CMA CMA Due Diligence & Risk Assessment 2

Question 1

A CMA appraiser identifies a 'consent to assign' requirement in a lease during due diligence. Why is this significant?

Accepted Answer

The seller cannot transfer the lease without the lessor's approval, which could delay or prevent the transaction

Answer

A consent to assign clause requires the mineral owner's (lessor's) written approval before the lessee can transfer the lease, which is a critical deal risk if approval is withheld.

Question 2

Which environmental risk is unique to mineral operations and must be assessed during due diligence?

Accepted Answer

Legacy site contamination from prior operations, including abandoned well plugging liability

Answer

Abandoned or improperly plugged wells create significant environmental liability and cleanup costs that could fall on a new owner, making this a critical due diligence item.

Question 3

What does 'operator default risk' mean in the context of royalty interest due diligence?

Accepted Answer

The risk that the working interest operator becomes insolvent or fails to properly operate and pay royalties

Answer

Operator default risk is the possibility that the working interest owner/operator goes bankrupt or becomes financially distressed, disrupting production and royalty payments.

Question 4

In mineral risk assessment, what does 'basis risk' refer to in commodity pricing?

Accepted Answer

The differential between the local commodity price and the benchmark index price used in the lease royalty calculation

Answer

Basis risk is the price differential between the commodity price received at the wellhead or local market versus the benchmark price (e.g., Henry Hub for gas, WTI for oil) used in financial projections.

Question 5

Why is 'severance damage' an important consideration in mineral interest due diligence?

Accepted Answer

Extracting minerals can reduce the value of remaining surface or mineral property rights

Answer

When a portion of a mineral interest is sold, the remaining interest may suffer severance damages if the partial conveyance reduces its value or utility.

(CMA) Certified Minerals Appraiser Practice Test

(CMA) Certified Minerals Appraiser Practice Test

CMA CMA Due Diligence & Risk Assessment 2