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. II. 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. II. 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 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 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?