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    Opportune has client-centric focus

    DAVID BAGGETT, FOUNDER AND MANAGING PARTNER OF OPPORTUNE | INTERVIEW

    DAVID BAGGETT, FOUNDER AND MANAGING PARTNER OF OPPORTUNE | INTERVIEW
    All photos by Sylvester Garza.

     

    Rapidly-growing Firm Concentrates on Consulting, Tax, and Outsourcing

     

    EDITOR'S NOTE: OGFJ's Mitch Duffy and Don Stowers met with Opportune's David Baggett recently at his office in downtown Houston. Here is what he told us about his fast-growing firm and his plans for the future.

     

    OIL & GAS FINANCIAL JOURNAL: David, you are the founder and managing partner of Opportune. Can you tell our readers about the firm's practice areas and what the company does – an overview, if you will?

    DAVID BAGGETT: We're an energy professional services firm. Our main practice areas are consulting, tax, and outsourcing. If you look at some of the Big Four accounting and auditing firms, they say audit, tax, consulting. Or in another case, consulting, IT, outsourcing. We say consulting, tax, outsourcing. So what we do is sort of a cookbook of what others have done, except that we are solely focused on the energy industry.

    Outsourcing is back-office, accounting, and land administration primarily for upstream companies. The tax component is a variety of things in support of our other service offerings, whether it be structuring or dealing with sales and use taxes and IT systems that we're implementing, or doing book tax provisions. It's a variety of things mostly in support of our other service offerings.

    Consulting is the biggest piece of Opportune. One component of that is corporate finance. Within that, we do restructurings, valuations, and we do due diligence on deals. We have a group that helps people with complex financial reporting issues. The biggest thing we do in that group is help people gather the data and assimilate the data for IPOs. Right now I think we're working on nine IPOs, so we help these companies understand what needs to go in a Form S-1 and get it pre-cleared through the SEC. We work with attorneys and audit firms on that. Within complex financial reporting, we do a lot of derivative evaluations and help with related reporting requirements. These derivatives might include an interest rate swap or some kind of oil forward sale, etc. Many companies want to understand where they stand on those deals from a fair value standpoint. We work with dozens of clients in these areas.

    Within our consulting practice, our process and technology group probably has the largest number of people. We work with companies to assess their current processes and related systems and make recommendations for improvement, whether it be on the process side or the technology side. Those tend to be bigger, longer-term projects.

    OGFJ: Do you have engineers on staff?

    DB: One of our partners is an aerospace engineer, but we really don't have engineers. We are primarily accounting, finance, and IT people, all of whom have energy backgrounds. We are, however, looking for engineering services that might complement our existing suite of services. That could include, as an example, reservoir engineers.

    OGFJ: You're focused exclusively on energy?

    DB: That's right. I believe we have less than a handful of clients that are not energy companies. I think that's because a lot of our drivers are the big private equity firms. They're not going to come into our market and hire a relatively small firm to help them with transactions, but they will hire a firm that is solely focused on one industry – in our case, energy. They actually prefer a focused firm like ours because, while the firms have a lot of money to place, they don't have a lot of arms and legs.

    The five Opportune partners are (from left) Josh Sherman, John Vanderhider, David Baggett, Don Jefferis, Matt Flanagan.
    The five Opportune partners are (from left) Josh Sherman, John Vanderhider, David Baggett, Don Jefferis, Matt Flanagan.

    OGFJ: When did you found the firm, and can you tell us a little about your background?

    DB: I founded it on June 4, 2005. On that particular day, we formed a partnership – and to have a partnership you need two people – so my wife and I registered the partnership. Literally, on the day we filed the paperwork to form the partnership, I had a call from a friend who manages the affairs of a wealthy Houston oilman and philanthropist. There was some potential litigation, and he needed someone to put together the damage models and be an expert witness on something. She said that some out-of-town attorneys were in that day, and they wanted to meet me at 11 am. Three other firms had also been invited. So I showed up at 11 o'clock, and I could already see that there were glossy presentations from two of the other firms on the table. I didn't even have business cards, so I gave them my cell phone number. They asked me if I had any staff – I said no. They asked me where I officed – I said out of my house. So I talked to them about the case for about 45 minutes. They had already talked to two groups before me, and a Big Four firm was due to come in after me. About 30 minutes into the meeting, the attorneys and principals excused themselves for a few minutes. When they returned, they said they had dismissed the other two groups and called the Big Four firm to tell them not to bother coming in. They asked if I could start immediately on the case. I said yes, and I worked with them until 8 o'clock that night. The next day I started hiring staff, and we've been busy ever since. We've never had a month where we lost money. Each year has been significantly better than the last. We're still growing at close to 30% annually. We found the right space.

    We do everything [the Big Four] do with the exception of audits, which we don't want to do.
    "We do everything [the Big Four] do with the exception of audits, which we don't want to do. There might be another firm or two that does restructuring and tax and is trying to bleed over into what we do. But, in the longer term, our competition is the Big Four. Frankly, there really is no other firm that does exactly what we do in the energy space."

    OGFJ: How about your personal background?

    DB: I grew up in Houston and went to Klein High School on the north side of town. You might think I was a great athlete because I lettered – in math. Every Saturday I was in a math tournament, and every Sunday I was in a chess tournament. I was the school nerd. I went to Texas A&M where I was perpetually broke and graduated in two years with honors. In 1981 I went to work for Touche Ross, and I became a partner there when I was 29, after they had merged with Deloitte (forming Deloitte & Touche in the US). At the time, I was the youngest partner in the history of the firm. Interestingly, when I started with Touche Ross in Houston, it wasn't as big as Opportune is now. At about age 36, I left Deloitte, where I had headed up the energy practice, to become CFO of a company called Contour Energy, which was run by John Bookout Jr., an absolutely brilliant man and the former CEO of Shell. I was only with Contour for a year and in the 1990s jumped on an opportunity to put together a company called American Plumbing & Mechanical, which became the largest residential plumbing and air-conditioning company in the United States. Ultimately, I was the president, COO, and CFO. We had 6,000 employees and 35 locations. I did this for about five years, then came back to Houston and started Opportune.

    OGFJ: How many employees do you have today?

    DB: Around 250. To illustrate how fast we've grown, in our first year in business, we held our Christmas party in the wine room at Sorrentos (a Houston restaurant). The next year we moved to the main dining room. The following year we took over the entire restaurant. After that, we couldn't fit in anymore, so we moved the party to the River Oaks Country Club.

    OGFJ: Opportune is expanding . You now have offices in Denver, Tulsa, and London in addition to the Houston headquarters.

    DB: That's right. We also have a fairly significant presence in the New York-New Jersey area. We just don't have an office there. And we plan to announce that we're opening an office in Dallas soon. It should be operational around the first of the year.

    OGFJ: Do you do the same things in all the offices?

    DB: With the bigger office being in Houston, we perform a wider variety of services here. Houston is sort of the hub. We have more bandwidth here. Although we don't offer the full suite of services in the other offices, we send people from Houston to the other offices to help out all the time. We also send people from the other offices to help out elsewhere. We're not constrained by geography.

    OGFJ: How did you decide on the various office locations you have?

    DB: It was client driven. We didn't say we wanted to be in Denver or Tulsa or Dallas for that matter. It's just where clients asked us to be. We went to London about three years ago because JP Morgan said they had some work there they'd like us to do. That's how we got a toe-hold in Europe. However, we do more work for our UK and European clients outside London than we do in the London office.

    OGFJ One of Opportune's practice areas is "strategy and organization." What sort of advice would you give to, say, an E&P company with regard to strategy?

    DB: It depends on where they are in their lifecycle. Let me give you an example. The University of Texas and Texas A&M University are land grant schools. They both benefit from something called the Permanent University Fund. The University Lands consists of a couple of million acres that just happen to fall in the Permian Basin. Historically, people come to them wanting to exploit the land. We helped them determine that they needed a strategy where they were more proactive in exploiting and potentially expanding the asset base. So we've been working with them. To accomplish this, they needed to take on some new activities, which means they need a different kind of governance, a different kind of funding, a different type of approval authorities, and a different type of expertise. As a result, they'll have to double their staff and change the governance of the organization. But the long-term benefits should be significant and will ultimately have a major impact on the funding of those two universities going forward. We use similar processes to help many of our clients with their strategy and organization.

    OGFJ: You mentioned corporate finance earlier. Can you elaborate on what you do in this particular industry segment?

    DB: In 2006-2007, most of the work we did in corporate finance was buy-side due diligence, primarily on upstream deals. Then we realized that the deal market wasn't always going to be this robust, so we gradually started expanding and providing other service lines. Then in 2008 the markets collapsed, and I'm glad we were more diversified. In the long term, our goal is to become the premier energy professional services firm. To do that, we're going to have to continue to expand our footprint geographically, and we're going to have to continue to expand the service lines as well. In the mid-term, we think the Pacific Rim would be a good fit for us. Long term, we're going to have to look everywhere.

    OGFJ: Another of your practices is "enterprise risk." What are your specific areas of expertise in risk management?

    DB: The enterprise risk component largely started off as part of our "process and technology" practice – really the ETRM practice. So the biggest part of what we do in enterprise risk is still energy trading and risk management. Our professional staff includes guys who have been chief risk officers of some very significant companies. Our clients include marquee names – companies that you would instantly recognize. Our enterprise risk program has expanded quite a bit through some alliances that we have internationally. We outsource some of the specialized programming work with regard to system implementation to companies in Russia and Ukraine because it would just be too expensive for us to do otherwise. So far we've been very pleased with the alliances that we're setting up.

    OGFJ Who are your competitors in the various practice areas? Are they mainly large accounting and consulting firms?

    DB: When we first started, I always thought our competitors in the longer term would be the Big Four firms because, conceptually, in the energy arena, we do everything they do with the exception of audits, which we don't want to do. There might be another firm or two that does restructuring and tax and is trying to bleed over into what we do. But, in the longer term, our competition is the Big Four firms. Frankly, there really is no other firm that does exactly what we do in the energy space. We've been trying to buy a reserves engineering firm, which I think would be a great fit with our restructuring and valuation practices. No one else has that – the finance, IT, and engineering – and ONLY energy. Right now we look like a Big Four firm that does only energy. If we add engineering, that would truly set us apart. We are aggressively pursuing that option.

    OGFJ: Are you involved in any renewable energy projects?

    DB: I made the decision not to do that because I've never believed in the economics of it. I've seen the math, and I just didn't believe in it. You need oil prices to go through the roof for renewables to be a viable option economically.

    OGFJ: How do you keep up with the energy industry? Do you attend conferences? What do you do?

    DB: We attend too many conferences, and we have too many people at those conferences. However, they're an important source of information. We also keep up with things by reading publications and visiting with clients.

    OGFJ: The shale revolution has been transformational. I recently saw a forecast that Texas – not the US, but the state of Texas – is set to become the world's largest oil producer by 2020. What impact has this had on your business?

    DB: It's had a tremendous impact on the entire country. Not only oil but gas. When the price of natural gas is between $3 and $4, it can make up for a lot of cheap labor costs in China and elsewhere. I think we're going to have another manufacturing revolution in this country. Cheap energy makes us competitive, especially in industries with high energy usage. If gas is $3 in the US and $10 in China, it's not hard to see what that means for us. If we're successful in figuring out an economical way to convert natural gas into gasoline, there is even more potential there. The price differential between gas and oil is about $3 versus $100. There is a huge amount of money that is being spent on infrastructure development today, and I think that is going to increase. In my view, the revolution in energy transportation infrastructure today is equivalent to the revolution in highway transportation back in the Eisenhower administration when we started building the interstate highway system.

    OGFJ: How significant will it be when the US begins to export natural gas in the form of LNG in large amounts? We've started converting import facilities to export facilities, and the government, while taking its time, has approved some of them.

    DB: As you say, we've already started some exports, but that's a drop in the bucket compared to what we'll eventually be capable of doing. What happened with natural gas production is that we were too successful with shale technology for our own good. Current domestic pricing which reflects domestic demand makes many otherwise viable gas plays unattractive economically. For a myriad of reasons, we have been late in getting the infrastructure built to handle exports. We could have been much farther along if we had truly understood the impact that technology would have on natural gas production.

    OGFJ: The federal government has enacted laws, including Sarbanes-Oxley and Dodd-Frank, that many consider burdensome and intrusive. Are these laws as bad as some have characterized, and what impact have they had on your business?

    DB: As a private company, Opportune hasn't been affected directly. As far as our clients are concerned, we made the decision years ago to not get involved in this particular market segment. Sarbanes-Oxley was enacted before we started Opportune, and is has become a mature law that is just a part of doing business. In short, it's been commoditized. Over time, I think Dodd-Frank will be commoditized as well. We'll do some work on Sarbanes-Oxley compliance or Dodd-Frank compliance as sort of an ancillary service for clients, but we don't intend to make this a key part of our business if we can't be among the top two or three professional service companies in the space. We're not, so we'll leave that to the Big Four or others.

    OGFJ: Looking forward, what are your goals for Opportune?

    DB: It sounds trite, but we live by our mission statement. Our mission is to add value to our clients' businesses. Long term, we want to be the premier energy professional services firm. To do that, we're going to have to expand our footprint and our range of services. Once we add some of these other services, like engineering, we'll be very close to our objectives. We need to expand our outsourcing capabilities even further. We have so many things we can do, but we want to be a leader in all these areas. We think we're in the right place at the right time doing the right things.

    OGFJ: Thanks very much for your time today, David.

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