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.
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