Before a third party can assess the desirability of making an investment and if so, the structure that investment should take, it will need to do due diligence on Target’s business and assets.
To run an efficient process, particularly where it may be anticipated that there will be a number of potential investors in competition, it would be advisable for Target to prepare itself well in advance for the due diligence exercise.
The key aspects of this process are set out below.
Target Point Person(s)
Identify who will be the point person or persons within Target who will be responsible for coordinating the accumulation of the relevant information for due diligence. There may also be some sensitivities internally with employees about the process and the best way to keep things confidential is to have only a small circle involved in the process until negotiations are well advanced.
Target should ensure it has appropriate legal advisers on board to advise on the type of information to provide for due diligence, how to protect the confidentiality of that information, market practice on the process, assisting with the investor memorandum if required as well as any eventual negotiation of the transaction. Target may also choose to have a financial adviser appointed if it wanted to run the process as an auction, or to advise the Target board on fair valuation and/or accountants appointed to prepare an accountant’s report.
Before any information is disclosed to potential investors/partners and their advisers, a suitable confidentiality/non-disclosure agreement should be entered into.
Competent Person’s Report (“CPR”)
Fundamental to any decision to invest by a partner will be the CPR – a report by a suitably qualified and reputable geological firm providing its conclusions on existence and value of the oil & gas reserves of Target. The CPR should be up to date and prepared using a standard acceptable under one of the following internationally recognised codes/organisations: the Society of Petroleum Engineers or Canadian NI 51-101.
It may be helpful to minimise the time lapse that would be involved if each of potential investor/partner were to carry out its own full financial and other investigations from scratch. Although not obligatory, it may be desirable to arrange for an accountant's report (which is intended to be a "warts and all" document) to be prepared by Target, which would then be addressed to the successful bidder, albeit subject to qualifications as to reliance and limitations on their liability in respect of their report. Whether this is required will depend very much on the circumstances depending on the circumstances and the image that Target wants to project.
Using the same rationale as the Accountant’s Report, it may be desirable for Target’s local lawyers to prepare opinions on the validity and enforceability of the relevant licences and key contracts governing the rights to oil & gas assets. Such opinions can also provide an overview of the regulatory regime in
It would be helpful to put all of the information into context for potential investors/partners for Target to produce an investment memorandum, or at least a presentation/teaser which sets out an overview of the business, assets, key terms of the exploration and production licences, key financial information, management and shareholding structure. This document could also set out what type of transaction would be preferred by Target ie straight equity investment, joint venture, operating know-how etc.
As an oil & gas company operating in
Historical accounting information.
Capital expenditure since the last accounts.
Share capital and borrowings, distinguishing between intra-group debt and bank borrowings.
Copies of underlying loan and security documents and guarantees.
Any business plan or projections for the current year.
Status of tax returns and details of tax position including losses (if applicable).
The corporate charter
Details of directors and other officers.
Details of principal assets, well equipment etc.
Details of relevant contracts related to the business and assets such as operating, farm-in, pooling, production sharing, trading, pipeline and export agreements
Joint venture agreements, licences and other material contracts
Details of the licences and permits which give title to oil & gas assets and/or are required for Target's business, ie in addition to the principal exploration and production licences, also any environmental, surface access, storage or export permits, etc.
Service contracts with directors and key employees.
Standard terms and conditions of employment for other categories of staff.
Details of pension schemes and other employee benefits such as profit-sharing schemes.
Analysis of workforce, by age and length of service.
Details of offices and other real property owned or lease (excluding the licenced areas for exploration and production provided above).
Details of any licences of intellectual property rights, eg with respect to well logs, seismic data etc.
Details of computer systems and software used.
Copies of insurance policies and information on claims.
Details of liabilities, including litigation or arbitration proceedings, and other disputes or investigations (including environmental disputes and investigations) affecting Target.
The above information will typically be assembled in a “data room”, organized generally in line with the above headings in response to questions set out in typical due diligence questionnaire.
The data room is a physical location where all the documentation are kept in folders for inspection. More typically, as prospective investor/partners and their advisers will likely be in various locations outside
Any further documents/answers provided in response to any further due diligence queries will be added to the data room, as the contents of the data room will be referred to in the warranties which may be given by Target to the prospective investor/partner as part of the contractual documentation which will govern the eventual transaction between the parties.
Richie Clark is a corporate partner and head of capital markets at London law firm Fox Williams LLP, where he focuses on public takeovers, pre-IPO finance, London listings and placings, secondary fundraisings, activist shareholder and corporate governance issues, with a sector focus on natural resources. Mr Clark previously acted for Cardinal Resources plc on its London-listing, financings and sale of its Ukrainian oil & gas assets to the Kuwait Energy Company. He can be contacted on +44 (0) 20 7614-2507 or firstname.lastname@example.org