United States: Strategic Considerations For Bridging The Bid-Ask Spread In Upstream M&A During Oil Price Volatility

Oil prices fell on Monday after producers failed to reach agreement on a production cap that would have contracted supply. West Texas Intermediate (WTI) dropped almost 7 percent in early trading, and, although it pared back most of the early losses in response to news that production in Kuwait had more than halved due to a workers strike, it is evident that price volatility will continue to be an issue as the sector heads further into the second quarter. Such volatility has negatively impacted parties' ability to come to terms on valuation and will continue to be a hurdle as more and more cash-strapped companies explore options to sell asset packages.

While it is certainly a buyer's market, a bid-ask spread continues to be a sticking point in many transactions. Despite pressing circumstances, potential sellers looking to boost liquidity may hesitate to sell low and miss the increase in value associated with an eventual price rebound. Conversely, potential buyers remain cautious, or even pessimistic, on the timing and magnitude of the rebound. However, parties who do not see eye to eye can explore the following options to bridge the gap and facilitate a transaction:

  • Earnouts/Contingent Payments. In a contingent payment's simplest form, the parties could negotiate a contingent payment based on the increase in commodity prices post-closing. This can be an effective way to alleviate valuation concerns with respect to both buyers and sellers. By proposing a contingent payment, a prospective buyer can trade a portion of its short-term upside on an acquisition to address a seller's reluctance to sell at a possible price floor. The time horizon, target price and payment amount for the contingent payment can be tailored to provide a level of shared benefit if oil prices rise. However, parties should carefully consider the interplay of such post-closing payments with other aspects of the transaction. For example, a buyer should consider whether payments should be contingent upon key employees continuing to operate the assets.
  • Retaining a Minority Interest. Similar to an earnout/contingent payment, a seller retaining a minority position in the asset will be able to participate in the upside with respect to its retained share when prices rebound. For example, a seller may choose to retain a minority working interest or an overriding royalty interest in a lease. While a retained working interest allows a seller to retain a portion of the upside in a property, such working interest also requires an owner to bear a share of the cost for operating the property. Thus, a cash-strapped seller may not be inclined to retain a working interest in a property that is subject to significant short-term operating costs. Parties may attempt to address such price sensitivities by providing for a carried retained working interest whereby, after the sale, the buyer will bear the seller's share of costs on the properties for a period of time or up to a certain dollar amount. However, such "carry consideration" will affect a buyer's valuation, and any carry amount will likely lead to a decrease in the buyer's cash offer. Alternatively, a retained overriding royalty interest will allow a seller to maintain a cost-free share of revenues from the properties. However, there may be a significant tax impact if a seller retains an overriding royalty interest when selling an oil and gas lease, because the transaction would be treated as a lease, rather than a sale, for federal income tax purposes. As a result, the sale proceeds would be treated as ordinary income rather than capital gains. A seller should carefully consider the tax impact of any such transaction with counsel.
  • Escrow/Holdback. Although an escrow/holdback arrangement does not directly address the valuation issue, it is likely to facilitate a deal by giving the seller comfort with respect to the financial impact of certain risks identified during its diligence process. For example, the parties may deposit into an escrow account or hold back funds if there is ongoing material litigation with respect to the conveyed assets. Such funds would be released to the seller only if the issue were to be resolved in favor of the buyer post-closing.
  • Risk Shifting. Typically, the higher the risk, the lower the amount the buyer would be willing to pay for the subject assets. In this regard, motivated sellers seeking to maximize the sale price might consider covenants, reps and warranties, and indemnification provisions that favor the buyer in an effort to boost the sale price. This can prove to be a win-win, especially if the seller is confident about the quality of its internal recordkeeping and the quality of the conveyed assets. In some cases, a seller's need for immediate cash infusion may make a lengthy escrow holdback period unpalatable. For such parties, insurance policies for the seller's representations and warranties are an increasingly viable option in upstream asset sales. A buyer may purchase a policy (or request the seller to purchase a policy on the buyer's behalf) to protect the buyer against risk without the need for a holdback. Likewise, a seller may prefer to bear the cost of purchasing an insurance policy and get paid in full immediately, rather than put a portion of its purchase price at risk for a period of time after the sale.

Parties exploring the above and other creative means to bridge the valuation gap will undoubtedly deviate from their tried-and-true forms. Despite exigent circumstances, both buyers and sellers must be mindful that hastily drafted ambiguous and inadequate language could potentially lead to future disputes and only exacerbate problems being faced by owners and operators in the current times. Careful discussion and drafting after consultation with accountants, legal counsel and financial advisors is therefore of paramount importance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.