The expansion of and changes within the oil and natural gas production and other extraction activities in the past few years has brought increased attention to the industry from states, regulators, and investors. One significant sign of the resurgence of the energy industry has been the increase in merger and acquisition (“M&A”) activity and rebalancing and swapping of production assets – especially among smaller and mid-sized producers within the oil and gas sector. Unfortunately, however sophisticated parties to these transactions may be, acquirers often inadvertently inherit an unknown liability from the companies that can remain hidden until long after the deal closes.
This potential unknown liability is unclaimed property (“UP”), and it could lead to a company not getting the value it paid for the acquisition, increasing audit risk, and potential interest and penalty assessments.
All companies generate UP, which arises when a liability of the company isn’t resolved in a timely manner. Typical examples include an uncashed check to a vendor/employee, an unresolved customer credit balance or, in the case of energy companies, revenue suspense account balances. Standard due diligence procedures relating to UP are often inadequate to assess a target’s actual UP liabilities. This is especially true for companies with extraction operations, where the review of the target’s level of compliance requires additional scrutiny given the industry’s complex UP reporting responsibilities, including current pay requirements specific to revenue suspense and uncashed royalty checks.
Although individual items or property types may be immaterial, collective amounts over many years of non-compliance can easily reach into the millions of dollars of potential exposure. Given the increased attention that the changes/contraction within the industry from state UP administrators and third-party auditors, it is extremely important for energy companies to make sure that they have effective due diligence process to determine whether a target company may have UP liabilities that will be assumed by the acquirer, and if so, the extent of such liabilities.
Our team can assist energy companies throughout the M&A process, from UP due diligence on targets, assessing and resolving liabilities that may have already been acquired, or even transitioning into ongoing UP compliance. Whether determining the applicability of current-pay provisions, sifting through the issues affecting the jurisdiction to which property may be reportable, or addressing royalty-interest splits across many successive generations of heirs, we know how to assist energy companies in all areas relating to UP.
Our team is comprised of a national group of professionals with diverse backgrounds, including industry and government, with several members of our team gaining notoriety through their published articles and speaking engagements, as well as through their participation in education seminars with organizations such as the Petroleum Accountants Society. Our UP professionals have assisted many buyers, sellers and their advisors in assessing the UP risks associated with their M&A transactions, and is available to assist energy companies with all UP matters relating to acquisitions, mergers, or divestitures, with experience gained from years of assisting numerous companies, private equity firms, and their legal counsel with these transactions. We encourage you to contact one of our professionals to discuss any questions or concerns that you may have regarding UP.
The Unclaimed Property Leadership Team for the Energy Sector
Cathleen Bucholtz, CPA
Managing Director & National Practice Leader
Los Angeles, CA