Due diligence is the process of investigating acquisition assets to make an informed decision about the cost, benefits and risks of acquiring such assets. Cinco Energy Management Group has handled over $20 billion in Acquisition & Divestiture (A&D) transactions across the United States, with clients such as major E&P companies, non-operators, international clients, and private equity groups.
Cinco is the industry leader in assessing producing and undeveloped properties. We work closely with our client’s attorneys and lending partners to help them navigate the risks inherent with their purchase. This article will explain how Cinco takes its clients through each step of the Due Diligence process to get the results they need.
The Contractual Due Diligence Period
Cinco begins evaluating the acquisition assets even before the purchase and sale agreement is signed. Oftentimes, we put together the Lease and Well Exhibits, and can also help our clients assess value to those assets based on their internal geodatabase models and projections. Once the agreement is signed, we have a contractual number of days to verify the seller’s represented working interests and net revenue interests in and to the leases and wells, and to verify the net acres in each lease. If we find different interests and net acres than what the seller represented, we determine the difference, and then compute this into a defect amount in accordance with the terms of the agreement. This amount is taken as a downward adjustment to the purchase price. During this process, we are in constant communication with our clients and their counsel.
Cinco provides high-level summaries as well as detailed defect notice reports that include variances found, the applicable defect category, and detailed findings to substantiate the variance. Our reporting is fully customizable according to our client’s needs and the terms of their purchase and sale agreement.
Key Metrics & Decision Making Benchmarks
Cinco provides key metrics and reporting on our client’s assets as we evaluate them, which puts our clients in a position to begin managing their assets the moment the transaction closes. As part of our reporting process we can analyze the health of our client’s assets by reviewing and reporting on production volumes holding acreage and by quantifying the type of defects found in terms of their potential affect on the client’s bottom line, to name a few.
Cinco will work around the clock to make sure our client’s transaction closes on schedule. We work with their counsel to prepare defect notices, cure items provided by the seller, and prepare assignments and other closing documents, as needed. Cinco is often asked to be present at a closing to address any last minute items and consult with our clients on best practices. Once the transaction is closed, we record transaction assignments and help our clients transition their assets.
Once the transaction closes, Cinco helps transition the business operations to our client’s preferred data management software, and inventory all assets. We digitize paper files, set up well, lease, and unit files, and offer guidance on selecting and building applications tailored to our client’s needs. We can also serve as an intermediary or long-term land department, providing support as our clients grow and transition.
After partnering with Cinco throughout a transaction; oftentimes our clients retain us to continue to help support their land department with asset management services. In this role, Cinco helps manage client obligations under Joint Operating Agreements including: monitoring billing, processing division orders, handling regulatory notices, and all pertinent correspondence. For new well proposals we handle the AFE process, analyze contractual obligations, ensure regulatory compliance, and manage all title related matters. We also provide leasehold maintenance, monitoring and reporting on assets, and mapping in conjunction with the above services.
Cinco partners with our clients throughout the acquisition life cycle and offers a holistic approach that balances client’s contractual obligations with their unique objectives and focus.
Written by: Lauren Schall King, Senior A&D Advisor. As a senior member of Cinco’s A&D team, Ms. Schall King consults with various clients, equity firms, and law firms in conjunction with oil and gas transactions across the United States.