Planning and Financial Controls for the Independent Producer

Abstract

Introduction The operational success of many independent oil producers has led to rapid growth. Many smaller firms, while remaining good "oil finders," have difficulty maintaining control and direction during this rapid expansion. The recent weakness in petroleum prices and demand has emphasized the fragile financial prices and demand has emphasized the fragile financial position of many independent producers. Recognizing position of many independent producers. Recognizing the need for planning and financial controls can prevent serious financial problems from developing. prevent serious financial problems from developing. The independent petroleum industry represents a unique financial situation that influences appropriate planning activities. It is capital intensive with planning activities. It is capital intensive with most independent operators working in a capital rationing environment (more acceptable investment opportunities than available capital). At the same time the special financing approaches used by the industry may provide financial leverage while actually reducing the risk of the operator. The operating characteristics are also unique, resulting in high operating leverage. As with all high operating leverage situations, petroleum production has relatively high fixed costs compared production has relatively high fixed costs compared to variable costs, creating high profit margins on incremental production. Earnings and cash flow will be sensitive to both volume and price changes. However, there is also the factor of exploration success which can result in even greater changes in production volume and therefore earnings. A relatively small change in exploration success, either in number or quality of discoveries, would have a substantial effect on the smaller producer. Manufacturing and other traditional industries do not have this unique characteristic. Management "style" also plays a role in designing an appropriate planning operation. Frequently firms have grown from a "one man operation." Delegating authority and establishing more ridgid management guidelines is not always an easy transition. Any formal planning activity must be consistent with their approach to managing the firm. SCOPE OF THE PLANNING FUNCTION The planning function of the independent producer will have a much narrower scope than that of the major oil company. It should concentrate on operational planning rather than strategic planning and should planning rather than strategic planning and should not place great emphasis on creating original forecasts. The objectives of the planning function for the independent should be to increase profitability, prevent financial problems, and reduce the effort prevent financial problems, and reduce the effort needed by top management for operational management duties. There should be unified objectives of the planning-financial control procedures to avoid planning-financial control procedures to avoid unnecessary restrictions while maintaining sufficient control. Maintaining management flexibility under the planning procedures is important for the independent producer. Strategic and operational planning decisions will not have a distinct boundary. Most aspects of strategic planning will be closely related to operational decisions. The dynamics of the industry in recent years has led to changing strategies. However, the strategic decisions may have been passive rather than intentional changes in the firms' passive rather than intentional changes in the firms' operation. Care must be taken that new unplanned and possibly undesirable strategies are not imposed through a series of operational decisions. Pure strategic decisions are made infrequently, therefore analysis of these strategies should not consume a major share of the resources devoted to planning within the independent firm. Strategic decision areas would include geographic area of operation, financing sources, mix of exploration/ development/workover ventures, mix of oil versus gas exploration or production, degree of participation in ventures, diversification within the industry and selling existing production. Although these all have substantial strategic implications, the decision frequently results from operational analysis of investment opportunities rather than an intentional strategic decision. p. 231