CHAPTER 6 DUE DILIGENCE PROCESS

• Jurisdiction: United States

Oil & Gas Agreements: Purchase & Sale Agreements
(May 2016)
CHAPTER 6
DUE DILIGENCE PROCESS
Marc R. Strahn
President
American Association of Professional Landmen
President
Wolf Haven Corporation
Story, WY
Gregory J. Nibert
Partner
Hinkle Shanor LLP
Roswell, NM
Aaron K. Friess
Associate
Hinkle Shanor LLP
Roswell, NM

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MARC RANDAL STRAHN, CPL, is president of The Wolf Haven Corp. and High Story Ventures Inc., oil and gas acquisition and divestiture companies specializing in mineral and production properties in the Rocky Mountain Region. He also serves as executive counsel to Hoover & Stacy Inc. of Cheyenne, Wyo., a Rocky Mountain land brokerage firm. He has 34 years of field landman and management experience. Strahn first discovered what a landman was while working for American Land Title Co. in Bozeman, Mont., in 1976. Formerly an independent landman and one of the owners of Hanson & Strahn Inc. of Cheyenne, he retired from the land brokerage business on May 31, 2007. Strahn attended Montana State University. In 2001 the governor of Wyoming appointed him to the Wyoming State Energy Commission where he finished his term as its chairman. In 2002 he was appointed to the Wyoming Natural Gas Pipeline Authority where he finished his term as vice-chairman. Strahn is the current president of the AAPL, having previously served as the Wyoming director and on many national committees for AAPL. Strahn is a member and speaker for the Rocky Mountain Mineral Law Foundation and has held all offices in the Wyoming Association of Professional Landmen, including president. In 2013, he was appointed to the University of Wyoming School of Energy Resources External Advisory Committee for its new Professional Land Management Program. A former Eagle Scout and scoutmaster for the Boy Scouts of America, Strahn also enjoys world travel and anything that involves a shotgun. He hopes one day to learn the frustrating game of golf. He lives in Story, Wyo., with wife and lifelong partner Kathi Hanson, CPL.

GREGORY J. NIBERT is a partner in Hinkle Shanor LLP and a New Mexico Board of Legal Specialization recognized specialist in Oil and Gas Law. He has been listed in The Best Lawyers in America since 1993, and in Chambers USA America's Leading Lawyers for Business since 2005. Mr. Nibert is a past president of the Independent Petroleum Association of New Mexico and continues to serve on its Board of Directors. He has served as Treasurer and Trustee of the Rocky Mountain Mineral Law Foundation, a Chaves County Commissioner (2007-14), President of the Chaves County Bar Association, and Chair of the Natural Resources Section of the State Bar of New Mexico. He has presented papers and speeches to a number of organizations on oil and gas law topics, including the Rocky Mountain Mineral Law Foundation and the American Association of Professional Landmen. Greg received a Bachelor of Arts degree from the University of New Mexico in 1980 and a Juris Doctor degree, cum laude, from Pepperdine University in 1983. He was Editor in Chief of the Pepperdine Law Review for 1982-83. Greg is a native of Roswell, New Mexico. He and his wife, Carolyn, have two sons, Gregory an attorney in Denver, and Jeff, a fishing guide at Vermejo Park Ranch.

AARON K. FRIESS recently joined Stinson Leonard Street LLP as an Associate Attorney in the firm's Bismarck, North Dakota office, having started his law career as an Associate in the Roswell, New Mexico office of Hinkle Shanor LLP. His practice involves mineral title examination on fee, state, and federal lands, as well as oil and gas transactions. Aaron graduated magna cum laude from Washburn University School of Law in 2014, where he served as the Editor-in-Chief of the Washburn Law Journal. While at Washburn, he earned the Rocky Mountain Mineral Law Foundation's David P. Phillips Scholarship and the Energy & Mineral Law Foundation's President's Scholarship. Aaron is a member of the State Bar of New Mexico, the New Mexico Landman's Association, the Independent Petroleum Association of New Mexico, and the Landman's Association of North Dakota.

Due Diligence: What to Do, When to Do It, What to Look For and How to Find It

Gregory J. Nibert and Aaron K. Friess

Hinkle Shanor LLP

Roswell, New Mexico

Thirty years ago in May of 1986, the Rocky Mountain Mineral Law Foundation held a similar special institute where the following statement was made:

The natural resources industry has always been cyclical. There's no reason to expect that this cycle has been broken. Without much imagination, we can assume that conditions will change in the future that will generate another rush back into the industry. As in the past, these changes may be the result of increased commodity prices, significant new discoveries, or new-developed technologies which will either lower production cost or increase the value of previously useless or low-valued products. The natural resources industry is one of the few generators of original wealth and will continue to be a viable endeavor as long as our economic, social and governmental systems remain intact. ¹

These words have been proven true. After a tremendous boom period as a result of new technology and new techniques of establishing production from formations that were once thought incapable of production, we once again find ourselves in the valley of suppressed oil prices, a reduction in drilling, layoffs, and a number of companies unable to meet their financial obligations. It is in these times that opportunities arise for those who have the financial ability to acquire mineral properties. Hopefully, this special institute, and the papers presented, will be useful as there will likely be a substantial uptick in the purchase and sale of mineral properties brought about by the current economic conditions.

I. INTRODUCTION:

Due diligence is a process of ascertaining that the representations and warranties of the seller in a transaction are as represented to satisfy buyer that it will receive the assets being sold in an acceptable condition, with full knowledge of the risks and liabilities associated therewith, and buyer will receive the benefit of the bargain it struck with the seller. Each company has its own procedures and focus of due diligence, as well as its own process for conducting due diligence. In fact, each and every transaction has unique aspects that may require modifications to the company's procedures and focus. Indeed, the very phrase "due diligence" conjures up

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widely-varying interpretations and definitions, mostly variations of "I know it when I see it."² Additionally, due diligence frequently involves coordination among many personnel from different disciplines: attorneys, landmen, engineers, geologists, accountants, division order analysts, marketing personnel and other consultants must coordinate their efforts to effectuate a thorough, efficient review of a transaction and the properties the buyer intends to acquire. Within the company, in-house counsel must work with the corporate development personnel who sought the deal, the land department that will have to integrate the properties, the geologists and engineers who must confirm existing production, the potential for future production, as well as the condition of any equipment, the finance personnel securing and coordinating funding for the transaction, and the assorted personnel handling the tasks that would otherwise fall through the departmental cracks. Keeping this vast human apparatus working smoothly and accomplishing an effective due diligence review requires clear coordination and understandings among the participants. In essence, a due diligence team is assembled. Moreover, the vast amount of information reviewed in due diligence, combined with the fast-paced nature of most transactions, leaves open the risk of important information going unnoticed.

As a result, due diligence lends itself to checklists and similar task-defining devices. Checklists enable all personnel to see and understand each of their objectives and share of the task, and to track progress and outstanding issues. The coordinating personnel can, with ease, monitor each team's progress and address outstanding issues. Ideally, due diligence should consist of a master checklist and several sub-checklists for discrete portions of the process. Each team and person must understand their portion of the task, and understands how their task fits into the overall due diligence process, which will keep the process moving in the right direction.³ Appendix 1 to this Paper contains an example of a master checklist. Appendix 2 is a Sample Form Due Diligence Checklists and Forms which is the most comprehensive checklist that the authors came across in the preparation of this Paper.⁴ Checklists are not "one-size-fits-all" or even "one-size-fits-most." Rather, Appendix 1 contains common objectives that may appear in most transactions, and users should customize their checklist to accomplish their transaction's objectives, but does not include detailed environmental steps, which is included in Appendix 2. A customized checklist helps to reduce each task to a series of repeatable steps, which will minimize the likelihood of overlooking important details and keep reviewing personnel from becoming overwhelmed by the daunting amount of material they must review.

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This Paper makes no attempt to cover the due diligence waterfront: entire Special Institutes have covered due diligence,⁵ and innumerable resources analyze the broad themes and minutia of the due diligence process.⁶ This Paper will trace the due diligence process from the point at which the process begins, will cover the process of conducting a due diligence review, including the materials to examine and the goal of the examination, and will conclude with how to report the results of the due diligence review.

II. COMMUNICATION AND PLANNING:

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