Mergers, Acquisitions & Divestitures

Using the SEC’s “Reliable Technology” concept for Buy/Sell Transactions

Author: Rod Sidle, Research Fellow, Aucerna and SPE Distinguished Lecturer

Download the full paper 


The goal of this blog post is to examine what the concept of a “Reliable Technology” (as defined in the U.S. Securities and Exchange Commission’s “Modernized” regulations) means for those in the Acquisition & Divestiture world and how they can use it. While the term, Reliable Technology, was introduced for SEC oil and gas reserves estimation and disclosures, the concept behind it has broad applicability wherever oil and gas evaluations are done. Certainly, the impact of such uncertainties is very high when oil and gas assets are being bought and sold.

(NOTE: the opinions expressed in the blog do not represent legal or regulatory guidance but are intended for information and to stimulate discussion only.)

Making your acquisitions visible

When a buyer makes an acquisition, they may have what I call “the missing barrels”. They’ve bought the property with barrels of undeveloped resources; they’re sure that they are there, but nobody else “sees” them. Not the banks they’re trying to get a loan from based on the acquisition, not their reserves consultant or independent evaluator, not the SEC and thus not their stockholders.

The buyer can use Reliable Technology to make those barrels visible so that there is a clear justification for why they have confidence that those barrels are actually there. Reliable Technology will help make the barrels seen to allow the buyer to take full credit for what they now own.

Sellers, on the other hand, want to be paid for what the opportunity is worth. Reliable Technology can help sellers to make that not-so-obvious value clear with good, hard science. This allows them to justify a higher asking price instead of just hoping to recoup extra value from speculation and potential upside.

Quantifying the value of reduced uncertainty

It takes work to qualify a Reliable Technology – data, staff time, analysis – and this means money. Buyers and Sellers need to justify this investment by showing the value created from this work.

So how can we quantify the value of using Reliable Technology to make acquisitions visible? The SPEE publishes an annual survey on elements of evaluations done by operators, banks, consultants, etc. Included are some very interesting data sets for how we quantify reduction in risks and the understanding of high confidence.

SPEE Reserve Adjustment Factors

The table shows the Reserve Adjustment Factors (RAFs) used to reduce the value of reserve potential for the level of uncertainty associated with that potential. The factors represent the percentage of value of full certainty, (e.g., 90 = 90% of full value). When there are high confidence reserves such as Proved Producing, the Adjustment Factor rates in the 80s and 90s. So this table can be used to get some numeric sense of just what the confidence levels are that people associate with volumes. Let’s take a closer look to see what the table tells us about the opportunity for Reliable Technology.

Reserve Categorization describes the level of uncertainty in the ultimate production of volumes. These uncertainties include:

  • Are the volumes actually there?
  • And if they are there, can they be recovered?

Now let’s look at Proved Undeveloped, Probable Undeveloped, Possible Undeveloped, and Contingent Undeveloped and compare how the marketplace has, in this survey, defined their level of discounting for those different levels of uncertainty in potential reserves. The higher categories are for volumes with lower uncertainty (i.e., higher confidence of production).

There are technologies that help identify volumes for which there is a lower uncertainty and thus higher confidence that they can be developed, which would move them into the lower uncertainty categories. Doing this helps make the business case for reliable technology.

SPEE General Reserve Adjustment Factors

What does the table show? Looking at the mean for Proved Undeveloped, this reserve adjustment factor is around 60%, which means that for things defined as a PUD, buyers are comfortable paying, on average, 60% of its calculated, full-certainty value. For Probable, Possible, and Contingent, the mean price gets lower, allowing us to quantify the opportunity. As the chart shows, using technology to move something from a Probable, or a 50/50 chance of success, to a Proved, doubles the value.

Without doing anything to the reserves themselves, having technologies that provide high confidence in reserves will lead buyers to pay twice as much as they would for lower confidence reserves. This holds true with increasing confidence in what would otherwise be Possible reserves as well.

The SPEE RAF data suggests some producers may be doing this right now. Producers who use Reliable Technology can put more value on a volume than other buyers or sellers. Looking at the range of adjustment factors used in the table, going from P90 to P10, shows the broad range that is used.

Looking at the P10 of Probable Undeveloped — the high end of what someone did pay was half of the value. Compare that to the mean or P50 of the Proved Undeveloped, where most would pay around 50-60% for a PUD. This suggests there are buyers who have enough confidence in Probable Undeveloped Reserves that they will pay for them as if they are PUDs. The same is true for the similar columns comparing Possible Undeveloped and Probable Undeveloped Reserves.

Some buyers have found how to be comfortable at the end of the RAF range – using values about the same as a higher confidence reserves category for their bids. They’ve found that the comfort they have with these technologies gives them the assurance they need to make winning bids. They have this comfort because they’re able to see more value using confidential data or analysis for assets they’re trying to buy than does their competition.

What to Do to Capture Value from a “Reliable Technology”

Seller’s perspective

For sellers, they own the property and thus have had the chance to look for opportunities and test the data to find where there could be high confidence methods of analysis that can be used. Sellers should build their documentation, use it with their reserves consultant when the reserves report is done, then use it in the data room so they can convince potential buyers of the opportunity. With this, all buyers have higher confidence (or at least may think they need to outbid those that do, as those who aren’t necessarily convinced, will need to bid with those that are to get the property). This enhances the seller’s ability to get a fair price for what they’ve done.

Buyer’s perceptive

For buyers, if they have an element of knowledge about an area in which they are already active from the development of a Reliable Technology, it gives them a competitive advantage for acquisitions within that area.

For example, think of a situation where a buyer develops a technology for identifying re-frac candidates in unconventional wells. It might be a combination of simulation, historical data, seismic — something that might allow the buyer to identify the potential. If they develop that technology as Reliable, then when others are selling a property and just hoping to get value for what the decline appears to be on the existing producing wells, that buyer can bid based on the additional opportunity that others aren’t seeing. Reliable Technology can give buyers a built-in advantage to capture value at a lower cost.

Further, the demonstration of this Reliable Technology will impact the buyer’s ability to raise funding for the acquisition from the additional reserves that can now be seen by reserve consultants, banks, private investors or stock shareholders.

Conclusion

While the term “Reliable Technology” came from SEC Reserve Reporting regulations, the concept behind it has much broader implications than just regulatory disclosures. A methodical evaluation and documentation of a “Reliable Technology” provides the high confidence in estimates of future oil and gas recoveries. In the world of acquisitions and divestitures, confidence in reserves directly relates to transaction values – giving the seller a better value and allowing the buyer to more fully justify the potential that was paid for.

Download the full paper: Using the SEC's "Reliable Technology concept for Buy/Sell Transactions

Author: Rod Sidle, Research Fellow, Aucerna and SPE Distinguished Lecturer

About the Author

Rod SidleRod Sidle is a recognized expert in reservoir engineering and economics with a focus on reserves estimation - a reputation he has earned through 35+ years’ experience primarily with Shell Oil Company and Royal Dutch Shell, and also as an independent consultant to oil and gas clients. Rod is an active member of SPE who has previously served as SPE Distinguished Lecturer and member of the Oil and Gas Reserves Committee. He is also a member of SPEE, where he is currently the Chair of the Reserves Definition Committee, and a former member of the Board of Directors. Since retiring from Shell, Rod has worked as a lecturer on project evaluation at Texas A&M University in the Petroleum Engineering Department, a Director of Reserves at Occidental Oil and Gas Corporation, and the Reserves Manager for Sheridan Production Company, a privately funded oil and gas producer.