P&A: Here and Now

There is one thing that few oil companies and investors have on their mind, that is fast approaching and will make a splash on almost every future deal valuation: Asset Retirement Obligation. To be more specific, P&A liabilities is what I mean by ARO. Little thought of this obligation has been put into this by investors because it was seen as a far and distance cost that barely made any impact on NAV models. This is not the case today, especially for wells drilled on federal acreage.

BLM offices take this obligation seriously because they don’t want to be the ones to front the cost of abandoning these wells. These large, near-term costs are something that oil producers begrudgingly pay. In order to assure that the BLM isn’t stuck brunting the cost in case of voluntary declaration of bankruptcy by the oil producers, they will certainly require higher levels of surety bond issuance in order to continue operations.

In a recent acquisition that I’ve analyzed, the PV0 was less than the PV15. Why? Because of P&A costs. The party that was selling this asset had severely mismanaged this asset, and had an immense inventory of wells ready for P&A. Obviously, they wanted to get rid of the asset, but who would want to take on such a large liability. We ended up proposing that the selling party literally give our firm the asset. We would ensure that the P&A’s would get done, and made sure the wells that were still producing could continue to cover the P&A costs while producing decent returns. Unfortunately the deal didn’t fall through, they didn’t take to kindly to us taking the asset from them for free, but it was the only way to justify taking such a legacy asset like this one.