Due Diligence Presented By – Sharon Flanery

Objectives: I.Overview II.Title III.File Review IV.Miscellaneous

I. Overview “Such a measure of prudence … as is properly to be expected … ordinarily exercised … under the particular circumstances; not measured by any absolute standard, but depending on the relative facts of the special case” Black’s Law Dictionary

I. Overview: Why Assets are “Defective” Two Main Reasons: – Low Production – Old and Complicated Titles

I. Overview: Old and Complex Title The King of EnglandJames Swan

I. Overview: Title Defects Know APA definition – NRI or WI – Affect ability to drill – Acreage deficiencies – Pooling – Title Issues re marketability

Objectives: I.Overview II.Title III.File Review IV.Miscellaneous

They say they have an accurate property listing … They say they have maps … They say title is clean …. They say it won’t take long to run title … II. Title: Due Diligence

Find Title Opinions Leasehold chains / confirm ownership Curative issues Title: HBP

Find abstracts or title opinions Determine process for taking leases Leases may fall out because of a lack of title research in acquiring the lease II. Title: Undeveloped Leases

Find Title Opinions Title insurance II. Title: Surface & Fee Tracts

Mortgages held by O&G Owner – Subordination Prior O&G Leases – affidavit of non-production – release and surrender Gaps in the chain of title II. Title: Typical Defects & Curative

Missing estate records Outstanding working interest holders Missing documents Ineffective reservation Surface use restrictions Competing chains of title Lease not executed by all interest holders II. Title: Typical Defects & Curative

Objectives: I.Overview II.Title III.File Review IV.Miscellaneous

GOAL: any issue that may adversely affect ability to explore, drill, and produce in the Marcellus Shale III. File Review: HBP & Non-HBP

Leases, modifications, amendments, renewals, and other documents creating and defining the rights that make up the leasehold estates Copies of all unrecorded documents Landowner complaints, adverse claims, etc. Expiration date for Non-HBP III. File Review: HBP & Non-HBP

– Depth Restrictions – Pooling Clauses – Drilling Commitments/Pugh Clauses – Assignment restrictions – Pref Rights or ROFR – Material Restrictions (i.e., restrictions on well location, cooperation with other mineral owners, etc.) III. File Review: HBP & Non-HBP

Cross-reference wells to leases Royalty and Shut-In payments (12 months) - check copies or 1099s Verify against production DOI against NRI III. File Review: HBP Payments

Compare WI to JIB Decks Flat rate royalties – Issues with Minimum Royalty Acts in PA and WV III. File Review: HBP Payments

III. File Review: Non-HBP Payments Delay Rentals Bonuses Paid-Up or Promise to Pay? – Consideration issues – Closing Mechanics – Ratifications/Amendments/Acknowledgement of Payment

Permits Plats - confirm drilled on lease Declarations of Units Production data for last five years III. File Review: HBP Well Files

Consumer list – by well and lease Is it metered? Overburn policy? Other policies or agreements: safety precautions, safety concerns, releases, PSC or PUC issues? III. File Review: Free Gas Issues

What are You Looking For? – Adverse impact on ability to develop – Causes a lower NRI or lower WI – Reduces acreage – Find other big risks III. File Review: Contracts

List of wells & leases for each contract Farmouts/Farmins Operating Agreements Partnership or Investor Agreements Areas of Mutual Interest Drilling Commitments Seismic Agreements III. File Review: Contracts

Objectives: I.Overview II.Title III.File Review IV.Miscellaneous

Other Contracts Pipelines Coal Mining Lien and Litigation Searches Operations Issues Other DD Areas

Surface Use Agreements Water purchase/transportation agreements Water disposal agreements Water line easements/licenses Water withdrawal agreement Turn around agreements Tank site agreements IV. Misc.: Other Contracts

Easements/ROWs list by lease and well Gathering line lists Map of pipeline system Line lists referenced back to map and related easements List of easements that require ongoing payments or free gas IV. Misc.: Pipelines

Review pipeline documents against map for gaps in the line Review payment history Review for size restrictions, third party gas, assignment restrictions, vested in seller, etc. Meter list IV. Misc.: Pipelines

Stream Crossings Road Crossings Railroad Crossings Surface leases for drips, compressors, other facilities Confirm on map Review Agreements and confirm payments are current IV. Misc.: Pipelines

Look for mine plans – may lose ability to drill within the primary term or meet a drilling commitment Coal Owner Leases – May have restrictions on development e.g. lay 4 inch line only, pay to move line each time, no storage, no injection, etc. IV. Misc.: Coal Mining in the Area

Lien search in each county where property is located – seller or any entity in which seller has property vested Litigation search in each county where property is located UCC search in each seller’s state of formation IV. Misc.: Lien & Litigation Searches

Secretary of State search for good standing Certificate of existence Proper corporate documentation: articles, bylaws, operating agreements, minute books, resolutions, etc. IV. Misc.: Lien & Litigation Searches

Permits: coal or landowner objections Wellsite restoration issues Contractor list, contractor agreements Plugging list & schedule, orphan well list Production reports IV. Misc.: Operations Issues

Potential encroachments Third party drainage claims Coal, timber or other surface/mineral operations IV. Misc.: Operations Issues

Marketing Environmental Measurement Legal Insurance Financial IV. Misc.: Other DD

Data will be incomplete Decide what is important i.e. most risk Know definition of “defects” in APA Summarize often - status, issues, etc. Adjust DD as you progress Final Thoughts

Questions?