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2012 AAPL ANNUAL MEETING SPONSORS PLATINUM GOLD SILVER SAN FRANCISCO SEMINAR GOLF A wholly owned subsidiary of ExxonMobil BRONZE.

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Presentation on theme: "2012 AAPL ANNUAL MEETING SPONSORS PLATINUM GOLD SILVER SAN FRANCISCO SEMINAR GOLF A wholly owned subsidiary of ExxonMobil BRONZE."— Presentation transcript:

1 2012 AAPL ANNUAL MEETING SPONSORS PLATINUM GOLD SILVER SAN FRANCISCO SEMINAR GOLF A wholly owned subsidiary of ExxonMobil BRONZE

2 Presented by: J. J. McAnelly Overview of Trades: Joint Exploration and Joint Venture Agreements AAPL - Copyright © All Rights Reserved. 58 th Annual Meeting - San Francisco June 13-16, 2012

3 3 Overview of Trades: Joint Exploration and Joint Venture Agreements

4 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

5 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

6 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

7 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

8 8 Typical Legal Structure Tax Partnership Land Player Capital Player Assets (leases, wells) JOA Joint Development Agreement Parties + Third Parties PSA/APA

9 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

10 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

11 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

12 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

13 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

14 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

15 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

16 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

17 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

18 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

19 19 Secondment – the Cultural Conflict VS.

20 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

21 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 –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

22 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

23 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

24 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

25 2000 K St. NW, Ste. 500 Washington, DC  A&D, Project Development J.J. McAnelly David Sweeney  Regulatory matters Charles Shoneman Mark Lewis  Tax Greg Bopp Jim Reardon  Environmental Tim Wilkins Jason Hutt Louisiana Street, Ste Houston, TX

26 WeKnowEnergy 26 ®


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