Buying important assets may be made easier-and less expensive-by doing some proactive intelligence gathering and due diligence, says David Marcell, executive director, CIBC World Markets, Houston. Should your targeted company or assets need to be sold, you may be able to place a bid ahead of a public sale. "Look for any deviation from strategy," he told participants in the second annual A&D Strategies and Opportunities conference, hosted by Oil and Gas Investor and Wellspring Partners, in Dallas recently. And then watch for tactics that don't match that strategy. "Something that just doesn't feel right." Follow this with patience, patience, patience. "You understand your prey, and you're waiting for it to make a wrong move." Sources of public-company intelligence include analysis by Wall Street analysts and credit-rating agencies; company press releases, SEC filings and guidance on earnings-per-share and cash flow-per-share estimates; and industry contacts, including personnel within the target company's operations, the company's vendors, partners and competitors, and its chief financial and investor-relations officers. Look at production trends. Has the company's management overpromised and underdelivered? Marcell was with Union Pacific Resources in 1996 when its prolific Austin Chalk exploitation program was experiencing rapid production decline. To boost its production was one of the reasons UPR bid aggressively, but unsuccessfully, for Pennzoil. "We were trying to cover [it] up." Look at the company's core areas of exploration and operations, and then look at what percent of upcoming capex will be devoted to each. "Will the company be changing areas, or getting rid of areas?" Consider asset transitions, too, such as shifts in the company's percentage of proved developed producing, proved developed nonproducing and proved undeveloped reserves. Look for reserves-to-production ratio anomalies. Is reserve life very short or very long? "Someone is going to fix that somehow, some way." He also suggests looking at the demographics of management for sources of conflict. Are the managers in their 30s and 40s and the board members in their 70s? It may be that the board is looking to sell and reap the proceeds soon, while management could want to continue to grow the company. "And listen to the buzz-or lack of." Who's in favor lately and who's out? "It's easy to get into the penalty box. It's hard to get out." With all the data being gathered, prepare a baseline. And choose which assets and companies are most important. "You can't follow everyone." Some key multiples are long-term debt to capitalization, interest coverage, debt to EBITDA, debt to thousand cubic feet equivalent (Mcfe) of reserves, lease operating expenses per Mcfe, general and administrative expenses per Mcfe, finding costs, reserve replacement, and the reserves-to-production ratio. Be careful too to choose data carefully, so that it is consistent. "Garbage in, garbage out." Marcell offered Anadarko Petroleum Corp. as an example of a company that has been experiencing both overt and subtle transitions that may result in a sale. Many in the industry have been surprised; some are not. "Corporate A&D people all over the world have been looking at [Anadarko] very closely." Primarily driven by internal growth through exploration, Anadarko switched tacks in 2000 when it bought UPR and then Berkley Petroleum in 2001. In October 2001, it made an $827-million writedown. In January 2002, it made a $1.7-billion writedown. In August 2002, it sold $300 million of assets and then, in October, bought Howell Corp. Meanwhile, John Seitz was named chief executive officer and then resigned a year later. Last spring, the company reported a production decline. In August, it made its first layoffs in its history as an independent public company. "I had no idea," Marcell said of the transitions under way, "but I can see [now]." -Nissa Darbonne, Managing Editor