The Challenge
The portfolio of production and exploration assets had to be evaluated on an asset-by-asset basis because each production center had its own production forecast uncertainty that had to be aggregated to assess the current and future value of the portfolio. This assessment would form the base of the value, and therefore, the transaction price. Each of the approximately twenty-five exploration assets were scattered across six individual plays. This required a play-based approach that drew upon Dependency Theory. By focusing on common or shared risk elements, we found that the exploration opportunities could be dramatically reduced. All producing and non-producing assets were assessed across the full range of outcomes to allow for resolution of the downside potential, prioritize learning requirements, and illuminate risk mitigation actions.
Real-Time Negotiation Support
During the negotiation meetings, Decision Strategies organized and led the “hot room,” which was a secluded room not far from the negotiation room. Occasionally, one of the negotiators would take a short break to update the hot room team on the current elements under discussion and provide specific offers or demands that were being made by the seller’s team. Because we had a flexible stochastic model, we could provide the negotiator with near-instant assessments of potential pathways, highlighting value accretion/destruction as well as downside risk and mitigation opportunities. Understanding primary negotiation objectives as well as the degrees of freedom in fulfilling those objectives provided the negotiators with a distinct competitive advantage.
The negotiation process required the assessment of the full range of possible outcomes. This work was carried out from both the purchaser’s and the seller’s perspective to try to gain insight as to the degrees and avenues of objective fulfillment for both parties. It allowed for a pseudo-Game Theory approach that has stood the test of time.
The Solution
Ultimately, the purchase price became a combination of cash and work commitment, with the selling entity retaining a small overriding royalty.
The work allowed for a convincing argument that was able to significantly reduce the cash price and what ultimately became the primary avenue for value retention, as well as a reduced work commitment based on the dependent nature of the exploration projects.
At one point in the negotiation, the seller was adamant with regard to the upside potential of the exploration portfolio. Due to the shared risk of the individual opportunities, we recognized this potential to have less than a half of a percent probability of occurring. Because of this data, our advice to the negotiation team was to offer to preserve the upside potential for the seller while negotiating seller mitigation for the downside potential.
In the end, our client was able to negotiate the purchase of the producing assets and validly assess the exploration opportunities with a minimum expenditure of monetary resources and work commitment.
