TURRETT

Acquisition and Divestiture

 

Due diligence for oil and gas acquisition is performed by Turrett on our clients’ behalf.  We are experts at performing due diligence to support acquisitions.  We will evaluate the target assets and give an unbiased opinion of the current assets and the upside potential.  Our experience covers the entire range of development from fields that have been long-time producers to fields that are merely prospective.

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Clients may request that we perform a preliminary review of an opportunity by reviewing public records.  Turrett’s professional staff have the skills and experience to perform a preliminary review utilizing the key, reputable sources available.  These sources include state databases from their respective regulatory agencies such as the Colorado Oil and Gas Conservation Commission (COGCC), the Wyoming Oil and Gas Conservation Commission (WOGCC), Railroad Commission of Texas (Texas RRC), Utah Division of Oil and Gas, or the California Department of Conservation Division of Oil, Gas, & Geothermal Resources (DOGGR) to name a few.  To further bolster the information available, we utilize public information that is a result of filings with the securities exchanges worldwide.  Other sources are professional organization information and newspapers or industry periodical sources.

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Sources that may be used to find public information when performing due diligence:

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• State regulatory agencies

• Public filings on securities exchanges

• Subscription services for professional information

• Professional organization resources and knowledge base

• News and industry periodical resources

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In-depth due diligence generally is started with a data room.  The project owner has typically collected information on the opportunity in the form of geology, geophysics, or engineering data.  Data rooms can be online or hardcopy.  If there is no data room, we have the capability to receive large uploads of electronic data that can serve as a temporary data room for the duration of the assignment.

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Our experts will review the available data for the opportunity for completeness and perform our work to arrive at our independent conclusions.  Depending on the level of development of the field, there will be differing types of information and data available.  For relatively undeveloped fields, there may only be a well log or a seismic line.  For developed, producing fields, there is typically a reserve report and substantial supporting data including production records, well logs, well tests, seismic, and interpretation reports.

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The results of our work can be tailored to the needs of our client.  Generally, we provide a P50 value for producing fields along with cash flow forecasts based on several pricing scenarios.  We are also requested to prepare development plan scenarios to model future capital expenditures (CAPEX) and operating expenditures (OPEX) with the associated increase in production.  We present a range of present values (PV) for the project allowing the client to review the opportunity at different rates of return.

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Development planning can be a critical tool for the potential acquisition of a project or property.  Development planning and the implementation of the plan can significantly increase the value of the property by either modeling the increase in reserves or proving the reserves.  Development planning also serves to provide guidance on how to allocate capital in various pricing scenarios.  Aggressiveness of the deployment of capital can also be modeled on the pricing scenarios to guide the speed at which development occurs.

 

Review of physical assets is a subset of the acquisition and divestiture process.  Physical assets generally include surface assets such as tanks, pump jacks, dehydrators, drill rigs, and compressors among other items.  The review of physical assets will match these assets to inventories and review them for their current book value.  Another crucial aspect of the physical asset review is to look for environmental degradation such as spills outside of containments that may lead to a penalty or an environmental site cleanup.  Preparing a review of the surface assets will provide confidence and reduce risk for the acquisition.

 

Proforma economic analysis is performed on the asset through modelling the performance of the asset under various scenarios.  The most common scenario is the base case which is the existing operating conditions with a price forecast based on either US Securities and Exchange Commission (SEC) pricing or futures strip pricing.  The base case can also incorporate the development plan for the property if one exists and is approved by management through authorizations for expenditure (AFEs).

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Any number of cases can be run for proforma economics.  Proformas are an excellent way to perform what-if scenarios to optimize the development based on many different assumptions.   Assumptions include forward-looking pricing of oil and gas, costs of services in the field, access to capital, and timing.

 

Operating cost (OPEX) and capital cost (CAPEX) review is an important part of acquisition and divestiture because it is a key way to make a project economic or increase the rate of return.  Capital costs can be deferred or reduced based on the current economic conditions surrounding the project.  The same adjustments can be made to the operating costs.  Additional ways to optimize OPEX and CAPEX can sometimes be discovered through close analysis of the circumstances surrounding the property such as economies of scale and resource sharing. 

 

Review of ownership structure is a crucial step in the due diligence process.  The deeds of trust or the leases need to be in an organized schedule and reviewed for validity.  Many leases are time limited and are only held by production.  If certain minimum production targets are not made, the leases may become invalid.  It is important to review the lease schedule in addition to the many other aspects of the acquisition.  For example, if the lease is valid but the development plan cannot be implemented in time, the project may be lost or severely set back.  Another item to be aware of is unusual leasing including carving out certain depth intervals or lease reversions.  Depth interval exclusions can prevent development of upside potential in certain formations.  Lease reversions can be an unwelcome surprise if one is triggered during the period of the business plan.

 

Upside potential is a major reason to acquire a property.  Properties with upside potential may be bought or sold for a multiple of production which makes them a fair buy.  Identifying upside potential is the opportunity to escalate the value of the property without having to acquire additional leases (in most cases).  Typically upside potential is created by applying technology or accessing behind-pipe hydrocarbons.  Examples of applying technology to increase production can be to waterflood, drill a horizontal well through old vertical wells, or perform a stimulation to the reservoir.  Behind-pipe upside potential is a productive horizon that has been drilled through but was not perforated to produce.

 

Sensitivity analysis is a helpful tool to model differing scenarios when evaluating a property.  Sensitivities can prepare a series of outcomes based on variables in the model.  Constraining the inputs that can be used in variables from a lowest case to a highest case gives the potential inputs in the model.  For example, the price of oil can be input using appropriate low and high historical prices.  Other variables are input similarly.  Once the constraints have been entered into the model, a Monte Carlo simulation can be run to see the probability of outcomes.  This can be an illuminating process to help decision-making.

 

Permits and Environmental Impact Analyses are necessary steps in many oil and gas property developments.  For federal land leases, Environmental Impact Assessments are required to reduce and mitigate development impacts.

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Permits are required for drilling and location assessments.  Permits are also required for underground injection.  Reviewing the permits that are approved or have been rejected is an important part of the due diligence in acquisitions.

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The analyses described above can be crucial in divestitures as well as acquisitions.