Reserve-based lending (RBL) is a type of asset-based lending used to finance the operations of independent oil and gas companies. Debt is issued as a factor of reserve value, which is known as the Borrowing Base. Loans are subject to redeterminations of the borrowing base, commonly twice a year.
Cinco Energy Management Group, a leading oil & gas-focused land management firm, celebrates its 30th anniversary this year. In 1990, the current CEO and Founder Randy Nichols established the company as Cinco Land & Exploration Company. Building upon his early career as a company landman for independent E&Ps, Nichols started the company to provide superior quality land and title services to the oil and gas industry. The name “Cinco” was inspired by the five members of the Nichols family and the company’s first project in a Spanish-speaking area of South Texas.
The oil and gas industry is no stranger to market headwinds and unpredictable business cycles. However, the uncertainty of the COVID-19 pandemic and the Russian-Saudi price war have sent crude to record lows and rapidly intensified the financial hardship of many oil and gas companies. The depressed prices and lower demand forecasts have led most US producers to make deep budget cuts and will force others into bankruptcy in potentially greater numbers than what we saw in 2015. That year, 69 companies filed for bankruptcy protection. To add insult to injury for at-risk companies, lay-offs and furloughs will deprive resources allocated day-to-day functions, including maintaining assets and records.
Whether you are a newcomer or well-versed in the oil and gas business, there is never a shortage of learning opportunities. In part one of our glossary, we compiled a list of some of the most popular terms, such as "Affidavit of Production" and "Non-Participating Royalty." In part 2 of our oil and gas glossary of terms, we highlight more commonly used words, along with their definitions.
1. Adverse Possession: Obtaining title to land by taking possession of the land and staying in possession for a certain number of years, as set by law. The adverse possession statutes vary by state, but share requirements that the rightful owner has had notice (actual or constructive), that the possession is open, and notorious (i.e., occupation in a manner that is open and obvious to the public)
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.
Due diligence is the process of investigating assets to make an informed decision about the cost, benefits and risks of acquiring or investing in such assets. As an industry leader in title diligence, Cinco evaluates mineral properties across the US and works closely with our client’s attorneys and lending partners to help them navigate the risks inherent with their deal.
While no two oil and gas due diligence evaluations are alike, there are common stages and milestones that we see in every process. This article will breakdown the typical oil and gas title due diligence process and describe how Cinco supports our clients’ success at each step.
Negotiating and executing oil and gas transactions are never simple endeavors. Transactions require careful analysis and decision-making on a range of issues to ensure you are making a deal that satisfies your objectives.
It is not always feasible to gather internal resources to support the oil and gas acquisition or divestiture process, particularly around title due diligence. Most deal terms provide for a relatively short due diligence period, thereby requiring a dedicated group of experts to examine the assets ahead of closing. Hiring an external party to get the job done will most likely be a necessity. When that occurs, it is important to know what you don’t know.
Here are some keys to getting the most value out of your title due diligence team:
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:
When conducting an acquisition due diligence review, it is important to understand the terms and conditions of the purchase, and the affect that the terms and conditions will have on the review. The definitions section of the Purchase and Sale Agreement (“PSA”) will define such terms and further guide you on how to effectively conduct your review. Terms such as pertinent dates, how to calculate net acres, excluded assets, title defects, and encumbrances are just a few items defined in this section of the PSA. When conducting due diligence, it is important to understand these definitions up-front, as the way they are defined will dictate how downward adjustments to the purchase price are applied.