From Russ Darbyshire
The question I asked on the NAPE floor: Do you agree or disagree with this statement: No one is running due diligence on A&D transactions any more.
Disclaimer: This poll is not a proper statistical poll and the results don’t represent a significant statistical result.
I spoke to 30+ companies on the floor at NAPE on Thursday, February 14, 2019, asking the above question.
In regard to acquisitions, everyone I spoke to said, “We always run due diligence.” Three companies said, “We would not do a deal any other way.” A couple of companies said, “But sometimes we are limited in our ability to run due diligence, it just depends.” Many companies added, “The depth and scope of our due diligence depends on the deal.” One company did imply that they would cut corners on due diligence if that was the only way they could make a deal with the Seller.
On divestment due diligence, the answers were pretty much uniform. Most said that they normally don’t run due diligence before a divestment because, “We know the properties we are selling. We have a history of managing them and know all the issues with them.”
When I asked who ran their due diligence, the answer was, “We have in-house people that perform it.” But when I asked, “Do you mean company employees that perform due diligence?”, that answer was: “Well, no, we have some contractors that help.”
Another question I asked, was this: “Have you ever done a deal where there was no upfront due diligence, but the Seller gave you a limited title warranty after the sale to perform due diligence?” A few of the people I talked to did not know exactly what I was talking about. Most said, “No, we would never do a deal like that.” I asked why, “Because we would never get our money back on defects.” I will note that my recent experience as an expert witness in a couple of lawsuits where there was a limited title warranty provided by the Seller, with a time frame for the Buyer to perform due diligence, bore this out.
As part of my discussion with them, I also asked if they had any “due diligence screw-ups” I could blog about. Everyone laughed and said, “Yes, but we don’t like to talk about that!”
The bird’s eye view of all of this is:
1. When the price of oil is high and there is a lot of money chasing too few acquisition deals in active basins, the Seller is in the driver’s seat. That means the Seller will dictate the terms of the due diligence effort in most PSA’s and if a Seller wants the deal closed, they are going to eliminate or cut due diligence.
2. The companies most likely to bend to the situation described above, where the Seller has the power to dictate the due diligence effort, were companies funded by private equity and companies operating in the Permian Basin. The large independents and majors said, “We won’t take the deal if the Seller starts limiting our ability to perform due diligence on an acquisition.”
3. Most of the Permian companies I talked to pointed out that the “Seller’s market” has rapidly diminished the past few weeks, with the fluctuation of the price of oil.
4. Companies running due diligence are probably not doing it with experienced personnel, as evidenced with the high number of answers indicating due diligence screw-ups.
The informal results of my discussions all seem logical, based on the current state of the industry. However, I don’t see any evidence that “due diligence screw-ups” have produced any effort by companies to either upgrade their personnel performing due diligence, or advance along the learning curve to eliminate future errors. It has become “all about doing the deal” and volume, doing many deals.