Purchase Price Allocations in Upstream Energy Deals: Tax Considerations From NAPE 2026 | Podcast

In this episode of Weaver: Beyond the Numbers, Jon Roberts and Ashley Werner discuss how purchase price allocations affect upstream energy transactions. They break down the tax implications of proved developed producing (PDP) and proved undeveloped (PUD) reserves, with a focus on managing recapture related to intangible drilling costs, depletion and depreciation. They also address how equipment is valued in acquisitions and exits and why a well‑by‑well approach can help limit unexpected tax exposure.

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Detailed Description of Purchase Price Allocations in Upstream Energy Deals: Tax Considerations From NAPE 2026

00:00:00
Ashley: Hi, I’m Ashley Werner, joined by Jon Roberts, partner-in-charge of energy.

We’re at NAPE today talking about purchase price allocations.

00:00:07
Jon: Fun stuff.

00:00:08
Ashley: These upstream deals usually include PDP (proved developed producing) and PUD (proved undeveloped). What does that mean for tax?

00:00:14
Jon: With the acronyms — proved developed producing and proved undeveloped.

A lot of times, you’re going to look to — that’s really what the companies are buying. They’re buying reserves.

00:00:24
Jon: When you look from a recapture tax perspective, you’re really trying to push more value to your PUDs that have never been developed because you’ve spent the money developing your PDPs.

00:00:33
Jon: You’ve got a huge balance sitting out there. We allocate values to PUDs. That’s going to be — assuming you’ve held it for a year and a day — all long-term capital gain.

So long-term capital gain, Section 1231 gain, that’s really what we’re always trying to get to with purchase price allocations. There’s a difference between a 37% tax rate and a 20% tax rate. When you see PUDs versus PDPs, the goal is always going to be to add value to avoid recapture when possible in these.

00:00:57
Ashley: Well, you’re throwing around recapture. Can you elaborate on that? What are we doing with recapture?

00:01:03
Jon: Recapture becomes more of a four-letter word on these deals. The goal of any type of purchase price allocation when it comes to an upstream deal is avoiding recapture.

The recapture is on your IDC (intangible drilling costs), depletion and depreciation. You’re getting an ordinary deduction for those upfront.

00:01:18
Jon: When you sell those, those have to be recaptured. To the extent you have gain on the property, those recapture items that you got deductions for at the beginning eventually get recaptured as ordinary income.

To the extent you have gain on the property, you have to look at the recapture. We call these “land mines of recapture.” The goal is to always allocate value as reasonably as possible to properties that don’t have big land mines or recapture involved.

00:01:43
Ashley: And what about equipment? Do we have to ascribe any value there?

00:01:46
Jon: We’ve seen, in the very beginning, the companies are really buying reserves. They’re buying the oil in the ground, the gas in the ground. They’re not typically putting a lot of value on 15- or 20-year-old pump jacks sitting out in West Texas.

Now, there’s certainly value there. You kind of talk out of both sides of your mouth. When you’re acquiring the deal, you want a lot of value to the equipment because you get that depreciation, now bonus depreciation, in year one.

00:02:09
Jon: When you’re selling, I think we’re talking more on the sell side, you have to take a reasonable approach. If you put $1 million of equipment in the field last year, there’s obviously still some value there.

If it’s 20 years old, there’s probably a little bit less value. You try to be as reasonable as you can with a lot of that.

00:02:26
Jon: And then, at least the way that we’ve always done things at Weaver, our approach is to report everything well by well. And this isn’t exactly equipment — this is more back to the recapture landmine. You try to report everything well by well.

00:02:40
Jon: When you’re doing these recapture analyses, if you’re putting it in one bucket by field or by lease, you can end up with these pretty big landmine recapture buckets.

So all of the pain and grief we go through year over year asking for LOS (lease operating statement) and then detail well by well.

00:02:55
Jon:  When you have an exit event, a PSA (purchase and sale agreement) or a PPA (purchase price allocation), that’s really when we get the benefit of doing all of that grunt work over the five years to do well by well because you can look at it property by property and should shove value from one well to the other well to the extent that it’s reasonable.

We’re not doing anything not above board.

00:03:13
Ashley: Of course.

00:03:14
Jon: Obviously, limiting recapture and allocating more value to the reserves away from equipment — because the equipment’s all going to be recaptured. A lot of that’s going to be what we do with the purchase price allocation.

00:03:26
Ashley: All right. What should companies do first from a tax perspective?

00:03:29
Jon: I would say they should call us first. But if you’ve got a PSA, a PPA or a deal like that, that’s when we do our best work.

We do great work on compliance, but the ability to jump in and then work on deals is what we do, and that’s why we’re here at NAPE.

00:03:47
Ashley: Okay. More from us at NAPE.

00:03:49
Jon: Thanks.

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