If you have an interested buyer, this may be an ideal time to engage an investment banker to market the properties to multiple buyers, in a process where competition drives value and provides leverage in negotiations.
Running a process to sell Oil & Gas interests typically takes 3 to 5 months from kick-off to closing. Incomplete or inaccurate records can delay closing. If there is an issue, Big Sky can assist clients in retrieving records, reconciling discrepancies and summarizing data to facilitate buyer review.
When selling Oil & Gas interests, investment bankers generally provide the following services:
Most investment bankers are compensated with success fees that are only paid if a transaction is completed. Success fees are paid out of proceeds at closing and should be based on a percentage of the total proceeds. The relative size of the fee will depend on anticipated size of the transaction, its complexity and the scope of services in the agreement. Retainers are also common and should be proportional to the complexity of the project, but small relative to anticipated success fees.
Equity investments in E&P projects generally are securities. Fractional Oil & Gas interests can be securities, depending on the scenario, and people who arrange the sale of these assets may be subject to the broker-dealer requirements. Federal and state securities laws require recipients of transaction-based compensation, relating to the sale of securities, to register as broker-dealers. Paying fees to unregistered brokers presents legal and regulatory risks for the seller.
Note – Big Sky Energy Advisors, LLC conducts all securities transactions through Big Sky Energy Capital, LLC, a registered broker dealer and member of FINRA.
Value can be estimated from other transactions involving similar assets by examining metrics that capture the relative value of production and undeveloped reserves. The most common metrics are Dollars per Equivalent Barrel of Daily Production, ($/boe/d), and Dollars per Equivalent Barrel of Proven Reserves ($/Boe). A more precise estimate of market value can be determined from a reserve report. A common valuation metric for producing wells is PV10, projected cash flow discounted at a 10% annual rate. For proven undeveloped locations, most buyers apply discount rates between 15% and 25% to the projected cash flows, depending on uncertainty with respect to timing for drill-out and other factors.
Timing is one of the most important factors in achieving a successful sale. In additional to picking an optimal time with respect to economic and commodity price cycles, the desirability of a specific asset is dynamic and depends on the performance of nearby wells and recent transactions in the area. History illustrates that market conditions can change suddenly. The best strategy is to be opportunistic and execute a sale process without delay when the timing is right.
Non-operated Oil & Gas assets that could be cumbersome to evaluate or that include a mix of properties that are likely to appeal to different types of buyers may need to be split into multiple packages to maximize value.
In a competitive process, having a reserve report can expand the universe of potential buyers. While a schedule of your ownership will be sufficient to generate an offer for buyers owning similar interests, other buyers will request an engineering reserve report that becomes the starting point for their analysis.
In preparation for a sale of non-operated interests, we recommend gathering the following key records:
Depending on asset category, buyers may include:
Your investment banker will manage the process, and your time commitment will be concentrated in the initial and final phases of the process. Initially, your assistance will be needed to gather documents and data needed to prepare marketing materials. While marketing prospects, your technical staff may deliver presentations to potential buyers. In the final phase, you or your land department will likely be working on the project daily while a purchase agreement is finalized, title is verified and defects are resolved or cured. At other times, you can expect one or two brief calls every week to keep you informed of developments.
Finding an experienced investment banker is an important first step. Your accountant or attorney would be a good source for recommendations. Interviewing several bankers is a good way to get educated on market conditions, valuation and other considerations relevant to your business.
Selling a business is a complex process with many issues arising that require experience to see it through to a successful closing. Therefore, your chance of success is far greater working with an experienced investment banker. If you have an interested buyer, this may be an ideal time to engage an investment banker to market the business in a competitive process where multiple buyers provide choices and give leverage in negotiations.
There are five primary factors to consider as you are thinking about timing a sale. Rarely do all these factors coincide, so they should be judged on a relative basis, and a good time to sell would be when the general momentum is favorable. The five items to consider include:
Quality companies with meaningful competitive advantages, strong market positions, solid growth prospects and good management are successfully sold in just about any market. Yet market conditions will impact valuation and the demand for acquisitions, so timing the sale improves the odds of a successful sale.
History illustrates that market conditions can change suddenly and deteriorate rapidly. The best strategy is to be opportunistic and execute a sale process without delay when the timing is right.
Ultimately, price discovery is accomplished through a well-executed sales process involving multiple buyers. Two valuation approaches are widely used by buyers: The “Market Approach” and the “Income Approach.” The Market Approach estimates the value of a business from historical financial results by multiplying a financial result such as EBITDA (earnings before interest, taxes, depreciation and amortization) by a multiple determined from transactions targeting other companies in the same or similar industries. Alternatively, the “Income Approach,” values a business from its cash flow projections using a present value calculation where projected cash flows are summed, applying a discount to each year that gets larger with time.
Valuation based on EBITDA multiples may have a significant disconnect from value implied by cash flow projections. The fact is that no two companies are exactly alike, and assigning a value based purely on EBITDA multiples of similar companies fails to capture the specific strengths and opportunities of a business. Accordingly, “selling the future” using a detailed forecast based on thoughtful, well-supported assumptions is an important component of a sale transaction process.
The competitiveness surrounding the selling process can have a significant impact on value. The true value of a business to a buyer is the present value of the anticipated cash flow under their control. Nevertheless, a buyer will rarely value a business on this basis unless their only alternative is losing the deal to another buyer.
Selling a business typically takes 4 to 8 months depending on the number of buyers and related circumstances. When time is of the essence, the process can be compressed; however, the downside of compressed processes is the likely exclusion of some potential buyers.
Reputable investment bankers are compensated with success fees and the seller has no obligation to pay a fee unless a transaction is completed. Success fees are paid in cash at closing out of proceeds, and should be a percentage of the total proceeds. Retainers are paid up-front and should be proportional to the complexity of the project but small relative to anticipated success fees.
Your investment banker will manage the process, and, as the business owner, your time commitment will be concentrated at the beginning and end of the process. Initial meetings (one or two days) will consist of a detailed review of your business, and provide the basis for the marketing strategy and information memorandum. Later in the process, you may need to host buyer visits, typically a few days. In the final phase, you will be in contact with your banker almost daily, while details are negotiated and agreements are finalized. At other times, you can expect to have one or two brief calls with your banker every week.
In most situations, it is preferable that customers and employees do not learn about a potential sale until a transaction is all but certain. Hence, it is advisable to take a “need to know” approach when sharing information about the potential sale with employees.
An experienced investment banker is always alert to potentially compromising situations and will work with you to protect confidentiality. Reputable bankers will not contact any potential buyer without your approval. In most situations, the initial calls will be made without identifying the seller and written summaries provided to potential buyers are carefully vetted to make sure they don’t contain information that would make is easy for a recipient to identify the seller. Before disclosing the identity of the seller, potential buyers are required to execute confidentiality agreements. Access to the most sensitive business data should be restricted to a select few potential buyers, and some information should only be provided to the ultimate buyer. Where heightened concern exists, it may be advisable to avoid certain potential buyers altogether, or wait until the very end of a process to contact them.
We believe that there are many compelling reasons to choose a registered broker dealer to represent you in your business sale:
Note – Big Sky Energy Advisors, LLC conducts all transactions involving securities through Big Sky Energy Capital, LLC, a registered broker dealer and member of FINRA.
We work on a contingent basis, meaning that our clients are under no obligation to pay us a success fee unless a transaction is closed. Our fee is typically comprised of two components:
Our senior professionals work on every aspect of your transaction from start to finish. The people you meet prior to engaging us will be the same people who will be working on your sale. We believe this is an advantage to our clients as many other firms delegate the majority of the work to junior professionals.
We believe that the probability of meeting your objectives for selling your business is far greater if you have the full commitment from your investment banker. An exclusive representation agreement is the only arrangement that provides this type of commitment, and it is the only way that we work. When you engage us to represent you, we enter into a formal letter agreement that provides for us to be your exclusive agent for a specified period of time. This agreement details the services that we will provide and how we are to be compensated upon the closing of the transaction.