Due Diligence Presented By Sharon Flanery Objectives I
Due Diligence Presented By – Sharon Flanery
Objectives: I. Overview II. Title III. File Review IV. Miscellaneous
I. Overview • “Such a measure of prudence … as is properly to be expected … ordinarily exercised … under the particular circumstances; not measured by any absolute standard, but depending on the relative facts of the special case” Black’s Law Dictionary
I. Overview: Why Assets are “Defective” • Two Main Reasons: – Low Production – Old and Complicated Titles
I. Overview: Old and Complex Title The King of England James Swan
I. Overview: Title Defects • Know APA definition – NRI or WI – Affect ability to drill – Acreage deficiencies – Pooling – Title Issues re marketability
Objectives: I. III. IV. Overview Title File Review Miscellaneous
II. Title: Due Diligence • They say they have an accurate property listing … • They say they have maps … • They say title is clean …. • They say it won’t take long to run title …
Title: HBP • Find Title Opinions • Leasehold chains / confirm ownership • Curative issues
II. Title: Undeveloped Leases • Find abstracts or title opinions • Determine process for taking leases • Leases may fall out because of a lack of title research in acquiring the lease
II. Title: Surface & Fee Tracts • Find Title Opinions • Title insurance
II. Title: Typical Defects & Curative • Mortgages held by O&G Owner – Subordination • Prior O&G Leases – affidavit of non-production – release and surrender • Gaps in the chain of title
II. Title: Typical Defects & Curative • Missing estate records • Outstanding working interest holders • Missing documents • Ineffective reservation • Surface use restrictions • Competing chains of title • Lease not executed by all interest holders
Objectives: I. III. IV. Overview Title File Review Miscellaneous
III. File Review: HBP & Non-HBP • GOAL: any issue that may adversely affect ability to explore, drill, and produce in the Marcellus Shale
III. File Review: HBP & Non-HBP • Leases, modifications, amendments, renewals, and other documents creating and defining the rights that make up the leasehold estates • Copies of all unrecorded documents • Landowner complaints, adverse claims, etc. • Expiration date for Non-HBP
III. File Review: HBP & Non-HBP – Depth Restrictions – Pooling Clauses – Drilling Commitments/Pugh Clauses – Assignment restrictions – Pref Rights or ROFR – Material Restrictions (i. e. , restrictions on well location, cooperation with other mineral owners, etc. )
III. File Review: HBP Payments • Cross-reference wells to leases • Royalty and Shut-In payments (12 months) - check copies or 1099 s • Verify against production • DOI against NRI
III. File Review: HBP Payments • Compare WI to JIB Decks • Flat rate royalties – Issues with Minimum Royalty Acts in PA and WV
III. File Review: Non-HBP Payments • Delay Rentals • Bonuses • Paid-Up or Promise to Pay? – Consideration issues – Closing Mechanics – Ratifications/Amendments/Acknowledgement of Payment
III. File Review: HBP Well Files • Permits • Plats - confirm drilled on lease • Declarations of Units • Production data for last five years
III. File Review: Free Gas Issues • Consumer list – by well and lease • Is it metered? • Overburn policy? • Other policies or agreements: safety precautions, safety concerns, releases, • PSC or PUC issues?
III. File Review: Contracts • What are You Looking For? – Adverse impact on ability to develop – Causes a lower NRI or lower WI – Reduces acreage – Find other big risks
III. File Review: Contracts • List of wells & leases for each contract • Farmouts/Farmins • Operating Agreements • Partnership or Investor Agreements • Areas of Mutual Interest • Drilling Commitments • Seismic Agreements
Objectives: I. Overview II. Title III. File Review IV. Miscellaneous
IV. Miscellaneous • • • Other Contracts Pipelines Coal Mining Lien and Litigation Searches Operations Issues Other DD Areas
IV. Misc. : Other Contracts • Surface Use Agreements • Water purchase/transportation agreements • Water disposal agreements • Water line easements/licenses • Water withdrawal agreement • Turn around agreements • Tank site agreements
IV. Misc. : Pipelines • Easements/ROWs list by lease and well • Gathering line lists • Map of pipeline system • Line lists referenced back to map and related easements • List of easements that require ongoing payments or free gas
IV. Misc. : Pipelines • Review pipeline documents against map for gaps in the line • Review payment history • Review for size restrictions, third party gas, assignment restrictions, vested in seller, etc. • Meter list
IV. Misc. : Pipelines • Stream Crossings • Road Crossings • Railroad Crossings • Surface leases for drips, compressors, other facilities • Confirm on map • Review Agreements and confirm payments are current
IV. Misc. : Coal Mining in the Area • Look for mine plans – may lose ability to drill within the primary term or meet a drilling commitment • Coal Owner Leases – May have restrictions on development e. g. lay 4 inch line only, pay to move line each time, no storage, no injection, etc.
IV. Misc. : Lien & Litigation Searches • Lien search in each county where property is located – seller or any entity in which seller has property vested • Litigation search in each county where property is located • UCC search in each seller’s state of formation
IV. Misc. : Lien & Litigation Searches • Secretary of State search for good standing • Certificate of existence • Proper corporate documentation: articles, bylaws, operating agreements, minute books, resolutions, etc.
IV. Misc. : Operations Issues • • • Permits: coal or landowner objections Wellsite restoration issues Contractor list, contractor agreements Plugging list & schedule, orphan well list Production reports
IV. Misc. : Operations Issues • Potential encroachments • Third party drainage claims • Coal, timber or other surface/mineral operations
IV. Misc. : Other DD • Marketing • Environmental • Measurement • Legal • Insurance • Financial
Final Thoughts • • • Data will be incomplete Decide what is important i. e. most risk Know definition of “defects” in APA Summarize often - status, issues, etc. Adjust DD as you progress
Questions?
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