Drilling and well services company due diligence

Due diligence is not about judging whether the company looks good. The task is to prove that what the seller described exists, belongs to the seller and will keep working after closing. In a drilling and well services company the proof falls into four groups: ownership of the rig and trucks, the standing of the people and permissions, the history recorded in job files, and the obligations left in the ground. Each group has its own documents and searches, and a finding in one can change how another is read. The sections below set out what to request, what a finding means and which findings can end a deal.

Start with the registries

Searches come before inspections because they can end the matter early. Ontario’s Access Now service allows a search of the Personal Property Security Registration system for a lien registered against personal property, and Alberta, British Columbia and Manitoba, for example, each keep a registry of their own. A buyer searches the company’s legal name and any former names and, where the registry allows a serial-number search (Alberta’s does for motor vehicles and trailers, for example), the serial numbers of the rig and each support truck, in every province where the equipment has been based. Ontario’s Personal Property Security Act defines equipment as goods that are not inventory or consumer goods, so a rig the company uses in its work, rather than holds for sale or lease, falls within it. Our answer on checking for liens walks through the steps.

A registration for a loan the seller never mentioned means the balance sheet is incomplete until the debt is explained. Two registrations over the same rig raise the question of which lender ranks first, which the priority rules of the governing provincial Act answer and a lawyer should read. A registration for a loan repaid long ago may be housekeeping, cured by a discharge before closing.

Inspect the rig as the person who will replace it

An independent inspection by someone who knows drilling rigs should be set beside the maintenance log, and the equipment list in the offer should be matched, serial number by serial number, to what is physically on the yard. A rig with no maintenance record is not necessarily a bad rig, but its condition is unknown, and an unknown condition can be addressed with a price adjustment or a holdback. Our answer on assessing equipment condition covers the general method. In Ontario, a CVOR abstract summarizes a carrier’s safety performance, including collisions, convictions and inspections, and a poor record is worth understanding before closing.

Licences and certifications: confirm them with the issuing body

Copies of certificates in a data room are only a starting point, so a buyer asks for every authorization the company works under and confirms the status of each with the authority that issued it. Treadstone Law’s guide to verifying licences before buying a regulated business, written for Ontario, describes three patterns found across regulated sectors: some licences can be formally transferred, some require the buyer to apply from scratch, and some are personal to an individual and cannot transfer at all. The diligence task is to establish which pattern governs the company’s well-work authorization and who the named individual is. If the answer is a person, the question becomes whether that person has signed an employment or transition agreement that outlasts closing. Where a fresh application is needed, its timetable becomes a closing condition.

What the job files show

A buyer asks for a sample of job files across several years, chosen by the buyer rather than the seller. A good file shows the contract, what was drilled, the yield and water-quality results recorded and the customer’s sign-off. Alongside the files comes a list of every callback, complaint, claim and dispute, with how each ended, and a few customers can be telephoned with the seller’s permission. Repeated complaints about yield or quality from one period can point to a crew, a rig or a method problem rather than bad luck in the ground. A court search for claims against the company tests the seller’s list against a source the seller does not control.

The wells left behind

The seller should list every abandoned well the company drilled or serviced that it knows of, with what was recorded about its condition and any decommissioning done. What the provincial rules require of the well’s owner, the contractor or both is a question for counsel and the provincial authority. The diligence task is to establish how many such wells exist and what the records say. The deal structure and the purchase agreement then decide who carries them. A buyer who wants protection can ask for an indemnity or a holdback, as our guide to escrow and holdbacks explains.

Findings that end deals

• A security registration the seller did not disclose: treat it as a live debt until a payout letter or discharge shows otherwise, and the price may need reworking.
• A certificate holder who will not stay and cannot be replaced: the company may be unable to do well work for the buyer on day one.
• A rig that fails inspection with no budget for repair: the buyer is paying for an asset that needs replacing.
• Open yield or water-quality disputes from several customers: the pattern matters more than any single claim.
• Revenue resting on one or two developers who will not confirm they will continue.