May 11, 2021
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When scoping for acquisitions, it’s not enough to examine the potential profit of an acquisition or investment opportunity. The role and importance of liabilities continue to grow in North America, both as a result of an increased focus on abandonment and reclamations by regulators and extra scrutiny on ESG strategies by investors. The potential liability of an asset must be known before a decision is made, as it can be the difference between a great or costly acquisition.
Companies looking at potential transactions and assessing assets need a trustworthy, independent tool to evaluate liabilities. Internal ARO calculations provided by sellers might not be reliable. Numbers once provided by the Alberta Energy Regulator (AER) are no longer publicly available. Preferably, evaluators need a way to calculate ARO before entering a data room, so they don’t waste time looking at an asset where the liability far outweighs the more immediate profitability.
The biggest challenge in incorporating ARO into your A&D scoping process is the availability of data. In the past, producers could rely on LLR data provided by the AER to give them a rough estimate of liability. While the LLR calculation was often an incomplete look at the liability picture, some found it a useful metric for over-the-fence scoping. However, after the AER stopped publicly providing that info in 2020, evaluators needed to find a different source of ARO data for their A&D scoping.
For publicly listed assets, Asset Retirement figures or LLR figures are sometimes still provided by the seller. If a buyer is sticking with publicly available opportunities, this may be sufficient — provided the asset isn’t heavily influenced by factors such as working interest, sour gas, date of abandonment, discounting, or pipelines. Click here to read a case study comparing the difference between LLR and ARO in liability calculations. The values provided in a listing might also prove unreliable, as a producer’s future liability evaluation is based on their own assumptions and cost model.
However, if the potential opportunity is unlisted, or is affected by one of the many factors that LLR fails to capture, the evaluator is going to need more liability data. This could involve digging into the data on each potential opportunity and running it through the same ARO calculation process they use for their internal ARO reporting, but ideally, you’d like quick glance information for evaluating properties pre-data room.
Given both the importance of ARO calculations in A&D scoping and the challenges involved in getting that data on third parties, it’s essential that those performing evaluations have a process in place to incorporate liability data pre and post data room.
AssetBook ARO Manager by XI Technologies is one such process, providing ARO liability estimates for every company, well, facility, and pipeline in the WCSB. Our web-based software will help you reduce time spent on A&D evaluations, easily assess liability data, and accurately compare deals.
If you’d like to get a more detailed look on how ARO Manager can help you best incorporate ARO into your A&D scoping, contact us today to book a demo.