Question
May 26, 2004
Mr.Michael Verne
Premerger Notification Office
Bureau of Competition
Room 303
Federal Trade Commission
6th Streetand Pennsylvania Avenue, N.W.
Washington.D.C. 29580
DearMr. Verne:
This correspondence is afollow-up to our conversation of May 25, 2004 concerning a proposed transaction.
The factual circumstancesdescribed were as follows. Company A and Company H each currently hold a 50percent membership in a limited liability company ("Company C") whichis engaged in oil and gas exploration and development activities. Company A nowintends to acquire Company B's 50 percent interest in Company C, a transactionwhich it is understood will be viewed as the acquisition by Company A of all ofthe assets of Company C for HSR purposes. Company C's assets primarily consistof interests in oil and gas fields in states in the Appalachian region (the"Fields"). At this point in time there are approximately 9,200 wellsproducing in the Fields.
The focus of my inquirywas whether Company A's acquisition of Company C would fall under exemptionssuch as the unproductive real property exemption set forth in 16 CFR802.2(c) (the "Unproductive Real Property Exemption") andthe exemption concerning acquisitions of carbon-based mineral reserves set,forth in 16 CFR 802.3 (the "Oil and Gas Exemption").
Myunderstanding from our discussion is as follows:
1. To the extent that certain properties and reserves inportions of the Fields have not yet generated any revenues, such properties andreserves will be treated as falling under the Unproductive Real PropertyExemption, while those properties and reserves which are currently developedand producing will qualify for the Oil and Gas Exemption (assuming the latter'saggregate value is under $500 million).
2. In applying the Unproductive Real Property Exemption toCompany C's interests in the non-producing properties in the Fields, it is -notnecessary to determine whether, for purposes of 16 CFR 802.2(c)(2)(iii),such properties are or are not "adjacent to or used in conjunction withreal property that is not unproductive real property" as long as any othersuch adjacent properties are otherwise exempt under the Oil and Gas Exemption.That is, if certain unproductive real properties in the Fields are adjacent toproductive real properties in the Fields which are part of the transaction butqualify for the Oil and Gas Exemption, the unproductive real properties stillqualify for the Unproductive Real Property Exemption.
3. In determining whether the transaction falls within theterms of the Oil and Gas Exemption, Company A need focus only on Company C'sassets. In other words, the $500 million figure in the Oil and Gas Exemptionrelates only to the target company (Company C) and not to the existing assetsof Company A and Company B.
4. On the basis of the foregoing, Company A may acquire alland hold all of the membership interests in Company C without the need to makean HSR filing if it is determined by Company A, or its designee, in compliancewith the HSR regulations at 16 CFR 801.10, that: (i) a portion ofCompany C's assets consists of ownership interests in oil and gas propertieswhich have not yet generated any revenues and therefore fall within theUnproductive Real Property Exemption; (ii) another major portion of Company C'sassets consists of ownership interests in developed and producing oil and gasproperties, as to which the fair market value of the properties, reserves,rights and associated exploration or production assets relating to suchproperties does not exceed $500 million; and (iii) to the extent that there areany remaining direct or indirect assets of Company C which do not qualify asexempt assets under the HSR regulations, such remaining assets have a fairmarket value of less than $50 million.
Please contact me as soon aspossible at (redacted) if you should disagree with any of the views expressedabove.