At its most basic level, oil and gas title due diligence seeks to protect your investment by confirming that the represented interest in a given property as well as any valued potential upside are accurately portrayed. No two deals are the same, and similarly, due diligence should be tailored to meet the specific objectives of the management team. How you perform due diligence is as important as why you should conduct certain types of due diligence.
Below, we will cover some common types of acquisitions, which are indicative of a certain type of due diligence. We will also discuss some regional differences in due diligence, which you and your team should always evaluate before implementing any due diligence plan.
Common Acquisition Types
Asset-based acquisition: Typically, value is placed on the tangible assets in place along with potential upside. Due diligence is commonly focused around proving up the value of these assets and asserting title defects in line with the purchase and sale agreement.
Entity-based acquisition (equity, joint venture, merger): A common approach here is to de-risk the assets of the entity by doing a high-level review and comparing the company’s practices against industry standards. From there, targeted due diligence is conducted.
Debt financing: Typically this is in the form of reserve-based lending, though there are many other debt financing structures. The goal of this due diligence is to ensure there is enough value in the collateralized assets to support the loan.
Restructuring (pre-bankruptcy, stalking horse bids, etc.): This type of due diligence is typically targeted and can be driven by protecting the client’s existing interest in said assets.
In addition to understanding which type of due diligence is needed to support the type of acquisition, it is also important to consider the location of the assets. For example, if you are in Arkansas, courthouses are typically not online, and how you locate documents may be very different than somewhere like Oklahoma. Understanding how to search for and locate records, as well as the general regulatory framework of each region, is paramount to ensuring that due diligence is conducted correctly, efficiently and in a cost-effective manner. It is always important to weigh the cost and time required to complete a due diligence item against the overall risk and value placed on that task.
Due diligence is strategic as much as it is tactical. Beyond documents and data requests, it is essential to have clear understanding why you're doing due diligence, how your team will use the information, and the value the diligence process creates for the client and other stakeholders. If not, you risk wasting time on inconsequential review tasks or worse, failing to address issues of real consequence.
With that in mind, how DO you know what the right objectives are in your due diligence project? A due diligence firm, like Cinco, will typically ask you a series of questions to understand your goals and then craft a plan taking into account both the type of due diligence and any regional considerations. When selecting your service provider, ask about their experience in an area, and overall due diligence experience.
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