THE JOINT OPERATING AGREEMENT AND THE DUE DILIGENCE PROCESS. Nancy Kerby & Christine Kenworthy Principals

Transcription

1 THE JOINT OPERATING AGREEMENT AND THE DUE DILIGENCE PROCESS Nancy Kerby & Christine Kenworthy Principals

2 LAND/A&D SPECIALISTS

3 TFV Consulting Services Terra Firma provides contract services to energy companies Clients are companies of all sizes Work for land, business development, land administration and sometimes accounting departments Projects can be transactions, special projects, data clean-ups Teams are multi-discipline

4 What is an LOI? Letter of Intent A document outlining an agreement between two or more parties before an agreement is finalized Will include general description of lands and properties but not detailed exhibits Allows parties to move forward to a PSA Services its useful life after a PSA is finalized

5 What is a PSA? The Purchase and Sale Agreement is the contract that governs the Buyer and the Seller during a transaction Not placed of public record Frequently referred to in recorded Conveyances Assignments and Deeds placed in county records at conclusion of transaction Traditionally, in place before due diligence begins

6 Overview of Due Diligence Definition: The process of determining that the Seller owns what they have represented they own. Goal: The goal is to make sure that the Buyer is getting what it pays for and isn t strapped with obligations that haven t been represented. What is reviewed? Who does it? How long does it take?

7 TABLE OF CONTENTS Introduction 2 The Essence of a Contract 6 1 Six Components of a Contract 7 2. The Rules for Contract Interpretation 11 The Seismic Phase The Seismic Option Agreement 27 The Development Phase The Confidentiality Agreement The Joint Venture Agreement Letter Agreements The Oil and Gas Lease The Area of Mutual Interest Agreement The Farmout Production payment 79 The Drilling Phase Surface Contracts 89 Joint Operating Agreement 101 Unit Operating Agreements 153

8 ACQUISITION

9 JOA & The A&D Due Diligence Process Review JOA for Every Well Being Sold Certain Provisions Pertaining to A&D Current Parties to JOA Contract Area/Depth Restrictions Memorandums of JOA

10 Memorandum of JOA Since Joint Operating Agreements don t get placed of record, Memorandums can be filed instead Provides public notice-helps with title chain Identifies the responsible parties Identifies the well, unit or contract area Protects parties to JOA in case of bankruptcy of one of the JOA parties

11 Transferability of Interests Article VIII. D. - Maintenance of Uniform Interest Preferential Right to Purchase Consents to Assign Election Periods Consents & Pref Rights Successor Oper Elections/Change of Oper Provisions

12 Article VIII. D. - Maintenance of Uniform Interest (pages ) Purpose is to maintain uniformity of ownership in the Contract Area and to reduce the administrative burden to the Operator of the Contract Area Limitations on what portion of interest(s) can be assigned Limitations on how many owners you can assign to Violations of this provision do occur and can cause title complications and issues, particularly during a sale

13 Article VIII. D. - Maintenance of Uniform Interest Which of the following would be a violation of this provision (refer to diagram page 108): Sunrise Oil & Gas sells 50% of its interest in the W/2 of the Contract Area to Buyer s Group Inc Windjammer Petroleum sells 25% of its interest in the SW/4 NE/4 of the Contract Area Venture Oil & Gas sells 100% of its interest in Tract 2 save and except for its interest in the CA #1 wellbore located on the Contract Area Horizon sells 50% of its interest in equal shares to Bell Co, ABZ Company, Smith Oil, R. B. Jones and R. B. Jones Jr. who were individual investors in the W/2 SE/4 of the Contract Area

14 Article VIII. D. - Maintenance Violations: of Uniform Interest Windjammer Petroleum sells 25% of its interest in the SW/4 NE/4 of the Contract Area Venture Oil & Gas sells 100% of its interest in Tract 2 save and except for its interest in the CA #1 wellbore located on the Contract Area Horizon sells 50% of its interest in equal shares to Bell Co, ABZ Company, Smith Oil, R. B. Jones and R. B. Jones Jr. who were individual investors in the W/2 SW/4 of the Contract Area

15 Non-Consent Issues Contract Workbook addresses Non- Consent penalties (pages ) Article VI Drilling and Development

16 After Payout Interests Payout of Non-Consenting Interests or Contractual Back-ins After Payout Penalties and Payout are defined in the governing agreements frequently related to Non-consenting Interests in the JOA Are Tracked by Accounting APO Interests are Often Not Represented by Sellers How do they get lost Why does this matter?

17 Sample Well List provided by Sunrise to Buyer API Number COMPANY LEASE NUMBER RSV CAT LEASE AREA FIELD WI BPO RI BPO WI APO RI APO PDP CARTER 25 WILCOX BLANCO PDP CARTER AA 01 WILCOX BLANCO PDP CARTER AA 12 WILCOX BLANCO PDP CARTER AB 03 WILCOX BLANCO PDP CARTER AB 07 WILCOX BLANCO PDP CARTER AB 09 WILCOX BLANCO PDP CARTER AB 16 WILCOX BLANCO PDP CARTER AB 19 WILCOX BLANCO PDP CARTER AB 20 WILCOX BLANCO PDP CARTER AB 21 WILCOX BLANCO PDP CARTER AB 26 WILCOX BLANCO PDP PRICE, AO 01 WILCOX BLANCO PDP PRICE, AO 04 WILCOX BLANCO PDP PRICE, AO 05 WILCOX BLANCO PDP PRICE, LA EST 04 WILCOX BLANCO PDP LOVE, R 1 WILCOX BLANCO PDP LOVE, R 2 WILCOX BLANCO PDP LOVE, R 3 WILCOX BLANCO PRO LOVE, R 15 SWD XYZ RANCH SI YANCEY 005 XYZ RANCH TA YANCEY 023L XYZ RANCH TA YANCEY 025 SWD XYZ RANCH PRO YANCEY 119 XYZ RANCH

18 Other Ambiguities in the Well List API Number COMPANY RSV CAT LEASE AREA FIELD WI BPO RI BPO WI APO RI APO LEASE NUMBER PDP CARTER 25 WILCOX BLANCO PDP CARTER AA 01 WILCOX BLANCO PDP CARTER AA 12 WILCOX BLANCO PDP CARTER AB 03 WILCOX BLANCO PDP CARTER AB 07 WILCOX BLANCO PDP CARTER AB 09 WILCOX BLANCO PDP CARTER AB 16 WILCOX BLANCO PDP CARTER AB 19 WILCOX BLANCO PDP CARTER AB 20 WILCOX BLANCO PDP CARTER AB 21 WILCOX BLANCO PDP CARTER AB 26 WILCOX BLANCO PDP PRICE, AO 01 WILCOX BLANCO PDP PRICE, AO 04 WILCOX BLANCO PDP PRICE, AO 05 WILCOX BLANCO PDP PRICE, LA EST 04 WILCOX BLANCO PDP LOVE, R 1 WILCOX BLANCO PDP LOVE, R 2 WILCOX BLANCO PDP LOVE, R 3 WILCOX BLANCO PRO LOVE, R 15 SWD XYZ RANCH SI CARTER AB 4 XYZ RANCH TA YANCEY 023L XYZ RANCH TA YANCEY 025 SWD XYZ RANCH PRO YANCEY 119 XYZ RANCH

19 Preferential Rights Page 152 VIII. F. Preferential Right to Purchase Should any party desire to sell all or part of its interests under this agreement, or its rights and interests in the Contract Area, it shall promptly give written notice to the other parties, with full information concerning its proposed disposition the other parties shall then have an optional prior right, for a period of ten (10) days after the notice is delivered, to purchase for the stated considerations on the same terms and conditions the interest which the other party proposes to sell

20 Preferential Rights Election periods (for response to offers) vary Must review entire contract area ownership to determine if there are unusual ownership situations Violations of Maintenance of Uniform Interest Confirmation of Current Owners Confirmation of All Owner s Interests During a transaction, the timing of offering preferential rights is critical

21 Additional PRP Provision Language However, there shall be no preferential right to purchase in those cases where any party wishes to mortgage its interests, or to transfer title to its interests to its mortgagee in lieu of or pursuant to foreclosure of a mortgage of its interests, or to dispose of its interests by merger, reorganization, consolidation, or by sale of all or substantially all of its Oil and Gas assets to any party, or by transfer of its interests in a subsidiary or parent company or to a subsidiary of a parent company, or to any company in which such party owns a majority of the stock.

22 PRP Significance in Due Diligence Preferential rights can affect whether a transaction is successful or not if highvalue properties in a package have associated preferential rights, the Buyer may not be interested in the package if the preferential rights holders exercise

23 Original Interests of the Parties to the Contract Area Sunrise 50.00% Windjammer 12.5% Venture 12.5% Horizon 12.5% Monroe 12.5%

24 Preferential Rights Example 1 Windjammer sells its entire company to a third party for stock and $100,000,000. Sunrise, Venture, Horizon and Monroe wish to invoke their preferential right to purchase. What amounts will each of them pay to Windjammer?

25 Preferential Rights Example 2 Windjammer sells all of its interest in the Contract Area, along with other properties not part of the Contract Area, to XYZ Company. XYZ Company purchase price offer is $15,000,000 total with $5,000,000 allocated to the Contract Area. Sunrise wishes to invoke its preferential rights to purchase. Monroe, Horizon and Venture do not. What amount will the parties have to pay to Windjammer?

26 Preferential Rights Example 3 Windjammer sells all of its interest in the Contract Area, along with other properties not part of the Contract Area, to XYZ Company. XYZ Company purchase price offer is $15,000,000 total with $5,000,000 allocated to the Contract Area. All of the parties (Sunrise, Monroe, Horizon and Venture) wish to exercise their preferential right. What amount will each of the parties have to pay to Windjammer?

27 Original Interests of the Parties to the Contract Area Sunrise 50.00% Windjammer 12.5% Venture 12.5% Horizon 12.5% Monroe 12.5%

28 Calculations for Preferential Rights Example 3 ORIGINAL INT PRORATED INT ALLOC $ Sunrise 50.00% % $2,857,145 Venture 12.5% % $ 714,285 Horizon 12.5% % $ 714,285 Monroe 12.5% % $ 714,285 $5,000,000

29 Preferential Rights Example 4 Sunrise merges with Windjammer. Who should receive preferential rights offers?

30 Successor Operator Elections/ Change of Operator Provisions Agreements provide for selection of new operator Some older agreements require balloting

31 Consents and Notices Need to be identified in agreements immediately once properties for sale are identified Consents will most likely not be in joint operating agreements but frequently are in leases and in some other types of agreements Notice of sale is required under certain types of JOAs

32 OK WE NEED TO KEEP IN CLOSE COMMUNICATION MEETING IN PROGRESS

33 LAND/A&D SPECIALISTS