CHAPTER 13 EVALUATING OIL & GAS PROPERTIES: COMMERCIAL DEAL MAKING FROM AN INDUSTRY PERSPECTIVE

• Jurisdiction: United States

Due Diligence in Mining and Oil & Gas Transactions
(Apr 2010)
CHAPTER 13
EVALUATING OIL & GAS PROPERTIES: COMMERCIAL DEAL MAKING FROM AN INDUSTRY PERSPECTIVE
Philip A. 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 Pro-duction 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.

Evaluating Oil and Gas Properties Commercial Deal Making from an Industry Perspective

RMMLF Presentation

April 30, 2010

Philip Holmes

Anadarko Petroleum Corporation

Denver Colorado

April 12, 2010

Final Mar 22 PAH

OUTLINE

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. Other Factors to Consider

IV. Completing the Transaction - "Papering the Deal"

V. Summary

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General Process: Key Events

Acquisitions

Divestments

I Goals and Strategy Discussion

First step of any property evaluation:

Clear understanding of the companies Goals and Strategy

What are you trying to accomplish?

Goals and Strategy can be different

Acquisition, Divestment, Trade or JV

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I Goals and Strategy - Acquisitions

What are the goals of the Acquisition?

Clearly articulating the goals and strategy are critical!

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: Oil ? Gas

OR

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

I Strategy - Acquisitions

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

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. Synergy with existing operations

a. Optimize operations - CAPEX, OPEX, COPAS reductions

3. Aggressive Development

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

4. Financing for the Acquisition

a. Access to low cost of capital - Some international firms have clear advantage . . . PV10 vs. PV〈〈

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5. Price Forecast

a. Is your Corporation a price "Bull"? while the rest of the industry is a "Bear"?

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?

c. Willing to go to a data room and participate in the bidding process?

d. Other will only consider only one-on-one deals

9. "Geo-Political" forecasting

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

10. Other . . .

Additional considerations: Corporate vs. Asset only deal

Asset deals focus on value, title and environmental diligence

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

I Strategy - Divestments

Divestments: Clearly articulating the goals and strategy are critical!

Different goals can drive your property evaluation in different directions

Some examples include

1. Is the Divesture "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 an 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?

b. Commodity: Oil vs. Gas?

c. Certain properties could command a premium?

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

a. Internal vs. External (Investment Bank / Marketing Firms)

▪ Manpower Availability, VDR - can you run one?

▪ May have specialized knowledge, contacts

▪ Technical expertise in completing the transaction

• Marketing Expertise, handling data rooms, actual transaction, etc.

▪ Speed of completing the transaction

b. Identifying all possible upside

c. Timing to go to the market

d. Clear Records - Financial records in good order (LOS)

▪ Land records, title clean . . .

5. Purchaser Qualifications

a. Invite anyone to bid, "Pre-qualify"?

▪ Operatorship, WI position vs. royalty

b. Future environmental liabilities - Could properties come back?

6. Impact Divestment will have on the corporation

a. Reserves

▪ Booked reserves vs. sold reserves

b. Tax Impact - Gain / Loss

c. Financial Income Statement - Gain/Loss

d. Pro forma P&L Statements

e. Reductions? Direct, indirect expenses, people

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I Strategy - Trades

What are the goals and strategy of the trade?

Simultaneous Acquisition and Divestment

Trades are probably the most difficult Transaction to close Helps if there is a degree of trust between the parties involved in the trade

Some key considerations for conducting a trade include

1. Typically a "Cashless" transaction

(Sometimes small cash boot used as equalizer)

2. Homework - Are both parties at similar level of knowledge of their properties?

3. Is there a clear motivation for both parties to do the trade? Examples include:

a. Overlapping ownership, Consolidate operatorship of properties

b. Desire to enter / exit an area

4. Time - Usually a major enemy in any trade

a. Both parties need to agree on / set clear timetables . . . Important to create a sense of urgency -

b. Technical evaluation can take time, important work on parallel timelines

c. Timely sharing on data needed by both sides

5. Metrics? What basis should the trade be based upon?

a. Production, Reserves, Value?

▪ Can be difficult to agree on value or reserves - sometimes production can be a good basis for the trade . . . "production neutral"?

6. Term Sheet

a. Parties should agree on a one-page "Term Sheet" which captures the essence of the deal

▪ Serves as the basis for drafting the detailed PSA

▪ Clarity of key points of the deal - assist other team members

7. Negotiator

a. Selection of a knowledgeable negotiator can smooth out the process

b. Personal relationships . . .

8. Other . . .

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I Strategy - Joint Ventures

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