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Upstream: Transactional Due Diligence: Undisclosed: Buy-Side Due Diligence

An undisclosed global producer of chemicals (“the Company”) recently entered the oil and gas exploration and production business by acquiring 43,686 net acres, including leasehold interest in 107 wells, in the Austin Chalk and Eagle Ford fairways of the established Giddings Field for $30.0 million. The Company engaged Opportune professionals to perform certain financial due diligence procedures to support the acquisition. Specifically, Opportune professionals were engaged by the client to provide the following services:

  • Analyze Seller’s historical LOS to identify potential adjustments (i.e., non-recurring, out-of-period) to accurately reflect historical results
  • Discussions with Seller’s management and accounting staff to obtain an understanding regarding financial reporting policies, procedures and internal controls
  • Review significant material contracts entered into by Seller that may affect current or future financial results and identify material commitments and contingencies and determine if the LOS is reflective of contractual terms on a test basis
  • Verify to source documentation revenues and revenue-related deductions for one or two of the most recently recorded production months in the LOS for the top 80% of allocated value properties
  • Perform trend analysis on lease operating expenses to identify any unusual activity levels or anomalies
  • Test reporting of production volumes and severance taxes to regulatory agencies with reported results

The Opportune team completed a detailed work program and supporting schedules to document our work related to the following:

  • Selected 50% of acquired net assets for testing, providing 80% coverage of the total allocated purchase price
  • Recalculated revenue schedule for the months of February 2019 and March 2019, ultimately showing correct computation for assets with complex working interests
  • Verified outside owners’ working interest using seller’s accounting software package data, adjusted for exclusions and non-consent by certain owners, as well as additional purchases of interest by seller in recent years
  • Recalculated price for all oil and residue gas for the selected months based on contractual terms with outside purchasers using Platts and Inside FERC’s pricing index
  • Tested inventory balances as of deal closing date with outside sources
  • Considered variance among reported inventory due to timing of meter readings by operator and wells with shut-in cycles having high-pressure buildup leading to incorrect meter readings
  • Provided volume trend analysis by production month by well for oil and gas and documented support for anomalies identified
  • Investigated appropriateness of specific purchase price allocations for the assets between well bores and surrounding acreage
  • Identified potentially uneconomic wells based on review of gross, well level, production basis LOS
  • Determined certain expenses were excluded from the LOS provided in the data room and discussed reasons for exclusions with Seller management

Opportune professionals added value by helping the Company gain comfort over seller-provided information, as well as current systems and methodologies used to account for the oil and gas properties acquired. In addition, Opportune led useful discussions between the Company and the Seller. These conversations helped explain the Seller’s unique accounting policies surrounding accounting date lag vs. production date, how the Seller’s accounting software treats timing of revenues and expenses, as well as subtle nuances of ownership interest in the acquired assets due to non-consent or opt-out by certain owners.

Opportune uses a collaborative approach to solve its clients’ problems. The equivalent of two full-time employees were engaged over the course of three weeks. Over nine employee’s expertise and professional judgements were used in this engagement, offering knowledge in areas such as commodity pricing, asset valuation and financial due diligence while keeping the total cost of the project within budget. The wide array of experience held by Opportune employees allows for subject matter expertise over even the most unique and challenging minutia of complex upstream deals while keeping our project teams lean and agile. For more information, CLICK HERE.

Amy Stutzman

Managing DirectorOpportune LLP