When the stakes are high with oil and gas acquisitions—and they always are—you need a rigorous due diligence process performed by an experienced firm to avoid driving up costs or taking too much time. This specialized analytical process, when done correctly, will help uncover potential risks as well as opportunities, while also helping to prevent investment errors or miscalculations.
Smart, money-saving questions
You can’t afford not to ask certain probing questions for vetting purposes when deciding who to hire as your oil and gas due diligence team. You’ll be surprised by what is revealed during this “due diligence” exercise.
Here are the top five:
Do they have expertise in your target play/area? The firm you select needs to have specific experience related to the location and type of transaction you are working on. It is critical to understand the nuances of the mineral title in a particular geographical area, as they can differ widely. For example, in Pennsylvania, the small parcel sizes and early patent dates tend to require more time, while in West Texas, segregated leasehold rights introduce specific complexities that must be carefully accommodated for in the review plan. The same is true of other regulatory challenges and “red-flag” issues that need close attention.
Do they have the resources to get the job done well and on time? Timing is everything when you are evaluating and ultimately closing a financial transaction. Most due diligence periods are shorter than the buyer would like and, as a result, you need a firm with enough dedicated staff to maximize the information reviewed. Some follow-on questions include: Are they experienced in managing high-volume workloads? Do they have the professional management capacity to manage your high-priority project? Most say they do; but in reality, they don’t!
What will the deliverables be? In addition to a standard report of findings, different clients need different deliverables, such as Acquisition Title Reports, Critical Action Calendars, or a drilling program evaluation. A good due diligence service provider will make sure to fully understand your immediate goals, as well as your future objectives, so that information can be captured, organized and recorded in the most valuable way for your acquisition/divestiture project. Cinco personnel pride themselves in delivering the right data, at the right time, to best suit your needs.
What is the plan? While each due diligence project is unique, the general process and key elements of a well-run project are not. The firm should have a proven methodology, or plan, that ensures the project stays on time and within budget, as well as ways to mitigate unforeseen risks that typically arise in the course of any due diligence. For instance, Cinco landmen use a refined framework and tested portfolio of tools that allow us to make rapid adjustments and do the most with what we have.
Have they done due diligence on an asset of similar size, type and structure? Ensure you work with a transactional team who has seen many due diligence projects of all sizes and structures. It’s a good idea to check with your attorney handling the transaction to see if they have heard of the company. Also, ask the title firm what type of due diligence they recommend based on the deal size, type and structure. They will be familiar with issues to watch out for and help you come up with a scope that works best with your objectives post-closing.
In summary, take advantage of the available due diligence resources and don’t hesitate to ask the tough questions. It will save you time and money in the long run.
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