Work on rig helps auditor drill into company books

HOUSTON — Many accountants would get lost in the plush garden of oil and gas acronyms, insider terminology and generally obscure language.

So would Jeff Labay — if his father hadn’t scooped him up more than a decade ago for a gig as a floor hand on an oil rig. Now an accountant for Houston-based MaloneBailey, Labay, 33, says his client base is made up almost entirely of upstream oil and gas companies.

Labay was a 20-year-old community college student, with no clear attraction to any field of study, when the oil industry began to shape his future. He was working at H-E-B when his father — an experienced rig supervisor at El Campo-based BL Oilfield Services — strode in to tell him that two of his floor hands had just quit.

“I jumped at it,” he said. “Growing up, my whole family was in the oil industry. I was always curious about it.”

But Labay also had the indelible stamp of an accountant. A math whiz from an early age, Labay had found an error in his father’s tax return when he was 10 years old. After a year on the rig in Brookshire, he decided to go back to college.

He continued to work in an oil field services shop while earning a degree in finance from the University of Houston at Victoria.

Now Labay reviews his clients’ books at MaloneBailey, which has in recent years carved a niche business auditing small publicly traded companies — ranging from startups with no revenue to companies with $400 million in assets.

As credit markets for “microcap” companies ease, the firm has managed to pick up more than 150 clients that must file reports with the Securities and Exchange Commission, a milestone surpassed by only six large accounting firms.

Labay said his time on the rig gave him a deeper sense of his clients’ operations.

“If they’re telling me they drilled a well and it has multiple good zones, or that they found out it was a dry zone, I can understand what they’re talking about,” he said.
Labay spoke with FuelFix about common bookkeeping problems for small oil and gas companies, and about how his time in the oil field informs his work in the accounting field. Edited excerpts:

FuelFix: What does a floor hand do?

Labay: They do a lot. I worked on a work-over rig; that’s a rig on wheels that goes out to the wells that are broken or need maintenance. When we start taking pipe out of a well, the floor hand would run the tong machine, which is basically the thing that separates the pipes from one another. I would run that most of the time.

FuelFix: How did you get into upstream oil and gas accounting?

Labay: In my second year here, I got the opportunity to work on my first upstream oil and gas company, and I really enjoyed it, so I pushed the manager group to give me a few more of those clients. Today, it’s 95 percent of my client base.

FuelFix: It’s a pretty complex business.

Labay: Yeah. One of the toughest things for an accountant is to come in and learn the oil field terminology. My experience really helps me picture in my mind what the clients are describing when they talk about their operations.

FuelFix: Why are smaller companies more vulnerable to accounting pitfalls?

Labay: They really don’t have the cash on hand to build out a full accounting department. A startup may just have one person. A mid-sized company may have eight to 10 people.

FuelFix: What’s a common mistake these companies make?

Labay: Sometimes, when a company abandons an oil field, it calculates a lower cost for its asset retirement obligations by including the salvage value of its well bores and pumping units in estimating the value of its oil and gas properties. That’s not allowed. Another mistake would be not disclosing and describing the internal controls of how they calculate their reserve estimates. We’ve seen a lot of SEC comments around that.

FuelFix: What do you run into a lot when working for small upstream clients?

Labay: Convertible debt instruments: We see it so much. Smaller public companies don’t have a lot of cash on hand, so they issue stock in place of giving cash to service providers. They may not have the best credit rating because they’re startups or small companies. So instead of just going to a bank and getting a loan around with a 6 percent interest rate, they may have to get a conversion feature where the lender can convert that debt into common shares at a certain price.