CHAPTER 12 EVALUATING OIL & GAS PROPERTIES: COMMERCIAL DEAL MAKING FROM AN INDUSTRY PERSPECTIVE

• Jurisdiction: United States

Due Diligence in Oil and Gas Transactions
(May 2011)
CHAPTER 12
EVALUATING OIL & GAS PROPERTIES: COMMERCIAL DEAL MAKING FROM AN INDUSTRY PERSPECTIVE
Jeffrey R. Fiske
Philip Holmes
Anadarko Petroleum Corporation
Denver Colorado

PHILIP A. HOLMES is the Business Development Manager for Anadarko Petroleum Corporation and is based in Denver Colorado. With his background as an engineer, Philip has had a very broad experience in the Petroleum industry and has worked in numerous positions in operations, reservoir engineering and business development. With Anadarko, he has worked in Business Development (acquisitions, divestments, trades) in both the Southern and Rocky Mountain divisions, as well as serving as Operations Manager in Qatar. Prior to Joining Anadarko, Philip worked for Amoco Production Company where he had a worked both domestically and internationally. With Amoco, Philip led Production New Ventures teams to capture deals in Ecuador and Algeria, as well as serving in various management positions in Colorado, Wyoming, and The Netherlands. In these assignments, the evaluating oil and gas properties from a single well to fully developed plays has been an integral part of the position.

May 2011 Summary

Evaluating Oil and Gas Properties

Commercial Deal Making from an Industry Perspective

This presentation highlights some of the key steps involved when considering a transaction. They include understanding the corporate goals and strategy and how the potential transaction supports those aims. Next is usually the technical evaluation of the properties in question. We discuss the process of conducting the technical and financial evaluation as well as highlighting some of the key "pitfalls" typically encountered while conducting evaluations - whether it is an acquisition, divestment, trade, or JV. Also discussed are some of the additional considerations required to understand a corporate vs. asset transaction. Once the value is established through this process, the key issues required to complete the deal are discussed, including the Confidentiality Agreement, Purchase and Sale Agreement, Conveyancing Documents as well as the Final Settlement Statements.

Jeff Fiske, Regional Senior Counsel

Philip Holmes, Business Development Manager

Anadarko Petroleum Corporation, Denver Colorado

The views expressed in this paper are solely those of the author (or authors).

Please cite as: Fiske, Jeffrey R., and Holmes, Philip, "Evaluating Oil & Gas Properties: Commercial Deal Making from an Industry Perspective," Due Diligence in Oil & Gas Transactions, Paper No. 12, Page No. ___ (Rocky Mt. Min. L. Fdn. 2011).

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Evaluating Oil and Gas Properties

Commercial Deal Making from an Industry Perspective

RMMLF Presentation

May, 2011

Final

Jeff Fiske and Philip Holmes

Anadarko Petroleum Corporation

Denver Colorado

Evaluating Oil and Gas Properties

Commercial Deal Making from an Industry Perspective

I. Goals and Strategy - What are you trying to accomplish?

Acquisitions, Divestments, Trades & Joint Ventures

II. Evaluation of Properties

Reserves, Resources and Economic Evaluation

III. Additional Factors to Consider

Land, Environmental, etc.

IV. Completing the Transaction - "Papering the Deal"

V. Wrap Up and Summary

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First step of any property evaluation:

Clear understanding of the companies Goals and Strategy

What are you trying to accomplish?

How are you going to accomplish it?

Goals and Strategy can be different ....

Acquisition, Divestment, Trade or JV

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What are the goals of the Acquisition?

Clearly articulating the goals and strategy are critical I Different goals can drive your property evaluation

For Example -

➢ Is the acquisition "Mission Critical" for the corporation? Part of a larger corporate strategy?

▪ i.e. Entry into a new play - considered a must have, will pay a "Premium"

▪ Strategic re-positioning for the future: Gas --〉 Oil

OR

➢ Is it a "Nice to Have", would acquire only if the price is "right"?

What Is your strategy to "Win the Bid"?After your goals are established ...

Clearly understanding your "Competitive Advantage" is critical

Some classic considerations include

1. Identifying upside potential that others do not see

a. Deeper horizons, new play types, horizontal drilling, Increased density drilling

2. Aggressive Development

a. Ability to develop the field faster than the competition: Money, people, expertise

3. Synergy with existing operations

a. Optimize operations - CAPEX, OPEX, COPAS reductions

4. Financing for the Acquisition

a. Access to low cost of capital - Some international firms have clear advantage ...

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5. Price Forecast

a. How does your Corporation's price deck compare to the forward strip?

A signal to buy or drill?

6. Cost Structure

a. Low cost operator, supply chain leverage

7. Market Timing- Business Cycle Considerations

a. Opportunities

• Willing to buy when the rest of the industry is heading for the door?

8. Competition

a. Understanding your competition, who they are, can you be competitive?

b. Pre-emptive bids or willing to go to a data room and participate in the bidding process?

c. Others will only consider only one-on-one deals

9. "Geo- Political" forecasting

a. Understanding governmental trends Local, State, Federal and International

Additional considerations: Corporate vs. Asset only deal

Corporate deals: additional items to consider including:

1. Corporate Deals

a. Premium over "Fair Market Value"

▪ Will the transaction be accretive?

▪ Cash, stock or a combination

b. Personnel - Do you need the additional staff, including "back office"

c. People-related considerations

▪ Pensions, health plans

d. Structural considerations

▪ Merging accounting, land, etc. systems into existing systems

e. Non-Petroleum related considerations

▪ Office buildings, fleet leases, etc.

f. Existing and potential future litigation

g. Corporate Debt

h. Other issues ...

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2. Impact Acquisition will have on Corporate Books

a. Reserves, F&D costs

b. Pro-forma P&L Statements

c. Balance Sheet, Capital Structure

3. Internal Corporate checks prior to completing the acquisition

a. Does the team acquiring the new resources have the resources necessary to execute?

▪ People, Equipment, Capital

b. Internal Competition for Capital - Will the new properties compete?

c. People & related Overhead costs

Divestments: Clearly articulating the goals and strategy are critical I

Different goals can drive your property evaluation in different directions Some examples include:

1. Is the Divestiture "Mission Critical" for the corporation? Part of a larger corporate strategy?

a. Must raise cash: pay down debt, fund new discovery, etc. Considered "Mission Critical"

b. Strategic decision to exit a certain play type or "region" - no longer core

OR

2. Is a "Nice to Have", would divest if the price is "right"...

OR

3. Part of a regular (annual) effort to optimize the portfolio

a. Routinely exit bottom 10%

b. Life cycle of the project - Development complete

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Divestments - Considerations Include:

1. How do you target which assets to sell?

a. Internal vs. external perspective of the properties? Properties which command a premium?

b. Commodity: Oil vs. Gas?

2. Technical Review of the properties

a. Internal reviews - perception may change

b. Build a road map to get max value

3. Setting the Minimum acceptable sales price

a. Internal evaluation - set clear range of values

b. Reality check of value from external perspective

If effectively marketed, the "marketplace" should value your assets correctly

4. Maximizing Price for Properties...