We have analyzed hundreds of acquisition opportunities for operators, non-operated working interest buyers, and mineral and royalty buyers. The assets involved include proved developed producing (PDP) wells, undeveloped acreage, and everything in between. The reservoirs range from conventional targets penetrated by century old wellbores to the Marcellus and Utica Shale with laterals several miles long. We know time is of the essence when a competitive acquisition opportunity comes along, and the evaluation on which an offer is based must be reasonable and reliable.
The source and quality of data used for an acquisition evaluation often depends on the nature of the sale process. If the buyer is making an unsolicited offer, the initial evaluation may be done using a publicly available list of wells, public production data, and assumptions for ownership interests, expenses, pricing differentials, etc. An evaluation based on public data and such assumptions is often enough to submit a letter of intent (LOI) outlining proposed terms to the seller. The LOI should specify that the offer may be revised once more precise data is received from the seller in due diligence.
If the seller is actively trying to sell the properties, they will often hire an investment bank or broker to create a sales package and market the properties on their behalf. In this case, the data will be much more accurate and precise, and is uploaded to a virtual data room (VDR) for potential buyers to review. The data included in a VDR includes a list of wells with their ownership interests and wellbore details, monthly (and sometimes daily) oil, gas, and water production, a lease operating statement (LOS) summarizing net production, revenue, pricing, and expenses for the last twelve months, a lease schedule, midstream agreements, purchaser statements, and more. There may even be an Aries or PHDWin database included which already contains the list of wells and undeveloped locations with forecasts and economic assumptions. If so, cash flow summaries for each reserves category will be provided and will serve as the basis for the seller’s asking price.
Whether a summary of reserves and economics is provided by the seller or not, it is incumbent on the buyer to perform their own evaluation based on their own interpretation of the provided data. This can be done internally if the buyer has the experience, equipment, and manpower to do so, or through a consulting firm like Casto Petroleum Engineering. The consultant should not bring any bias to the evaluation and should aim for “down the middle” forecasts – not optimistic or pessimistic. While it might seem logical to use pessimistic forecasts leading to a low valuation in order to undercut the asking price, one should remember that, if the buyer is successful, they may have to live with those pessimistic forecasts next year at reserve report time.
The consultant’s acquisition evaluation is very similar to a real estate appraisal, not necessarily in methods, but in utility. When buying a house, you want to make sure the appraised value is more than the portion of the purchase price that will be financed. The actual amount offered may be much lower. Companies that are successful at acquiring assets below value may be able to borrow more against the property than they paid for it, creating a wedge of value that can be rolled into the next acquisition.
If you need assistance evaluating oil and gas assets anywhere in the U.S., contact us at wes@castope.com.