Tax Partnership Agreement (Optional)

Report
2012 AAPL ANNUAL MEETING SPONSORS
PLATINUM
GOLD
SILVER
BRONZE
SAN FRANCISCO SEMINAR
A wholly owned subsidiary of ExxonMobil
GOLF
Overview of
Trades:
58th Annual Meeting - San Francisco
June 13-16, 2012
Joint
Exploration
and
Joint Venture
Agreements
Presented by:
J. J. McAnelly
AAPL - Copyright © 2012. All Rights Reserved.
Overview of Trades:
Joint Exploration and Joint Venture Agreements
3
Who are the Players?
• The Capital Player
– National/multi-national or private equity
– Well funded
– Limited/shale or onshore domestic operating experience, but may
be used to operating
– Limited or no unconventional resource experience
– Latecomer to unconventional resource plays
• The Land/Expertise Player
–
–
–
–
–
U.S. Independents
Private equity/land acquisition ventures
Early entrants
Experienced/innovators
Can move quickly
4
Deal Drivers – Capital Players
• Long term development potential and resources
• Technical expertise
• Reserves diversity -- not Gulf of Mexico, Arctic, Oil
Sands, etc.
• Recognition of barriers to entry into unconventional
plays
• Deferred payment (carry)
• Favorable (for now) tax treatment
• Hedging
• Everybody else is doing it
5
Deal Drivers – Land/Expertise Player
• Capital – Unconventional plays are large and require
more wells than conventional plays to fully exploit
• Capital – CAPEX requirements are immediate – fast
lease expiration and largely undeveloped acreage
• Capital – Little or no midstream infrastructure
• Capital – Better valuations than banks or equity/debt
markets
• Capital – Monetization
• Capital – Lower finding costs
6
Result -- Oil & Gas Joint Venture
• Two or more owners pool capital, leases, technical
expertise, and management to develop a field
• Joint Ownership of Assets -- Not a separate entity
(other than, perhaps, for tax purposes or midstream
assets)
• Typically multi-well joint venture agreement
• Often a Carry Payment required of the entering party
• Generally entails Area of Mutual Interest or similar
arrangement that restricts ability of parties to compete
7
Typical Legal Structure
Parties
Capital Player
Land Player
PSA/APA
Joint
Development
Agreement
JOA
+
Third Parties
Tax
Partnership
JOA
Assets (leases, wells)
8
Typical Transaction Documents
•
•
•
•
•
•
•
•
Joint Development Agreement
Joint Operating Agreement (Optional)
Area of Mutual Interest Agreement (Optional)
Tax Partnership Agreement (Optional)
Purchase and Sale Agreement (Optional)
Midstream Agreement (Optional)
Gathering Agreement (Optional)
Secondment Agreement (Optional)
9
Top Ten Negotiated Issues/Potential Pitfalls
1. Failure to Know Your Counterparty or Its Goals
2. Deployment of Capital
3. Credit Support and Non-Performance Remedies
4. Control of Development
5. Midstream Issues
6. Secondment
7. Restrictions on Transfers/Exits
8. Tax Partnership
9. Operatorship
10. Other
10
1. Failure to Know Your Counterparty
• Counterparty Reputation in the Industry
• Buyer Goals: Multi-Nationals (NOCs) and Non-E&P Types
(Fortune 500 Companies/Hedge Funds/Private Equity)
• Long term investment/Quick deployment of capital
• Knowledge and Experience
• Diversification/Hedging/Investment Ops
• Entry into Resource Play
• Deferred Payment (carry)/Tax Benefits (IDCs)
• Seller Goals: Typically large independents or smaller land
acquisition companies
• Funding Source (avoids uncertain or expensive credit
markets)
• Solves lease expiry issues on large acreage positions
• Expand Non-OCS reserves (i.e. Post-Macondo effect)
11
2. Capital Deployment
•
•
•
•
•
•
Amount of carry
Term of carry
Pace of expenditure of carry
Unspent carry: use-or-pay vs. use-or-lose
Land Player's "skin-in-the-game"
Efficient/cost-effective deployment of capital
12
Competing Capital Deployment Goals
• Land Player Goals
• Conserve capital and slow-play of development (i.e. low
price environment and/or limited lease expiry issues)
• Expend carry on risky/unproven areas (flank or fringe
areas) or geologic formations (lease expiry issues, prove
reserves)
• Expend carry on capital intensive projects (midstream/
processing) with limited reserves creation
• Expend carry on unproven techniques, equipment or
technologies
• Prove-up reserves (shareholder or financing purposes)
• Capital Player Incentives
• Prove-up reserves
• Gain expertise
• Efficient deployment of carry (use budgets, footage
requirements, and/or mandatory operations to cause
execution of operations assumed in economics)
13
3. Credit Support and Breach
• Especially important when carry or capital commitment
is involved
• Forfeiture/Reassignment of non-earned (or earned)
acreage
• Escrow of carry funds
• Sinking funds/overriding royalties
• Parent guarantee
• Mandatory non-consent and information freeze-out
• Letter of Credit
• Mortgage of interests
• Ensure that evidence of JV is filed of record
14
4. Control of Development - Generally
•
•
•
•
Capital Player as financing source only
Limited involvement (no right to propose)
Right to propose operations
Full alignment and integration (AIPN/International
Model)
• Right to conduct operations
• Area-wide
• Halo area
• Designated areas (pre-designated or to-be-determined)
15
Potential Control Mechanisms
• International Model vs. Domestic Model
– Work programs/budgets; variances from either
– Operating committees vs. "trust us"
– Minimum work commitments
– Right to non-consent
• How Third Parties Can Ruin Your Day (or Deal)
– Right to propose operations
– Ability to force operations
– Ability to stop operations
16
5. Midstream
• Alternatives
– No midstream arrangements
– Gathering/marketing agreements only
– Asset co-tenancy ("pipe-within-a pipe")
– Traditional corporate joint venture (jointly
owned entity)
• Midstream Structure Drivers
– Regulatory: Avoid FERC or State regulation
– Participants' business strategy
– Costs vs. return
– Investment vehicle (MLP, sale, etc.)
17
6. Secondment
• Capital Player's employees/designees are imbedded
with Land Player in order to gain expertise
• Cultural differences and issues
• How much access/responsibility
• Right to terminate seconded employee
• Liability for theft/errors/omissions
• Ownership of secondee's work
• Conduct requirements designed for international
companies
• Ability to force Land Player to include/integrate
secondees
18
Secondment – the Cultural Conflict
VS.
19
7. Transfer Restrictions/Exits
–
–
–
–
–
–
–
–
Consents to assign
Preferential purchase rights
Put/Call Rights
Right of First Offer/Negotiations
Maintenance of Uniform Interests
Conversion to Working Interests
Term of Restrictions
Sale of Entity/IPO
20
8. Tax Partnerships
– Ability to deduct intangible drilling costs are often
major components of transaction value
– "Complete Payout" Limitation
• Must actually pay or accrue the expense to be deducted
• Must own WI earned for the "complete payout
period"
– "Sharing Arrangement" issues and Rev. Rul. 77-176
– A solution – tax partnership (generally API 1997
Model Tax Partnership Agreement; no longer
officially published)
– Note – when tax partnerships (or state law
partnerships) are involved in an acquisition
transaction, ensure that tax attorneys are
consulted regarding 754 elections
21
9. Operatorship
•
•
•
•
No Right to Conduct Operations
Specified Area with Right to Operate
Halo Area with Right to Operate
Initial Acquirer has Right to Operate AMI
Acquisitions
• Pre-Carry/Post-Carry Period Split
• Right to Operate upon Operator Sell-Down
or Change of Control
22
10. Miscellaneous
• Title and Environmental Review and Remedies
• Management Fees and G&A Reimbursements
• Press Releases and Disclosure Restrictions (Deal
or Data)
• Regulatory Issues
• Survival or Representations and Indemnities
• Scope and Duration of Area of Mutual Interest
23
Cross-Disciplinary Considerations
• Corporate
– Consider SPV vs. JV discussion with clients
– Inadvertent state law partnership with JV structure
• Midstream/FERC
• Finance
– Ensure that Borrower presently owns pledged assets
– Ensure that reserve report accounts for (i) carry and (ii)
back-in
– Ensure APOD (if any) accounts for mandatory operations
– Consider effects of JV arrangement on security interests –
especially if Borrower was not original JV party
• Regulatory
• Environmental
• Financial Restructuring/Bankruptcy
• Labor and Employment
24
711 Louisiana Street, Ste. 2300
Houston, TX 77002-2770
713-223-2300
 A&D, Project Development
J.J. McAnelly
 Regulatory matters
Charles Shoneman
202.828.5860
[email protected]
Mark Lewis
202.828.5834
[email protected]
713.221.1194
[email protected]
David Sweeney
2000 K St. NW, Ste. 500
Washington, DC 20006-1872
202-828-5800
713.221.1288
[email protected]
 Tax
Greg Bopp
713.221.1511
[email protected]
Jim Reardon
713.221.1366
[email protected]
 Environmental
Tim Wilkins
512.542.2134
[email protected]
Jason Hutt
202.828.5850
[email protected]
25
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