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 Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions