Portfolio Company Consolidation and Integration

Portfolio Company Consolidation and Integration – a Roadmap to Success

Background

A global investment firm recognized that its approach to working with its upstream oil and gas portfolio companies needed to evolve as those companies shifted to a long-term business model focused on cash flow generation and distribution. The investment firm’s team recognized their time was best spent focusing on large capital decisions and risk management in an inherently volatile industry.

Concurrently, it was determined that reorganizing the oil and gas portfolio companies under a single corporate entity would enhance focus on overall investment performance, strengthen the balance sheet, create significant supply chain and back-office synergies, and provide exit opportunities for LP investors and other stakeholders.

Carnrite was engaged to develop an Operating Model that would provide the structure, ways of working, and expectations to support an effective working relationship between the investment firm and its portfolio companies. Additionally, Carnrite supported the development of a shared mission, strategy, and values, created key processes, developed standard KPIs to measure performance, and established roles and responsibilities to define the go-forward relationship between the investment firm and its portfolio companies.

Creation of Pubco

A new independent energy company was formed and, through a series of transactions, underwent a reorganization whereby certain entities previously owned and under the common control of affiliates of the investment firm were contributed. The investment firm provides management services and other assistance to the Company, including strategic planning, identifying acquisitions, screening and evaluating potential investments, forming exit strategies, making large capital allocation decisions, and providing such other assistance as Newco required.

The Company consolidated multiple credit facilities to further strengthen the balance sheet and reduce borrowing costs. It then merged with a publicly-traded company to create a new publicly traded entity (“Pubco”). The scale of Pubco’s combined operations positioned the combined company and its shareholders to attract interest from new institutional investors.

Defining the Operating Model

For Pubco to be successful, the parent company and its operating subsidiaries must have a strong partner relationship focused on delivering value for investors. Achieving this goal requires teamwork, collaboration, clear roles, and responsibilities, and focus on the critical elements of the Operating Model.

Carnrite’s Operating Model is a framework that connects a company’s Vision, Mission, and Strategy to results by defining how an organization operates (Ways of Working), with a focus on achieving results and creating value. The Operating Model was used as a framework to determine which elements needed to be addressed and defined at the Pubco-level and which could continue to be managed by the operating subsidiaries. With Carnrite’s support and input from operating subsidiary leadership, the investment firm defined Pubco’s:

  • Vision, mission, strategy, and values (Strategy)
  • Organizational structure, roles, responsibilities, and decision rights (Structure)
  • Key performance indicators, or KPIs (Metrics and Motivators)
  • Selected work processes and policies, such as financial planning (i.e., budgeting), delegation of authority, financial and operational reporting, ESG and EHS, accounting and other business support functions (Processes)

Conclusion from Carnrite Group

The Pubco model is an innovative way to structure private equity investments in the oil and gas industry going forward. It is a natural evolution of the model given that companies are no longer created to “build and flip”, but instead are expected to operate and generate cash flow distributions on a long-term basis. The Pubco model provides opportunities to consolidate support functions, reduce G&A, leverage increased scale to negotiate better vendor quality and pricing, and simplify the capital structure.

The defined roles and responsibilities allow each group to do what they do best; private equity teams allocate capital, manage financial risk, and make investments, while operating subsidiary management teams execute, operate, and manage operational risk. The shared vision, mission, strategy, and values, combined with a defined operating model to ensure alignment about how work gets done, resulted in an efficient and effective company.

The thoughtful and efficient integration of the investment firm’s portfolio companies created the required scale to establish a public company, which provides an exit pathway for investors. We expect this model to be replicated by other private equity groups globally.

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