TURRETT

Cost Allocation / Purchase Price Allocation

Turrett provides cost allocation and purchase price allocation for oil and gas transactions.  We review the assets acquired and perform a fair market value analysis to arrive at the appropriate cost allocation for each asset in the asset purchase agreement.

 

An acquisition of oil and gas minerals may be made by cash purchase, exchange of other property, services rendered, gift, inheritance, or liquidating dividends.  In such transactions, an allocation of the purchase price is generally completed for each of the various properties/assets acquired, then between leasehold interest and equipment.  The purpose of the cost allocation is to accurately record the market value of assets as of the effective date of the transaction.

 

Services we perform include:

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• Valuation of proved oil and gas assets:  For producing properties, Turrett  projects future income and expenses upon assets for which the purchase is based and determines the present worth of expected future income of the property based on an appropriate discount rate commensurate with the perceived risk and current market expectations.   The assets are also compared against transactions of assets in similar classes to give real-world benchmarks for the actual transaction value of assets.

• Valuation of contingent and prospective resources:  Valuation can be done by using an analog asset or an estimation of reserves, appropriately risk-adjusted.  Contingent resources are considered contingent based on many different factors.  Certain contingent assets are lower risk than others and that is reflected in the discount rate applied.

• Valuation of oil field equipment:  The fair market value of equipment can range from replacement cost to salvage cost, depending upon the oil and gas to be produced and the current market conditions.  Surface equipment valuations can vary significantly based on the demand at the given time.  Current transaction data, when available, is imperative to arriving at a reliable market value.

• Environmental liabilities:  The cost of environmental liabilities can be determined from the discounted cash flow of investigation and remediation efforts.  Most environmental liability is based on the plugging and abandonment (P&A) costs associated with each wellbore.  In certain states the P&A cost is stipulated in advance and is bonded or in escrow.

 

Purchase price allocations are necessary in either a business or an asset sale.  The IRS would generally provide that the purchase price be allocated to the specific classes of assets at fair market value, with any remaining consideration being allocated to goodwill.  In appraising the asset, the value of contracts relevant to the asset would usually have value if they contain better-than-market terms.