– Agree. K Walsh concurs.
Monday, July 09, 2012 3:33 PM
Verne, B. Michael
oil & gas/unproductive real property exemptions
Thanksfor taking the time to discuss our exemption question this afternoon. As discussed,I'm writing to confirm the applicability of the unproductive real propertyexemption under the HSR Act to the transaction described below.
CompanyA proposes to purchase certain producing and non-producing oil and gas reservesassets (the "Assets") from Company B for approximately $635 million,subject to certain purchase price adjustments (the "Purchase"). TheAssets consist of (i) developed and producing oil and gas reserves, andassociated exploration and production assets related to such properties; (ii)non-producing oil and gas reserves at anticipated future drilling locations;and (iii) certain additional assets, including gathering pipelines. Certain ofthe non-producing oil and gas reserves may be adjacent to the developed andproducing oil and gas reserves. The non-producing oil and gas reserves areundeveloped and have produced no revenue to date.
Weunderstand that the PNO staff has articulated the following principles:
1. Reserves of oil and gas that are presently producing maybe included in the $500 million carbon based mineral reserves exemption under16 C.F.R. 802.3(a).
2. Reserves of oil and gas that have not generated revenuesin excess of$5 million during the 36 months preceding tile Purchase are exempt-with no dollar limit -as unproductive real property under 16 C.F.R. 802.2(c), and therefore do not count toward the $500 million carbon basedmineral reserves exemption limit in 802.3(a).
3. Non-producing oil and gas reserves are exempt -with nodollar limit -as unproductive real property even if they are adjacent toproducing reserves hat are also part of the Purchase, so long as the adjacentproducing reserves qualify for the carbon-based mineral reserves exemptionunder 16 C.F.R. 802.3(a).
4. Non-producing oil and gas reserves may be treatedseparately from producing oil and gas reserves that are located at differentdepths under a single tract of land. The producing oil and gas reserves undersuch tract will count towards the $500 million carbon-based mineral reservesexemption limit of 802.3(a), and tile non-producing reserves under such tractwill fall under tile unproductive real property exemption and have no dollarlimit.
Basedon these principles, we have determined the following:
1.The developed and producing oil and gas reserves, and the associatedexploration and production assets related to such properties, are valued atapproximately $290 million and are therefore exempt pursuant to 16 C.F.R. 802.3(a). In determining whether real property qualifies for exemption under 16C.F.R. 802.3(a), Company A may consider only the value of Company B's assetsthat are sold as part of the Purchase, and not the value of any of Company A'sexisting assets,
2,The non-producing oil and gas reserves are exempt pursuant to 16 C,F,R, 802.2(c), The exception to what constitutes unproductive real propertyarticulated in 16 C.F.R 802.2(c)(2)(iii) applies only where non-producingreal property is adjacent to non-exempt real property. Additionally,non-producing oil and gas reserves are treated separately from producing oiland gas reserves that are located at different depths under a single tract ofland. Thus, while certain of the non-producing oil and gas reservescontemplated in the Purchase may be adjacent to productive reserves or locatedunder the same tract of land at different depths relative to productivereserves, because those productive reserves are separately exempt pursuant to16 C.F.R. 802.3(a), the non-producing reserves remain exempt as unproductivereal property pursuant to 16 C.F.K 802.2(c).
3. The remaining assets, which include gatheringpipelines, do not fall under the exemptions in 16 C.F.R. 802.2(c) or 802.3, butare valued at substantially less than $68.2 million and therefore do not meetthe HSR Act's size-of-transaction test.
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Giventhe exemptions set forth in 16 C.F.R 802.3(a) and 802.2(c), we haveconcluded that Company A may acquire the Assets from Company B without filingnotification under the HSR Act. Please let us know at your earliest convenienceif you agree with our conclusions outlined above. Thanks very much.