Five Tips for Evaluating Oil and Gas Acquisitions

When it comes to acquiring any type of asset, it’s important to keep your eyes open across all aspects of the business—from its past performance to its future potential earnings, and everything in between. This is particularly so when evaluating oil and gas acquisitions on the heels of several declining years, during which staff was lean, bankruptcies were common and things were left undone…leading to more physical defects, as well as financial problems. Thus, the need for careful and thorough evaluations performed by qualified professionals in land and title matters.

Tips to consider

Before finalizing that offer to acquire your next O&G entity, we suggest you take the following tips into consideration.

Tip # 1 – Look at future value vs. land and regulatory constraints

For most business development teams, the asset under evaluation is assessed based not only on current yields, but on intrinsic future value. Many times, the future value is determined by technical advisors and analysts. It is also important, however, to look at land and regulatory constraints before expending too many resources. This will provide a bigger picture of costs (both obvious and hidden) that will affect your return on investment going forward.

Tip # 2 – Know your seller's circumstances

Over the past several years, O&G companies have developed, bought, sold and traded positions with a lean staff. Some companies have recently emerged from bankruptcy. Most people are now doing the job of two or three individuals. If an asset is slated for divestiture, many companies simply are not willing to allocate the necessary resources to ensure the asset is cleaned up for sale. This means that any would-be buyer needs to plan for more due diligence time, allow for mechanisms in their purchase and sale agreements to identify defects and cure them, and have a strategy for those defects that lack information to resolve them one way or another.

Tip # 3 – Review the JIB/REV decks

Before spending too much time and money on evaluating any given O&G asset, take your Reserve Report and compare it to the Joint Interest Billing (JIB) and Revenue Accounting data, noting where deltas exist, if any. This is a great exercise to see if certain areas, asset types or operators have problems. It the deltas are too large, you can walk away from the deal at an early stage. If the variances aren't too problematic, address them during a contractual due diligence period. Cinco does this frequently for our clients’ asset evaluations, and it takes very little time and is well worth it!

Tip #4 – Check production actuals

An asset’s total number of wells versus the wells that are in production can vary widely, especially in today’s economic climate of shutting down wells to remain competitive. Therefore, it’s a good idea to verify production by taking your list of wells and appending APIs; then, use a subscription-based service, where available, to compare production notes. If your assumption includes that “X” wells are currently producing and you find that they are in fact not, that raises a red flag and should be discussed before proceeding any further. Cinco highly recommends this crucial step in evaluation to be able to determine real value and, again, it takes very little time.

Tip #5 – Ask what Land System the seller uses

Knowing what land system is implemented at the O&G company targeted for acquisition can be key to understanding the quality of maintenance performed on the asset. Having no land system in place may signal that critical actions to maintain the asset, such as extension options, surface damage payments, etc., have not been done on a timely basis. To account for a potential increase in risk, the due diligence process must address these issues. This is not to say that acquiring a company without a land system is a bad choice—but it can increase your information management risk and result in delays getting access to information; likewise, if an asset is managed through multiple land systems, there is more potential for important land-related issues to fall through the cracks.

Hiring a qualified land advisor to provide insight and intelligence during an oil and gas acquisition is always a good idea. Transactions can be complex, but by following these tips and getting expert help, you will be well on your way to closing a successful acquisition. Contact us for help before you gear up for your next acquisition.