Since January 1, 2000, B&C has completed due diligence evaluations in more than 30 different
transactions with an aggregate transaction value in excess of $4 billion. The vast majority
of these engagements were for the acquiring companies or their lenders or equity investors.
One of the characteristics of our due diligence service that makes B&C the "go to" firm for this type evaluation is its comprehensiveness. Using a gas midstream example, our due diligence protocol can be pictured as a five-tined pitchfork that we use to get to the heart of the business and sift out any "deal-breakers."
Historical performance
We review, compile, and analyze the available data on asset and business performance, from both an operational and a financial perspective. This includes throughput volumes, product recoveries, fuel rates, operating expenses, margins, and capital expenditures, for example.
The objective is to determine (or ensure) that the pro forma economic forecasts are consistent with history. If history shows an annual average opex of $1 per unit of plant inlet but the forecast is 50¢, our client needs to know why.
Contracts
In gas processing, the revenue stream to the processor is determined by the processing agreements or gas purchase contracts with the producers of the gas. We review enough of the contracts to determine that the revenue parameters in the economic model are consistent with the actual contracts governing the commercial business. Fortunately, the "80/20" rule often applies: 20% of the contracts will account for 80% or more of the gross margin.
Physical Assets
The third "tine of the fork" is often the most appealing to our engineer side: a trip to the field to "kick the tires" and visit with the operators. The objectives are to determine the physical state of the facilities, the level of wear and tear, and the diligence of the owner’s maintenance effort. Are the plants and systems suited for the intentions of the buyer? Are there skeletons in the closet that could trigger unanticipated expenditures? Frequently, our site visits disclose unrealized opportunity and we are able to identify hidden upside for the potential buyer.
Competition
We also use the site visit to gather "on the ground" intelligence about the intensity of competition for available gas supplies in the area. This knowledge augments our other research into local area market conditions. Sizing up the competition is critical to developing a sense of the potential buyer’s likely ability to maintain and grow volumes and margins. It is also essential to evaluating the reasonableness of the buyer’s business plan, particularly if consolidation of operations and/or integration into existing assets is a major factor in that plan.
Economic Model
This is where the "rubber" of all the investigations and inquiry in the first four areas meets the "road" of cold, hard economics. It is essential for the buyer and its lenders and/or investors to have confidence in the pro forma cash flows on which the bid and the financing are based. The economic model must accurately incorporate the terms of the relevant commercial contracts and the demonstrated system performance. We will either audit the buyer’s model or develop a model based on one of our prototype models. A key part of the audit of an existing model is rigorous examination of the model’s mechanics, making sure that all of its parts derive from a common logical core. At the end of the day, the output of the model can make or break the deal. It must be robust and reliable.
While our evaluations are generally based on discounted cash flows, clients always want to know how the proposed acquisition price squares with the earnings multiples being paid in similar transactions. B&C maintains a database of transactions in the hydrocarbon processing sector spanning over many years to provide a standard of comparison and also to identify trends in multiples recently obtained. (See the Midstream Multiples chart.)
A broad range of skill sets and experience is required to perform this type of work thoroughly and efficiently under severe time pressures. In every case, the Senior Consultants of B&C bring to the table a unique blend of superior engineering ability, first-hand operations experience, well grounded business acumen, and an aptitude for working against hard deadlines. This combination is hard to find in today’s marketplace, but it is essential to effective due diligence.
