The slide in hydrocarbon pricing in the last nine months has forced buyers and sellers of oil and gas assets to reassess economic models and risk tolerance for acquisition and divestiture transactions. As hydrocarbon prices have dropped, buyers have generally gained the upper-hand in negotiating leverage.

With reduced revenues and margins, however, buyers have less room for error in valuing and absorbing the cost of liabilities, both anticipated and unanticipated, arising out of acquisitions. In addition to valuing asset risk, buyers must be much more wary of the increased counterparty risk of sellers. With reductions in revenues, borrowing bases, and reduced potential future sources of capital all affecting sellers' access to capital, buyers are more at risk of being left with a seller that is insolvent or otherwise incapable of fulfilling its indemnity and other contractual obligations.

To mitigate the increased risk, buyers should increase their focus on identifying and quantifying risk while increasing protective measures that affect the periods before, during and after the sign and close of a transaction. These types of risks can be generally mitigated in three manners: expanding the scope of due diligence terms; expanding the scope of indemnity provided by sellers; and requiring post-closing escrows and other sources of funds against which buyers can seek recourse.