Question
April 13, 2005
Via Email
B. Michael Verne
Premerger Notification Office
Federal Trade Commission
600 Pennsylvania Ave., N.W.
Washington, D.C. 20580
Re: Transactions Involving Oil and Gas Properties
Dear Mr. Verne:
Asa follow-up to our telephone discussion on Tuesday April 5th, we wanted to putthe details of two proposed transactions involving oil and gas properties in aletter to you and confirm our understanding of the HSR analysis. The two transactions are related, involving the sameparties, and there is a good chance that the second transaction will occur amonth or two after the first transaction. However, the two transactions are notconditioned on one another and there is no guarantee that the secondtransaction will ever occur.
Atthe time of the first transaction, "Seller" will own all interests ina limited partnership (the "Limited Partnership") holding oil and gasproperties valued in excess of $1 billion (the "Properties"). Atclosing of the first transaction, "Buyer" will pay in excess of $500million to the Limited Partnership in exchange for a "variable undividedpercentage interest" (the "Production Payment") in oil and gasreserves underlying certain of the Properties. This Production Payment entitlesBuyer to cash payments from the Limited Partnership of the net profits (aftercosts) realized by the Limited Partnership as it sells the oil and gas that isproduced.
Althoughthis Production Payment is not made "in kind" (i.e. the LimitedPartnership does not give Buyer actual oil and gas for Buyer to sell but insteadpays Buyer cash proceeds from production sales by the Limited Partnership), theProduction Payment may be considered to be a real property interest under thelaws of some states. Buyer will not operate the wells at this point, thoughthere are restrictions on Seller's ability to operate the Properties (Sellergenerally must operate the Properties in accordance with Buyer's instructions).Buyer may become the operator at some later time under a contractualarrangement or, possibly, as operator of record.
Historically,the PNO has often treated acquisitions ofproductions payments like financing arrangements or collateralized loanssubject either to HSR statutory exemption (c)(1) (the"ordinary course of business" exemption) or (c)(2) (exemption for acquisitionsof obligations which are not voting securities). As I understand it, the PNO's position has not changed, and the acquisition of the ProductionPayment in this case would not be reportable.
Subsequentto the acquisition of the Production Payment, Buyer and Seller arecontemplating entering into an agreement for a second transaction. As notedabove, the first transaction is not conditioned on the parties signing anagreement for the second transaction, and there is some chance that the secondtransaction will never occur. In the second transaction Buyer would purchase95% of the common interest in the Limited Partnership from the Seller for morethan $50 million but less than $500 million and would become the partnership'smanaging general partner. Seller would retain the remaining partnershipinterests including certain preferred interests. Buyer would have the right toredeem Seller's partnership interests in seven and one-half years or upon theoccurrence of certain partnership contribution defaults or changes in law afterwhich it could terminate the Production Payment as holder of the interests onboth sides of the Production Payment transaction. Seller would also have theright to early redemption of its partnership interests if certain events beyondSeller's control materialize. At the time of the second transaction, the valueof the oil and gas properties held by the Limited Partnership would be lessthan $500 million because they are subject to the Production Paymentobligation.
Becausethe value of the oil and gas properties in the limited partnership will notexceed $500 million at the time of the second transaction, the 802.3 exemption(acquisitions of carbon based mineral reserves) and 802.4 exemption(acquisitions of voting securities of issuers or non-corporate interests inunincorporated entities holding certain assets the acquisition of which isexempt) apply, and no HSR filing will be required for the secondtransaction.
Wewould appreciate it if you could confirm this analysis and conclusions. Thankyou for your help on this matter.