Ryder Scott Company Petroleum Consultants December-February 1999, Vol. 1, No. 2, Story 2

Newsletter

Richoux stresses finding hidden value

Fred Richoux
Fred Richoux

Fred Richoux, manager of the Ryder Scott Calgary office, told attendees of an Oct. 20 Canadian Deal-Makers panel discussion that a second opinion improves the chances of uncovering the hidden upside in sales packages, especially in noncore properties.

Richoux made his remarks at the 1998 Canadian Deal-Makers Property & Prospect Exposition at the Calgary Convention Center, an annual event for sourcing potential acquisitions, divestitures and capital in the Canadian oil and gas industry. He was one of four members on the Third Party Engineering panel that commented on evaluation engineering and property trades.

Richoux said that a Ryder Scott team had recently found behind-pipe zones and proved undeveloped reserves that added several million dollars to a sales package evaluated by the Calgary office. "This made for a great rate of return on the cost of the study," he said.

Richoux cautioned, however, that sellers should not expect consultants to find hidden value every time. From the acquisition side, buyers often find it in their interest to discredit the engineering report in hopes of lowering the price.

"I had a client tell me once that he knew my estimate was too low because he paid more than that for the property," he said. "He should have hired us before he bought it."

Richoux added, "We have one answer for a given well or field regardless of the end use of the estimate and our fee is not contingent on the magnitude of the answer. We call it like we see it."

Using an independent engineer also assures that the reserves being purchased are bookable, he remarked, because engineering firms typically work within Policy 2–B (Canada) or U.S. Securities and Exchange Commission guidelines. That means that proved reserves in a sales package are also proved in a securities filing.

"This is very important for a publicly traded company that needs to show value on the books for money spent," said Richoux.

Other benefits to the seller mentioned by Richoux include the following:

Report is in a usable format.
Use of a consultant frees up staff to carry out core responsibilities.
Knowledgeable buyers and their financial backers trust a report from a recognized consultant. A consultant may have prior knowledge of the same or analogous properties. Sharing that insight benefits a minor interest holder.
Using a consultant keeps a proposed divestiture confidential from seller’s staff.

Other benefits to the buyer include the following:

A third-party report helps alleviate buyers’ fears that marketed reserves are inflated.
An in-place, current report enables a buyer to move faster to meet lending requirements. Deals are often killed during the time it takes to scramble to get a report in a very short time.

Richoux discussed other benefits to both buyers and sellers and provided tips on how to work with a consulting firm. For a copy of Richoux’s presentation, contact him at 403-262-2799 or at his e-mail address, fpr@ryders-calgary.com.

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