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Due Diligence

Due Diligence

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Due Diligence

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  1. Due Diligence Presented By – Sharon Flanery

  2. Objectives: • Overview • Title • File Review • Miscellaneous

  3. 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

  4. I. Overview: Why Assets are “Defective” • Two Main Reasons: • Low Production • Old and Complicated Titles

  5. I. Overview: Old and Complex Title The King of England James Swan

  6. I. Overview: Title Defects • Know APA definition • NRI or WI • Affect ability to drill • Acreage deficiencies • Pooling • Title Issues re marketability

  7. Objectives: • Overview • Title • File Review • Miscellaneous

  8. 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 …

  9. Title: HBP • Find Title Opinions • Leasehold chains / confirm ownership • Curative issues

  10. 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

  11. II. Title: Surface & Fee Tracts • Find Title Opinions • Title insurance

  12. 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

  13. 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

  14. Objectives: • Overview • Title • File Review • Miscellaneous

  15. III. File Review: HBP & Non-HBP • GOAL: any issue that may adversely affect ability to explore, drill, and produce in the Marcellus Shale

  16. 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

  17. 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.)

  18. 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

  19. III. File Review: HBP Payments • Compare WI to JIB Decks • Flat rate royalties • Issues with Minimum Royalty Acts in PA and WV

  20. III. File Review: Non-HBP Payments • Delay Rentals • Bonuses • Paid-Up or Promise to Pay? • Consideration issues • Closing Mechanics • Ratifications/Amendments/Acknowledgement of Payment

  21. III. File Review: HBP Well Files • Permits • Plats - confirm drilled on lease • Declarations of Units • Production data for last five years

  22. 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?

  23. 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

  24. 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

  25. Objectives: • Overview • Title • File Review • Miscellaneous

  26. IV. Miscellaneous • Other Contracts • Pipelines • Coal Mining • Lien and Litigation Searches • Operations Issues • Other DD Areas

  27. 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

  28. 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

  29. 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

  30. 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

  31. 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.

  32. 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

  33. 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.

  34. IV. Misc.: Operations Issues • Permits: coal or landowner objections • Wellsite restoration issues • Contractor list, contractor agreements • Plugging list & schedule, orphan well list • Production reports

  35. IV. Misc.: Operations Issues • Potential encroachments • Third party drainage claims • Coal, timber or other surface/mineral operations

  36. IV. Misc.: Other DD • Marketing • Environmental • Measurement • Legal • Insurance • Financial

  37. 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

  38. Questions?