012, $97.09 in 2013, and $101.75 in 2014. the industry’s top concern. foreign oil.6 Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012
  • 7. Capital spending outlook “ ow, more than ever, today’s N• Sixty-three percent of respondents anticipate increasing their domestic capital expenditures in oil and gas companies should be 2012, down from 71% in 2011. focusing on managing risk. Finding• Foreign capital outlays should remain relatively and producing oil and gas has unchanged this year, as 82% of respondents anticipate holding the line on such expenditures. always been an inherently risky• The maximum acquisition price companies business, but today there is far are willing to pay for conventional proved less margin for error than there reserves is $2.49 MMbtu, down from $2.57 was just a decade ago.” in last year’s survey. Alan MillisEmployment outlook Managing Director, Business Advisory Services, Grant Thornton LLP• Seventy-one percent of respondents expect employment levels to rise at their companies Industry issues and opportunities in 2012, up from 61% in 2011 and 50% in 2010. • Seventy-seven percent of respondents believe (Figure A) new reserves found in the various shale plays in• Eighty-six percent believe employment levels the U.S. shift or change the nation’s dependence in the oil and gas industry will increase this year, on foreign oil. up from 56% in 2011 and 33% in 2010. (Figure A) • While 28% of those surveyed believe their• More than half (55%) anticipate difficulties hiring company will qualify as an “end user”, 65% have and retaining employees in 2012, up from 22% not begun to implement the documentation and in 2011; availability of technical staff was rated reporting required by the Dodd-Frank Act. third among the industry’s top concerns.Figure A: Projected increases in employment levels (%)2010 50 Company2011 612012 71 Oil and gas industry2010 332011 562012 86 0 20 40 60 80 100 Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012 7
  • 8. 2011 Economic yearin reviewLoretta Cross, Managing Partner, Energy Advisory Services and Partner, Corporate Advisory & Restructuring Services, Grant Thornton LLPRob Moore, Director, Corporate Advisory & Restructuring Services, Grant Thornton LLPA number of events and developments directly • Nuclear and alternative energy sources fallingaffected the energy industry during 2011. from favor. Before the March 11, 2011, disasterFollowing are some of the highlights: at the Fukushima plant, nuclear power was• Geopolitical unrest in Libya, Egypt, Tunisia, beginning to be reconsidered in a positive and other Middle Eastern and North African light, but the incident soured public opinion. countries. The civil war in Libya has resulted As heavily subsidized manufacturers from China in approximately 1.8 million barrels per day and elsewhere flooded the world markets with of oil production no longer being available; low-cost solar panels, U.S. companies Solyndra however the larger implications of this conflict and Evergreen Power filed for bankruptcy; these will be playing out for some time. And recently, filings led to a steep decline in public support a joint exploration program proposed by the for government funding of alternative energy autonomous Kurdish region and ExxonMobil development. The wind power production tax has raised the ire of the Iraqi central government credit, the ethanol tax credit and related import over jurisdiction. tariffs all expired at the end of 2011.• Sharper scrutiny of hydraulic fracturing. • The beginnings of a rebound in Gulf of Various federal, state and local authorities Mexico drilling. While deep well permits are are looking to regulate or restrict hydraulic nowhere near 2008–2009 levels, regulators fracturing, and more studies are being conducted. approved 38 such permits in 2011 (versus four A recent earthquake near Youngstown, Ohio, during 2010 after April), 31 of which came in that is being attributed to the injection of the last six months of the year. Rig utilization wastewater from hydraulic fracturing into a and day rates have also improved. The Bureau disposal well will likely intensify the review of of Ocean Energy Management, Regulation and fracking processes and their byproducts. Enforcement (BOEMRE) recently completed Oil and Gas Lease Sale 218, which was the first Gulf of Mexico lease sale since the Deepwater Horizon incident. The winning bids totaled more than $337 million from 20 companies, including BP. “ ergers and acquisitions were numerous in the energy industry M during the year, with announced transactions reaching almost three times their 2010 total.”8 Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012
  • 9. • The issuance of new regulations. In December More equity capital was also made available 2011, the Environmental Protection Agency during 2011. In the public markets, IPOs for (EPA) issued final regulations limiting emissions companies in exploration and production as well of mercury and other pollutants from fossil-fired as energy services raised almost $2.4 billion during power plants. Compliance by the industry is 2011—nearly $1 billion, or 70%, more than they required within three years and is expected to did in 2010. And public equity offerings in 2011 cost $10 billion annually, and many utilities are totaled in excess of $9.5 billion, up by more than worried that older coal-fired plants might have 17% from $8.1 billion in 2010. to shut down. Congress may move to modify the 2012 capital budgets that have already been rule or extend the timeline for compliance, and announced indicate optimism, with most of them utilities are likely to initiate litigation against the exceeding 2011 levels by an average of 15–30%. enactment of the regulations. As we enter 2012, the industry faces a variety of ongoing challenges—the critical need for safety Last year, we believed that 2011 would allow in its operations; environmental concerns, includingindustry players to pursue growth opportunities, issues regarding hydraulic fracturing; increasinglyand this supposition has been shown to be correct. expensive technological requirements; and politicalMergers and acquisitions were numerous in the instability in many areas of the world. Many industryenergy industry during the year, with announced analysts are bullish on oil, with most predictingtransactions reaching almost three times their 2010 that prices will materially exceed $100 per barreltotal. In addition, transaction sizes increased during during the year. Analysts are generally bearish on2011. The three largest transactions announced— natural gas given the struggles in the market toKinder Morgan’s purchase of El Paso, Duke Energy’s balance supply with demand; most analysts areacquisition of Progress Energy, and BHP Billiton’s reducing their price expectations for the year topurchase of Petrohawk Energy—represented under $4/thousand cubic feet.aggregate consideration of more than $87 billion; this In summary, 2011 brought significant growth toamount is greater than the combined consideration the industry. Those participants that are positionedfor the 11 largest acquisitions announced in 2010. to manage the challenges discussed above are likelyAggregate consideration for all transactions in 2011 to experience another attractive year in 2012.whose values were reported totaled more than$312 billion, as compared with $216 billion in 2010. Joint ventures, which are primarily used toacquire interests in natural gas shale acreage, againcontributed sizable amounts of capital to theindustry in 2011. As in prior years, the majority ofjoint venture transactions involved foreign partnerswhose investment objectives also included makingtheir energy supply secure and gaining access totechnological and production knowledge. Some ofthe most notable joint ventures are listed below:• Consol Energy/Noble Energy—$3.4 billion• Devon Energy/Sinopec—$2.5 billion• Chesapeake Energy/Total—$2.32 billion• Consol Energy/Hess Corp.—$600 million Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012 9
  • 10. Prices and spendingVolatility in natural gas and crude oil prices is making Even so, the responses vary widely. For example,it exceedingly difficult to forecast where they are individual estimates for the average price of naturalheading in the near future. Estimates for the spot gas range from a low of $3 per Mcf in 2012 toprice of Henry Hub natural gas this year differ by a high of $5.10. Crude oil prices were no easieras much as $2.10 per Mcf at the extremes, while the to pin down, with 2012 estimates ranging fromspread between the highest and lowest forecasts for $75 to $115 per barrel.the price of West Texas intermediate crude oil is Respondents believe the average price of$40 per barrel. The majority of respondents believe natural gas must be $5.29 per MMbtu to justify aneither will approach the price levels needed to 20% increase in U.S. drilling activity, down fromsupport an increase in drilling activity of 20% or $5.69 a year ago. Sixteen percent of respondentsmore. As a group, they are more optimistic about expect that natural gas prices will reach thattheir capital spending plans. threshold, compared to 8% in 2011. Eighty-eight percent said they would curtail production if pricesAverage price projections were less than $4 per MMbtu in 2012.Our respondents predict that natural gas prices willrecover this year, with the average expectation forthe spot price of Henry Hub natural gas exceeding “ atural gas production continues N$4 per Mcf by 2013. They anticipate the price of to outpace demand, resulting inWest Texas intermediate crude oil hovering near the a few notable companies electing$100 level over the next several years. (Figure B) to curtail gas production in 2012.Figure B: Average price expectations Although uncertain and volatile prices are inherent in the industry,Year Natural gas Crude Oil it is difficult to be optimistic about2012 $3.91 per Mcf $93.14 per barrel2013 $4.30 per Mcf $97.09 per barrel a significant and sustained run up in2014 $4.69 per Mcf $101.75 per barrel gas prices in the near future.” Brandon Sear Leader, National Energy Practice, Grant Thornton LLP10 Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012
  • 11. Enterprise risk management—Risk in the spotlightAlan Millis, Managing Director, Business Advisory Services, Grant Thornton LLPNow, more than ever, today’s oil and gas companies • Water management—State and local restrictionsshould be focusing on managing risk. Finding and or lack of proximity to an adequate water supply inproducing oil and gas has always been an inherently certain geographic areas is making it more difficultrisky business, but today there is far less margin for to obtain sufficient water for fracturing wells.error than there was just a decade ago. The explosion • Security—Increasingly sophisticated “cyber-of social media has sparked a new wave of social terrorists” are an emerging threat to productionactivism and increased pressure on politicians and control (measurement/flow) systems.regulators to thoroughly scrutinize the businesspractices of E&P companies. Of course, it’s one thing to identify risks and As a result, leading E&P companies are quite another to manage them in a cost-effective way.implementing or enhancing an enterprise risk That’s why a risk inventory is just the first stepmanagement (ERM) program to more confidently in implementing an ERM program. Once a companymanage major risks that naturally occur in the E&P has accomplished this, it should evaluate each riskbusiness. Optimally designed, an ERM program in terms of 1) potential financial impact to theproduces a standardized and comprehensive risk business, 2) likelihood or probability of occurrence,inventory that arms board members, company and 3) the speed at which risk events can have anexecutives and department managers with the impact on the business.information they need to identify the risks that are ERM is much more than a process for trackingmost important to the company’s strategy. risks. According to a recent study by the American Discussions with many of our E&P clients found Productivity and Quality Center, organizationsthat they are placing more emphasis than before on with mature ERM programs in place “reach beyondaddressing operational risks, specifically: process design and mechanics… and aim to influence• Environmental—The inherent potential for culture, people and mental models.” In this regard, release of pollutants or spills which cause ground, a mature ERM function engenders a high degree air or water contamination; companies are of change management, necessitating the active focused on honing their ability to quickly and involvement of senior leaders. We recommend effectively respond to such a crisis. that our clients follow a “top-down” approach• Regulatory—Greater challenges in complying where executives engage each functional leader in with evolving regulatory requirements and the organization, particularly in operational areas, inconsistent enforcement of rules in jurisdictions, to continuously build knowledge and expertise particularly in emerging resource plays where throughout the organization about key business risks regulators have limited experience with oil and and related risk mitigation strategies. gas operations. Given the increasing complexity of risks facing• Public relations—The proliferation of social E&P companies and the speed with which missteps are media is significantly increasing the velocity disseminated, oil and gas business executives may be with which company news is disseminated to tempted to err on the side of caution and shoot down the public, prompting companies to devise new new opportunities that could put them in a position to strategies for shaping news coverage and opinions. expand the business. A well-managed ERM program• Contractors—An insufficient supply of positions business leaders to resist this temptation and adequately trained well site contractors in the pursue each new potential venture with the confidence newer resource plays. that they’re prepared for whatever might come. Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012 11
  • 12. When asked the same question for crude oil Of course, those plans hinge on where prices headprices, respondents set the average price floor at this year, as forecasted natural gas and crude oil prices$99.37, an $11.44 increase from last year. Forty-one rank in our survey as the most important factors inpercent believe crude oil prices will be high enough to capital spending decisions. Other factors, ranked bysupport a 20% increase in drilling activity this year, order of significance, include: availability of attractivedown from 55% a year ago. Sixty-six percent indicate drilling prospects, capital availability, projectedthat oil production would be cut if prices were less demand for natural gas and crude oil, drilling rigthan $70 per barrel, though none of our respondents availability, availability of skilled personnel, regulatoryexpect prices to dip that low this year. requirements or constraints, and tax considerations. Our respondents said they would pay a maximumof $2.49 per MMbtu for conventional proved natural Figure C: Plans for capital spending in 2012 comparedgas reserves, and $52.16 per barrel of crude oil. to 2011 for U.S. and foreign expenditures (%) Increase significantly 21 U.S.Capital spending outlook (more than 20%) 8 expendituresWhile a lesser percentage of respondents than last year Increase somewhat 41 Foreignanticipate increasing their domestic spending, they are (up to 20%) 10 expendituresstill in the solid majority (63%). Eighteen percent plan No change 27to spend more in overseas markets in the coming year, 82with the remaining 82% predicting they will hold Decrease 11steady with last year. (Figure C) 0 0 26 52 78 104 13012 Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012
  • 13. E&P industry—Key M&Atransaction risksBrandon Cradeur, Managing Director, Transaction Advisory Services, Grant Thornton LLPIt might surprise some that Houston ranked second M&A transaction can alter a company’s futureonly to New York City for M&A deal value significantly. The challenge is that most companiesduring the first nine months of 2011.* To be sure, are operationally focused and typically do not havethis was a notable achievement, considering that sufficient M&A experience at the executive level orU.S. metropolitan areas such as Chicago and Boston the infrastructure needed to acquire and integratehave a significantly higher presence of venture companies effectively. With so many E&P companycapitalists, private equity firms and hedge funds earnings and reserve restatements stemming fromwhose business models essentially consist of buying acquisitions in recent years, it’s clear that the industryand selling companies. is not immune to this challenge. But to those in exploration and production With that in mind, it’s a good idea for E&P(E&P), Houston’s emergence as a hotbed for M&A executives to examine key transaction considerationsactivity was far from unexpected. Since their primary that are unique to their companies and have theassets (i.e., reserves) are a dwindling resource with potential to negatively impact capital deployment and/a finite value, E&P companies are under constant or cash flows if not properly measured and factoredpressure to acquire and exploit reserves or buy other in. Grant Thornton’s Energy Transaction AdvisoryE&P companies when they can’t replace reserves Services group helps companies assess E&P transactionorganically. Fortunately, their historically strong risks in five overarching categories: (1) reserve andbalance sheets and cash positions allowed them to production characteristics, (2) reinvestment, (3)make deals last year, even as many other industries operating and capital efficiency, (4) tax exposures, andand locales were forced to retrench. (5) non-E&P operations. Executives should consider a The real surprise is how often E&P executives number of essential items within these categories whenask the same question when considering an M&A conducting due diligence:transaction: “Since our reserves—and their values—areunder the ground, why should we perform financial Reserve and production characteristicsdue diligence?” My response is always the same: • The impact of historical versus projected“How can a dynamic E&P company afford not to?” production volumes and volatility on cash flows. I’ve had the opportunity to work on more • Concentration and diversification among geologicthan 200 transactions during my career—as a basins (e.g., percentage of oil versus gas, onshoreprivate equity professional, a director of corporate versus offshore, and number of wells).development in industry, and an M&A transaction • The duration that proved undeveloped reservesadviser. Through this experience, I’ve learned that (PUDs) have been on the books, the relatedunderstanding key transaction risks—and negotiating drilling program to develop these PUDs, andand structuring the transaction to mitigate them— whether there were significant changes to theare critical to a successful deal. After all, a single drilling program.* Houston Chronicle, Dec. 19, 2011. Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012 13
  • 14. • The reserve report, which is a critical report Tax exposures relied upon during E&P transactions, presents • Federal, state and local income tax exposures. many risks and estimates that are important to • Sales and use tax, property tax, employment tax, consider, including (1) risks related to whether the escheat, or other applicable tax exposures. report was prepared internally or externally, (2) • Deferred tax assets/liabilities, net operating loss projection sensitivities based on production and (NOL) carryforwards, the depletion deduction forecasted capital expenditures (CAPEX), and allowance, like-kind exchanges, and tax basis (3) estimates generated by comparing the current verification. NYMEX strip with the price deck used.• Historical asset impairment testing and related analyses. “…it’s a good idea for E&P executives to examine key transaction considerations that are unique to their companies and have theReinvestment potential to negatively impact capital deployment and/or cash flows• The reserve life index—calculated by dividing if not properly measured and factored in.” proved developed producing (PDP) reserves by annual production—indicates the potential pressure of capital deployment. Non-E&P operations• Comparison of the annual reserve replacement • The potential for significant liabilities related to index, which indicates a company’s ability to other businesses (e.g., midstream, distribution or replace its annual production, with indexes refining/marketing) with different risk profiles, calculated by companies of similar sizes. such as an out-of-the-money trading book• Evaluating a company’s ability to economically from aggressive marketing/trading activity or replace reserves; this evaluation involves looking environmental liabilities from refineries and at historical finding and development (F&D) chemical plants. costs based on dollar-per-barrel equivalent (boe).• Calculating an undeveloped lease expiration In addition to looking at these items while waterfall, which identifies potential acreage and conducting their due diligence, E&P companies reserves at risk of being lost. should consider factors that fall outside these broader• Drilling and CAPEX assumptions used in categories. Following are some of the questions we developing PUD projections. encourage our clients to answer: Does the asset base,• The reserve acquisition price per boe versus as currently leveraged, generate adequate return historical F&D costs. on capital invested? If not, what are the scenarios• The existence of commitments related to seismic to optimize investment? What are the strategic acquisition, CAPEX, drilling, or long-term synergies that can be created by the transaction under take-or-pay contracts with commodity price consideration, and how are they expected to impact caps or floors. the overall value chain? Are hedging programs in place to protect against commodity price exposures? AreOperating and capital efficiency there any joint venture or royalty issues, counterparty• Operating efficiency as measured by the full-cycle risks, or off-balance sheet financing contingencies? cost and expressed as $/boe. The full-cycle cost is The challenge, of course, is finding the best way the average cash cost to produce each boe and the to perform financial and operational due diligence in capital necessary to replace it—in other words, today’s environment of limited or stretched corporate the sum of lease operating expenses (LOE) plus development budgets. Companies can build out general and administrative (G&A) burden plus their corporate development departments, engage F&D costs. experienced transaction advisory professionals to• Management’s ability to maintain a strong leverage their internal team, or elect to do both. liquidity position as measured by the ratio of Whatever approach a company takes with respect capital spending to cash flows. to due diligence, the rewards for conducting it will be clear: The company will not only make more informed decisions, but also perform its fiduciary duties for its investors and lenders in an optimal way.14 Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012
  • 15. Employment 86%After four straight years of low expectations for Hiring and retaining talenthiring, we saw a marked increase in the percentage of A majority of respondents (55%) expect torespondents looking for the industry’s overall level encounter difficulties hiring and retaining employeesof employment to rise in the coming months. Many in the coming year, up from just 22% a year ago. expect theseem to believe that these hiring plans will exacerbate (Figure D) They indicate that higher salaries will industry’s overallthe war for talent, as a majority now believes their likely be the most popular mechanism they use to employment levelcompanies will have difficulty hiring and retaining attract skilled workers, with larger cash bonuses, to increase over theemployees. Given that higher salaries, larger cash equity awards and other enhanced benefits all next year.bonuses and equity awards are widely used to attract drawing at least 50%. Fifty-seven percent predictnew workers, companies may have to differentiate increasing compensation for geologists, engineers andthemselves in other ways to bring on necessary talent. other professionals by at least 10% this year, up from 21% of respondents in last year’s survey. (Figure E)Employment levelsRespondents predict that hiring will pick up in Figure D: Respondents expecting difficulties hiring and2012 at their companies and in the industry overall. retaining employees in the coming year (%)Seventy-one percent expect their company’semployment level to increase in the coming year, 2011 22 2012 55compared with 61% in last year’s survey. 0 10 20 30 40 50 60That figure swelled to 86% when considering theindustry’s overall employment; that was a marked Figure E: Respondents planning to increase professional salaries by at least 10 percent (%)increase from the 56% of respondents who expectedthe industry to add workers last year. (Figure A) 2011 21 2012 57 0 10 20 30 40 50 60 “ he energy sector is booming and is one of the T few areas of job growth. Major oil companies seem to be switching their focus to the United States not only to achieve production growth, but also to position themselves for a longer- term investment in natural gas.” Andy Clifford President, Saratoga Resources, Inc. Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012 15
  • 16. Industry issues and opportunitiesNot surprisingly, respondents list uncertain natural Threats to company valuegas and oil prices as the greatest threat to their Respondents list uncertain natural gas and oil pricesbusiness. As such, they are increasingly turning to as the greatest challenge facing the industry today.hedging instruments to address that risk, but they Availability of technical staff moved up two spotsalso agree that additional government incentives to compared to last year’s survey; the issue now ranksincrease drilling would be the most effective way as their third biggest concern. Rounding out the listto keep consumer energy prices in check. Those are regulatory requirements, legislative initiatives,surveyed are more concerned than in recent years obtaining capital, environmental considerations, lackabout finding skilled workers, and they expressed of good exploration prospects, competition withuncertainty about how to handle rapidly changing larger companies, and litigation concerns.regulatory and tax requirements. HedgingEnhancing company value The survey found that 59% of respondents increasedSuccessful exploitation and exploration of resources the use of hedging instruments over the past yeartop our respondents’ list of factors with the greatest to effectively manage price risk. More than three-potential for enhancing company value. Those factors quarters (77%) said that hedging instruments wererank ahead of (in order): operating efficiencies, mergers required by lenders.and acquisitions, retaining and attracting people,better use of technology, price risk management(e.g. hedging), capital infusion and asset sales. “ n the public markets, IPOs for companies I in exploration and production as well as energy services raised almost $2.4 billion during 2011—nearly $1 billion, or 70%, more than they did in 2010.” Loretta Cross, Managing Partner, Energy Advisory Services and Partner, Corporate Advisory & Restructuring Services, Grant Thornton LLP and Rob Moore, Director, Corporate Advisory & Restructuring Services, Grant Thornton LLP16 Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012
  • 17. “ ome of the most attractive S features of shale plays are the long- lived nature of the reserves, the repeatability, the high probability of success and large lease positions.” Andy Clifford, President, Saratoga Resources. Inc.The role of government Figure F: Preferred areas of government focus (%)Those we surveyed said government incentivesto increase U.S. drilling for oil and gas is the most Open areas for drilling Short term Long term East Coast 34 66effective mechanism for reducing energy prices West Coast 33 67for the U.S. consumer. Increased U.S. refining Eastern Gulf Coast 60 40and processing capacity and increased efficiency Arctic 51 49 Onshore Federal 61 39through technology are also viewed as significantcontributors. Drilling Incentives 51 49 Asked to identify priority areas for the federal 0 20 40 60 80 100government to focus its support of the industry, Alternative Fuels Nuclear 25 75respondents said opening onshore federal lands for Solar 15 85drilling should be its biggest focus in the short term. Wind 26 74 0 20 40 60Clean coal was the top vote-getter for alternative fuel Geothermal 28 72 Biomass 25 75policies in the short term, coming in well ahead of Clean Coal 53 47other options such as biofuel, geothermal and wind Biofuel 33 67energy. Carbon emission credits are seen as a near- 0 20 40 60 80 100 Environmental safeguards 41 59term priority by less than a third of respondents.(Figure F) Carbon emission credits 29 71The shale gas boom R&D Credits Grants 43 57Seventy-seven percent of respondents believe Tax credits 50 50new reserves found in the various shale plays inthe U.S. will shift or change the nation’s dependenceon foreign oil.The Dodd-Frank ActOnly 28% of respondents believe they will qualifyas an “end user” and therefore be exempted fromcomplying with the Dodd-Frank Act. Even so, nearlytwo-thirds (65%) have not begun to implement thedocumentation and reporting required by the law. Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012 17
  • 18. Global use of IFRS—When, not whetherApril D. Little, Partner, Transaction and Risk Advisory Services and Practice Leader, IFRS Tax, Grant Thornton LLPA flock of nearly 2,000 public accountants and For its part, the International Accountingindustry professionals converged on the nation’s Standards Board (IASB) has indicated that it maycapital in December for the 2011 AICPA National be time to discontinue convergence efforts with theConference on Current SEC and PCAOB Financial Accounting Standards Board (FASB), asDevelopments. What drove us all to D.C.? A suggested in recent speeches by IASB Chairmancommon viewpoint was that we would finally hear Hans Hoogervorst. At the AICPA conference inhow and when International Financial Reporting Washington, he stated that the convergence effortsStandards (IFRS) would be incorporated into the have been “extremely useful in getting us to a pointU.S. financial reporting system. The anticipated where IFRS and U.S. GAAP are much improved andannouncement was expected to reflect thoughts closer together” but may be most beneficial wheninitially publicized in a May 26, 2011, Staff Paper, directed toward other countries pursuing convergenceWork Plan for the Consideration of Incorporating paths. His comments were generally indicative of theInternational Financial Reporting Standards into the best method of adoption, incorporating the approachFinancial Reporting System for U.S. Issuers: Exploring outlined in the staff paper, but he seemed cautiousa Possible Method of Incorporation. At the end of the about any plan that did not include a clear timelinethree-day conference, however, the flock flew the and a transparent, very high threshold for decliningcoop with no decision rendered. to endorse a standard. The IASB’s expectation is SEC Chief Accountant James Kroeker did that deviations from international standards will beacknowledge that while a decision had been expected “extremely rare”. The IASB continues to recommendby the end of 2011, a final determination would not that U.S. companies be allowed to voluntarily adoptbe forthcoming for a few months. His reasoning was IFRS in the very near future.that the staff paper was not yet complete, nor wereseveral major convergence projects that needed to Worldwide momentumbe finalized prior to a decision. The SEC indicated In the meantime, the rest of the world is flyingthat it has completed the majority of its fieldwork toward the use of IFRS as a common global standardand is finalizing a staff paper that will ensure a for financial reporting. The only question remainingstrong and lasting framework for standard setting. for most countries is when, not whether, to move toAccording to Kroeker, key requirements for IFRS. For these countries, a single common set ofa successful incorporation of IFRS include standards has several clear benefits. First, it would(1) providing clear U.S. authority over standard allow for greater transparency and comparability ofsetting in U.S. capital markets, (2) mandating and financial statements across an industry. As financialfacilitating a strong U.S. voice in establishing global reporting gained greater transparency, investoraccounting standards, and (3) responding to the confidence in it would inevitably grow. Second,economic and other impacts of change. global standards would allow for more efficient18 Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012
  • 19. capital markets. Investors would be able to compare The proposed revenue recognition standardtransactions and the allocation of capital based on simplifies guidance for revenue recognition in acommon accounting methods. Finally, with the issue significant way, moving from more than 220 existingof convergence settled, rulemakers would be able to revenue recognition models under U.S. GAAP to afocus their attention on improving one new set of single revenue recognition model. The most commonglobal standards. criticism of the proposed standard is its lack of Among those regions currently moving to IFRS, detailed guidance. The proposal was re-exposed inEurope is furthest along. Countries from Albania to November 2011, with final issuance expected in thethe United Kingdom have been successfully using first quarter of 2012.IFRS since 2005. The only remaining country on In the current international standards, there isthe European continent to prohibit the use of IFRS very little specific industry guidance for extractiveis Belarus, which has no common exchange, yet activities. IFRS 6, Exploration for and Evaluationeven Belarus is currently planning for convergence. of Mineral Resources, gives stopgap guidance forLatin America has begun the transition, with Brazil accounting for exploration and evaluation costs; thisand Venezuela requiring IFRS for many companies guidance is intended to help companies transitioningin 2011; Argentina and Colombia are mandating to IFRS from local GAAP. In the interim, aIFRS in 2012. In Asia, India and Indonesia are the discussion paper, Extractive Activities, was issued inmost recent countries requiring the use of IFRS for April 2010. In October 2010, the research project wasmany of their listed companies. Africa is not far paused to allow the IASB to conclude deliberationsbehind, with Nigeria planning for transition using a on its future workplan. The Board’s next step willphased-in approach from 2012 to 2015. be to determine, based on the completed research project, whether to add a proposed project forImplications for the U.S. energy sector extractive activities guidance to its future agenda.Here in North America, our neighbors to both the For now, energy companies will have to rely on onlynorth (Canada) and the south (Mexico) have charted limited industry-specific guidance.a path to mandatory use of IFRS. While the United Some of the other standards that will impactStates remains the lone holdout, the staff paper energy companies include IAS 36, Impairment ofdetails a method for incorporating IFRS into the U.S. Assets, and IAS 16, Property, Plant and Equipment.accounting system. The transition to international standards in these The staff paper described an endorsement two areas may involve a substantial amount of work,approach whereby existing standards would since both standards generally require considerationbe reviewed and grouped into several tiers: (1) of a much more precise unit of account. Fixed assets,completed Memorandum of Understanding for example, are capitalized based on replaceable(MOU) projects, (2) IASB agenda projects, and (3) components. Goodwill and other intangible assets,projects with no current revisions planned. Under similarly, are evaluated for impairment at the level ofthe proposal, convergence would be determined the cash-generating unit that is used to aggregate andseparately for each group. The SEC was clear that it analyze financial data. This will compel companiesis considering comments and refinements or alternate to maintain records and evaluate transactions at aapproaches and expects to make a decision in the much more detailed level than they are accustomed tocoming months. That decision is likely to be highly under U.S. GAAP.dependent on current key convergence projectsregarding topics of significant importance to the Why the time to act is nowenergy industry: leasing, revenue recognition and With U.S. standard setters not yet charting a pathfinancial instruments. toward the use of IFRS, why should U.S. companies The proposed leasing standard, which will be be concerned about international standards? Muchapplicable to leases of oil and gas properties, would as they were during the evolution of Sarbanes-Oxleyput the majority of leases on companies’ balance (SOX) Section 404 and FASB Interpretation No.sheets and effectively front-load expense for lessees 48 (FIN 48), companies in the United States are inand income for lessors. The revised leasing standard wait-and-see mode until the SEC announces a formalis currently being re-exposed and is not expected to plan for the use of international standards. Lackingbe finalized until at least mid-2012. any substantive guidance for energy and extractive Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012 19
  • 20. activities, many U.S. companies will postpone planning From the investor perspective, commonfor transition to IFRS for the foreseeable future. accounting standards decrease the number of For many, however, this tactic may result in a financial reporting languages a user must master.competitive disadvantage. Awareness of IFRS and True, dialect differences remain, but these can bethe basic differences between it and U.S. GAAP caused by a variety of factors:is increasingly important for companies requiring • Differences in interpretation due to commonaccess to global capital markets. Most global practices carried over from a country’s priorcreditors, vendors and even regulators of state-owned reporting standardsnatural resources arrange contractual obligations • Differences in transitional guidance that mayusing metrics tied to global reporting standards as prohibit or require certain accounting treatmentstheir domestic markets transition to IFRS. Some of • Lack of detailed application guidancethe common areas causing differences are discussed • Flexibility in choosing alternative accountingabove. Other classification differences impacting the policies (keeping in mind that different standardsbalance sheet can also influence key financial metrics do not always mean different outcomes)dramatically. For example, a company’s current ratiomay be affected by reclassifying all deferred taxes to Finally, as the United States moves closer tononcurrent for IFRS purposes. Or a company may IFRS, companies with an awareness of the newfind that while it cured a debt covenant violation standards will be in the best position to manageprior to finalizing the financial statements, the upcoming changes to U.S. GAAP and minimize theirentire obligation must be classified as current based impact on operations. Indeed, these companies willon a purely technical violation as of the year-end. be most capable of adopting IFRS in the next 18 toSome statements of financial position will be highly 24 months, based on a typical timeline (Figure G).volatile, particularly in the year of conversion, as a This timeline assumes that a company will evaluateresult of the optional use of fair value measurements common accounting policies across consolidatedfor intangible and fixed assets. groups and make changes to IT systems, hiring and Additionally, many players in the global M&A compensation policies, and contract negotiations.market are using IFRS as a common basis for In other words, these companies will have aevaluating transactions across the industry. competitive advantage when the United StatesWith IFRS conformity increasing on a global scale, ultimately taps into the global accounting pipeline.a U.S. GAAP metric becomes difficult to comparewith existing benchmarks. Companies may find Figure G: A typical timeline for IFRS adoptionthat capital markets are interested in common Example: 2012 IFRS reporting timetable for a March 31 year-end companymeasurement metrics under IFRS rather than IFRS IFRSU.S. GAAP. For example, one company I’m familiar trasition reportingwith translates all U.S. GAAP reporting information date date 2010/11 2011/12to IFRS solely for the purpose of entering the globalprivate equity market because, as one company Comparative year under IFRS First effective year under IFRSexecutive says, “the game is played globally, so wehave to react globally.” Acquirers see common global Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4accounting methods as a time and cost efficiency, April 1, 2010 March 31,2011 June 20, 2011 March 31, 2012 IFRS opening Last local First quarterly First IFRSwhile acquired companies find that interest in an statement GAAP financial report under financialinvestment increases as it grows competitive under of position statements IFRS statementscommon measurement standards. Companiesthat aren’t prepared risk turning off investors thatmight otherwise spend the resources needed toimprove technology systems, catalog and coordinateaccounting methods, or create duplicative reportingsystems for U.S. GAAP.20 Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012
  • 21. ImplicationsThe issues identified as concerns in this year’ssurvey—price volatility, finding and retaining talent,the need to operate more efficiently—are not likelyto go away in the coming months. Leading energycompanies are managing this uncertain environmentthrough a variety of means, all coordinated from thetop of the house in a strategic and holistic way.• Risk management—Employing ERM programs to make better strategic decisions and redeploy capital effectively, and incorporate risk management in financial reporting and the corporate culture.• Transactions—Turning to acquisitions and joint ventures to share risk, increase capital and expand access to new technologies.• Accounting standards—Getting ahead of IFRS requirements to open more doors to sovereign wealth funds and other global investors that may be interested in investing in high-risk energy ventures but demand consistency in reporting.• Talent—Benchmarking and tailoring benefits and compensation programs to remain competitive and take advantage of the information now available through newly enhanced compensation disclosure requirements in the U.S.• Operating efficiency—Focusing on improved cash management and working capital strategies, assessing changes to IT management and opportunities provided by cloud computing, and improving the tax function to capitalize on all available incentives and structure the overall tax organization for optimal tax advantage. Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012 21
  • 22. DemographicsAbout the survey About Grant ThorntonThis is the 10th Survey of Upstream U.S. Energy Grant Thornton LLP is the U.S. member firm ofCompanies commissioned by Grant Thornton. Grant Thornton International, one of the six globalThe survey was conducted via mail and Internet accounting, tax and business advisory organizations.from November 2011 through January 2012, with Through member firms in more than 100 countries,more than 100 responses from senior executives including 49 offices in the U.S., the partners ofof independent oil and gas exploration and service Grant Thornton member firms provide personalizedcompanies. Survey topics included price and attention and the highest quality service to publicemployment forecasts, capital spending plans, and private clients around the globe.regulatory and legislative developments, andnew areas of opportunity. Issues explored by the National Energy PracticeGrant Thornton Survey of Upstream U.S. Energy Grant Thornton’s National Energy Practice isCompanies were identified by seasoned professionals dedicated to serving the accounting, tax and businessin Grant Thornton’s Energy Practice. The figure advisory needs of public and privately ownedbelow indicates the demographics of the companies energy companies. Headquartered in Houston,that responded to the survey questionnaire. Grant Thornton’s Energy Practice group has experience in all segments of the industry withDemographics a focus on exploration and production, drillingExploration and production companies 75% and energy services, pipeline and distribution,Gathering and transportation companies 8% and refining and marketing. Grant Thornton’sService companies 13% experienced team of energy professionals providesOther companies 4% the following industry-specific services:Average total assets at the end of fiscal 2011 $1.63 billionAverage projected revenues for fiscal 2011 $544 million • auditPublic 27% • governance risk and compliancePrivate - C Corp 15% • federal taxPrivate - S Corp/Partnership 38% • international tax consultingMLP 20% • state and local tax consulting • forensics, investigations and litigation • information technology • performance improvement • business strategy • restructuring and turnaround • transaction advisory services • valuation22 Grant Thornton LLP Survey of Upstream U.S. Energy Companies 2012
  • 23. Contact informationEnergy practice key contacts Office locations Illinois OklahomaCleveland National Office Chicago 312.856.0200 Oklahoma City 405.218.2800Rick Gross, Audit Partner 175 W. Jackson Blvd., 20th Floor Oakbrook Terrace 630.873.2500 Tulsa 918.877.0800T 216.858.3627 Chicago, IL 60604-2687 Schaumburg 847.884.0123 312.856.0200 OregonPatrick Gable, Audit Partner Kansas Portland 503.222.3562T 216.858.3537 Washington National Tax Office Wichita 316.265.3231 1250 Connecticut Ave. NW, Suite 400 Maryland PennsylvaniaDallas Washington, DC 20036-3531 Baltimore 410.685.4000 Harrisburg 717.265.8600Kenneth Clay, Audit Partner 202.296.7800 Philadelphia 215.561.4200T 214.561.2290 Massachusetts Alaska Boston—N Station 617.723.7900 Rhode IslandDenver Anchorage 907.264.6620 Boston—Fin Distr. 617.226.7000 Providence 401.274.1200Bruce Johnson, Audit Senior Manager Westborough 508.926.2200T 303.813.4000 Arizona South Carolina Phoenix 602.474.3400 Michigan Columbia 803.231.3100Houston Detroit 248.262.1950Brandon Sear, National Energy California TexasPractice Leader Irvine 949.553.1600 Minnesota Austin 512.391.6821T 832.476.5048 Los Angeles 213.627.1717 Minneapolis 612.332.0001 Dallas 214.561.2300 Sacramento 916.449.3991 Houston 832.476.3600Loretta Cross, CARS Managing Partner San Diego 858.704.8000 Missouri San Antonio 210.881.1800T 832.476.3630 San Francisco 415.986.3900 Kansas City 816.412.2400 San Jose 408.275.9000 St. Louis 314.735.2200 UtahSusan Floyd-Toups, Tax Woodland Hills 818.936.5100 Salt Lake City 801.415.1000Executive Director NevadaT 832.476.3631 Colorado Reno 775.786.1520 Virginia Denver 303.813.4000 Alexandria 703.837.4400Kansas City New Jersey McLean 703.847.7500Greg Payne, Audit Partner Connecticut Edison 732.516.5500T 816.412.2400 Glastonbury 860.781.6700 Washington New York Seattle 206.623.1121Oklahoma City Florida Albany 518.427.5197Kevin Schroeder, Audit Partner Fort Lauderdale 954.768.9900 Long Island 631.249.6001 Washington, D.C.T 405.218.2800 Miami 305.341.8040 Downtown 212.422.1000 Washington, D.C. 202.296.7800 Orlando 407.481.5100 Midtown 212.599.0100Tulsa Tampa 813.229.7201 WisconsinJohn Meinders, Audit Partner North Carolina Appleton 920.968.6700T 918.877.0800 Georgia Charlotte 704.632.3500 Madison 608.257.6761 Atlanta 404.330.2000 Raleigh 919.881.2700 Milwaukee 414.289.8200Tim Ogden, Tax Practice LeaderT 918.877.0812 Ohio Cincinnati 513.762.5000Wichita Cleveland 216.771.1400Brad Heerey, Audit PartnerT 316.265.3231
  • 24. Content in this publication is not intended to answer specificquestions or suggest suitability of action in a particular case.For additional information on the issues discussed, consulta Grant Thornton client service partner.© Grant Thornton LLPAll rights reservedU.S. member firm of Grant Thornton International Ltd