Diamond A Energy (fka DAECE)

[wallstreet1991]

I came across this site talking about DD on oil and gas wells that I thought would be interesting to the readers here.

from http://www.leasemarketing.com/defduediligence.htm

Due Diligence
The following is a list of questions that we try to answer before making an offer to purchase income producing oil and gas properties (working interests and royalties). If a prospective buyer doesn't understand these questions and how to get answers (or employ someone who does), then they should not be making offers to purchase. Buying income properties is a difficult business and it is possible to lose all of your investment, and sometimes even more than your original investment through liabilities that you assume.


Obtain and analyze:


Production history of the lease
Production histories of nearby similar wells
Copies of recent JIB's (joint interest billings) and revenue cheque stubs

Talk to:

Operator of the well and ask about condition of well, future plans, and any additional potential
Determine if there are any gas balancing issues, environmental issues, workovers planned,...
Ask the operator if he maintains insurance that would protect you against various forms of liability
For working interests obtain copies of:

Operating agreement
Gas balancing agreement (if any)
Gas balancing statement (if any)
Gas marketing contracts (if any) - will a favorable or unfavorable gas purchase contract expire soon?
Any other contracts that pertain to the interest
Leases that you are buying
Form of the proposed assignment
Other questions:

Do you have a disbursement responsibility?
Are there any title questions?
Will lease rights be reduced for failure to drill more wells?
What lease rights are you buying?
What is your potential expense for plugging and abandonment?
Questions pertaining to any upside potential:

Do well logs indicate behind the pipe recompletion potential?
Might additional wells be drilled on the lease?
Is the producing formation a candidate for secondary recovery?
The answers to each of these questions may lead to more questions. Each property is its own small business with its own set of income and expenses. You should be able to construct a model representing the future potential net income of the property based on your understanding of the answers you obtained and various commodity pricing scenarios. Once it ceases to be profitable for the working interest parties to operate the well, the well will probably be plugged and all income will cease - including that from the royalties.

Also you should be aware of county property taxes, severance taxes, state and Federal income taxes. How will they reduce your cash flow? What is the most appropriate form of legal entity in which to hold title? What is it going to cost you to properly account for all this?

O. G. Bunting
Lease Marketing, Inc.