Merger and Acquisition Due Diligence Process of Oil & Gas Assets: The Role of Geoscientists

A reservoir’s life begins with exploration and discovery followed by delineation of the reservoir, development of the field, production by primary, secondary, and tertiary means, and finally abandonment. Integrated, sound reservoir management and continuous improvement are key to successful operations throughout a reservoir’s life and ultimately the survival of a company. Hydrocarbon reserves are the fundamental assets of a petroleum company. The goal of the company is to generate positive cash flow, a profit by production. However, this inevitably depletes the asset reserve base. In order to remain viable, a company needs to replace the reserves that are produced. As you can imagine this can be a challenging task and many companies do not replace what they produce.

One way a company can replenish reserves is through mergers and acquisitions (M&A). This may be necessary for a company to undertake due to a variety of reasons including lack of exploration success, less than anticipated production, aging depleted reservoirs or a way to grow its reserve base quickly.

To ensure one’s investment is sound, it’s important to begin any proposed M&A transaction by undertaking a due diligence process. In the United states, the term due diligence describes a general duty to exercise care in any transaction. In the context of oil and gas assets evaluation, conducting M&A due diligence requires a careful examination of every facet of the potential investment in order to get a sense of the whole sum of key parts. One of these key parts is Geoscience.

As geoscientists our role is to ensure the target assets of an acquisition or merger are assessed by diligent analysis and sound evaluation in order to assign a reserve value upon which the acquiring company can make a fair bid. A pinch of optimism is sometimes needed too since, while buying reserves in the ground is great, you should be looking for upside potential that could make the merger or acquisition a truly great deal.

In this presentation, I will provide a broad overview of M&A initiation and due diligence in the oil and gas industry. Then more details will be provided on the role of geoscientists in conducting due diligence on oil & gas assets.

The lecture will be concluded by building a strong platform of understanding using a few case studies showing what kinds of red flags and pitfalls acquirers should be able to spot, mitigate or avoid for a successful M&A valuation process.