Closing the Deal in the Bayou State: The Purchase and Sale of Producing Oil and Gas Properties

• Author: Patrick S. Ottinger
• Position: Ottinger Hebert, L.L.C. Lafayette, Louisiana. Member, Louisiana and Texas Bars; Adjunct Professor of Law, Paul M. Hebert Law Center, Louisiana State University, Baton Rouge, Louisiana.
• Pages: 691-786

Closing the Deal in the Bayou State: The Purchase and Sale of Producing Oil and Gas Properties Patrick S. Ottinger * TABLE OF CONTENTS Introduction .................................................................................. 693 I. Fundamentals of the Sale of Producing Oil and Gas Properties ... 696 A. The Nature of Producing Oil and Gas Properties ................... 696 B. Sales Involving Producing Oil and Gas Properties in Practice ............................................................................... 697 C. The “Hierarchy of Pertinent Law” ......................................... 697 D. Influence of Decisions of Other States ................................... 699 II. Provisions of the Louisiana Mineral Code Pertinent to the Sale and Assignment of Mineral Leases ....................................... 701 A. The Alienability of a Mineral Lease ...................................... 701 B. Inapplicability of the Remedy of Lesion Beyond Moiety ...... 702 C. Other Consequences Arising Out of the Assignment of the Mineral Lease .............................................................. 703 III. Provisions of the Louisiana Civil Code Pertinent to the Sale and Assignment of Mineral Leases ....................................... 703 A. Applicability of the Law of Sales ........................................... 704 B. Agreements Preparatory to the Sale ....................................... 704 1. Option .............................................................................. 705 2. Contract to Sell ................................................................ 706 3. Right of First Refusal ...................................................... 706 a. General ...................................................................... 706 b. “Pref Rights” in the Industry ..................................... 707 C. Other Associated Agreements ................................................ 712 1. Confidentiality Agreements ............................................. 712 2. Term Sheets ..................................................................... 713 3. Letters of Intent ............................................................... 714 4. Access or Boarding Agreements ..................................... 716 5. Transition Agreements .................................................... 717 Copyright 2016, by PATRICK S. OTTINGER. * Ottinger Hebert, L.L.C. Lafayette, Louisiana. Member, Louisiana and Texas Bars; Adjunct Professor of Law, Paul M. Hebert Law Center, Louisiana State University, Baton Rouge, Louisiana. 692 LOUISIANA LAW REVIEW [Vol. 76 D. Agreements of Sale ................................................................ 719 IV. Customary Features of a Purchase and Sale Agreement .............. 721 A. Definitions .............................................................................. 722 B. Property and Purchase Price................................................... 723 1. Identification of Assets to be Sold and to be Excluded ... 723 2. Preliminary Purchase Price .............................................. 726 3. Deposit ............................................................................. 726 4. Purchase Price Adjustments ............................................ 727 C. Due Diligence ........................................................................ 734 1. Purpose and Objective ..................................................... 735 2. Title Due Diligence ......................................................... 736 3. Environmental Due Diligence ......................................... 740 a. Scope ......................................................................... 740 b. Regulatory Requirement ........................................... 741 c. Site-Specific Trust Agreements ................................ 741 4. Regulatory Due Diligence ............................................... 743 a. Administrative ........................................................... 743 b. Regulatory ................................................................. 744 5. Other Areas of Interest in the Conduct of Due Diligence .......................................................................... 745 a. Financial .................................................................... 745 b. Litigation ................................................................... 745 c. Contractual ................................................................ 747 d. Insurance ................................................................... 749 D. Representations and Warranties ............................................. 749 1. Of the Seller ..................................................................... 750 2. Of the Purchaser .............................................................. 750 E. Covenants ............................................................................... 751 1. Pre-Closing Covenants .................................................... 752 2. Post-Closing Covenants ................................................... 752 F. Termination Provisions .......................................................... 753 G. Allocation of Liability and the Associated Indemnities ......... 755 H. The Closing ............................................................................ 757 1. Consummation of Transaction ......................................... 757 2. Preparation of Closing Documents .................................. 758 3. Typical Closing Documents ............................................ 758 I. Post-Closing Adjustments ...................................................... 759 J. Miscellaneous Provisions ....................................................... 760 1. “Freedom of Contract” .................................................... 760 2. Material Adverse Effect Clause ....................................... 761 3. Choice of Law ................................................................. 763 2016] CLOSING THE DEAL IN THE BAYOU STATE 693 4. Forum Selection Clauses ................................................. 765 V. Remedies for Breach of the Purchase and Sale Agreement .......... 766 A. Specific Performance ............................................................. 766 B. Money Damages .................................................................... 771 1. Duty to Mitigate .............................................................. 771 2. Stipulated Damages ......................................................... 772 C. Attorney’s Fees ...................................................................... 773 D. Prescription ............................................................................ 773 1. Applicable Prescriptive Period ........................................ 774 2. Unreasonable Delay in Seeking Relief ............................ 774 E. Arbitration of Disputes ........................................................... 777 Conclusion .................................................................................... 781 Appendix ...................................................................................... 782 INTRODUCTION The purchase and sale of producing oil and gas properties is a significant part of an oil and gas practice in Louisiana. 1 The term “producing oil and gas properties” encompasses not only the principal asset (the mineral lease) but also the equipment and wells that have been drilled pursuant to the mineral lease, as well as the panoply of agreements, licenses, permits, and other contractual rights assembled by the selling party in connection with the development and exploitation of the mineral lease. For a variety of reasons, a party who owns producing mineral leases might elect to divest itself of those interests. The reasons leading a leasehold owner to a decision to divest might range from a desire to be relieved of future liabilities, or at least to pass along such obligations to another, to “quit” the business, or to commit capital to other ventures or enterprises. Additionally, in the current environment of depressed prices for oil and gas, many exploration and production (“E&P”) companies operating under a commercial line of credit are facing the certainty of a redetermination of their borrowing base 1. Having practiced oil and gas law since the Spring of 1974, this Author has been involved in innumerable transactions of the type discussed here, involving the purchase and sale of producing properties in several states, totaling per transaction purchase prices ranging from smaller amounts to many millions of dollars. The total of all such transactions would be in the billions of dollars in the aggregate. 694 LOUISIANA LAW REVIEW [Vol. 76 by their lender. 2 In turn, this fact makes prudent an examination of properties, which are not deemed to be “core,” to reduce secured debt by selling such properties and paying down debt. Regardless of the reason for divesting itself of the interest, producing oil and gas properties will still have significant value, especially to those who are able to put them to a more profitable use. Although a major oil and gas—or even a large independent—company might deem a producing property to no longer be profitable according to its own internal financial yield or performance requirements, a smaller independent company can often find significant value in the same suite of assets. The smaller company may believe that it can operate the field more efficiently or economically by lowering the per-barrel “lifting costs,” 3 or other expenses of operation, at least in comparison to the seller. This marginal cost reduction is sometimes called “working the margins.” Typically, the sale—and concomitant purchase—of producing oil and gas properties entails several distinct phases: the announcement by the seller of an intent to divest and consequential solicitation of potential bidders; the preliminary...