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b. Acquisition Limitations
During this period, Mr. Billings formed an in-house
acquisition screening team consisting of himself, Mr. Wagner, Mr.
Reed, Mr. Miller, and Lee Van Ramshorst, a petroleum engineer.
Petitioner's management team adopted certain limitations for
screening and selecting acquisition targets. In particular,
petitioner was looking for companies with significant oil and gas
reserves. Further, petitioner sought both geographic and
geologic diversification. Petitioner wanted to (1) expand
outside of the Hugoton field into the Gulf Coast region, and (2)
broaden its production mix by acquiring more oil reserves. With
an initial line of credit in the amount of $25 million,
petitioner decided to target acquisitions in the range of $10 to
$25 million. Management decided to make smaller acquisitions in
order to spread the risk and avoid betting the entire company on
a single acquisition. Finally, petitioner hoped to gain, by way
of acquisition, access to otherwise unavailable proprietary
information, which is critical in the oil and gas exploration and
production business. Proprietary information, generally
available only to owners with a working interest in a field,
helps the owner/producer make decisions concerning whether to
pursue additional working interests or pull out of that field.
The use of reserve reports in connection with the purchase
and sale of oil and gas reserves is a common practice. A reserve
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