Question
July 13, 2005
Nancy M. Ovuka
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
7th & Pennsylvania Avenue, NW
Washington, DC 20580
Dear Nancy:
Iam writing to confirm my understanding of telephone conversations we had todayconcerning the potential reportability under the Hart- Scott-Rodino AntitrustImprovements Act of 1976, as amended ("HSRAct'), of a proposed transaction discussed below.
Proposed Transaction
Ourclient ("Company A") is engaged in oil and natural gas acquisition,exploitation, exploration and production activities. Company A proposes toacquire from a limited partnership ("Company B") assets consisting ofreal property interests in oil and gas properties located in Oklahoma (the"Oklahoma Properties") and Texas and New Mexico (the "Texas/NewMexico Properties"), associated exploration or production assets, andinterests in certain pipeline assets and a gas processing plant (collectively,the "Assets"). Each of the Oklahoma Properties and the Texas/NewMexico Properties has (i) proved developed producing reserves; (ii) proveddeveloped nonproducing reserves (which we understand from Company A havegenerated no revenue to date); and (iii) proved undeveloped reserves(which we understand from Company A are not producing and have generated norevenue to date). Company A intends to enter into two separate purchase andsale agreements with Company B, one for the acquisition of the OklahomaProperties and one for the acquisition of the Texas/New Mexico Properties.
Theaggregate purchase price for the Assets will be approximately $773 million. Thevalue of the interests in the developed and producing oil and gas properties,along with associated exploration or production assets relating to suchproperties does not exceed $500 million. The value of any interests inpipeline assets, the gas processing plant and any other assets other thanreserves of oil and natural gas, rights to reserves of oil and natural gas, andassociated exploration and production assets is less than $53.1 million.
Analysis and Conclusions
Youconfirmed our understanding that Company A's proposed acquisition of the Assetswould be exempt under the HSR Act. Specifically, based on ourconversations, you agreed as follows:
1.The proposed acquisition will fall under the unproductive real propertyexemption set forth in 16 C.F.R. 8.02.2(c) (the "Unproductive RealProperty Exemption") and the exemption concerning acquisitions ofcarbon-based mineral reserves set forth in 16 C.F.R. 8.02.3 (the"Oil and Gas Exemption").
2.To the extent that certain properties and reserves in portions of the OklahomaProperties and the Texas/New Mexico Properties have not yet generated anyrevenues, such properties and reserves (along with associated production andexploration assets) will be treated as falling under the Unproductive RealProperty Exemption regardless of dollar value, while those properties andreserves that are currently developed and producing will qualify for the Oiland Gas Exemption (assuming the value of the currently developed and producingreserves and associated exploration and production assets does not exceed $500million).
3.In applying the Unproductive Real Property Exemption to the Assets consistingof nonproducing properties and reserves, it is not necessary to determinewhether, for purposes of 16 C.F.R. 8.02.2(c)(2)(iii), such propertiesare or are not "adjacent to or used in conjunction with real property thatis not unproductive real property" as long as any other such adjacentproperties being acquired are otherwise exempt under the Oil and Gas Exemption.In other words, if nonproducing properties and reserves in the OklahomaProperties and the Texas/New Mexico Properties are adjacent to producingproperties and reserves that are part of the transaction but qualify for theOil and Gas Exemption, the nonproducing properties and reserves (developed orundeveloped) still qualify for the Unproductive Real Property Exemption.
4.In determining whether the transaction falls within the terms of the Oil andGas Exemption, Company A need only focus on the Assets of Company B beingacquired. In other words, the $500 million amount in the Oil and Gas Exemptionrelates only to the Assets of Company B and not to the existing assets ofCompany A, assuming Company A did not acquire its currently held assets fromCompany B within the previous 180 days as set forth under 16 C.F.R. 8.01.13(b).
5.To the extent the gas processing plant being acquired does not qualify as anassociated exploration or production asset, the location of the plant on oradjacent to oil and gas reserve properties being acquired does not effect theapplicability of the Unproductive Real Property Exemption or the Oil and GasExemption to the acquisition of those oil and gas properties and any associatedexploration and production assets.
6.On the basis of the foregoing, Company A may acquire the Assets without theneed to make an HSR filing assuming that as determined byCompany A, or its designee, in compliance with 16 C.F.R. 8.01.10 that (i)a portion of the Assets consists of interests in oil and gas properties (andassociated exploration or production assets) that have not generated anyrevenues and therefore fall within the Unproductive Real Property Exemption;(ii) another portion of the Assets consists of interests in developed andproducing oil and gas properties, as to which the 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 any otherportion of the Assets consists of direct or indirect interests of Company Bthat do not qualify for the Unproductive Real Property Exemption or the Oil andGas Exemption (e.g., interests in certain pipeline assets and a gasprocessing plant), such assets have a value that does not exceed $53.1 million.
Pleaselet me know as soon as possible if you disagree with any of the conclusionsdiscussed above, or if I have misunderstood any aspect of your advice. Thankyou for your assistance in this matter.