American Oil and Gas Reporter - January 2017 - 51

Outlook 2017
CLOSING THE DEAL
Boyd Russell is president and chief executive officer of Energy Navigator Software.
A practicing petroleum engineer with nearly 40 years of experience, Russell founded Energy Navigator in 1998, and is the original designer of the Value Navigator®
integrated forecasting, economics and reserves management system. He is a courtBoyd Russell

recognized expert in property evaluations, secondary and tertiary recovery meth-

President and
Chief Executive Oﬃcer

ods, formation damage, and horizontal wells. Russell holds a B.S. in engineering

Energy Navigator
Software

from the University of Alberta.

Merger and acquisition activity is forecast to increase this

Q: year as companies begin formulating strategies to capitalize on growth opportunities in a recovering market. The first step
in making an acquisition, of course, is identifying an asset. What
can operators do to enhance their ability to screen multiple properties and datasets to find the right fits? What tools and methods
can be employed to help identify the best available acreage, based
on an operator's specific criteria?

RUSSELL: First and foremost, operators do not want to get
carried away by the optimism that comes with a recovering market. Remember, in order to complete an acquisition, the buyer is
going to have to pay more than the seller's retention value. That
magic number will not be revealed, but the buyer can be assured
it will be close to market value, except in desperate cases. For the
potential acquisition to be a win, the acquirer must find additional value that the owner does not see or is unable to realize.
It seems obvious, but buyers should start the process of identifying assets by narrowing their focus. It is not practical to try
to consider every unconventional play in the lower-48.
The first priority is getting the C-suite onboard with the plan.
Pushing the price above corporate metrics often involves strategic benefits beyond the knowledge of the evaluators. Another key
issue is deciding where to be and why. This means understanding whether one is trying to expand his influence or build a new
core area.
The next step is determining financial capability. The value of
any deal is in the producing property plus the upside. To realize
that value, you will need to spend both the acquisition price plus
the cost to develop the upside. Are you prepared for that?
Once the where, why and how questions are answered, the next
issue is figuring out "what" to acquire, including determining
whether the goal is to acquire a company or an asset. As potential
acquiring companies refine their focus, they should take inventory of their strengths relative to other operators in the focus area.
Once these broad points have been considered, screening can

start in earnest. It will involve mapping parameters to find which
companies hold land in the focus area, and what the performance
metrics are on a regional basis. This process includes reviewing
U.S. Security & Exchange Commission filings, company press
releases, analyses from investment houses, and bankruptcy filings.
One point to consider is that the buyer should not pay for undrilled locations that the seller is not able to finance. If you have
cash flow and debt capacity, the rewards from that capacity accrue to you. So if one of your strengths is a strong balance sheet,
look for companies that do not have that strength.
In keeping, if the buyer is a top-decile operator, or has hired
a top-decile completions engineer, it should look for operators who
are not as far along the learning curve. If a company is driven by
acceleration and early cash flow, it should look for assets that are
completed with fewer stages per meter of pay, or companies that
use extended choke management. Different metrics create the opportunity for different evaluations, and therefore, win/win potential for a transaction.
Large companies usually spend more to drill because their standards are more stringent, but they also are less likely to dispose.
Accordingly, small independents should look for noncore big company land. Their opportunity is both lower development cost and
timelier drilling.
What do you know about geology that others do not? Does this
create opportunity?
These are only a few suggestions for narrowing the search and
creating a deal that can be mutually beneficial to buyer and seller. Hopefully, these will trigger other ideas for many other tactics one can employ to quickly and effectively choose strategic
opportunities.
Once you have narrowed your search and understand what criteria are important to your company decisions, using consistent
software processes to evaluate the viable opportunities will help
increase your confidence. Establishing a process that is consistent will prevent the need to "reinvent the wheel" each time you
evaluate, and will help identify where opportunities may overlap
so as to be ranked or prioritized.
JANUARY 2017 51

American Oil and Gas Reporter - January 2017

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