Speaking with a mentor about this article, he was concerned about the relevance. “Josh,” he said to me, “everything in the market right now is overpriced! Why do you want to write an article about under valuation?”
“Because,” I responded, “over pricing is what the current market is giving as feedback. But in truth, the absence of value is the core issue.”
So how can we avoid under valuation? I have identified three strategy-enhancing options that can be used, once your organization chooses to divest an asset.
The “Black & Gold Rule”
The first strategy follows the Golden Rule. Hands down, following this one rule is the easiest way to increase the value of your asset. Technically, it’s not the Golden Rule, it’s more like the Black & Gold Rule – the oilfield version of “treat others the way you would want to be treated.”
Build your divestiture package exactly the way you would want to acquire a package.
Data. Data. And More Data.
Data is essential. Include complete logs, geology, maps; anything that you would want to see. The more complete the data, the more value that is allocated to the package. But, beware, data can be a monstrous beast! Email transfers from computer to computer, then to phone, followed by a buzzing or beeping in our front pockets.
Logs are not designed to be viewed on a six-inch iPhone screen while in the field. Let’s be honest, those logs aren’t meant to be viewed on any screen. It’s always better to explain the data than to hope the data is understood without your input.
Avoiding under valuation requires communication. If your historical costs are elevated because the price per barrel was elevated, communicate that. Identify cost savings in operational expenses that can transfer when the asset does. When you market your asset, being easy to work with provides a significant time- saving advantage and increases the total value of the purchase to a buyer.
Explanations, accounting clarification, leasehold answers; each of these data pieces increases the value of the asset.
The idea behind a divestment strategy is expedited capital acquisition. What better way to gain capital than by providing information about other good wells or large companies in the area? While providing a comparable company or well analysis is good, it rarely generates the “expedited” response you hope for.
A specific “Gangbuster” well is great to show potential for an area. However, explaining why this hidden gem is available provides clear value to your buyer. Companies are clawing for great, available properties. The current market is not only filled with these companies, but many have excellent acquisition budgets. It truly is a seller’s market that you can be a part of by avoiding these under valuation pitfalls.
As Dr. Deming once said, “In God we trust, all others bring data.”