By Younas Chaudhary
Timely decision-making using information and data has helped increase profits and drive growth for our companies. While data helps us to make sound decisions, however, it can never be a substitute for fundamental business principles, like maintaining positive cash flow, prudently operating, managing costs, spending wisely, and doing the rigorous, essential, daily, hands-on work of running a business.
When I ventured into the oil and gas industry in the 1970s, there were no fancy charts or computational projections to guide our decision-making. Instead, I relied on a stack of thick ledgers, lots of pencils, long hours of hard work, carbon paper, and strenuous analytical thinking to review properties, conduct field visits, and make investing and operational decisions. Today, we have immeasurably better access to reliable, quick, and cost-efficient data that help us make fast, accurate projections about oil and gas wells, including the life of wells at variable product prices, reserve values, decline curves, and other parameters.
However, despite all this technology, the “human” behind the information and data is critically important. A person’s analytical capabilities, knowledge, experience, field notes, personal observations, and intuition play a far greater and more reliable guide in decision-making than fancy gadgets and automated software tools. Sophisticated statistical tools and quantitative data can provide us informative predictions, forecasts, and behavioral analysis. But the key challenge is to use these insights intelligently, to translate data analysis into effective actions.
When we pursue a deal, we seek data and information on a variety of topics from independent consultants and aligned lenders. (Since lenders have a vested interest in the success of any proposed deal, their advice is usually highly credible.) Once the results from these sources come in, our team conducts lengthy internal analysis into the parameters of the deal. In conducting this analysis, we have plenty of data in front of us; but the important thing is to make sense of all the inputs and use them to make timely, prudent decisions.
It is very important that you thoroughly research and study all data and information you have in hand related to a deal. If you cut corners by using less experienced analysts or unreliable software, you can easily get inaccurate data sets and errant projections. These can prevent you from seeing the full picture of the situation, such as general and administrative (G&A) costs like rent, utilities, insurance, legal fees, office costs, and salaries. They can also cause you to miss critical field cost data, like expenses for well pulling jobs, workovers, and recompletions.
Historical data helps us predict fairly well our future returns on existing oil wells, though it is difficult to make projections on undrilled wells. Today, we can easily secure payout projections based on 12-month, 24-month, or 48-month production models of existing oil wells using sophisticated software combined with human intelligence. In the case of undeveloped wells, even those in prime locations, there is always a sense of palpable uncertainty until the new well’s production comes online. However, despite all the available data in the world, it is essential to remember that luck and superstition also abound in the energy business. Good luck has favored me several times regardless of the data, though of course it was accompanied by a lot of hard work, long hours, consistency, and perseverance.
Another word of advice: Keep an open mind when analyzing data. Sometimes our own biases lead to subjective decisions that come back to bite us. For instance, if most of your investments are in Texas and suddenly you get a highly lucrative, well-researched offer from North Dakota to buy an oilfield production, you may be tempted to fall for short-term gains. In such a scenario, you will benefit greatly from taking a closer, critical look at data and investigating, for example, the long-term costs of running operations in a far-off location where you do not have existing operations.
In short, despite all the data you might have at hand, you must make wise, calculated, and timely decisions based on sound judgment and firm principles. Then, once you have made the decision, stick with it, put it behind you, and do not let self-doubt haunt you.
I am often asked if I use my intuition to make decisions. The truth is, I mostly rely on data, but I also always use my gut feeling of potential gains and losses when making decisions. To sum up, here are a few tips on using data and information wisely:
- Data is only a tool, and what really matters is how you analyze it and translate it into business decisions.
- Be aware of your internal biases when evaluating data sets, and when facing temptation, make sure to cast a careful, critical eye on the data.
- Use data to tell a story about how you can improve and grow your business
- Your gut feelings are indispensable, but it is equally imperative that you use good data to make decisions.
- The “human” behind the data is the most important thing and you cannot compare that to any kind of sophisticated technology.
Find out more about me in my best-selling book “From Dirt Roads to Black Gold.” Note that 100 percent of the proceeds from the sale of this book will help people in need through my foundation, the YBC Foundation.
Stay tuned for Blog 28 Tip 13: Keep emotions and business separate
The views, thoughts, and opinions expressed in this article are my own and do not represent the opinions of any entity with which I have been, am now, or will be affiliated. Further, I make no warranty regarding the accuracy or effectiveness of my recommendations, and readers are advised to consult other advisors as well as their own judgments in making business decisions.