Due Diligence: Part I (pre-lunch)

Due Diligence
Presented By – Sharon Flanery
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
• 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
File Review
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
• 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
File Review
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 1099s
• 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
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
I. Overview
II. Title
III. File Review
IV. Miscellaneous
IV. Miscellaneous
Other Contracts
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
• 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,
• Meter list
IV. Misc.: Pipelines
• Stream Crossings
• Road Crossings
• Railroad Crossings
• Surface leases for drips, compressors, other
• Confirm on map
• Review Agreements and confirm payments are
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
• 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
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