Due Diligence, Acquisition And Divestiture In Denver

Finance companies and investors in the oil and gas industry experience similar due diligence issues noted in other industries, the oil and gas business speaks its own language with its own customs. We advise clients to engage due diligence in the oil and gas industry as if they were purchasing the business as lenders and investors often take collateral to help them recover an investment from oil and gas projects that fail to perform. Lenders and investors need to understand the oil and gas industry thoroughly if they wish to avoid investment errors.

To properly evaluate risk, the first chore of a lender or investor is to become educated about its borrower. Does the company have significant experience in the industry, with this particular play, in that state, etc. Do participants understand and follow regulations applicable to the oil and gas industry?

A lender or investor should always consider the current commercial climate to determine whether a budget and project timeline are appropriate. Regulatory challenges should be anticipated as the environmental and financial challenges based on the industry.

Next, lenders need to understand the vocabulary of oil and gas and what is meant by assignment of interests, area of mutual interest, deep rights, farmout agreements, held by production, joint operating agreements, and Pugh clause net revenue interest. These are a few terms that are typically heard to define the legal interests and duties of participants in oil and gas transactions.

Lenders and investors need to appreciate accounting and bookkeeping that are special to the oil and gas industry. The primary working interests financial assets of many exploration and production companies (E&Ps) are oil and gas leases, reserves, and working interests. Depending on the state, these may be categorized as real estate or otherwise. The value of these assets is more subtle to quantify than other common commercial transactions. The value of oil and gas assets can change fiercely depending on prices. A lender or investor needs to be educated as to the various categories of assets, including a working knowledge "unproved possible reserves" versus "proved developed reserves". These values do change impacting a balance sheet.

Our attorneys also work with other consultants, such as geologists, petroleum engineers, accountants specializing in oil and gas industry, etc. should be engaged.

Lenders often use industry-specific packages, including reserve–base financing, project financing, or mezzanine financing with an equity kicker, or volumetric production payment financing. These lending packages have been created to incorporate the unique nature of the oil and gas industry.

The most important attribute to successfully lending and investing is mastering the terminology appreciating the economic climate, becoming knowledgeable as to regulatory and the law and being thorough as to due diligence.

If you are a lender or investor in the oil and gas industry, contact a lawyer in our Denver office at 720-515-5947 or our Steamboat Springs office at 970-367-4373 or email us to schedule a consultation today.