Prioritizing Oil and Gas Due Diligence Data and Determining Max-Bid Value

To quickly sift through available oil and gas assets and know how much to pay, we employ a proprietary algorithm that generates a “Max-Bid Value” – or an objective risk management tool we use to set bidding parameters.

Preamble: Investing in oil and gas assets, regardless if for Royalty Assets or Working Interest Assets, requires a deliberate and carefully executed due diligence plan even though the process for oil and gas asset evaluation is seemingly straightforward and repetitive. As mentioned in my earlier Blog titled, Due Diligence and Modeling Oil and Gas Acquisitions, among the challenges for oil and gas buyers is having enough time to complete requisite due diligence as an unexpected all cash buyer can swiftly show up and close on the subject Asset before the contracted buyer is ready to close. Worse yet is the painful after-the-fact realization that any frustration-instigated litigation to enforce a signed LOI or MOU is pointless as rarely, if ever, is litigation money well-spent capital. Therefore, we have adopted a two-step protocol to efficiently close oil and gas deals including; (1) to thoroughly and quickly source and qualify certain data points from prospective oil and gas assets to generate the Max-Bid Value before we sign an LOI or MOU with the seller; and (2) once an LOI or MOU is signed, we identify and input all relevant data into our Cash Flow Model (CFM), and proceed to deliberately execute various final due diligence tasks so that we close the transaction within the typically allowed 30 to 45 days.

Prioritizing Due Diligence Criteria and Generating Max-Bid Value: Step 1 of our aforementioned two-step protocol has us focused on identifying what we believe are four primary due diligence criteria – any one of which could disqualify an oil and gas asset for acquisition consideration – and they include existing cash flow, production decline, oil gravity or quality, and well redundancy. These data points, along with others, are then organized into our Due Diligence Auction Worksheet (DDAW), where the endgame output of our DDAW (link) is to generate a “Max-Bid Value” (MBV) for all offered assets at a pending auction or for every direct negotiated sale we endeavor to pursue. The Max-Bid Value is objectively derived via a proprietary algorithm we developed that prioritizes the primary data points to generate a factor that when multiplied by the subject asset’s existing cash flow, produces the maximum value we deem to pay for the asset. The MBV is an objective risk management tool that we adopt to mitigate negotiating mistakes caused by any emotional enthusiasm that could influence the bidding process. The link sources an actual DDAW we generated for an earlier Auction, and the asset specifics are blurred as we are bound by confidentiality, but the format is what is important to convey for this Blog post.

Final Due Diligence and Employing the Cash Flow Model (CFM): Step 2 is employed once an LOI or MOU has been signed and all involved parties work to close the transaction. Best practices to close oil and gas transactions requires that pre-planning availability for petroleum engineers, lawyers, and accounting is reserved in advance as the clock for the 30 to 45 days to close starts immediately after the LOI or MOU is signed and is rarely, if ever, extended by sellers. Streamlining this process is our CFM which allows us to quickly and efficiently evaluate production and operating data, and forecast and examine continued asset performance through unlimited what-if analysis. Again, please see my earlier Blog, Due Diligence and Modeling Oil and Gas Acquisitions, for a more thorough explanation of our evaluative process and final due diligence agenda. Aided by the DDAW and having determined our Max-Bid Value, once all asset due diligence data and information is verified and confirmed, in part, by employing our CFM, confidence in the acquisition process is heightened with each successful transaction closed.