Combining two companies can be complex, especially in the oil and gas industry. You aren’t just buying a customer base, the products, and physical equipment sitting in a warehouse — you’re purchasing the rights and titles necessary to produce. More than other industries, you have to confirm you’re getting what you’re paying for, which is why you must have a proper due diligence process in place to ensure success and mitigate risk.
To help your firm prepare for a potential purchase, we want to help you examine six essentials:
An open exchange of information is crucial to the success of any deal. When it comes to due diligence, it’s the first time the buyer has detailed access to the information the seller shared in their virtual data room during the bidding process. It’s the first in-depth opportunity to analyze information about the value of the potential asset.
In other words, it helps you see that you’re getting what you’re paying for.
For an oil and gas company, due diligence provides insight into the titles and leases for the various properties, wells, and tracts of land used by the seller. The selling company puts forth data that says, “I own this, I want to sell it, and someone wants to buy it.”
Due diligence can help buyers know when to back out of a deal, complete with several critical defects:
While no one issue stops a deal, the buyer must determine the internal threshold that will cause them to back away from the merger.
Ultimately, due diligence for the buyer is about telling the seller, “Prove that you own it.” The buyer begins the process from the perspective of “I want to prove you don’t own it,” with the intent of punching holes in their claim. If the buyer can’t punch holes, the seller owns the property, and the sale can move forward.
As stated earlier, oil and gas mergers and acquisitions are complex. Any asset or piece of data can impact the value of the investment. Such assets can have billions of dollars in long-term value, so both buyers and sellers must consider increased risks such as:
Additionally, the oil and gas industry has changed to be more focused on returns. Most companies buy those properties and assets with a significant amount in loan value. The buyer must be able to back up and collateralize that loan with what they’re paying for it, as the bank requires it.
Due diligence proves you have the collateral for the loan you’re pursuing. Without a thorough process, the purchaser can’t prove to its lenders and investors they will generate the asset’s expected return.
Too many firms forget that they aren’t just acquiring an asset you own. They’re accepting a responsibility to act as a prudent operator. Thus, they need the data to function correctly.
However, people often don’t get the correct data. It should go beyond just actual fact-finding and ensuring the seller owns what they say they own. The buyer needs the full range of data points, and they need it to be good data. Without it, the merged company can’t fully function after the acquisition is finished.
Moreover, proper due diligence when acquiring an asset isn’t cheap, but oil and gas companies try to cheap out on it. They either don’t have the right resources for proper due diligence, or the selling company hasn’t updated/maintained their data when selling. Creating data from scratch is costly if the selling data was terrible, but the company will also go off the rails without accurate information.
In our experience, both the seller and buyer should pay attention to four critical elements:
The seller should put their company in the best possible situation to be sold, including assets, leases, finances, equipment, and more. But preparing for proper due diligence requires a few extra steps:
Ultimately, your company doesn’t have to be perfect, but it has to be in a good position to sell. Not only must you preserve the value before you go to sell so your buyer can’t punch holes in your lease, but you must also be prepared for questions from the buyer.
When you’re the person spending the money to acquire the asset, it comes down to having a clear plan for getting the seller’s information into your systems of record. Such steps include:
While this might seem counter-intuitive, you should limit your research to the essentials of your defect threshold. Due diligence isn’t cheap. If you can’t find defects, then move forward. But if a deal doesn’t meet your threshold, you will waste money, especially if you can’t get out of the deal or impact your purchase price.
Don’t force what you can’t change. Due diligence should be about putting your company in the right frame of mind to complete a transaction that delivers a positive impact for both companies and your respective investors.
Both sides of a merger and acquisition want the process to be successful so everyone can reap the financial benefits. That means absolute transparency about the essential elements of the deal—and for oil and gas companies, that means the property and the data. Proper due diligence provides the necessary tools and clear communication that buyers and sellers need throughout the purchase process.
If your business desires expert guidance the next time you’re acquiring a crucial asset for the future of your business, talk to EAG Inc. today. We have experience at all levels of the oil and gas industry, especially when assessing IT concerns and advising senior leadership on the right course of action.