SPE-169858-MS
Due Diligence and Valuation of Unconventional Oil & Gas Assets for
Acquisition Bidding
AbstractAcquisitions & Divestitures (“A&D”) professionals routinely adjust the valuation parameters, on the basisof asset type being evaluated, to determine an acquisition price that is conservative yet competitive for usein a bid. A study of over seventy three A&D transactions over a two year period enabled us (the author’steam) to compare the valuation parameters for unconventional asset acquisitions vis-à-vis those forconventional asset acquisitions. Transaction data indicates that valuation metrics, particularly on aproduction multiple basis, for the acquisition of unconventional assets are significantly higher vis-à-visthose for the acquisition of conventional assets. The use of higher valuation multiples implies that theA&D market expects an unconventional asset to have lower risks and/or better growth prospects inrelation to a conventional asset.SPEE Monograph 3makesit clear that an unconventional asset – a term often used in A&D markets todescribe a continuous hydrocarbon reservoir of low permeability which exists over a large geographic areaand requires extensive stimulation to produce at commercial rates – does not always have fewer risksand/or more growth prospects. Therefore, the acquisition of an unconventional asset at overly aggressivevaluation could potentially lead to underperformance and adverse financial consequences for the buyer.The high valuation multiple for Halcón Resources Corporation’s (“Halcón”) acquisition of its Woodbineunconventional play in Texas, which so far has not met expectations, provides a glaring, well-documentedexample of underperformance with adverse financial consequences in recent history.We believe buyers should use high valuation multiples with confidence only for those unconventionalasset transactions which involve“resource play reservoirs” as defined in SPEE Monograph 3.1Using acash flow based analytical framework outlined in the paper, we argue it is highly likely that a resourceplay reservoir would offer lower risks and/or better growth prospectsvis-à-vis a conventional asset, all elsebeing equal. Hence, in relation to the acquisition of a conventional asset, the valuation multiples for theacquisition of a resource play reservoir – a subset of unconventional asset deals – should indeed be higher.For the remainder of unconventional asset deals, the practice of valuation at high multiples could lead toperilous financial consequences.The paper concludes with our recommendations for due diligence and deal structuring with respect toan unconventional asset acquisition. We identify due diligence items which include the determination ofwhether or not an unconventional asset exhibits the technical characteristics of a resource play reservoir.
Unfortunately, such determination requires extensive well data. Early in the exploration process, it maynot be possible to determine if an unconventional asset has the technical characteristics of a resource play
reservoir due to the lack of adequate well count and data. For such early stage unconventional assetacquisitions, we discuss certain deal structuring techniques which could potentially make bids more
competitive and less risky.
