10-Q
CONOCOPHILLIPS (COP)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-Q
(Mark One)
[X]
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2021
or
[ ]
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number:
001-32395
ConocoPhillips
(Exact name of registrant as specified in its charter)
Delaware
01-0562944
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification
No.)
925 N. Eldridge Parkway
,
Houston
,
TX
77079
(Address of principal executive offices)
(Zip Code)
281
-
293-1000
(Registrant's telephone number,
including area code)
Securities registered pursuant to
Section 12(b) of the Act:
Title of each class
Trading symbols
Name of each exchange on which registered
Common Stock, $.01 Par Value
COP
New York Stock Exchange
7% Debentures due 2029
CUSIP—718507BK1
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
[x]
No [
]
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to
be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that
the registrant was required to submit such files).
Yes
[x]
No [
]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated
filer, a non-accelerated
filer, a smaller
reporting company, or
an emerging growth company.
See the definitions of “large accelerated filer,”
“accelerated filer,”
“smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
[x]
Accelerated filer [
]
Non-accelerated filer [
]
Smaller reporting company
[ ]
Emerging growth company
[ ]
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the
extended transition period for
complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. [
]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [
] No
[x]
The registrant had
1,318,946,867
shares of common stock, $.01 par value, outstanding at September 30,
2021.
Table
of Contents
Page
Commonly Used Abbreviations
1
Part I—Financial Information
Item 1. Financial Statements
Consolidated Income Statement
2
Consolidated Statement of Comprehensive Income
3
Consolidated Balance Sheet
4
Consolidated Statement of Cash Flows
5
Notes to Consolidated Financial Statements
6
Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
33
Item 3. Quantitative and Qualitative Disclosures About Market Risk
59
Item 4. Controls and Procedures
60
Part II—Other Information
Item 1. Legal Proceedings
60
Item 1A. Risk Factors
60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
62
Item 6. Exhibits
63
Signature
64
Commonly Used Abbreviations
Table of Contents
1
ConocoPhillips
2021 Q3 10-Q
Commonly Used Abbreviations
The following industry-specific, accounting
and other terms, and abbreviations may
be commonly used in this
report.
Currencies
Accounting
$ or USD
U.S. dollar
ARO
asset retirement obligation
CAD
Canadian dollar
ASC
accounting standards codification
EUR
Euro
ASU
accounting standards update
GBP
British pound
DD&A
depreciation, depletion and
amortization
Units of Measurement
FASB
Financial Accounting Standards
BBL
barrel
Board
BCF
billion cubic feet
FIFO
first-in, first-out
BOE
barrels of oil equivalent
G&A
general and administrative
MBD
thousands of barrels per day
GAAP
generally accepted accounting
MCF
thousand cubic feet
principles
MBOD
thousand barrels of oil per day
LIFO
last-in, first-out
MM
million
NPNS
normal purchase normal sale
MMBOE
million barrels of oil equivalent
PP&E
properties, plants and equipment
MMBOD
million barrels of oil per day
SAB
staff accounting bulletin
MBOED
thousands of barrels of oil
VIE
variable interest entity
MMBOED
equivalent per day
millions of barrels of oil equivalent
per day
MMBTU
million British thermal units
Miscellaneous
MMCFD
million cubic feet per day
EPA
Environmental Protection
Agency
ESG
Environmental, Social and
Corporate Governance
Industry
EU
European Union
CBM
coalbed methane
FERC
Federal Energy Regulatory
E&P
exploration and production
Commission
FEED
front-end engineering and design
GHG
greenhouse gas
FPS
floating production system
HSE
health, safety and environment
FPSO
floating production, storage
and
ICC
International Chamber of
offloading
Commerce
G&G
geological and geophysical
ICSID
World Bank’s
International
JOA
joint operating agreement
Centre for Settlement of
LNG
liquefied natural gas
Investment Disputes
NGLs
natural gas liquids
IRS
Internal Revenue Service
OPEC
Organization of Petroleum
OTC
over-the-counter
Exporting Countries
NYSE
New York Stock Exchange
PSC
production sharing contract
SEC
U.S. Securities and Exchange
PUDs
proved undeveloped reserves
Commission
SAGD
steam-assisted gravity
drainage
TSR
total shareholder return
WCS
Western Canada Select
U.K.
United Kingdom
WTI
West Texas
Intermediate
U.S.
United States of America
Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
2
PART
I.
Financial Information
Item 1.
Financial Statements
Consolidated Income Statement
ConocoPhillips
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Revenues and Other Income
Sales and other operating revenues
$
11,326
4,386
30,708
13,293
Equity in earnings of affiliates
239
35
500
346
Gain (loss) on dispositions
2
(3)
294
551
Other income (loss)
49
(38)
884
(983)
Total
Revenues and Other Income
11,616
4,380
32,386
13,207
Costs and Expenses
Purchased commodities
4,179
1,839
11,660
5,630
Production and operating expenses
1,389
963
4,151
3,183
Selling, general and administrative
expenses
128
96
556
249
Exploration expenses
65
125
206
410
Depreciation, depletion and amortization
1,672
1,411
5,425
3,980
Impairments
(89)
2
(90)
521
Taxes
other than income taxes
403
179
1,154
570
Accretion on discounted liabilities
61
62
186
195
Interest and debt expense
219
200
665
604
Foreign currency transaction
(gain) loss
(10)
(5)
19
(88)
Other expenses
17
20
78
7
Total
Costs and Expenses
8,034
4,892
24,010
15,261
Income (loss) before income taxes
3,582
(512)
8,376
(2,054)
Income tax provision (benefit)
1,203
(62)
2,924
(171)
Net income (loss)
2,379
(450)
5,452
(1,883)
Less: net loss attributable to noncontrolling
interests
-
-
-
(46)
Net Income (Loss) Attributable
to ConocoPhillips
$
2,379
(450)
5,452
(1,929)
Net Income (Loss) Attributable
to ConocoPhillips Per Share
of Common Stock
(dollars)
Basic
$
1.78
(0.42)
4.10
(1.79)
Diluted
1.78
(0.42)
4.09
(1.79)
Average Common Shares
Outstanding
(in thousands)
Basic
1,332,286
1,077,377
1,327,216
1,079,525
Diluted
1,336,379
1,077,377
1,330,652
1,079,525
See Notes to Consolidated Financial Statements.
Financial Statements
Table of Contents
3
ConocoPhillips
2021 Q3 10-Q
Consolidated Statement
of Comprehensive Income
ConocoPhillips
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Net Income (Loss)
$
2,379
(450)
5,452
(1,883)
Other comprehensive income (loss)
Defined benefit plans
Reclassification adjustment for
amortization of prior
service credit included in net income (loss)
(9)
(8)
(28)
(24)
Net actuarial gain (loss) arising during the period
8
(78)
113
(73)
Reclassification adjustment for
amortization of net actuarial
losses included in net income (loss)
45
45
133
81
Income taxes on defined benefit
plans
(9)
10
(49)
3
Defined benefit plans, net of tax
35
(31)
169
(13)
Unrealized holding gain (loss) on securities
-
-
(1)
3
Income taxes on unrealized
holding gain on securities
-
-
-
(1)
Unrealized holding gain (loss) on securities,
net of tax
-
-
(1)
2
Foreign currency translation
adjustments
(237)
188
(72)
(302)
Income taxes on foreign
currency translation adjustments
(1)
2
(1)
4
Foreign currency translation
adjustments, net of tax
(238)
190
(73)
(298)
Other Comprehensive Income (Loss), Net of Tax
(203)
159
95
(309)
Comprehensive Income (Loss)
2,176
(291)
5,547
(2,192)
Less: comprehensive income attributable
to noncontrolling interests
-
-
-
(46)
Comprehensive Income (Loss) Attributable
to ConocoPhillips
$
2,176
(291)
5,547
(2,238)
See Notes to Consolidated Financial Statements.
Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
4
Consolidated Balance Sheet
ConocoPhillips
Millions of Dollars
September 30
December 31
2021
2020
Assets
Cash and cash equivalents
$
9,833
2,991
Short-term investments
678
3,609
Accounts and notes receivable (net of allowance
of $
2
and $
4
, respectively)
5,336
2,634
Accounts and notes receivable—related
parties
129
120
Investment in Cenovus Energy
1,416
1,256
Inventories
1,043
1,002
Prepaid expenses and other current
assets
1,746
454
Total
Current Assets
20,181
12,066
Investments and long-term receivables
8,058
8,017
Loans and advances—related parties
-
114
Net properties, plants and equipment
(net of accumulated DD&A of $
65,223
and $
62,213
, respectively)
56,689
39,893
Other assets
2,376
2,528
Total
Assets
$
87,304
62,618
Liabilities
Accounts payable
$
4,101
2,669
Accounts payable—related
parties
30
29
Short-term debt
920
619
Accrued income and other taxes
2,082
320
Employee benefit obligations
691
608
Other accruals
2,625
1,121
Total
Current Liabilities
10,449
5,366
Long-term debt
18,748
14,750
Asset retirement obligations
and accrued environmental costs
5,721
5,430
Deferred income taxes
5,630
3,747
Employee benefit obligations
1,162
1,697
Other liabilities and deferred credits
1,479
1,779
Total
Liabilities
43,189
32,769
Equity
Common stock (
2,500,000,000
shares authorized at $
0.01
par value)
Issued (2021—
2,089,046,718
shares; 2020—
1,798,844,267
shares)
Par value
21
18
Capital in excess of par
60,431
47,133
Treasury stock
(at cost: 2021—
770,099,851
shares; 2020—
730,802,089
shares)
(49,521)
(47,297)
Accumulated other comprehensive
loss
(5,123)
(5,218)
Retained earnings
38,307
35,213
Total
Equity
44,115
29,849
Total
Liabilities and Equity
$
87,304
62,618
See Notes to Consolidated Financial Statements.
Financial Statements
Table of Contents
5
ConocoPhillips
2021 Q3 10-Q
Consolidated Statement
of Cash Flows
ConocoPhillips
Millions of Dollars
Nine Months Ended
September 30
2021
2020
Cash Flows From Operating Activities
Net income (loss)
$
5,452
(1,883)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities
Depreciation, depletion and amortization
5,425
3,980
Impairments
(90)
521
Dry hole costs and leasehold impairments
7
114
Accretion on discounted liabilities
186
195
Deferred taxes
895
(428)
Undistributed equity earnings
258
450
Gain on dispositions
(294)
(551)
(Gain) loss on investment in Cenovus
Energy
(743)
1,302
Other
(866)
(188)
Working capital adjustments
Decrease (increase) in accounts and notes
receivable
(1,619)
1,132
Increase in inventories
(13)
(74)
Increase in prepaid expenses and other current
assets
(800)
(49)
Increase (decrease) in accounts payable
682
(583)
Increase (decrease) in taxes
and other accruals
2,648
(808)
Net Cash Provided by Operating
Activities
11,128
3,130
Cash Flows From Investing Activities
Cash acquired from Concho
382
-
Capital expenditures and investments
(3,767)
(3,657)
Working capital changes
associated with investing activities
79
(229)
Proceeds from asset dispositions
792
1,312
Net sales (purchases) of investments
2,846
(1,089)
Collection of advances/loans—related parties
105
116
Other
(386)
(31)
Net Cash Provided by (Used in) Investing
Activities
51
(3,578)
Cash Flows From Financing Activities
Issuance of debt
-
300
Repayment of debt
(363)
(234)
Issuance of company common stock
27
(2)
Repurchase of company common
stock
(2,224)
(726)
Dividends paid
(1,750)
(1,367)
Other
6
(27)
Net Cash Used in Financing Activities
(4,304)
(2,056)
Effect of Exchange
Rate Changes on Cash, Cash Equivalents
and Restricted Cash
(3)
(62)
Net Change in Cash, Cash Equivalents and
Restricted Cash
6,872
(2,566)
Cash, cash equivalents and restricted
cash at beginning of period
3,315
5,362
Cash, Cash Equivalents and Restricted
Cash at End of Period
$
10,187
2,796
Restricted cash of $
95
million and $
259
million are included in the "Prepaid expenses and other current assets" and "Other
assets" lines,
respectively, of our Consolidated Balance Sheet as of September 30, 2021.
Restricted cash of $
94
million and $
230
million are included in the "Prepaid expenses and other current assets" and "Other assets"
lines,
respectively, of our Consolidated Balance Sheet as of December 31, 2020.
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
6
Notes to Consolidated
Financial Statements
Note 1—Basis of Presentation
The interim-period financial information
presented in the financial statements
included in this report is unaudited
and, in the opinion of management, includes all known accruals and
adjustments necessary for a fair presentation
of the consolidated financial position of ConocoPhillips
,
its results of operations and cash flows
for such periods.
All such adjustments are of a normal and recurring
nature unless otherwise disclosed.
Certain notes and other
information have been condensed
or omitted from the interim financial statements
included in this report.
Therefore, these financial statements
should be read in conjunction with the consolidated
financial statements and
notes included in our 2020 Annual Report on Form
10-K.
Note 2—Inventories
Millions of Dollars
September 30
December 31
2021
2020
Crude oil and natural gas
$
485
461
Materials and supplies
558
541
Total
Inventories
$
1,043
1,002
Inventories valued on
the LIFO basis
$
305
282
Note 3—Acquisitions and Dispositions
Announced Acquisition of Shell Permian Assets
In September 2021, we signed a definitive agreement
to acquire Shell Enterprises LLC’s
assets in the Delaware
Basin in an all-cash transaction for $
9.5
billion before customary
adjustments (Shell Permian Acquisition).
Assets
to be acquired include approximately
225,000
net acres and producing properties
located entirely in Texas,
as well
as over
600
miles of operated crude, gas and
water pipelines and infrastructure.
The acquisition is anticipated to
close in the fourth quarter of 2021, subject to regulatory
approval and other customary
closing conditions.
Under
the terms of the agreement, we paid a deposit of $
475
million which is presented within “Cash
Flows from
Investing Activities - Other” on our consolidated statement
of cash flows.
See Item 1A “Risk Factors” for further
discussion of risks related to the Shell Permian Acquisition.
Acquisition of
Concho Resources Inc.
(Concho)
We completed our acquisition
of Concho on
January 15, 2021
and as defined under the terms of the transaction
agreement, each share of Concho common stock
was exchanged for
1.46
shares of ConocoPhillips common stock,
for total consideration
of $
13.1
billion.
Total Consideration
Number of shares of Concho common stock issued
and outstanding (in thousands)*
194,243
Number of shares of Concho stock awards
outstanding (in thousands)*
1,599
Number of shares exchanged
195,842
Exchange ratio
1.46
Additional shares of ConocoPhillips common stock
issued as consideration (in thousands)
285,929
Average price per share of ConocoPhillips
common stock**
$
45.9025
Total Consideration
(Millions)
$
13,125
*Outstanding as of January 15, 2021.
**Based on the ConocoPhillips average stock
price on January 15, 2021.
Notes to Consolidated Financial Statements
Table of Contents
7
ConocoPhillips
2021 Q3 10-Q
The transaction was accounted
for as a business combination under FASB
ASC 805 using the acquisition method,
which requires assets acquired and
liabilities assumed to be measured at their acquisition date
fair values.
Fair
value measurements were made
for acquired assets and liabilities, and
adjustments to those measurements
may
be made in subsequent periods, up to one year
from the acquisition date as we identify new information
about
facts and circumstances that
existed as of the acquisition date to
consider.
Oil and gas properties were valued
using a discounted cash flow approach
incorporating market participant
and internally generated price
assumptions; production profiles; and, operating
and development cost assumptions.
Debt assumed in the
acquisition was valued based on observable
market prices.
The fair values determined for
accounts receivables,
accounts payable, and most
other current assets and current liabilities were
equivalent to the carrying value
due to
their short-term nature.
The total consideration
of $
13.1
billion was allocated to the identifiable
assets and
liabilities based on their fair values as of January 15, 2021.
Assets Acquired
Millions of Dollars
Cash and cash equivalents
$
382
Accounts receivable, net
745
Inventories
45
Prepaid expenses and other current
assets
37
Investments and long-term receivables
333
Net properties, plants and equipment
18,968
Other assets
62
Total assets
acquired
$
20,572
Liabilities Assumed
Accounts payable
$
638
Accrued income and other taxes
49
Employee benefit obligations
4
Other accruals
510
Long-term debt
4,696
Asset retirement obligations
and accrued environmental costs
310
Deferred income taxes
1,123
Other liabilities and deferred credits
117
Total liabilities
assumed
$
7,447
Net assets acquired
$
13,125
With the completion of the Concho transaction,
we acquired proved and unproved
properties of approximately
$
11.8
billion and $
6.9
billion, respectively.
We recognized approximately
$
157
million of transaction-related costs,
all of which were expensed in the first
quarter of 2021.
These non-recurring costs related
primarily to fees paid to advisors
and the settlement of share-
based awards for certain Concho
employees based on the terms of the Merger Agreement.
In the first quarter of 2021, we commenced
a company-wide restructuring program,
the scope of which included
combining the operations of the two companies
as well as other global restructuring activities.
For the three-
and
nine-month periods ending September 30, 2021, we recognized
non-recurring restructuring costs
of approximately
$
52
million and $
209
million, respectively,
mainly for employee severance
and related incremental
pension benefit
costs.
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
8
The impact from these transaction and restructuring
costs to the lines of our consolidated income statement
for
the nine-month period ending September 30, 2021, are
below:
Millions of Dollars
Transaction
Cost
Restructuring Cost
Total
Cost
Production and operating expenses
$
110
110
Selling, general and administration
expenses
135
64
199
Exploration expenses
18
4
22
Taxes
other than income taxes
4
2
6
Other expenses
-
29
29
$
157
209
366
On February 8, 2021, we completed a debt
exchange offer
related to the debt assumed from Concho.
As a result
of the debt exchange, we recognized
an additional income tax related
restructuring charge of $
75
million.
See
Note 19.
From the acquisition date through
September 30, 2021, “Total Revenues
and Other Income” and “Net Income
(Loss) Attributable to ConocoPhillips”
associated with the acquired Concho business
were approximately $
4,499
million and $
1,600
million, respectively.
The results associated with the Concho business
for the same period
include a before- and after-tax
loss of $
305
million and $
233
million, respectively,
on the acquired derivative
contracts.
The before-tax loss is recorded
within “Total Revenues
and Other Income” on our consolidated
income
statement.
See Note 11.
The following summarizes the unaudited
supplemental pro forma financial information
as if we had completed the
acquisition of Concho on January 1, 2020:
Millions of Dollars
Supplemental Pro Forma (unaudited)
Three Months Ended
September 30, 2020
Nine Months Ended
September 30, 2020
Total
revenues and other income
$
5,019
16,384
Net loss
(565)
(1,184)
Net loss attributable to ConocoPhillips
(565)
(1,230)
$ per share
Earnings per share:
Three Months Ended
September 30, 2020
Nine Months Ended
September 30, 2020
Basic net loss
$
(0.41)
(0.90)
Diluted net loss
(0.41)
(0.90)
The unaudited supplemental pro forma
financial information is presented
for illustration purposes
only and is not
necessarily indicative of the operating
results that would have occurred
had the transaction been completed on
January 1, 2020, nor is it necessarily indicative of future
operating results of the combined entity.
The unaudited
pro forma financial information
for the three-
and nine-month periods ending September 30, 2020 is
a result of
combining the consolidated income statement
of ConocoPhillips with the results of Concho.
The pro forma results
do not include transaction-related
costs, nor any cost savings
anticipated as a result of the transaction.
The pro
forma results include adjustments
to reverse impairment expense
of $
10.5
billion and $
1.9
billion related to oil and
gas properties and goodwill, respectively,
recorded by Concho in the nine-month
period ending September 30,
2020.
Other adjustments made relate
primarily to DD&A, which is based on the unit-of-production
method,
resulting from the purchase price allocated
to properties, plants and equipment.
We believe the estimates
and
assumptions are reasonable, and the relative
effects of the transaction
are properly reflected.
Notes to Consolidated Financial Statements
Table of Contents
9
ConocoPhillips
2021 Q3 10-Q
Assets Sold
In 2020, we completed the sale of our Australia
-West asset and operations.
The sales agreement entitled us to a
$
200
million payment upon a final investment
decision (FID) of the Barossa development project.
On March 30,
2021, FID was announced and as such, we recognized
a $
200
million gain on disposition in the first
quarter of 2021.
The purchaser failed to pay the
FID bonus when due.
We have commenced an arbitration
proceeding against the
purchaser to enforce our contractual
right to the $
200
million, plus interest accruing from the
due date.
Results of
operations related to
this transaction are reflected
in our Asia Pacific segment.
See Note 10.
In the third quarter of 2021, we sold our interests
in certain noncore assets in our Lower 48 segment
for
approximately $
150
million after customary adjustments,
recognizing a before-tax gain
on sale of approximately
$
26
million.
Production from these noncore Lower
48 properties averaged
approximately
15
MBOED in the nine-
months ended September 30, 2021.
We also completed the sale of our
noncore exploration interests
in Argentina,
recognizing a before-tax
loss on disposition of $
179
million. Results of operations
for Argentina were reported
in
our Other International segment.
For the three- and nine-months ended September
30, 2021, we recorded contingent
payments of $
121
million and
$
222
million, respectively,
relating to previous dispositions.
The contingent payments are
recorded as gain on
disposition on our consolidated income statement
and are reflected within our Canada
and Lower 48 segments.
No
contingent payments were
recorded in 2020.
Note 4—Investments,
Loans and Long-Term
Receivables
Australia Pacific LNG Pty Ltd
(APLNG)
APLNG executed project financing
agreements for an $
8.5
billion project finance facility in 2012.
All amounts were
drawn from the facility.
The project financing facility has been restructured
over time and at September 30, 2021,
this facility was composed of a financing agreement
with the Export-Import Bank of the United States,
a
commercial bank facility and
two
United States Private
Placement note facilities.
APLNG made its first principal
and interest repayme
nt in March 2017 and is scheduled to make
bi-annual payments until September
2030.
At
September 30, 2021, a balance of $
5.7
billion was outstanding on these
facilities.
See Note 9.
During the fourth quarter of 2020, the estimated
fair value of our investment
in APLNG declined to an amount
below carrying value, primarily due to the weakening
of the U.S. dollar relative to the Australian
dollar.
Based on a
review of the facts and circumstances
surrounding this decline in fair value, we concluded
the impairment was not
other than temporary under the guidance of FASB
ASC Topic
323, “Investments – Equity
Method and Joint
Ventures.”
Due primarily to improved outlooks for
commodity prices and the strengthening
of the U.S. dollar
relative to the Australian
dollar during the first nine months of 2021, the estimated
fair value of our investment
increased and is above carrying value at
September 30, 2021.
On October 25, 2021, Origin Energy Limited agreed
to the sale of
10
percent of their interest
in APLNG for
approximately $
1.6
billion which is expected to close in the fourth
quarter of 2021.
The transaction is subject to
preemption rights in favor
of ConocoPhillips and Sinopec among other considerations.
We will continue to
monitor and evaluate the relationship
between the carrying value and fair value
of APLNG, including any impact
from this announced transaction.
At September 30, 2021, the carrying value
of our equity method investment
in APLNG was $
6.4
billion.
The
balance is included in the “Investments and
long-term receivables” line on our consolidated
balance sheet.
Loans
As part of our normal ongoing business operations,
and consistent with industry practice, we enter
into numerous
agreements with other parties to pursue
business opportunities.
Included in such activity are loans made to
certain affiliated and non-affiliated
companies.
At September 30, 2021, significant loans
to affiliated companies
included $
114
million in project financing to Qatar Liquefied
Gas Company Limited (3), which is recorded
within
the “Accounts
and notes receivable—related
parties” line on our consolidated balance sheet
.
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
10
Note 5—Investment in Cenovus
Energy
Our investment in Cenovus Energy
(CVE) shares is carried on our consolidated
balance sheet at fair value of $
1.4
billion based on the closing price of $
10.06
per share on the NYSE on the last trading
day of the quarter.
At
September 30, 2021 and December 31, 2020, we held
141
million and
208
million shares of CVE common stock,
respectively.
At September 30, 2021, our investment
approximated
7
percent of the issued and outstanding
CVE
common stock.
During the third quarter,
we sold
47
million shares of our CVE common stock, recognizing
proceeds of $
404
million.
Since we began disposing of our CVE shares
in May 2021, we have sold
67
million shares for total proceeds
of $
584
million, of which $
569
million was received by the end of the third
quarter.
Subject to market conditions, we
intend to continue to decrease
our investment over time.
All gains and losses are recognized
within “Other income (loss)” on our consolidated
income statement.
Proceeds
related to the sale of our CVE shares are
presented within “Cash Flows from Investing
Activities” on our
consolidated statement
of cash flows.
See Note 12
for information related
to fair value measurement
.
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Total
Net gain (loss) on equity securities
$
17
(162)
743
(1,302)
Less: Net gain (loss) on equity securities sold during
the period
(50)
-
177
-
Unrealized gain (loss) on equity securities
still held at
the reporting date
$
67
(162)
566
(1,302)
Note 6—Impairments
During the three-
and nine-month periods ended September 30, 2021 and
2020, we recognized before
-tax
impairment charges within the following
segments:
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Alaska
$
-
-
3
-
Lower 48
(89)
1
(93)
514
Europe, Middle East and North Africa
-
1
-
7
$
(89)
2
(90)
521
In the three-month period ended September 30, 2021,
we recorded a credit to impairment
of $
89
million in our
Lower 48 segment due to a decreased ARO
estimate for a previously
sold asset, in which we retained the ARO
liability.
In the first quarter of 2020, we recorded
impairments of $
511
million related to certain noncore
natural gas assets
in the Lower 48 segment which were written
down to fair value.
Notes to Consolidated Financial Statements
Table of Contents
11
ConocoPhillips
2021 Q3 10-Q
Note 7—Debt
Our debt balance at September 30, 2021, was
$
19.7
billion compared with $
15.4
billion at December 31, 2020.
On January 15, 2021, we completed the acquisition of Concho
in an all-stock transaction.
In the acquisition, we
assumed Concho’s publicly
traded debt, with an outstanding principal balance
of $
3.9
billion, which was recorded
at fair value of $
4.7
billion on the acquisition date.
Debt assumed consisted of the following:
●
3.75
% Notes due
2027
with principal of $
1,000
million
●
4.3
% Notes due
2028
with principal of $
1,000
million
●
2.4
% Notes due
2031
with principal of $
500
million
●
4.875
% Notes due
2047
with principal of $
800
million
●
4.85
% Notes due
2048
with principal of $
600
million
The adjustment to fair value of the senior
notes of approximately $
0.8
billion on the acquisition date will be
amortized as an adjustment to interest
expense over the remaining contractual
terms of the senior notes.
In the first quarter of 2021, we completed
a debt exchange offer
related to the debt assumed from
Concho.
Of the
approximately $
3.9
billion in aggregate principal amount
of Concho’s senior notes
offered in the exchange,
98
percent, or approximately
$
3.8
billion, were tendered and accepted.
The new debt issued by ConocoPhillips had
the same interest rates
and maturity dates as the Concho senior notes.
The portion not exchanged, approximately
$
67
million, remained outstanding across
five series of senior notes issued by Concho.
The debt exchange was
treated as a debt modification for
accounting purposes resulting in a portion
of the unamortized fair value
adjustment of the Concho senior notes allocated
to the new debt issued by ConocoPhillips on the settlement
date
of the exchange.
The new debt issued in the exchange is
fully and unconditionally guaranteed by
ConocoPhillips
Company.
See Note 3
.
We have a revolving
credit facility totaling $
6.0
billion with an expiration date
of
May 2023
.
Our revolving credit
facility may be used for direct
bank borrowings, the issuance of letters
of credit totaling up to $
500
million, or as
support for our commercial paper program.
The revolving credit facility is broadly
syndicated among financial
institutions and does not contain any
material adverse change provisions
or any covenants requiring maintenance
of specified financial ratios or credit ratings.
The facility agreement contains
a cross-default provision
relating to
the failure to pay principal or
interest on other debt obligations
of $
200
million or more by ConocoPhillips, or any
of its consolidated subsidiaries.
The amount of the facility is not subject to redetermination
prior to its expiration
date.
Credit facility borrowings may
bear interest at a margin above
rates offered
by certain designated banks in the
London interbank market or
at a margin above the overnight federal
funds rate or prime rates
offered by certain
designated banks in the U.S.
The facility agreement calls for
commitment fees on available,
but unused, amounts.
The facility agreement also contains
early termination rights if our current directors
or their approved successors
cease to be a majority of the Board of Directors.
The revolving credit facility supports
our ability to issue up to $
6.0
billion of commercial paper.
Commercial paper
is generally limited to
maturities of 90 days
and is included in the short-term debt on our consolidated
balance
sheet. With no commercial paper outstanding
and
no
direct borrowings or letters
of credit, we had access to $
6.0
billion in available borrowing capacity
under our revolving credit facility at
September 30, 2021.
At December 31,
2020, we had $
300
million of commercial paper outstanding
and
no
direct borrowings or letters of credit
issued.
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
12
Following our September 20, 2021, announcement
regarding the Shell Permian
Acquisition,
the three rating
agencies reviewed their pre-announcement
ratings on our debt resulting in the
following:
●
Fitch affirmed its rating of our long-term debt as “A” with a “stable” outlook.
●
S&P affirmed its rating of our long-term debt of “A-” with a “stable” outlook.
●
Moody’s affirmed its rating of our senior long-term debt of “A3” and upgraded the outlook to “positive”
from “stable.”
We do not have any
ratings triggers on any of our
corporate debt that would
cause an automatic default, and
thereby impact our access to liquidity,
upon downgrade of our credit ratings.
If our credit ratings are downgraded
from their current levels, it could
increase the cost of corporate
debt available to us and restrict
our access to the
commercial paper markets.
If our credit rating were to deteriorate
to a level prohibiting us from accessing
the
commercial paper market, we
would still be able to access funds under our revolving
credit facility.
At September 30, 2021, we had $
283
million of certain variable rate
demand bonds (VRDBs) outstanding with
maturities ranging through 2035.
The VRDBs are redeemable at the option of the bondholders
on any business
day.
If they are ever redeemed, we have
the ability and intent to refinance on
a long-term basis, therefore, the
VRDBs are included in the “Long-term debt” line on our consolidated
balance sheet.
Notes to Consolidated Financial Statements
Table of Contents
13
ConocoPhillips
2021 Q3 10-Q
Note 8—Changes in Equity
Millions of Dollars
Attributable to ConocoPhillips
Common Stock
Par
Value
Capital in
Excess of
Par
Treasury
Stock
Accum. Other
Comprehensive
Income (Loss)
Retained
Earnings
Non-
Controlling
Interests
Total
For the three months ended September 30, 2021
Balances at June 30, 2021
$
21
60,337
(48,278)
(4,920)
37,116
44,276
Net income
2,379
2,379
Other comprehensive income
(203)
(203)
Dividends paid ($
0.43
per common share)
(579)
(579)
Dividends payable ($
0.46
per common share)
(609)
(609)
Repurchase of company common stock
(1,243)
(1,243)
Distributed under benefit plans
94
94
Balances at September 30, 2021
$
21
60,431
(49,521)
(5,123)
38,307
-
44,115
For the nine months ended September 30, 2021
Balances at December 31, 2020
$
18
47,133
(47,297)
(5,218)
35,213
29,849
Net income
5,452
5,452
Other comprehensive income
95
95
Dividends paid ($
1.29
per common share)
(1,750)
(1,750)
Dividends payable ($
0.46
per common share)
(609)
(609)
Acquisition of Concho
3
13,122
13,125
Repurchase of company common stock
(2,224)
(2,224)
Distributed under benefit plans
176
176
Other
1
1
Balances at September 30, 2021
$
21
60,431
(49,521)
(5,123)
38,307
-
44,115
Millions of Dollars
Attributable to ConocoPhillips
Common Stock
Par
Value
Capital in
Excess of
Par
Treasury
Stock
Accum. Other
Comprehensive
Income (Loss)
Retained
Earnings
Non-
Controlling
Interests
Total
For the three months ended September 30, 2020
Balances at June 30, 2020
$
18
47,079
(47,130)
(5,825)
37,351
31,493
Net income
(450)
(450)
Other comprehensive income
159
159
Dividends paid ($
0.42
per common share)
(454)
(454)
Distributed under benefit plans
34
34
Other
1
1
Balances at September 30, 2020
$
18
47,113
(47,130)
(5,666)
36,448
-
30,783
For the nine months ended September 30, 2020
Balances at December 31, 2019
$
18
46,983
(46,405)
(5,357)
39,742
69
35,050
Net income
(1,929)
46
(1,883)
Other comprehensive loss
(309)
(309)
Dividends paid ($
1.26
per common share)
(1,367)
(1,367)
Repurchase of company common stock
(726)
(726)
Distributions to noncontrolling interests and other
(32)
(32)
Dispositions
(84)
(84)
Distributed under benefit plans
130
130
Other
1
2
1
4
Balances at September 30, 2020
$
18
47,113
(47,130)
(5,666)
36,448
-
30,783
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
14
Note 9—Guarantees
At September 30, 2021, we were
liable for certain contingent
obligations under various contractual
arrangements
as described below.
We recognize a liability,
at inception, for the fair value
of our obligation as a guarantor
for
newly issued or modified guarantees.
Unless the carrying amount of the liability is noted below,
we have not
recognized a liability because the
fair value of the obligation
is immaterial.
In addition, unless otherwise stated, we
are not currently performing with any
significance under the guarantee and expect
future performance to be
either immaterial or have only a remote
chance of occurrence.
APLNG Guarantees
At September 30, 2021, we had outstanding
multiple guarantees in connection with our
37.5
percent ownership
interest in APLNG.
The following is a description of the guarantees
with values calculated utilizing September
2021
exchange rates:
●
During the third quarter of 2016, we issued a guarantee
to facilitate the withdrawal
of our pro-rata portion
of the funds in a project finance reserve account.
We estimate the remaining
term of this guarantee
is
9
years
.
Our maximum exposure under this guarantee
is approximately $
170
million and may become payable
if an enforcement action is commenced by
the project finance lenders against
APLNG.
At September 30,
2021, the carrying value of this guarantee
was $
14
million.
●
In conjunction with our original purchase of an ownership
interest in APLNG from Origin Energy
Limited in
October 2008, we agreed to reimburse
Origin Energy Limited for our share
of the existing contingent liability
arising under guarantees of an existing
obligation of APLNG to deliver natural
gas under several sales
agreements with remaining terms of
1 to 21 years
.
Our maximum potential liability for future
payments, or
cost of volume delivery,
under these guarantees is estimated
to be $
670
million ($
1.2
billion in the event of
intentional or reckless breach) and
would become payable if APLNG fails
to meet its obligations under these
agreements and the obligations
cannot otherwise be mitigated.
Future payments are considered
unlikely,
as
the payments, or cost of volume delivery,
would only be triggered if APLNG does not have
enough natural
gas to meet these sales commitments
and if the co-venturers
do not make necessary equity contributions
into APLNG.
●
We have guaranteed
the performance of APLNG with regard
to certain other contracts executed
in
connection with the project’s continued
development.
The guarantees have
remaining terms of
15 to 24
years
or the life of the venture.
Our maximum potential amount of future payments
related to these
guarantees is approximately
$
180
million and would become payable
if APLNG does not perform.
At
September 30, 2021, the carrying value of these guarantees
was $
11
million.
Other Guarantees
We have other guarantees
with maximum future potential payment
amounts totaling approximately
$
720
million,
which consist primarily of guarantees
of the residual value of leased office buildings, guarantees
of the residual
value of corporate aircrafts,
and a guarantee for our portion
of a joint venture’s
project finance reserve accounts.
These guarantees have remaining
terms of
one to five years
and would become payable if certain asset
values are
lower than guaranteed amounts
at the end of the lease or contract term, business
conditions decline at
guaranteed entities, or as a result
of nonperformance of contractual
terms by guaranteed parties.
At September
30, 2021, the carrying value of these guarantees
was $
11
million.
Indemnifications
Over the years, we have entered
into agreements to sell ownership
interests in certain legal entities,
joint ventures
and assets that gave rise to
qualifying indemnifications.
These agreements include indemnifications for
taxes,
lease commitments and environmental
liabilities.
Those related to environmental
issues have terms that are
generally indefinite and the maximum
amounts of future payments are
generally unlimited.
The carrying amount
recorded for these indemnification
obligations at September 30, 2021, was $
30
million.
We amortize the
indemnification liability over the relevant
time period the indemnity is in effect, if one exists,
based on the facts
and circumstances surrounding each type
of indemnity.
In cases where the indemnification term is
indefinite, we
will reverse the liability when we have
information the liability is essentially
relieved or amortize the liability over
Notes to Consolidated Financial Statements
Table of Contents
15
ConocoPhillips
2021 Q3 10-Q
an appropriate time period as the fair
value of our indemnification exposure
declines.
Although it is reasonably
possible future payments may exceed
amounts recorded, due to the nature
of the indemnifications, it is not
possible to make a reasonable estimate
of the maximum potential amount
of future payments.
See Note 10
for
additional information about environmental
liabilities
.
Note 10—Contingencies and Commitments
A number of lawsuits involving a variety
of claims arising in the ordinary course of business
have been filed against
ConocoPhillips.
We also may be required
to remove or mitigate
the effects on the environment
of the placement,
storage, disposal or release of
certain chemical, mineral and petroleum
substances at various
active and inactive
sites.
We regularly assess the need for accounting
recognition or disclosure of these contingencies.
In the case of
all known contingencies (other than those related
to income taxes), we accrue
a liability when the loss is probable
and the amount is reasonably estimable.
If a range of amounts can be reasonably
estimated and no amount within
the range is a better estimate
than any other amount, then the low end of the range
is accrued.
We do not reduce
these liabilities for potential insurance
or third-party recoveries.
We accrue receivables for
insurance or other
third-party recoveries when applicable.
With respect to income tax-related
contingencies, we use a cumulative
probability-weighted loss accrual
in cases where sustaining a tax
position is less than certain.
Based on currently available information,
we believe it is remote that future
costs related to known
contingent
liability exposures will exceed
current accruals by an amount that
would have a material adverse
impact on our
consolidated financial statements.
As we learn new facts concerning contingencies,
we reassess our position both
with respect to accrued liabilities and other potential
exposures.
Estimates particularly sensitive to future
changes
include contingent liabilities recorded
for environmental
remediation, tax and legal matters.
Estimated future
environmental remediation
costs are subject to change due to
such factors as the uncertain
magnitude of cleanup
costs, the unknown time and extent of such
remedial actions that may be required,
and the determination of our
liability in proportion to that of other responsible
parties.
Estimated future costs
related to tax and legal
matters
are subject to change as events
evolve and as additional information
becomes available during the administrative
and litigation processes.
Environmental
We are subject to international,
federal, state and
local environmental laws
and regulations and record
accruals for
environmental liabilities based on
management’s best estimates.
These estimates are based on currently
available
facts, existing technology,
and presently enacted laws and regulations,
taking into account stakeholder
and
business considerations.
When measuring environmental liabilities,
we also consider our prior experience in
remediation of contaminated
sites, other companies’ cleanup experience, and data
released by the U.S. EPA
or
other organizations.
We consider unasserted claims in our determination
of environmental liabilities,
and we
accrue them in the period they are both probable and
reasonably estimable.
Although liability of those potentially responsible
for environmental remediation
costs is generally joint and
several for federal
sites and frequently so for other
sites, we are usually only one of many companies
cited at a
particular site.
Due to the joint and several liabilities, we could
be responsible for all cleanup costs related
to any
site at which we have been designated
as a potentially responsible party.
We have been successful to
date in
sharing cleanup costs with other financially sound
companies.
Many of the sites at which we are potentially
responsible are still under investigation
by the EPA or
the agency concerned.
Prior to actual cleanup, those
potentially responsible normally assess the
site conditions, apportion responsibility and determine
the appropriate
remediation.
In some instances, we may have
no liability or may attain a settlement
of liability.
Where it appears
that other potentially responsible parties may
be financially unable to bear their proportional share,
we consider
this inability in estimating our potential liability,
and we adjust our accruals accordingly.
As a result of various
acquisitions in the past, we assumed certain environmental
obligations.
Some of these environmental obligations
are mitigated by indemnifications
made by others for our benefit, and some of the indemnifications
are subject to
dollar limits and time limits.
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
16
We are currently participating
in environmental assessments
and cleanups at numerous federal
Superfund and
comparable state and
international sites.
After an assessment of environmental
exposures for cleanup and other
costs, we make accruals on an
undiscounted basis (except
those acquired in a purchase business combination,
which we record on a discounted
basis) for planned investigation
and remediation activities for sites where
it is
probable future costs will be incurred
and these costs can be reasonably estimated.
We have not reduced
these
accruals for possible insurance recoveries
.
At September 30, 2021, our balance sheet included
a total environmental
accrual of $
191
million, compared with
$
180
million at December 31, 2020, for remediation
activities in the U.S. and Canada.
We expect to incur a
substantial amount of these expenditures
within the next
30 years
.
In the future, we may be involved
in additional
environmental assessments,
cleanups and proceedings.
Litigation and Other Contingencies
We are subject to various
lawsuits and claims including but not limited to matters
involving oil and gas royalty
and
severance tax payments,
gas measurement and valuation
methods, contract disputes,
environmental damages,
climate change, personal injury,
and property damage.
Our primary exposures for such matters
relate to alleged
royalty and tax underpayments
on certain federal, state
and privately owned properties, claims
of alleged
environmental contamination
from historic operations,
and other contract disputes.
We will continue to defend
ourselves vigorously in these matters.
Our legal organization
applies its knowledge, experience and professional
judgment to the specific characteristics
of our cases, employing a litigation management
process to manage and monitor the legal
proceedings against us.
Our process facilitates the
early evaluation and quantification
of potential exposures in individual cases.
This
process also enables us to track those cases
that have been scheduled for trial and/or
mediation.
Based on
professional judgment and experience
in using these litigation management
tools and available information
about
current developments in all our cases,
our legal organization regularly
assesses the adequacy of current accruals
and determines if adjustment of existing
accruals, or establishment of new accruals, is
required.
We have contingent
liabilities resulting from throughput agreements
with pipeline and processing companies not
associated with financing arrangements.
Under these agreements, we may be required
to provide any such
company with additional funds through
advances and penalties for fees related
to throughput capacity not utilized.
In addition, at September 30, 2021, we had performance
obligations secured by letters
of credit of
$
281
million (issued as direct bank letters
of credit) related to various
purchase commitments for materials,
supplies, commercial activities and services incident to
the ordinary conduct of business.
In 2007, ConocoPhillips was unable to reach
agreement with respect to the empresa
mixta structure mandated
by
the Venezuelan government’s
Nationalization Decree.
As a result, Venezuela’s
national oil company,
Petróleos de
Venezuela, S.A. (PDVSA),
or its affiliates, directly assumed control
over ConocoPhillips’ interests
in the Petrozuata
and Hamaca heavy oil ventures and
the offshore Corocoro development
project.
In response to this expropriation,
ConocoPhillips initiated international
arbitration on November 2, 2007, with the ICSID.
On September 3, 2013, an
ICSID arbitration tribunal held that Venezuela
unlawfully expropriated ConocoPhillips’
significant oil investments in
June 2007.
On January 17, 2017, the Tribunal reconfirmed
the decision that the expropriation
was unlawful.
In
March 2019, the Tribunal unan
imously ordered the government of Venezuela
to pay ConocoPhillips approximately
$
8.7
billion in compensation for the government’s
unlawful expropriation of the company’s
investments in
Venezuela in 2007.
On August 29, 2019, the ICSID Tribunal
issued a decision rectifying the award and
reducing it
by approximately $
227
million.
The award now stands at
$
8.5
billion plus interest.
The government of Venezuela
sought annulment of the award,
which automatically stayed
enforcement of the award.
On September 29, 2021,
the ICSID annulment committee lifted the
stay of enforcement
of the award.
The annulment proceedings have
been suspended as a result of Venezuela’s
non-payment of advances
to cover the costs of these proceedings.
Notes to Consolidated Financial Statements
Table of Contents
17
ConocoPhillips
2021 Q3 10-Q
In 2014, ConocoPhillips filed a separate
and independent arbitration under the rules
of the ICC against PDVSA
under the contracts that had established
the Petrozuata
and Hamaca projects.
The ICC Tribunal issued
an award in
April 2018, finding that PDVSA owed ConocoPhillips
approximately $
2
billion under their agreements in connection
with the expropriation of the projects
and other pre-expropriation fiscal
measures.
In August 2018, ConocoPhillips
entered into a settlement with PDVSA to recover the full amount of this ICC award, plus interest through the
payment period, including initial payments totaling approximately $500 million within a period of 90 days from the
time of signing of the settlement agreement. The balance of the settlement is to be paid quarterly over a period of
four and a half years.
Per the settlement, PDVSA recognized
the ICC award as a judgment in various
jurisdictions,
and ConocoPhillips agreed to suspend
its legal enforcement actions.
ConocoPhillips sent notices of default to
PDVSA
on October 14 and November 12, 2019, and to
date PDVSA has failed to cure
its breach.
As a result,
ConocoPhillips has resumed legal enforcement
actions.
To date,
ConocoPhillips has received approximately
$
766
million in connection with the ICC award.
ConocoPhillips has ensured that
the settlement and any actions taken
in
enforcement thereof meet all
appropriate U.S. regulatory
requirements, including those related
to any applicable
sanctions imposed by the U.S. against
Venezuela.
In 2016, ConocoPhillips filed a separate
and independent arbitration under the rules
of the ICC against PDVSA
under the contracts that had established
the Corocoro Project.
On August 2, 2019, the ICC Tribunal
awarded
ConocoPhillips approximately
$
33
million plus interest under the Corocoro
contracts.
ConocoPhillips is seeking
recognition and enforcement
of the award in various jurisdictions.
ConocoPhillips has ensured that all the actions
related to the award meet
all appropriate U.S. regulatory
requirements, including those related
to any applicable
sanctions imposed by the U.S. against
Venezuela.
The Office of Natural Resources
Revenue (ONRR) has conducted audits
of ConocoPhillips’ payment of royalties
on
federal lands and has issued multiple orders
to pay additional royalties
to the federal government.
ConocoPhillips
and the ONRR entered into a settlement
agreement on March 23, 2021, to resolve
the dispute.
All orders and
associated appeals have been withdrawn
with prejudice.
Beginning in 2017, cities, counties, governments
and other entities in several states
in the U.S. have filed lawsuits
against oil and gas companies,
including ConocoPhillips, seeking compensatory
damages and equitable relief to
abate alleged climate change impacts.
Additional lawsuits with similar allegations are
expected to be filed.
The
amounts claimed by plaintiffs are
unspecified and the legal and factual issues
involved in these cases are
unprecedented.
ConocoPhillips believes these lawsuits
are factually and legally meritless and
are an inappropriate
vehicle to address the challenges associated
with climate change and will vigorously
defend against such lawsuits.
Several Louisiana parishes and the State
of Louisiana have filed
43
lawsuits under Louisiana’s
State and Local
Coastal Resources Management
Act (SLCRMA) against oil and gas
companies, including ConocoPhillips, seeking
compensatory damages for contamination
and erosion of the Louisiana coastline allegedly
caused by historical oil
and gas operations.
ConocoPhillips entities are defendants
in
22
of the lawsuits and will vigorously defend
against
them.
Because Plaintiffs’ SLCRMA theories are
unprecedented, there is uncertainty
about these claims (both as to
scope and damages) and we continue to
evaluate our exposure in these
lawsuits.
In October 2020, the Bureau of Safety
and Environmental Enforcement
(BSEE) ordered the prior owners of Outer
Continental Shelf (OCS) Lease P-0166,
including ConocoPhillips, to decommission
the lease facilities, including two
offshore platforms located
near Carpinteria, California.
ConocoPhillips is challenging this order.
This order was
sent after the current owner of OCS Lease P-0166
relinquished the lease and abandoned the lease platforms
and
facilities.
BSEE’s order to
ConocoPhillips is premised on its connection to
Phillips Petroleum Company,
a legacy
company of ConocoPhillips, which held a historical
25
percent interest in this
lease and operated these facilities,
but sold its interest approximately
30 years
ago.
ConocoPhillips continues to evaluate
its exposure in this matter.
On May 10, 2021, ConocoPhillips filed arbitration
under the rules of the Singapore International
Arbitration Centre
(SIAC) against Santos KOTN
Pty Ltd. and Santos Limited for
their failure to timely pay the $
200
million bonus due
upon FID of the Barossa development project
under the sale and purchase agreement.
Santos KOTN
Pty Ltd. and
Santos Limited have filed a counterclaim,
and the arbitration is underway.
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
18
Note 11—Derivative and Financial Instruments
We use futures, forwards,
swaps and options in various markets
to meet our customer needs, capture
market
opportunities and manage foreign exchange
currency risk.
Commodity Derivative Instruments
Our commodity business primarily consists of natural
gas, crude oil, bitumen, LNG and NGLs.
Commodity derivative instruments
are held at fair value on our consolidated
balance sheet.
Where these balances
have the right of setoff,
they are presented on a net basis.
Related cash flows are recorded
as operating
activities
on our consolidated statement
of cash flows.
On our consolidated income statement,
gains and losses are
recognized either on a gross
basis if directly related to our physical
business or a net basis if held for trading.
Gains
and losses related to contracts
that meet and are designated with the NPNS
exception are recognized
upon
settlement.
We generally apply this
exception to eligible crude contracts
and certain gas contracts.
We do not
apply hedge accounting for our commodity
derivatives.
The following table presents the gross
fair values of our commodity derivatives,
excluding collateral,
and the line
items where they appear on our consolidated
balance sheet:
Millions of Dollars
September 30
December 31
2021
2020
Assets
Prepaid expenses and other current
assets
$
1,601
229
Other assets
109
26
Liabilities
Other accruals
1,681
202
Other liabilities and deferred credits
94
18
The gains (losses) from commodity derivatives
incurred, and the line items where they appear on
our consolidated
income statement were:
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Sales and other operating revenues
$
(483)
33
(862)
30
Other income (loss)
7
(2)
23
3
Purchased commodities
405
(27)
550
(29)
On January 15, 2021, we assumed financial derivative instruments
consisting of oil and natural gas
swaps in
connection with the acquisition of Concho.
At the acquisition date, the financial derivative
instruments acquired
were recognized at fair
value as a net liability of $
456
million with settlement dates under the contracts
through
December 31, 2022.
During the first quarter of 2021, we recognized
a loss of $
173
million on Concho derivative
contracts with settlement dates
on or before March 31, 2021, and an
additional $
132
million loss related to all
remaining Concho derivative contracts
with settlement dates subsequent
to March 31, 2021, for a total loss of
$
305
million.
This loss associated with the acquired financial
instruments is recorded within the
“Sales and other
operating revenues” line on our
consolidated income statement.
Notes to Consolidated Financial Statements
Table of Contents
19
ConocoPhillips
2021 Q3 10-Q
By the end of March 2021, all oil and natural
gas derivative financial instruments
acquired from Concho were
contractually settled.
In connection with the settlement, we issued
a cash payment of $
692
million in the first
quarter of 2021 and $
69
million in the second quarter of 2021.
Cash settlements related
to the Concho derivative
contracts are presented
within “Cash Flows From Operating Activities”
on our consolidated statement
of cash
flows.
The table below summarizes our material
net exposures resulting from
outstanding commodity derivative
contracts:
Open Position
Long/(Short)
September 30
December 31
2021
2020
Commodity
Natural gas and power (billions
of cubic feet equivalent)
Fixed price
10
(20)
Basis
(19)
(10)
Financial Instruments
We invest in financial
instruments with maturities based on our cash
forecasts for the various
accounts and
currency pools we manage.
The types of financial instruments in which we currently
invest include:
●
Time deposits: Interest bearing deposits
placed with financial institutions for a predetermined
amount of
time.
●
Demand deposits: Interest bearing deposits
placed with financial institutions.
Deposited funds can be
withdrawn without notice.
●
Commercial paper: Unsecured promissory
notes issued by a corporation, commercial
bank or government
agency purchased at a discount to
mature at par.
●
U.S. government or government
agency obligations: Securities issued by the U.S.
government or U.S.
government agencies.
●
Foreign government obligations:
Securities issued by foreign governments.
●
Corporate bonds: Unsecured debt
securities issued by corporations.
●
Asset-backed securities: Collateralized
debt securities.
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
20
The following investments are
carried on our consolidated balance sheet at cost, plus accrued
interest and the table
reflects remaining maturities at September 30, 2021 and
December 31, 2020:
Millions of Dollars
Carrying Amount
Cash and Cash Equivalents
Short-Term
Investments
Investments and Long-Term
Receivables
September 30
December 31
September 30
December 31
September 30
December 31
2021
2020
2021
2020
2021
2020
Cash
$
634
597
Demand Deposits
1,847
1,133
Time Deposits
1 to 90 days
7,226
1,225
469
2,859
91 to 180 days
8
448
Within one year
5
13
One year through five years
2
1
U.S. Government
Obligations
1 to 90 days
16
23
-
-
$
9,723
2,978
482
3,320
2
1
The following investments in debt securities
classified as available for sale are carried at
fair value on our consolidated
balance sheet at September 30, 2021 and December 31, 2020:
Millions of Dollars
Carrying Amount
Cash and Cash Equivalents
Short-Term
Investments
Investments and Long-Term
Receivables
September 30
December 31
September 30
December 31
September 30
December 31
2021
2020
2021
2020
2021
2020
Major Security Type
Corporate Bonds
$
-
-
113
130
184
143
Commercial Paper
110
13
69
155
U.S. Government
Obligations
-
-
-
4
6
13
U.S. Government
Agency Obligations
2
-
8
17
Foreign Government
Obligations
10
-
3
2
Asset-backed
Securities
2
-
59
41
$
110
13
196
289
260
216
Cash and Cash Equivalents and Short-Term
Investments have remaining maturities
within one year.
Investments and Long-Term
Receivables have remaining maturities greater
than one year through eight years.
Notes to Consolidated Financial Statements
Table of Contents
21
ConocoPhillips
2021 Q3 10-Q
The following table summarizes the
amortized cost basis and fair value
of investments in debt securities classified
as available for sale:
Millions of Dollars
Amortized Cost Basis
Fair Value
September 30
December 31
September 30
December 31
2021
2020
2021
2020
Major Security Type
Corporate bonds
$
296
271
297
273
Commercial paper
179
168
179
168
U.S. government obligations
6
17
6
17
U.S. government agency obligations
10
17
10
17
Foreign government obligations
13
2
13
2
Asset-backed securities
61
41
61
41
$
565
516
566
518
At September 30, 2021 and December 31, 2020, total
unrealized losses for debt
securities classified as available for
sale with net losses were negligible.
Additionally, at
September 30, 2021 and December 31, 2020, investment
s
in
these debt securities in an unrealized loss position
for which an allowance for
credit losses has not been recorded
were negligible.
For the three-
and nine-month periods ended September 30, 2021, proceeds
from sales and redemptions of
investments in debt securities classified
as available for sale were $
165
million and $
485
million, respectively.
For
the three-
and nine-month periods ended September 30, 2020,
proceeds from sales and redemptions of
investments in debt securities classified
as available for sale were $
109
million and $
298
million, respectively.
Gross realized gains and
losses included in earnings from those sales and redemptions
were negligible.
The cost of
securities sold and redeemed is determined using the specific
identification method.
Credit Risk
Financial instruments potentially exposed
to concentrations of credit
risk consist primarily of cash equivalents,
short-term investments, long-term
investments in debt securities,
OTC derivative contracts
and trade receivables.
Our cash equivalents and short-term investments
are placed in high-quality commercial paper,
government money
market funds, U.S. government
and government agency obligations,
time deposits with major international banks
and financial institutions, high-quality corporate
bonds, foreign government obligations
and asset-backed
securities.
Our long-term investments in debt
securities are placed in high-quality corporate
bonds, asset-backed
securities, U.S. government and government
agency obligations, foreign
government obligations, and
time
deposits with major international banks
and financial institutions.
The credit risk from our OTC derivative
contracts, such as forwards,
swaps and options, derives from the
counterparty to the transaction.
Individual counterparty exposure
is managed within predetermined credit limits
and includes the use of cash-call margins when appropriate,
thereby reducing the risk of significant
nonperformance.
We also use futures, swaps
and option contracts that have
a negligible credit risk because these
trades are cleared primarily with an
exchange clearinghouse and subject to
mandatory margin requirements until
settled; however,
we are exposed to the credit risk
of those exchange brokers
for receivables arising from
daily
margin cash calls, as well as for cash
deposited to meet initial margin requirements.
Our trade receivables result primarily
from our oil and gas operations
and reflect a broad national and
international customer base, which limits
our exposure to concentrations
of credit risk.
The majority of these
receivables have payment
terms of
30 days
or less, and we continually monitor this exposure
and the
creditworthiness of the counterparties.
We may require collateral
to limit the exposure to loss including,
letters of
credit, prepayments and surety
bonds, as well as master netting arrangements
to mitigate credit risk with
counterparties that both buy from and
sell to us, as these agreements permit the amounts
owed by us or owed to
others to be offset against
amounts due to us.
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
22
Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure
exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable
threshold amounts that are contingent on our credit rating. The variable threshold amounts typically decline for
lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if we fall below
investment grade. Cash is the primary collateral in all contracts; however, many also permit us to post letters of
credit as collateral, such as transactions administered through the New York Mercantile Exchange.
The aggregate fair value
of all derivative instruments with such credit
risk-related contingent
features that were in
a liability position at September 30, 2021 and December 31,
2020, was $
455
million and $
25
million, respectively.
For these instruments,
no
collateral was posted at
September 30, 2021 or December 31, 2020.
If our credit rating
had been downgraded below investment
grade at September 30, 2021, we
would have been required to post
$
396
million of additional collateral, either with cash
or letters of credit.
Note 12—Fair Value
Measurement
We carry a portion of our assets and liabilities
at fair value that are measured
at the reporting date using an exit
price (i.e., the price that would be received to sell an
asset or paid to transfer
a liability) and disclosed according to
the quality of valuation inputs under the following hierarchy:
●
Level 1: Quoted prices (unadjusted) in an
active market for identical
assets or liabilities.
●
Level 2: Inputs other than quoted prices that are
directly or indirectly observable.
●
Level 3: Unobservable inputs that are
significant to the fair value of assets
or liabilities.
The classification of an asset or liability is based on the lowest
level of input significant to its fair value.
Those that
are initially classified as Level 3 are subsequently
reported as Level 2 when the fair value derived
from unobservable
inputs is inconsequential to the overall
fair value, or if corroborated
market data becomes available.
Assets and
liabilities initially reported as Level 2 are subsequently
reported as Level 3 if corroborated
market data is no longer
available.
There were no material transfers
into or out of Level 3 during the three-
and nine-month periods ended
September 30, 2021, nor during the year ended December
31, 2020.
Recurring Fair Value
Measurement
Financial assets and liabilities reported at fair
value on a recurring basis primarily include our investment
in CVE
common shares, our investments
in debt securities classified as available for
sale, and commodity derivatives.
●
Level 1 derivative assets and
liabilities primarily represent exchange-traded
futures and options that are
valued using unadjusted prices available
from the underlying exchange.
Level 1 also includes our
investment in common shares
of CVE, which is valued using quotes for shares
on the NYSE, and our
investments in U.S. government
obligations classified as available for
sale debt securities, which are
valued using exchange prices.
●
Level 2 derivative assets and
liabilities primarily represent OTC
swaps, options and forward
purchase and
sale contracts that are
valued using adjusted exchange
prices, prices provided by brokers
or pricing
service companies that are all corroborated
by market data.
Level 2 also includes our investments
in debt
securities classified as available for sale including
investments in corporate
bonds, commercial paper,
asset-backed securities, U.S. government
agency obligations and foreign
government obligations
that are
valued using pricing provided by brokers
or pricing service companies that are corroborated
with market
data.
●
Level 3 derivative assets and
liabilities consist of OTC swaps,
options and forward purchase and
sale
contracts where a significant
portion of fair value is calculated
from underlying market data
that is not
readily available.
The derived value uses industry standard
methodologies that may consider the
historical relationships
among various commodities, modeled market
prices, time value,
volatility factors
and other relevant economic measures.
The use of these inputs results in management’s
best estimate of
fair value.
Level 3 activity was not material for
all periods presented.
Notes to Consolidated Financial Statements
Table of Contents
23
ConocoPhillips
2021 Q3 10-Q
The following table summarizes the
fair value hierarchy
for gross financial assets and liabilities (i.e., unadjusted
where the right of setoff exists
for commodity derivatives accounted
for at fair value on a recurring
basis):
Millions of Dollars
September 30, 2021
December 31, 2020
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Assets
Investment in CVE shares
$
1,416
-
-
1,416
1,256
-
-
1,256
Investments in debt securities
6
560
-
566
17
501
-
518
Commodity derivatives
882
788
40
1,710
142
101
12
255
Total
assets
$
2,304
1,348
40
3,692
1,415
602
12
2,029
Liabilities
Commodity derivatives
$
893
723
159
1,775
120
91
9
220
Total
liabilities
$
893
723
159
1,775
120
91
9
220
The following table summarizes those
commodity derivative balances subject to
the right of setoff as
presented on our consolidated
balance sheet.
We have elected to
offset the recognized fair
value amounts for
multiple derivative instruments
executed with the same counterparty
in our financial statements when a legal
right of setoff exists.
Millions of Dollars
Amounts Subject to Right of Setoff
Gross
Amounts Not
Gross
Net
Amounts
Subject to
Gross
Amounts
Amounts
Cash
Net
Recognized
Right of Setoff
Amounts
Offset
Presented
Collateral
Amounts
September 30, 2021
Assets
$
1,710
113
1,597
883
714
-
714
Liabilities
1,775
129
1,646
883
763
34
729
December 31, 2020
Assets
$
255
2
253
157
96
10
86
Liabilities
220
1
219
157
62
4
58
At September 30, 2021 and December 31, 2020, we
did not present any amounts
gross on our consolidated
balance sheet where we had the right of setoff.
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
24
Reported Fair Values
of Financial Instruments
We used the following methods
and assumptions to estimate the fair value
of financial instruments:
●
Cash and cash equivalents and short-term investments:
The carrying amount reported on the balance
sheet approximates fair
value.
For those investments classified as
available for sale debt securities, the
carrying amount reported on the balance sheet
is fair value.
●
Accounts and notes receivable (including
long-term and related parties): The carrying
amount reported on
the balance sheet approximates
fair value.
The valuation technique and methods used to
estimate the
fair value of the current portion of fixed
-rate related party
loans is consistent with Loans and advances—
related parties.
●
Investment in CVE:
See Note 5
for a discussion of the carrying value and fair
value of our investment in
CVE common shares.
●
Investments in debt securities classified
as available for sale: The fair value
of investments in debt
securities categorized as Level
1 in the fair value hierarchy
is measured using exchange prices.
The fair
value of investments in debt
securities categorized as Level 2 in
the fair value hierarchy
is measured using
pricing provided by brokers
or pricing service companies that are corroborated
with market data.
See
Note 11.
●
Loans and advances—related parties: The carrying
amount of floating-rate loans
approximates fair value.
The fair value of fixed-rate
loan activity is measured using market
observable data and is categorized
as
Level 2 in the fair value hierarchy.
See Note 4.
●
Accounts payable (including
related parties) and floating-rate
debt: The carrying amount of accounts
payable and floating-rate
debt reported on the balance sheet approximates
fair value.
●
Fixed-rate debt: The estimated
fair value of fixed-rate
debt is measured using prices available from
a
pricing service that is corroborated
by market data; therefore,
these liabilities are categorized
as Level 2 in
the fair value hierarchy.
●
Commercial paper: The carrying amount of our commercial
paper instruments approximates
fair value
and is reported on the balance sheet as short-term
debt.
The following table summarizes the
net fair value of financial instruments
(i.e., adjusted where the right of setoff
exists for commodity derivatives):
Millions of Dollars
Carrying Amount
Fair Value
September 30
December 31
September 30
December 31
2021
2020
2021
2020
Financial assets
Investment in CVE shares
$
1,416
1,256
1,416
1,256
Commodity derivatives
827
88
827
88
Investments in debt securities
566
518
566
518
Loans and advances—related parties
114
220
114
220
Financial liabilities
Total
debt, excluding finance leases
18,815
14,478
22,797
19,106
Commodity derivatives
858
59
858
59
Notes to Consolidated Financial Statements
Table of Contents
25
ConocoPhillips
2021 Q3 10-Q
Note 13—Accumulated Other Comprehensive
Loss
Accumulated other comprehensive
loss in the equity section of our consolidated balance sheet included:
Millions of Dollars
Defined Benefit
Plans
Net Unrealized
Gain (Loss) on
Securities
Foreign
Currency
Translation
Accumulated
Other
Comprehensive
Loss
December 31, 2020
$
(425)
2
(4,795)
(5,218)
Other comprehensive income (loss)
169
(1)
(73)
95
September 30, 2021
$
(256)
1
(4,868)
(5,123)
The following table summarizes reclassifications
out of accumulated other comprehensive
loss and into net
income (loss):
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Defined benefit plans
$
29
30
83
46
The above amounts are included in the computation of net periodic benefit cost and are presented net of tax expense of $
7
million and $
7
million for the three-month periods ended September 30, 2021 and September 30, 2020, respectively, and $
22
million and $
11
million for the
nine-month periods ended September 30, 2021 and September 30, 2020, respectively
.
See Note 15.
Note 14—Cash Flow Information
Millions of Dollars
Nine Months Ended
September 30
Cash Payments
2021
2020
Interest
$
695
591
Income taxes
358
803
Net Sales (Purchases) of Investments
Short-term investments
purchased
$
(5,487)
(9,662)
Short-term investments
sold
8,478
8,776
Long-term investments purchased
(228)
(271)
Long-term investments sold
83
68
$
2,846
(1,089)
We paid a deposit of $
475
million under the terms of the agreement of the Shell Permian
Acquisition.
This deposit
is included within the “Cash Flows from Investing
Activities - Other” on our consolidated statement of cash
flows.
See Note 3
for additional information on cash
and non-cash changes to our consolidated
balance sheet associated
with our Concho acquisition and information on
the announced Shell transaction.
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
26
Note 15—Employee Benefit Plans
Pension and Postretirement
Plans
Millions of Dollars
Pension Benefits
Other Benefits
2021
2020
2021
2020
U.S.
Int'l.
U.S.
Int'l.
Components of Net Periodic Benefit Cost
Three Months Ended September 30
Service cost
$
17
15
21
14
-
1
Interest cost
12
19
17
21
1
2
Expected return on plan assets
(22)
(30)
(21)
(37)
-
-
Amortization of prior service credit
-
-
-
(1)
(9)
(7)
Recognized net actuarial loss
9
8
12
5
-
1
Settlements
28
-
27
-
-
-
Net periodic benefit cost
$
44
12
56
2
(8)
(3)
Nine Months Ended September 30
Service cost
$
56
46
63
41
1
2
Interest cost
40
59
51
63
3
5
Expected return on plan assets
(66)
(90)
(63)
(108)
-
-
Amortization of prior service credit
-
-
-
(1)
(28)
(23)
Recognized net actuarial loss
36
24
37
16
1
1
Settlements
72
-
28
(1)
-
-
Curtailments
12
-
-
-
-
-
Special Termination
Benefits
9
-
-
-
-
-
Net periodic benefit cost
$
159
39
116
10
(23)
(15)
The components of net periodic benefit cost,
other than the service cost component, are included
in the “Other
expenses” line item on our consolidated
income statement.
We recognized a proportionate
share of prior actuarial losses from other comprehensive
income as pension
settlement expense of $
28
million and $
72
million during the three- and nine-month periods
ended September 30,
2021, respectively.
As part of our company-wide restructuring
program, we concluded that
actions taken during
the first quarter of 2021, would result
in a significant reduction of future service of active employees
in the U.S.
qualified pension plan, a U.S. nonqualified supplemental
retirement plan and the U.S.
other postretirement benefit
plans.
As a result, we recognized an increase
in the benefit obligation as a curtailment
loss of $
12
million on the
U.S. pension benefit plans.
In conjunction with the recognition of pension settlement
expense, the fair market
values of the pension plan assets were updated
and the pension benefit obligations of the U.S.
qualified pension
plan and the U.S. nonqualified supplemental
retirement plan were remeasured
at September 30, 2021.
At the
measurement date, the net pension
liability decreased by $
106
million compared to December 31, 2020, primarily
a result of an increase in the discount rate,
resulting in a corresponding increase to
other comprehensive income.
Notes to Consolidated Financial Statements
Table of Contents
27
ConocoPhillips
2021 Q3 10-Q
The relevant assumptions are
summarized in the following table:
September 30
December 31
2021
2020
Expected return on plan assets
3.40
%
5.80
Relevant discount rates
U.S. qualified pension plan
2.80
%
2.40
U.S. nonqualified pension plan
2.30
1.85
During the first nine months of 2021, we contributed
$
409
million to our domestic benefit plans and $
104
million
to our international benefit plans.
In 2021, we expect to contribute a
total of approximately $
475
million to our
domestic qualified and nonqualified pension and postretirement
benefit plans and $
115
million to our
international qualified and nonqualified pension and
postretirement benefit plans.
Severance Accrual Activity
Millions of Dollars
Balance at December 31, 2020
$
24
Accruals
165
Benefit payments
(102)
Balance at September 30, 2021
$
87
Accruals include severance costs
associated with our company-wide restructuring
program.
Of the remaining
balance at September 30, 2021, $
51
million is classified as short-term.
See Note 3
for information relating to
our
Concho acquisition.
Note 16—Related Party
Transactions
Our related parties primarily include equity method
investments and certain trusts
for the benefit of employees.
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
Significant Transactions
with Equity Affiliates
2021
2020
2021
2020
Operating revenues and other income
$
22
21
63
59
Purchases
1
-
5
-
Operating expenses and selling, general
and administrative
expenses
45
16
135
43
Net interest (income) expense*
$
-
(1)
(2)
(5)
*We paid interest to,
or received interest from, various affiliates
.
See Note 4
for information related
to loans to
equity affiliates.
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
28
Note 17—Sales and Other Operating Revenues
Revenue from Contracts
with Customers
The following table provides further
disaggregation of our consolidated
sales and other operating revenues:
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Revenue from contracts
with customers
$
8,880
3,078
23,794
9,908
Revenue from contracts
outside the scope of ASC Topic
606
Physical contracts
meeting the definition of a derivative
2,620
1,280
7,348
3,432
Financial derivative contracts
(174)
28
(434)
(47)
Consolidated sales and other operating
revenues
$
11,326
4,386
30,708
13,293
Revenues from contracts
outside the scope of ASC Topic
606 relate primarily to physical
gas contracts at market
prices which qualify as derivatives accounted
for under ASC Topic
815, “Derivatives and Hedging,”
and for which
we have not elected NPNS.
There is no significant difference
in contractual terms or the policy for
recognition of
revenue from these contracts
and those within the scope of ASC Topic
606.
The following disaggregation
of
revenues is provided in conjunction
with
Note 18—Segment Disclosures and Related Information
:
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Revenue from Outside the Scope of ASC Topic
606
by Segment
Lower 48
$
2,123
1,018
5,934
2,692
Canada
266
152
776
452
Europe, Middle East and North Africa
231
110
638
288
Physical contracts
meeting the definition of a derivative
$
2,620
1,280
7,348
3,432
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Revenue from Outside the Scope of ASC Topic
606
by Product
Crude oil
$
215
100
517
218
Natural gas
2,192
1,042
6,423
2,895
Other
213
138
408
319
Physical contracts
meeting the definition of a derivative
$
2,620
1,280
7,348
3,432
Notes to Consolidated Financial Statements
Table of Contents
29
ConocoPhillips
2021 Q3 10-Q
Practical Expedients
Typically,
our commodity sales contracts are
less than 12 months in duration; however,
in certain specific cases
they may extend longer,
which may be out to the end of field life.
We have long-term commodity sales contracts
which use prevailing market prices at the time of delivery, and under these contracts, the market-based variable
consideration for each performance obligation (i.e., delivery of commodity) is allocated to each wholly unsatisfied
performance obligation within the contract.
Accordingly,
we have applied the practical expedient allowed in ASC
Topic 606 and do not disclose the aggregate amount of the transaction price allocated to performance obligations
or when we expect to recognize revenues that are unsatisfied (or partially unsatisfied) as of the end of the
reporting period.
Receivables and Contract
Liabilities
Receivables from Contracts
with Customers
At September 30, 2021, the “Accounts
and notes receivable” line on our consolidated
balance sheet, includes
trade receivables of $
4,262
million compared with $
1,827
million at December 31, 2020, and includes both
contracts with customers
within the scope of ASC Topic
606 and those that are outside the scope of ASC Topic
606.
We typically receive payment within 30 days or less (depending on the terms of the invoice) once delivery is made.
Revenues that are outside the scope
of ASC Topic 606 relate
primarily to physical gas sales contracts
at market
prices for which we do not elect NPNS and are
therefore accounted
for as a derivative under ASC Topic
815.
There
is little distinction in the nature of the customer
or credit quality of trade receivables
associated with gas sold
under contracts for which NPNS
has not been elected compared to trade
receivables where NPNS has been
elected.
Contract Liabilities from Contracts
with Customers
We have entered
into contractual arrangements
where we license proprietary technology
to customers related
to
the optimization process for
operating LNG plants.
The agreements typically provide for
negotiated payments to
be made at stated milestones.
The payments are not directly related
to our performance under the contract
and
are recorded as deferred
revenue to be recognized
as revenue when the customer can utilize
and benefit from
their right to use the license.
Payments are received in installments over the construction period.
Millions of Dollars
Contract Liabilities
At December 31, 2020
$
97
Contractual payments received
7
Revenue recognized
(62)
At September 30, 2021
$
42
Amounts Recognized in the Consolidated
Balance Sheet at September 30, 2021
Current liabilities
$
42
For the nine-month period of 2021, we recognized revenue of $62 million in the “Sales and other operating
revenues” line on our consolidated income statement. No revenue was recognized during the three-month period
ended September 30, 2021. We expect to recognize the contract liabilities as of September 30, 2021, as revenue
during 2022.
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
30
Note 18—Segment Disclosures and Related
Information
We explore for,
produce, transport and market
crude oil, bitumen, natural gas,
LNG and NGLs on a worldwide
basis.
We manage our operations
through
six
operating segments, which are primarily defined
by geographic
region: Alaska; Lower 48; Canada; Europe,
Middle East and North Africa; Asia Pacific; and
Other International.
Corporate and Other represents
income and costs not directly associated
with an operating segment, such as most
interest income and expense;
premiums on early retirement of debt;
corporate overhead and
certain technology
activities, including licensing revenues;
and unrealized holding gains
or losses on equity securities.
Corporate
assets include all cash and cash equivalents
and short-term investments.
We evaluate performance
and allocate resources based
on net income (loss) attributable to ConocoPhillips.
Intersegment sales are at
prices that approximate market.
On January 15, 2021, we completed our acquisition
of Concho, an independent oil and gas exploration
and
production company with operations
across New Mexico and West
Texas.
Results of operations for
Concho are
included in our Lower 48 segment for the current
period.
Certain transaction and restructuring
costs associated
with the Concho acquisition are included in our Corporate
and Other segment.
See Note 3.
Notes to Consolidated Financial Statements
Table of Contents
31
ConocoPhillips
2021 Q3 10-Q
Analysis of Results by Operating Segment
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Sales and Other Operating Revenues
Alaska
$
1,395
864
3,946
2,396
Intersegment eliminations
-
(30)
-
(11)
Alaska
1,395
834
3,946
2,385
Lower 48
7,566
2,323
19,968
6,859
Intersegment eliminations
(1)
(9)
(5)
(47)
Lower 48
7,565
2,314
19,963
6,812
Canada
967
348
2,636
1,026
Intersegment eliminations
(406)
(20)
(1,063)
(200)
Canada
561
328
1,573
826
Europe, Middle East and North Africa
1,127
432
3,270
1,320
Asia Pacific
673
477
1,880
1,930
Other International
1
1
4
5
Corporate and Other
4
-
72
15
Consolidated sales and other operating
revenues
$
11,326
4,386
30,708
13,293
Sales and Other Operating Revenues
by Geographic Location
(1)
United States
$
8,963
3,148
23,978
9,209
Australia
-
-
-
605
Canada
561
328
1,573
826
China
193
161
519
374
Indonesia
231
167
634
503
Libya
313
6
833
50
Malaysia
249
148
727
447
Norway
678
358
1,708
1,046
United Kingdom
136
68
729
224
Other foreign countries
2
2
7
9
Worldwide consolidated
$
11,326
4,386
30,708
13,293
Sales and Other Operating Revenues
by Product
Crude oil
$
6,433
2,321
16,725
6,981
Natural gas
4,099
1,509
11,422
4,354
Natural gas liquids
414
129
976
364
Other
(2)
380
427
1,585
1,594
Consolidated sales and other operating
revenues by product
$
11,326
4,386
30,708
13,293
(1) Sales and other operating revenues are attributable to countries based on the location of the selling operation.
(2) Includes LNG and bitumen.
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Net Income (Loss) Attributable
to ConocoPhillips
Alaska
$
405
(16)
935
(76)
Lower 48
1,631
(78)
3,274
(880)
Canada
155
(75)
267
(270)
Europe, Middle East and North Africa
241
92
601
318
Asia Pacific
257
25
749
945
Other International
(97)
(8)
(106)
14
Corporate and Other
(213)
(390)
(268)
(1,980)
Consolidated net income (loss) attributable
to ConocoPhillips
$
2,379
(450)
5,452
(1,929)
Notes to Consolidated Financial Statements
Table of Contents
ConocoPhillips
2021 Q3 10-Q
32
Millions of Dollars
September 30
December 31
2021
2020
Total Assets
Alaska
$
14,617
14,623
Lower 48
33,200
11,932
Canada
6,797
6,863
Europe, Middle East and North Africa
8,956
8,756
Asia Pacific
10,657
11,231
Other International
1
226
Corporate and Other
13,076
8,987
Consolidated total assets
$
87,304
62,618
Note 19—Income Taxes
Our effective tax rate
for the three-month periods ended
September 30, 2021 and 2020 was
34
percent and
12
percent, respectively.
Both periods were primarily impacted by
shifts in our before-tax income between
higher
and lower tax jurisdictions as well as the change in
our U.S. valuation allowance
driven by the fair value
measurement of our CVE common shares.
Our effective tax rate
for the nine-month periods ended September
30, 2021 and 2020 was
35
percent and
8
percent,
respectively,
and both periods were impacted by the
same items noted above.
Our 2021 effective tax
rate was adversely
impacted by $
75
million due to incremental interest
deductions from the exchange of debt
acquired from Concho offsetting
U.S. foreign source revenue
that would otherwise have been offset
by foreign tax
credits.
The nine-month period ending September 30, 2020,
also reflects the tax impact of the gain
on disposition
recognized for the Australia-West
divestiture.
For additional information relating to the debt exchange, see Note
7.
During the three and nine-month periods of 2021, our valuation
allowance decreased by $
4
million and $
156
million, respectively,
compared to increases of $
33
million and $
264
million for the same periods of 2020.
The
change to our U.S. valuation
allowance for all periods relates
primarily to the fair value measurement of our
CVE
common shares and our expectation
of the tax impact related to incremental
capital gains and losses.
The Company has ongoing income tax audits
in numerous jurisdictions which are occasionally
extended or
completed earlier than anticipated.
Within the next twelve months we may
have audit periods close that could
significantly impact our total unrecognized
tax benefits.
The amount of such change and the associated
impact on
our financial statements is not estimable
at this time.
Our deferred tax liability
increased by approximately
$
1.1
billion as part of the liabilities assumed through our
Concho acquisition.
Additionally, our reserve
for unrecognized tax
benefits increased by $
150
million related to
tax credit carryovers
acquired from Concho that we do not expect
to recognize.
See Note 3.
Management’s Discussion and Analysis
Table of Contents
33
ConocoPhillips
2021 Q3 10-Q
Item 2.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Management’s Discussion and Analysis is the company’s
analysis of its financial performance and of significant
trends that may affect future performance.
It should be read in conjunction with the financial statements
and
notes.
It contains forward-looking statements
including, without limitation, statements
relating to the company’s
plans, strategies, objectives, expectations
and intentions that are made pursuant to
the “safe harbor” provisions of
the Private Securities Litigation Reform Act of 1995.
The words “anticipate,”
“believe,” “budget,”
“continue,”
“could,”
“effort,”
“estimate,”
“expect,”
“forecast,”
“goal,”
“guidance,”
“intend,”
“may,”
“objective,”
“outlook,”
“plan,” “potential,”
“predict,” “projection,”
“seek,” “should,”
“target,”
“will,” “would,”
and similar expressions
identify forward-looking statements.
The company does not undertake
to update, revise or correct any of the
forward-looking information unless required to do so under
the federal securities laws.
Readers are cautioned that
such forward-looking statements
should be read in conjunction with the company’s
disclosures under the heading:
“CAUTIONARY STATEMENT
FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS
OF THE PRIVATE
SECURITIES
LITIGATION REFORM
ACT OF 1995,”
beginning on page 57.
The terms “earnings” and “loss” as used in Management’s
Discussion and Analysis refer to net income (loss)
attributable to ConocoPhillips.
Business Environment and Executive Overview
ConocoPhillips is the world’s
largest independent E&P company
with operations and activities in 14 countries.
Our
diverse, low cost of supply portfolio
includes resource-rich unconventional
plays in North America; conventional
assets in North America, Europe, and Asia; LNG
developments; oil sands in Canada; and an inventory
of global
conventional and unconventional
exploration prospects.
Headquartered in Houston, Texas,
at September 30,
2021, we employed approximately
9,900 people worldwide and had total assets
of $87 billion.
Completed and Announced Acquisitions
On January 15, 2021, we completed our acquisition
of Concho Resources Inc. (Concho), an independent
oil and gas
exploration and production
company with operations across
New Mexico and West Texas.
The addition of
complementary acreage in the Delaware
and Midland Basins resulted in a significant
Permian presence to augment
our leading unconventional positions
in the Eagle Ford, Bakken and
Montney.
See Note 3.
In September 2021, we signed a definitive agreement
to acquire Shell Enterprises LLC
’s assets in
the Delaware
Basin (Shell Permian Acquisition) in an all-cash transaction
for $9.5 billion before customary
adjustments.
Assets
to be acquired include approximately
225,000 net acres and producing properties
located entirely in Texas,
as well
as over 600 miles of operated crude, gas
and water pipelines and infrastructure.
This acquisition further enhances
our already sizeable Permian
position, and we believe that our development,
operational and commercial
expertise will deliver significant incremental
value.
This acquisition is expected to close in the
fourth quarter of
2021, subject to regulatory approval
and other customary closing conditions.
See Note 3.
See Item 1A “Risk
Factors” for further discussion of the risks related to the Shell Permian Acquisition.
Overview
While commodity prices in the third quarter of 2021 improve
d
to pre-pandemic levels,
we expect that they will
continue to be cyclical and volatile.
Our view is that a successful business strategy
in the E&P industry must be
resilient in lower price environments,
while also retaining upside during periods
of higher prices.
As such, we are
unhedged, remain highly disciplined in our investment
decisions and continually monitor market
fundamentals
including OPEC plus updates regarding
supply guidance and inventory
levels.
Demand continues to recover but
has yet to regain pre
-pandemic levels.
The speed and extent of this recovery
will be influenced by continual easing
of COVID-19 restrictions that have
reduced economic activity and depressed
the demand for our products globally.
Management’s Discussion and Analysis
Table of Contents
ConocoPhillips
2021 Q3 10-Q
34
The energy macro-environment
,
including energy transition, continues
to evolve.
We believe ConocoPhillips can
play a valued role in the energy
transition.
We have adopted a triple mandate
that simultaneously calls for
meeting energy pathway demand,
delivering competitive returns of and on
capital, and achieving our net-zero
ambition on operational (scope 1 and 2) emissions.
Our triple mandate is supported by financial principles
and capital allocation priorities that
should allow us to
deliver superior returns through the price cycles
.
Our financial principles consist of maintaining
balance sheet
strength, providing peer-leading
distributions, making disciplined investment
s, and delivering ESG excellence,
all of
which are in service to delivering competitive financial
returns.
Our completed and announced acquisitions
this
year further reinforce our value
proposition.
In the third quarter,
total company production
was 1,544 MBOED
resulting in cash provided by operating
activities of $4.8 billion.
In the nine-month period ended September 30,
2021, we generated $11.1 billion in
cash provided by operating activities,
returning $1.8 billion to shareholders
through dividends and $2.2 billion through share
repurchases.
We ended the quarter with cash,
cash equivalents
and short-term investments totaling
$10.5 billion.
In February
2021, we resumed our share repurchase
program at an annualized
level of $1.5 billion, which we
increased in the second quarter to an annualized
level of $2.5 billion for 2021.
Additionally, in
May 2021 we announced a paced monetization
program related to the
208 million shares of
Cenovus Energy (CVE) common shares
owned at that time.
We plan to fully dispose of our CVE shares
by year-end
2022, however,
the sales pace for the remaining shares will
be guided by market conditions,
and we retain
discretion to adjust accordingly.
During the third quarter of 2021, we sold 47 million shares
for $404 million and
inception to date have sold
67 million shares for $584 million.
Proceeds from the disposition of CVE shares
will be
deployed toward incremental
share repurchases.
See Note 5.
In September 2021, we declared an increase
in the company’s quarterly
ordinary dividend from 43 cents per share
to 46 cents per share, representing
a 7 percent increase.
The dividend is payable on December 1, 2021,
to
stockholders of record
at the close of business on October 28, 2021.
Planned distributions for 2021 amount to
a total of approximately $6 billion
between dividends
and share
repurchases combined.
Additionally in September 2021, we demonstrated
our commitment to preserving our ‘A’
-rated balance sheet by
restating our intent
to reduce the company’s
gross debt by $5 billion over five years
through natural and
accelerated maturities.
In conjunction with our Shell Permian Acquisition announcement
,
we also communicated an increase
to our
planned disposition target that was
initially set in June at $2 to $3 billion by 2022.
We are now targeting
$4 to $5
billion in disposition proceeds by 2023, with the additional
$2 billion sourced primarily from the Permian
Basin as
part of our ongoing portfolio high-grading and
optimization efforts.
To date,
we have generated
$0.2 billion in
disposition proceeds.
The proceeds from these transactions will be used
in accordance with the company’s
priorities, including returns of capital
to shareholders and reduction of gross
debt.
Management’s Discussion and Analysis
Table of Contents
35
ConocoPhillips
2021 Q3 10-Q
In September 2021, in conjunction with the announcement
of the Shell Permian Acquisition,
we reaffirmed our
commitment to ESG leadership and
excellence by announcing an improvement
to our operational GHG emissions
intensity reduction targets
by 2030.
Our Paris-aligned climate-risk commitment
now includes:
●
Net-zero ambition for
operational (scope 1 and 2) emissions
by 2050 with active advocacy for a price
on
carbon to address end-use (scope 3) emissions;
●
Targeting
a reduction in gross operated
and net equity operational GHG emissions intensity
by 40 to 50
percent from 2016 levels by 2030, an
improvement from the previously
announced target of 35 to 45
percent on only a gross operated
basis;
●
Zero routine flaring by 2030, with an
ambition to get there by 2025;
●
10 percent reduction target
for methane emissions intensity
by 2025 from a 2019 baseline, in addition to
the 65 percent reductions we have
made since 2015;
●
Adding continuous methane detection devices
to our operations,
with an initial focus on the larger Lower
48 facilities;
●
Dedicated low carbon technology
organization responsible
for identifying and prioritizing global emissions
reduction initiatives and opportunities associated
with the energy transition including carbon capture,
utilization and storage
(CCUS) and hydrogen; and
●
ESG performance factoring into
executive and employee compensation
programs.
Operationally,
we remain focused on safely
executing the business.
Production was 1,544 MBOED in the third
quarter of 2021, an increase of 477 MBOED or 45 percent,
compared with the third quarter of 2020, primarily
due
to the addition of approximately
343 MBOED in the Permian Basin from our Concho
acquisition and the absence of
last year’s economic curtailments
predominantly in North American operated
assets as a result of lower oil prices.
We re-invested
$1.3 billion into the business in the form of capital
expenditures during the third quarter,
with over
half of our investments focused
on flexible, short-cycle unconventional
plays in the Lower 48 segment where our
production is liquids-weighted and
has access to both domestic and export markets
.
For the full year,
we remain
disciplined with our allocation of capital with a
planned $5.3 billion program excluding
the impacts of the recently
announced Shell Permian Acquisition which is anticipated
to close in the fourth quarter.
Business Environment
Commodity prices are the most significant
factor impacting our profitability and
related reinvestment of operating
cash flows into our business.
Dynamics that could influence world energy markets
and commodity prices are
global economic health, supply or demand disruptions
or fears thereof caused by civil
unrest, global pandemics,
military conflicts, actions taken
by OPEC plus and other major oil producing countries,
environmental laws, tax
regulations, governmental policies,
and weather-related disruptions.
Our strategy is to create
value through price
cycles by delivering on the financial, operational
and ESG priorities that underpin our value proposition
.
Our earnings and operating cash flows
generally correlate with
price levels for crude oil and natural
gas, which are
subject to factors external
to the company and over which we have
no control.
The following graph depicts the
trend in average benchmark prices
for WTI crude oil, Brent crude oil and
Henry Hub natural gas:
Management’s Discussion and Analysis
Table of Contents
ConocoPhillips
2021 Q3 10-Q
36
-
1
2
3
4
5
20
40
60
80
Q3'19
Q4'19
Q1'20
Q2'20
Q3'20
Q4'20
Q1'21
Q2'21
Q3'21
WTI/Brent
$/Bbl
WTI Crude Oil, Brent Crude Oil and Henry Hub Natural Gas Prices
Quarterly Averages
WTI - $/Bbl
Brent - $/Bbl
HH - $/MMBTU
HH
$/MMBTU
Brent crude oil prices averaged
$73.47 per barrel in the third quarter of 2021, an increase
of 71 percent compared
with $43.00 per barrel in the third quarter of 2020.
WTI at Cushing crude oil prices averaged
$70.56 per barrel in
the third quarter of 2021, an increase of 72 percent
compared with $40.93 per barrel in the third
quarter of 2020.
Oil prices increased alongside the ongoing global economic
recovery following 2020’s
COVID impacts as well as
OPEC plus supply restraint,
continued capital discipline by U.S. E&P’s
and various unplanned supply disruptions in
producing countries.
Henry Hub natural gas prices averaged
$4.02 per MMBTU in the third quarter
of 2021, an increase of 103 percent
compared with $1.98 per MMBTU in the third
quarter of 2020.
Henry Hub prices have increased due to
healthy
domestic demand accompanied by record
levels of feedgas demand for
LNG exports to Europe and Asia.
Our realized bitumen price averaged
$41.19 per barrel in the third quarter of 2021, an
increase of 160 percent
compared with $15.87 per barrel in the third
quarter of 2020.
The increase in the third quarter of 2021 was driven
by higher blend price for Surmont sales, largely
attributed to a strengthening
of WTI price.
We continue to
optimize bitumen price realizations
through the utilization of downstream
transportation solutions
and
implementation of alternate
blend capability which results in lower diluent
costs.
For the third quarter of 2021 our total
average realized
price increased to $56.92 per BOE compared
with $30.94
per BOE in the third quarter of 2020.
Management’s Discussion and Analysis
Table of Contents
37
ConocoPhillips
2021 Q3 10-Q
Key Operating and Financial
Summary
Significant items during the third quarter
of 2021 and recent announcements included the following:
●
Delivered strong operational
performance across the company’s
asset base, including successful planned
maintenance turnarounds, resulting
in third quarter production of 1,507 MBOED,
excluding Libya.
●
Net cash provided by operating
activities was $4.8 billion, exceeding capital
expenditures and investments
of $1.3 billion.
●
Distributed a total of $4.0 billion to
shareholders year to date,
comprised of $2.2 billion in share
repurchases and $1.8 billion in dividends as
part of the company’s plan to return
approximately $6.0
billion to shareholders during 2021.
●
Announced an increase to the quarterly dividend
by 7 percent to 46 cents per share.
●
Ended the quarter with cash and cash equivalents
totaling $9.8 billion and short-term investments
of $0.7
billion, equaling $10.5 billion in ending cash, cash equivalents
and short-term investments.
●
As part of a commitment to ESG excellence,
announced an improvement to
the company’s scope
1 and 2
GHG emissions intensity reduction targets
from a 2016 baseline to 40 to 50 percent
on a net equity and
gross operated basis, from
the previous target of 35 to 45 percent
on only a gross operated basis
.
●
Announced highly accretive pending acquisition
of Shell Enterprises LLC’s complementary
Delaware Basin
position in the Permian for $9.5 billion in cash,
before customary closing adjustments.
●
Generated approximately
$0.2 billion in disposition proceeds from Lower 48 noncore
asset sales as part of
the company’s target
to generate $4 to $5 billion in proceeds
by 2023.
Production from the disposed
assets average approximately
15 MBOED in the first nine months of 2021.
Outlook
Capital,
Cost and Production
Fourth-quarter 2021 production is
expected to be 1.53 to 1.57 MMBOED.
This guidance excludes Libya
and
impacts from pending acquisitions.
Guidance regarding capital and
cost are unchanged.
This production guidance includes the impact of planned conversion
of the significant majority of previously
acquired Concho two-stream contracted
volumes to a three-stream (crude oil,
natural gas and natural
gas liquids)
reporting basis as Concho volumes are integrated
into the company’s
commercial activities.
The conversion to
three-stream reporting is neutral
to earnings.
Effective in the fourth
quarter,
this conversion is expected
to add
production of approximately
40 MBOED and increase revenue and operating
costs by roughly $70 million.
Depreciation, Depletion and Amortization
Our proved reserve estimates
are greatly impacted by commodity
price fluctuations, and generally decrease
as
prices decline and increase as prices rise.
Proved reserves estimates
were updated and increased in the current
quarter utilizing historical twelve-month
first-of-month average
prices, which decreased third quarter DD&A
expense by approximately
$240 million before-tax.
As such, the company reduced its 2021 DD&A expense
guidance by $0.3 billion to $7.1 billion.
Results of Operations
Table of Contents
ConocoPhillips
2021 Q3 10-Q
38
Results of Operations
Unless otherwise indicated, discussion of results for the three
-
and nine-month periods ended September 30, 2021,
is based on a comparison with the corresponding periods of 2020.
Consolidated Results
A summary of the company's net income (loss) attributable
to ConocoPhillips by business segment follows:
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Alaska
$
405
(16)
935
(76)
Lower 48
1,631
(78)
3,274
(880)
Canada
155
(75)
267
(270)
Europe, Middle East and North Africa
241
92
601
318
Asia Pacific
257
25
749
945
Other International
(97)
(8)
(106)
14
Corporate and Other
(213)
(390)
(268)
(1,980)
Net income (loss) attributable to
ConocoPhillips
$
2,379
(450)
5,452
(1,929)
Net income (loss) attributable to
ConocoPhillips in the third quarter of 2021 increased
$2,829 million.
Third
quarter earnings were positively impacted
by:
●
Higher realized commodity prices.
●
Higher sales volumes, primarily due to our Concho
acquisition and absence of production curtailments in
our North American operated
assets.
See Note 3.
●
Higher equity in earnings of affiliates, primarily due to
higher LNG sales prices.
●
A gain of $17 million after-tax on our CVE common shares
in the third quarter of 2021, as compared to a
$162 million after-tax loss on those shares
in the third quarter of 2020.
See Note 5.
Third quarter 2021 net income increases
were partly offset by:
●
Higher production and operating expenses
and taxes other than income taxes,
primarily due to higher
sales volumes.
●
Higher DD&A expenses caused by higher production
volumes, partially offset by lower rates
driven from
price-related reserve revisions
due to higher commodity prices in 2021.
Net income (loss) attributable to
ConocoPhillips in the nine-month period ended September
30, 2021, increased
$7,381 million.
●
Inclusive of the third quarter gain associated
with our CVE common shares, in the nine-month period we
recognized a gain of $743 million
after-tax on our CVE common shares,
compared with an after-tax loss of
$1,302 million in the nine-month period of 2020.
In addition to the items detailed above,
earnings in the nine-month period were positively
impacted by:
●
Lower impairments of $611 million, primarily due to a
credit recognized for a decrease
in the ARO
estimate of a previously sold asset,
in which we retained the ARO liability,
as well as the absence of
impairments recognized in the prior period
for non-core gas assets
in our Lower 48 segment.
See Note 6.
●
An after-tax gain of $194 million recognized
for a FID bonus associated with our
Australia-West divestiture
completed in the second quarter of 2020.
See Note 3.
●
Lower exploration expenses
due to the absence of charges associated
with the early cancellation of our
2020 winter exploration program
as well as the absence of 2020 dry hole expenses in Alaska
,
and
unproved property impairment
and dry hole expenses for the Kamunsu
East Field in Malaysia,
which is no
longer in our development plans.
Results of Operations
Table of Contents
39
ConocoPhillips
2021 Q3 10-Q
In addition to the items detailed above,
the increases in earnings in the nine-month period ended September
30,
2021, were partly offset by:
●
Absence of a $597 million after-tax gain
on our Australia-West
divestiture completed in May
2020.
●
Restructuring and transaction expenses
of $288 million after-tax associated
with the Concho acquisition
and mark-to-market impacts on certain
key employee compensation
programs.
●
Realized losses on hedges of $233 million after
-tax related to derivative
positions assumed through our
Concho acquisition.
These derivative positions were settled
entirely within the first quarter of 2021.
See
Note 11.
●
Absence of gains recorded in
2020 from foreign currency derivatives.
See the “Segment Results” section for additional
information.
Income Statement Analysis
Unless otherwise indicated, all results in Income Statement
Analysis are before-tax.
Sales and other operating revenues
for the three-
and nine-month periods of 2021 increased $6,940 million
and
$17,415 million, respectively,
mainly due to higher realized commodity
prices and higher sales volumes.
Equity in earnings of affiliates for
the three-
and nine-month periods of 2021 increased $204 million and
$154
million, respectively,
primarily due to higher earnings driven by higher LNG and
crude prices, partially offset by a
higher effective tax rate
related to equity method
investments in our Europe,
Middle East, and North Africa
segment.
Gain (loss) on dispositions in the third quarter of 2021 recognized
a loss of $179 million for the sale of noncore
assets in our Other International segment. Offsetting
the loss were gains recognized
for contingent payments
associated with previous dispositions
in our Canada and Lower 48 segments and gains
on sales of certain noncore
assets in our Lower 48 segment.
For the nine-month period of 2021, net gains on dispositions
decreased $257
million primarily due to the absence of a $587 million gain
associated with our Australia
-West divestiture,
partially
offset by a $200 million FID bonus recognized
in the first quarter of 2021 associated with
our Australia-West
divestiture.
Other income (loss) for the three-
and nine-month periods of 2021 increased $87 million
and $1,867 million,
respectively.
During these periods in 2021, we recognized
gains of $17 million and $743 million, respectively,
on
our CVE common shares,
compared with losses of $162 million and $1,302 million for
the same periods in 2020.
Purchased commodities for the three
-
and nine-month periods of 2021 increased $2,340 million and
$6,030
million, respectively,
primarily due to higher gas and crude prices and
volumes.
Production and operating expenses
for the three-
and nine-month periods of 2021 increased $426 million
and
$968 million, respectively,
primarily in line with higher production volumes.
Selling, general and administrative
expenses increased $307 million in the nine-month
period of 2021, primarily
due to transaction and restructuring
expenses associated with our Concho acquisition
,
and higher costs associated
with compensation and benefits, including mark-to
-market impacts of certain key
employee compensation
programs.
Exploration expenses for
the nine-month period of 2021 decreased $204 million, primarily
due to the absence of
charges associated with the early cancellation
of our 2020 winter exploration
program as well as the absence of
2020 dry hole expenses in Alaska and an unproved
property impairment and dry hole expenses related
to the
Kamunsu
East Field in Malaysia.
Results of Operations
Table of Contents
ConocoPhillips
2021 Q3 10-Q
40
DD&A for the three-
and nine-month periods of 2021 increased $261 million and
$1,445 million, respectively,
mainly due to higher production volumes
partly offset by lower rates
from price-related reserve revisions
.
Impairments decreased $91 million in the third
quarter of 2021, primarily due to a decrease in an ARO
estimate for
a previously sold asset, in which we retained
the ARO liability.
The decrease of $611 million in the nine-month
period of 2021 was also impacted by the absence
of impairments
recorded for certain non-core
gas assets in our
Lower 48 segment.
Taxes
other than income taxes for
the three-
and nine-month periods of 2021 increased $224 million and
$584
million, respectively,
caused by higher sales volumes primarily in Lower
48 and higher commodity prices.
Foreign currency transaction
(gain) loss for the nine-month period of 2021 was
impaired by $107 million due to the
absence of derivative gains and
other remeasurements.
See
Note 19—Income Taxes
for information regarding
our income tax provision
(benefit) and effective tax
rate.
Results of Operations
Table of Contents
41
ConocoPhillips
2021 Q3 10-Q
Summary Operating Statistics
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Average Net Production
Crude oil (MBD)
Consolidated operations
802
535
814
546
Equity affiliates
13
13
13
13
Total
crude oil
815
548
827
559
Natural gas liquids (MBD)
Consolidated operations
123
89
116
97
Equity affiliates
7
8
8
7
Total
natural gas liquids
130
97
124
104
Bitumen (MBD)
69
49
69
50
Natural gas (MMCFD)
Consolidated operations
2,144
1,201
2,143
1,353
Equity affiliates
1,033
1,034
1,055
1,042
Total
natural gas
3,177
2,235
3,198
2,395
Total Production
(MBOED)
1,544
1,067
1,553
1,112
Dollars Per Unit
Average Sales Prices
Crude oil (per bbl)
Consolidated operations*
$
70.39
39.49
64.62
39.04
Equity affiliates
73.44
37.56
65.71
38.22
Total
crude oil
70.43
39.45
64.63
39.02
Natural gas liquids (per bbl)
Consolidated operations
33.28
13.73
28.02
11.72
Equity affiliates
56.70
30.21
49.81
31.65
Total
natural gas liquids
34.79
15.29
29.58
13.45
Bitumen (per bbl)
41.19
15.87
36.61
2.90
Natural gas (per MCF)
Consolidated operations*
5.93
2.77
5.02
3.07
Equity affiliates
5.95
2.61
4.48
3.98
Total
natural gas
5.94
2.70
4.84
3.47
Millions of Dollars
Exploration Expenses
General administrative,
geological and geophysical,
lease rental, and other
$
65
81
199
296
Leasehold impairment
-
-
1
31
Dry holes
-
44
6
83
$
65
125
206
410
*Average sales prices, including the impact of hedges settling per initial contract terms in the first quarter of 2021 assumed in our
Concho
acquisition, were $63.95 per barrel for crude oil and $4.98 per mcf for natural gas for the nine-month
period ended September 30, 2021.
As of
March 31, 2021, we had settled all oil and gas hedging positions acquired from Concho.
See Note 11.
Results of Operations
Table of Contents
ConocoPhillips
2021 Q3 10-Q
42
We explore for,
produce, transport and market
crude oil, bitumen, natural gas,
LNG and NGLs on a worldwide
basis.
At September 30, 2021, our operations
were producing in the U.S., Norway,
Canada, Australia, Indonesia,
China, Malaysia, Qatar and Libya.
Total
production of 1,544 MBOED increased 477 MBOED or
45 percent in the third quarter of 2021 and 441
MBOED or 40 percent in the nine-month period of 2021, primarily
due to:
●
Higher volumes in the Lower 48 due to our Concho acquisition.
●
New wells online in the Lower 48, Canada, Norway
and Malaysia.
●
Higher volumes in our North American operated
assets due to the absence of production curtailments.
●
Higher production in Libya due the absence of a forced
shutdown of the Es Sider export terminal and
other eastern export terminals after
a period of civil unrest.
●
Improved well performance in
Norway,
Canada, Alaska and China.
Production increases
in the third quarter and in the nine-month period of 2021 were
partly offset by normal field
decline.
In addition to the normal field decline, in the nine-month period
of 2021, production also decreased due to:
●
Absence of production from Australia
-West due to our second quarter
2020 disposition.
●
Higher unplanned downtime in the Lower 48 due to Winter
Storm Uri, which impacted production by
approximately 50 MBOED in the first
quarter of 2021.
Production excluding Libya
for the third quarter of 2021 was
1,507 MBOED, an increase of 441 MBOED from the
same period a year ago.
After adjusting for closed acquisitions
and dispositions as well as estimated impacts from
the 2020 curtailment program,
third-quarter 2021 production increased
26 MBOED or 2 percent.
This increase
was primarily due to new production from
the Lower 48 and other development programs
across the portfolio,
partially offset by normal field decline.
Production from Libya averaged
37 MBOED.
Production excluding Libya
for the nine-month period of 2021 was 1,514 MBOED,
an increase of 406 MBOED from
the same period a year ago.
After adjusting for closed acquisitions
and dispositions as well as impacts from the
2020 curtailment program and
Winter Storm Uri impacts from 2021, production
increased 17 MBOED or 1 percent.
This increase was primarily due to new production
from the Lower 48 and other development
programs across the
portfolio, partially offset by
normal field decline.
Production from Libya averaged
39 MBOED.
Results of Operations
Table of Contents
43
ConocoPhillips
2021 Q3 10-Q
Segment
Results
Alaska
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Net Income (Loss) Attributable
to ConocoPhillips
($MM)
$
405
(16)
935
(76)
Average Net Production
Crude oil (MBD)
163
184
179
179
Natural gas liquids (MBD)
13
14
15
15
Natural gas (MMCFD)
11
14
10
10
Total Production
(MBOED)
178
201
196
195
Average Sales Prices
Crude oil ($ per bbl)
$
72.55
40.88
66.78
41.92
Natural gas ($ per MCF)
2.63
2.48
3.06
2.71
The Alaska segment primarily explores for,
produces, transports and markets
crude oil, NGLs and natural gas.
As of
September 30, 2021, Alaska contributed
19 percent of our consolidated liquids production
and less than 1 percent
of our consolidated natural
gas production.
Net Income (Loss) Attributable to ConocoPhillips
Earnings from Alaska increased
$421 million in the third quarter of 2021 and $1,011 million
in the nine-month
period of 2021, respectively.
In the third quarter,
increases to earnings include:
●
Higher realized crude oil prices.
●
Lower DD&A expenses primarily driven by
lower production volumes and lower rates
in the quarter from
price-related reserve revisions
.
Offsets to the earnings increase include
:
●
Lower volumes due to a July turnaround
at our Western North Slope assets.
In addition to the items detailed above,
in the nine-month period of 2021, earnings also increased due to:
●
Lower exploration expenses
due to the absence of charges associated
with the early cancellation of our
2020 winter exploration program
as well as the absence of 2020 dry hole expenses.
●
Higher volumes due to the absence of production
curtailments.
In addition to the items detailed above,
in the nine-month period of 2021, earnings also decreased due to:
●
Higher DD&A expenses primarily caused by higher
rates in the first half of 2021.
Production
Average production
decreased 23 MBOED in the third quarter of 2021 and increased
1 MBOED in the nine-month
period of 2021, respectively.
In the third quarter of 2021, decreases to production
include:
●
Normal field decline.
●
A July turnaround at our Western
North Slope assets.
More than offsetting the items
detailed above, in the nine-month period of 2021, production
increased due to:
●
Absence of curtailments.
●
Improved performance in the Greater
Prudhoe Area and Western
North Slope assets.
Results of Operations
Table of Contents
ConocoPhillips
2021 Q3 10-Q
44
Willow Update
In August 2021, an Alaska federal
judge vacated the U.S. government’s
approval granted
to our planned Willow
project previously approved
by the Bureau of Land Management (BLM) in October 2020.
The Department of
Justice did not appeal the decision and neither did we.
We believe the best path forward
is to work closely with
the BLM and engage directly with the relevant
agencies to address the matters
described in the decision.
In the
interim, we are continuing with FEED
work in service of a final investment decision.
Lower 48
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Net Income (Loss) Attributable
to ConocoPhillips
($MM)
$
1,631
(78)
3,274
(880)
Average Net Production*
Crude oil (MBD)
457
197
442
211
Natural gas liquids (MBD)
101
68
93
74
Natural gas (MMCFD)
1,389
566
1,389
577
Total Production
(MBOED)
790
359
767
381
Average Sales Prices
Crude oil ($ per bbl)**
$
68.59
36.43
63.14
34.02
Natural gas liquids ($ per bbl)
32.87
13.51
27.48
10.96
Natural gas ($ per MCF)**
4.63
1.63
4.13
1.45
*Subsequent to the current period, we anticipate a change in both product mix and average net production
attributed to the planned conversion
of previously acquired two-stream contracted volumes to three-stream.
**Average sales prices, including the impact of hedges settling per initial contract terms in the first quarter of 2021 assumed in our Concho
acquisition, were $61.90 per barrel for crude oil and $4.07 per mcf for natural gas for the nine-month
period ended September 30, 2021.
As of
March 31, 2021, we had settled all oil and gas hedging positions acquired from Concho.
See Note 11.
The Lower 48 segment consists of operations
located in the U.S. Lower 48 states,
as well as producing properties in
the Gulf of Mexico.
As of September 30, 2021, the Lower 48 contributed
54 percent of our consolidated liquids
production and 65 percent of our consolidated
natural gas production.
Net Income (Loss) Attributable to ConocoPhillips
Earnings from the Lower 48 increased $1,709
million in the third quarter of 2021 and increased
$4,154 million in
the nine-month period of 2021, respectively.
In the third quarter,
increases to earnings include:
●
Higher realized crude oil, natural
gas and NGL prices.
●
Higher sales volumes of crude oil and natural
gas due to our Concho acquisition and the absence of
production curtailments.
Offsets to the earnings increase include:
●
Higher DD&A expenses, production and operating
expenses and taxes other than
income taxes primarily
due to higher production volumes.
Partially offsetting the increase
in DD&A expenses were lower rates
from price-related reserve revisions.
In addition to the items detailed above,
in the nine-month period of 2021, earnings also increased due to
:
●
The absence of $399 million in after-tax impairments
related to certain noncore
gas assets.
In addition to the items detailed above,
in the nine-month period of 2021, earnings also decreased due to:
●
Impacts resulting from our Concho Acquisition,
including higher selling, general and administrative
expenses for transaction and restructuring
charges, as well as realized losses
on derivative settlements.
See Note 3
and
Note 11.
Results of Operations
Table of Contents
45
ConocoPhillips
2021 Q3 10-Q
Production
Average production increased
431 MBOED and 386 MBOED in the three-
and nine-month periods of 2021,
respectively.
In the third quarter,
increases to production include:
●
Higher volumes due to our Concho acquisition.
●
New wells online from our development programs
in Permian, Eagle Ford
and Bakken.
●
Absence of curtailments.
Offsets to the production increases
include:
●
Normal field decline.
In addition to normal field decline,
in the nine-month period of 2021, production also
decreased due to:
●
Higher unplanned downtime, primarily due to Winter
Storm Uri.
Asset Acquisitions and Dispositions
In September 2021, we announced the Shell Permian
Acquisition for $9.5 billion in cash before
customary
adjustments.
The transaction is anticipated to
close in the fourth quarter of 2021, subject to regulatory
approval
and other customary closing conditions.
See Note 3.
See Item 1A “Risk Factors” for further discussion of risks
related to the Shell Permian Acquisition.
Additionally in September 2021, we completed
divestitures
of certain noncore assets in our Lower 48 segment
,
recording proceeds of approximately
$150 million.
Production from these assets averaged
approximately 15
MBOED in the nine-months ended September 30, 2021.
See Note 3.
Results of Operations
Table of Contents
ConocoPhillips
2021 Q3 10-Q
46
Canada
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Net Income (Loss) Attributable
to ConocoPhillips
($MM)
$
155
(75)
267
(270)
Average Net Production
Crude oil (MBD)
8
6
10
4
Natural gas liquids (MBD)
4
2
4
2
Bitumen (MBD)
69
49
69
50
Natural gas (MMCFD)
73
43
83
35
Total Production
(MBOED)
93
64
96
62
Average Sales Prices
Crude oil ($ per bbl)
$
58.99
25.16
53.81
15.39
Natural gas liquids ($ per bbl)
33.47
5.99
28.49
1.89
Bitumen ($ per bbl)
41.19
15.87
36.61
2.90
Natural gas ($ per MCF)
2.45
0.71
2.36
1.05
Average sales prices include unutilized transportation costs.
Our Canadian operations mainly consist
of the Surmont oil sands development in Alberta
and the liquids-rich
Montney unconventional
play in British Columbia.
As of September 30, 2021, Canada contributed 8 percent
of our
consolidated liquids production and
4 percent of our consolidated natural
gas production.
Net Income (Loss) Attributable to ConocoPhillips
Earnings from Canada increased $230 million
and $537 million,
respectively,
in the three-
and nine-month periods
of 2021.
Increases to earnings include:
●
Higher realized bitumen and crude oil prices.
●
Higher sales volumes in our Surmont and Montney
assets.
●
After-tax gains
on disposition related to contingent
payments of $77 million and $149 million in
the three-
and nine-month periods of 2021, respectively,
associated with the sale of certain assets
to CVE in 2017.
See Note 3.
Offsets to the earnings increase include
:
●
Higher production and operating expenses
primarily due to increased Surmont and Montney
production.
Production
Average production
increased 29 MBOED in the third quarter of 2021 and
increased 34 MBOED in the nine-month
period of 2021, respectively.
In the third quarter,
increases to production include:
●
Absence of curtailments.
●
Absence of third quarter 2020 turnaround
activity in the Surmont.
●
New wells online in the Montney.
●
Production from our Kelt acquisition
completed in the third quarter of 2020.
Offsets to the production increases
include:
●
Higher well failures, plant power trips
and facility upsets in the Surmont.
In addition to the items detailed above,
in the nine-month period of 2021, production also increased
due to:
●
Improved well performance in
the Surmont.
Results of Operations
Table of Contents
47
ConocoPhillips
2021 Q3 10-Q
Europe, Middle East and North Africa
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Net Income Attributable
to ConocoPhillips
($MM)
$
241
92
601
318
Consolidated Operations
Average Net Production
Crude oil (MBD)
117
77
118
82
Natural gas liquids (MBD)
5
5
4
5
Natural gas (MMCFD)
303
256
303
276
Total Production
(MBOED)
172
125
172
133
Average Sales Prices
Crude oil ($ per bbl)
$
72.43
41.79
65.94
43.72
Natural gas liquids ($ per bbl)
50.32
23.50
40.75
20.01
Natural gas ($ per MCF)
11.96
2.40
8.40
2.85
The Europe, Middle East and North Africa
segment consists of operations
principally located in the Norwegian
sector of the North Sea and the Norwegian Sea, Qatar,
Libya and commercial operations
in the U.K.
As of
September 30, 2021, our Europe, Middle East
and North Africa operations contributed
12 percent of our
consolidated liquids production and
14 percent of our consolidated natural
gas production.
Net Income Attributable to ConocoPhillips
Earnings from Europe, Middle East
and North Africa increased by $149 million and $283 million in the three
-
and
nine-month periods of 2021, respectively.
Increases to earnings include:
●
Higher realized natural
gas, crude oil and NGL prices.
●
Higher LNG sales prices, reflected in equity in earnings
of affiliates.
●
Higher sales volumes of crude oil and LNG.
Offsets to the earnings increases
include:
●
Higher taxes.
●
Higher production and operating expenses
and DD&A expenses.
Consolidated Production
Average consolidated
production increased 47 MBOED and 39 MBOED in the three
-
and nine-month periods of
2021, respectively.
Increases to production
include:
●
Higher production in Libya due to the absence of a
forced shutdown of the Es Sider export
terminal and
other eastern export terminals after
a period of civil unrest.
●
Improved well performance in
Norway.
●
New production from Norway
drilling activities including our Tor
II redevelopment project with first
production in December 2020.
Offsets to the production increases
include:
●
Normal field decline.
Results of Operations
Table of Contents
ConocoPhillips
2021 Q3 10-Q
48
Asia Pacific
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Net Income Attributable
to ConocoPhillips
($MM)
$
257
25
749
945
Consolidated Operations
Average Net Production
Crude oil (MBD)
57
71
65
70
Natural gas liquids (MBD)
-
-
-
1
Natural gas (MMCFD)
368
322
358
455
Total Production
(MBOED)
119
125
125
147
Average Sales Prices
Crude oil ($ per bbl)
$
74.66
42.79
67.41
42.94
Natural gas liquids ($ per bbl)
-
-
-
33.21
Natural gas ($ per MCF)
6.66
5.33
6.30
5.42
The Asia Pacific segment has operations
in China, Indonesia, Malaysia and Australia.
As of September 30, 2021, Asia
Pacific contributed 7 percent
of our consolidated liquids production
and 17 percent of our consolidated natural
gas
production.
Net Income Attributable to ConocoPhillips
Earnings from Asia Pacific increased
$232 million in the third quarter of 2021 and decreased $196 million
in the nine-
month period of 2021, respectively.
In the third quarter,
increases to earnings include:
●
Higher crude oil and natural gas
prices.
●
Higher LNG sales prices, reflected in equity in earnings
of affiliates.
●
Lower DD&A expenses in the third quarter
of 2021 primarily driven by lower production volumes
and
lower rates from price-related
reserve revisions.
In addition to the items detailed above,
in the nine-month period of 2021, earnings also increased due to:
●
A $200 million gain on disposition related
to a FID bonus from our Australia-West
divestiture.
For additional
information related to
this FID bonus, see
Note 3
and
Note 10
.
●
Lower production and operating
expenses related to the absence of Australia
-West.
Offsetting the items detailed
above, in the nine-month period of 2021, earnings decreased
due to:
●
Absence of a $597 million after-tax gain
related to our Australia
-West divestiture.
●
Absence of sales volumes associated with Australia
-West.
Consolidated Production
Average consolidated
production decreased 6 MBOED and 22 MBOED in the three
-
and nine-month periods of 2021,
respectively.
In the third quarter,
the primary decrease to production was
normal field decline.
Partly offsetting the decrease
in production was:
●
Increased production in Malaysia
associated with Malikai Phase 2 first
production and ramp-up.
●
Bohai Bay development activity in
China.
In addition to normal field decline, in the nine-month period
of 2021, production also decreased due to:
●
The divestiture of our Australia
-West assets that contributed
23 MBOED in the nine-month period of 2020.
In addition to the items detailed above,
in the nine-month period of 2021, production also increased
due to:
●
The absence of curtailments across the segment
and increased demand in Indonesia from coal supply
restrictions.
Results of Operations
Table of Contents
49
ConocoPhillips
2021 Q3 10-Q
Other International
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Net Income (Loss) Attributable
to ConocoPhillips
($MM)
$
(97)
(8)
(106)
14
The Other International segment consists
of exploration and appraisal
activities in Colombia as well as
contingencies associated with prior operations
in other countries.
Earnings from our Other International
operations decreased $89 million and $120
million in the three-
and nine-
month periods of 2021, respectively,
due to a loss on divestiture related to
our Argentina exploration
interests in
the third quarter as well as an absence of a $29 million after
-tax benefit to earnings from the dismissal
of
arbitration related to
prior operations in Senegal recognized
in the first quarter of 2020.
See Note 3
for additional
information
regarding the divestiture.
Corporate and Other
Millions of Dollars
Three Months Ended
Nine Months Ended
September 30
September 30
2021
2020
2021
2020
Net Loss Attributable to
ConocoPhillips
Net interest expense
$
(176)
(179)
(627)
(508)
Corporate general and administrative
expenses
(57)
(50)
(251)
(90)
Technology
(6)
(8)
31
(16)
Other income (expense)
26
(153)
579
(1,366)
$
(213)
(390)
(268)
(1,980)
Net interest expense consists
of interest and financing expense,
net of interest income and capitalized
interest.
Net interest expense increased
by $119 million in the nine-month period of 2021 primarily due
to higher debt
balances assumed due to our Concho acquisition.
See Note 7.
Corporate G&A expenses include compensation
programs and staff
costs.
These expenses increased by $7 million
in the three-month period of 2021 primarily due to mark
to market adjustments
associated with certain
compensation programs.
For the nine-month period of 2021, Corporate
G&A expenses increased by $161 million
primarily due to restructuring expenses associated
with our Concho acquisition.
See Note 15.
Technology includes
our investment in new technologies
or businesses, as well as licensing revenues.
Activities are
focused on both conventional
and tight oil reservoirs, shale gas,
heavy oil, oil sands, enhanced oil recovery,
as well
as LNG.
Earnings from Technology
increased $47 million in the nine-month period of 2021
primarily due to higher
licensing revenues.
Other income (expense) or “Other” includes certain corporate
tax-related items, foreign
currency transaction gains
and losses, environmental costs
associated with sites no longer in operation,
other costs not directly associated
with an operating segment, premiums
incurred on the early retirement of debt,
holding gains or losses on equity
securities, and pension settlement expense.
For the three-
and nine-month periods of 2021, “Other” increased
$179 million and $1,945 million, respectively.
During these periods in 2021, we recognized
gains of $17 million and
$743 million, respectively,
on our CVE common shares, compared
with losses of $162 million and $1,302 million for
the same periods in 2020.
Partially offsetting the impact on
the nine-month period was the release of a $92
million deferred tax asset
associated with our Australia West
divestiture.
Capital Resources and Liquidity
Table of Contents
ConocoPhillips
2021 Q3 10-Q
50
Capital Resources and Liquidity
Financial Indicators
Millions of Dollars
September 30
December 31
2021
2020
Cash and cash equivalents
$
9,833
2,991
Short-term investments
678
3,609
Total
debt
19,668
15,369
Total
equity
44,115
29,849
Percent of total debt to
capital*
31
%
34
Percent of floating-rate
debt to total debt
4
%
7
*Capital includes total debt and total equity.
To meet our
short-
and long-term liquidity requirements,
we look to a variety of funding sources,
including cash
generated from operating
activities, our commercial paper and credit
facility programs, and our ability
to sell
securities using our shelf registration
statement.
During the first nine months of 2021, the primary uses of our
available cash were $3.8 billion to
support our ongoing capital expenditures
and investments program
;
$2.2 billion
to repurchase common stock
,
$1.8 billion to pay dividends, and $1.1 billion of hedging, transaction
and
restructuring costs.
During the first nine months of 2021, our cash and cash
equivalents increased by $6.8 billion
to $9.8 billion.
At September 30, 2021, we had cash
and cash equivalents of $9.8 billion, short-term investments
of $0.7 billion,
and available borrowing capacity
under our credit facility of $6.0 billion, totaling
approximately $16.5 billion of
liquidity.
We believe current cash
balances and cash generated by
operating activities, together with access
to
external sources of funds as described below in the “Significant
Changes in Capital” section, will be sufficient to
meet our funding requirements in the near-
and long-term, including our capital spending prog
ram,
acquisitions,
dividend payments and debt obligations
.
On September 20, 2021, we signed a definitive agreement
for the Shell Permian Acquisition for
$9.5 billion in cash
before customary adjustments
.
The effective date of the transaction
is July 1, 2021, and we expect to close in the
fourth quarter of 2021 subject to regulatory
clearance and the satisfaction
of other customary closing conditions.
The transaction will be funded from available
cash, and we expect our remaining cash
to meet our obligations and
business needs.
Significant Changes in Capital
Operating Activities
Cash provided by operating activities was
$11.1 billion for the first nine months
of 2021, compared with $3.1
billion for the corresponding period of 2020.
The increase in cash provided by operating
activities is primarily due
to higher realized commodity prices and
higher sales volumes mostly due to our acquisition of Concho.
The
increase in cash provided by operating
activities was partly offset by the settlement
of all oil and gas hedging
positions acquired from Concho,
and transaction and restructuring cost
s.
Our short-
and long-term operating cash flows
are highly dependent upon prices for crude oil, bitumen,
natural
gas, LNG and NGLs.
Prices and margins in our industry have historically
been volatile and are driven by market
conditions over which we have
no control.
Absent other mitigating factors,
as these prices and margins fluctuate,
we would expect a corresponding change
in our operating cash flows.
Capital Resources and Liquidity
Table of Contents
51
ConocoPhillips
2021 Q3 10-Q
The level of production volumes, as well as
product and location mix, impacts our cash
flows.
Future production is
subject to numerous uncertainties, including,
among others, the volatile crude oil and natural
gas price
environment, which may impact
investment decisions; the effects
of price changes on production sharing and
variable-royalty contracts;
acquisition and disposition of fields; field production decline rates;
new technologies;
operating efficiencies; timing of startups
and major turnarounds; political instability;
impacts of a global pandemic;
weather-related disruptions; and
the addition of proved reserves through
exploratory success and their timely and
cost-effective development.
While we actively manage these factors,
production levels can cause variability
in
cash flows, although generally this
variability has not been as significant as that caused
by commodity prices.
To maintain
or grow our production volumes, we must
continue to add to our proved
reserve base.
See the
“Capital Expenditures and Investments”
section, for information about
our capital expenditures and investments.
On January 15, 2021, we assumed financial derivative instruments
consisting of oil and natural gas
swaps in
connection with our acquisition of Concho.
At March 31, 2021, all oil and natural
gas derivative financial
instruments acquired from Concho
were contractually settled.
In the first six months of 2021, we paid $761 million
relating to these settlements.
See Note 11.
Investing Activities
For the first nine months of 2021, we invested
$3.8 billion in capital expenditures.
Our 2021 operating plan capital
expenditures is currently expected
to be $5.3 billion compared with $4.7 billion in 2020.
See the “Capital
Expenditures and Investments”
section, for information about our capital
expenditures and investments.
For additional information on Acquisitions
& Dispositions discussed below,
see Note 3.
We completed our acquisition
of Concho on January 15, 2021.
The assets acquired in the transaction
included
$382 million of cash.
In May 2021, we announced and began
a paced monetization of our investment
in CVE common shares with the
plan to direct proceeds toward
our existing share repurchase program.
We expect to fully dispose
of our CVE
shares by year-end 2022, however,
the sales pace will be guided by market conditions,
and we retain discretion to
adjust accordingly.
Since we began our monetization program,
we have sold 67 million CVE shares,
representing
32% of our holdings at December 31, 2020, receiving $569
million of cash proceeds.
See Note 5.
Other proceeds
from dispositions include our sale of certain noncore
assets in our Lower 48 segment for approximately
$150
million and contingent payments
associated with previous divestitures.
In September 2021, we signed a definitive agreement
to acquire the Shell Permian assets
for $9.5 billion, before
customary adjustments.
Under the terms of the agreement, we paid a deposit
of $475 million which is presented
within “Cash Flows from Investing
Activities - Other” on our consolidated statement
of cash flows.
See Item 1A
“Risk Factors” for further discussion of risks related to the Shell Permian Acquisition.
We invest in short
-term investments as part of our
cash investment strategy,
the primary objective of which is to
protect principal, maintain liquidity
and provide yield and total returns;
these investments include time deposits,
commercial paper,
as well as debt securities classified as available
for sale.
Funds for short-term needs
to support
our operating plan and provide resiliency
to react to short-term price volatility
are invested in highly liquid
instruments with maturities within the year.
Funds we consider available to maintain
resiliency in longer term
price downturns and to capture opportunities
outside a given operating plan may
be invested in instruments
with
maturities greater than one year.
Investing activities in the first
nine months of 2021 included net sales of $2,846 million of investments.
We sold
$2,991 million of short-term instruments
and invested $145 million in long-term instruments
.
See Note 11.
Capital Resources and Liquidity
Table of Contents
ConocoPhillips
2021 Q3 10-Q
52
Financing Activities
We have a revolving
credit facility totaling $6.0 billion,
expiring in May 2023.
Our revolving credit facility
may be
used for direct bank borrowings,
the issuance of letters of credit totaling
up to $500 million, or as support for our
commercial paper program.
With no commercial paper outstanding
and no direct borrowings or letters
of credit,
we had access to $6.0 billion in available borrowing
capacity under our revolving credit
facility at September 30,
2021.
On January 15, 2021, we completed the acquisition
of Concho in an all-stock transaction.
In the acquisition, we
assumed Concho’s publicly
traded debt, which was recorded
at fair value of $4.7 billion on the acquisition
date.
In
June 2021, we reaffirmed our commitment
to preserving our ‘A’
-rated balance sheet by restating
our intent to
reduce gross debt by $5 billion over
the next five years, driving a more
resilient and efficient capital
structure.
The current credit ratings on our
long-term debt are:
●
Fitch: “A”
with a “stable” outlook
●
S&P:
“A-” with a “stable”
outlook
●
Moody’s: “A3”
with a “positive” outlook
See Note 3
for additional information on our Concho
acquisition and
Note 7
for additional information on debt
,
revolving credit facility and credit
ratings.
Certain of our project-related
contracts, commercial contracts
and derivative instruments contain
provisions
requiring us to post collateral.
Many of these contracts and instruments
permit us to post either cash or letters
of
credit as collateral.
At September 30, 2021 and December 31, 2020, we
had direct bank letters of credit
of $281
million and $249 million, respectively,
which secured performance obligations
related to various purchase
commitments incident to the ordinary
conduct of business.
In the event of credit ratings
downgrades, we may be
required to post additional letters
of credit.
Shelf Registration
We have a universal
shelf registration statement
on file with the SEC under which we have the
ability to issue and
sell an indeterminate number of various
types of debt and equity securities.
Capital Requirements
For information about our capital
expenditures and investments,
see the “Capital Expenditures and Investments”
section.
In addition to our capital expenditure and
investments
program, we anticipate completing
the Shell
Permian Acquisition in the fourth quarter
for $9.5 billion before customary
adjustments.
See Note 3
.
Our debt balance at September 30, 2021, was
$19.7 billion, compared with $15.4 billion at December 31, 2020.
The net increase is primarily due to $4.7 billion of debt assumed
in the Concho acquisition.
The current portion of
debt, including payments for finance
leases, is $920 million.
Payments will be made using current
cash balances
and cash generated by
operations.
See Note 7.
We believe in delivering va
lue to our shareholders through
a growing and sustainable dividend supplemented
by
additional returns of capital, including share
repurchases.
In 2020, we paid $1.8 billion, equating to $1.69 per
share of common stock, in dividends.
In the first nine months of 2021, we paid dividends totaling
$1.8 billion, the
equivalent of $1.29 per share.
On September 20, 2021, we announced an increase
in our quarterly dividend from
$0.43 per share to $0.46 per share,
representing a 7 percent increase.
The dividend is payable December 1, 2021,
to stockholders of record
at the close of business on October 28, 2021.
We anticipate returning
approximately
$2.4 billion to shareholders in dividends
in 2021, or $1.75 per share.
Capital Resources and Liquidity
Table of Contents
53
ConocoPhillips
2021 Q3 10-Q
In late 2016, we initiated our current
share repurchase program,
which has a total program authorization
of $25
billion.
In May 2021, we began a paced monetization
of our CVE shares, the proceeds of which, have
been applied
to share repurchases.
The pace of CVE share sales will be guided by market conditions,
and we retain the
discretion to adjust accordingly.
In the nine months ended September 30, 2021, we repurchased
39.3 million
shares at a cost of $2,224 million, $561 million of which
was funded using CVE share proceeds.
Since the inception
of the share repurchase program,
we have repurchased 228 million shares
at a cost of $12.7 billion.
Our total
planned distributions for 2021, including dividends
and share repurchases, is approximately
$6.0 billion.
Our dividend and share repurchase programs
are subject to numerous considerations,
including market conditions,
management discretion and other factors.
See “Item 1A—Risk Factors
– Our ability to declare and pay dividends
and repurchase shares is subject to certain
considerations” in Part
I—Item 1A in our 2020 Annual Report on Form
10-K.
Capital Expenditures and Investments
Millions of Dollars
Nine Months Ended
September 30
2021
2020
Alaska
$
698
882
Lower 48
2,250
1,398
Canada
129
593
Europe, Middle East and North Africa
385
410
Asia Pacific
235
280
Other International
33
66
Corporate and Other
37
28
Capital expenditures and investments
$
3,767
3,657
During the first nine months of 2021, capital expenditures
and investments supported
key development programs,
primarily:
●
Development activities in the Lower 48, primarily Permian,
Eagle Ford and Bakken.
●
Appraisal and development activities in Alaska
related to the Western
North Slope and development
activities in the Greater Kuparuk Area.
●
Appraisal activities in liquids-rich plays
and optimization of oils sands development in Canada.
●
Continued development activities across
assets in Norway.
●
Continued development activities in China,
Malaysia and Indonesia.
In February 2021, we announced 2021 operating plan
capital expenditures of $5.5 billion.
In June 2021, we
reduced capital guidance to $5.3 billion, recognizing
synergistic savings
from our Concho acquisition.
Capital Resources and Liquidity
Table of Contents
ConocoPhillips
2021 Q3 10-Q
54
Guarantor Summarized Financial
Information
We have various
cross guarantees among our Obligor group;
ConocoPhillips, ConocoPhillips Company
and
Burlington Resources LLC,
with respect to publicly held debt securities.
ConocoPhillips Company is 100 percent
owned by ConocoPhillips.
Burlington Resources LLC is
100 percent owned by ConocoPhillips
Company.
ConocoPhillips and/or ConocoPhillips
Company have fully and unconditionally
guaranteed the payment obligations
of Burlington Resources LLC,
with respect to its publicly held debt securities.
Similarly, ConocoPhillips
has fully and
unconditionally guaranteed the payment
obligations of ConocoPhillips Company
with respect to its publicly held
debt securities.
In addition, ConocoPhillips Company has
fully and unconditionally guaranteed the payment
obligations of ConocoPhillips with respect
to its publicly held debt securities.
All guarantees are joint and several.
The following tables present summarized
financial information for
the Obligor Group, as defined below:
●
The Obligor Group will reflect guarantors
and issuers of guaranteed securities consisting
of
ConocoPhillips, ConocoPhillips Company
and Burlington Resources LLC.
●
Consolidating adjustments for elimination
of investments in and transactions
between the collective
guarantors and issuers
of guaranteed securities are reflected
in the balances of the summarized financial
information.
●
Non-Obligated Subsidiaries are excluded
from the presentation.
Upon completion of the Concho acquisition on January 15, 2021, we assumed
Concho’s publicly traded
debt of
approximately $3.9 billion in aggregate
principal amount, which was recorded
at fair value of $4.7 billion on the
acquisition date.
We completed a debt exchange
offer that settled on February
8, 2021, of which 98 percent, or
approximately $3.8 billion in aggregate
principal amount of Concho’s
notes, were tendered and accepted
for new
debt issued by ConocoPhillips.
The new debt issued in the exchange is fully and
unconditionally guaranteed by
ConocoPhillips Company.
Both the guarantor and issuer of the exchange
debt is reflected within the Obligor Group
presented here.
See
Note 3
and
Note 7
for additional information relating
to the Concho transaction.
Transactions
and balances reflecting activity between the Obligors
and Non-Obligated Subsidiaries
are presented
below:
Summarized Income Statement
Data
Millions of Dollars
Nine Months Ended
September 30, 2021
Revenues and Other Income
$
20,893
Income (loss) before income taxes*
5,445
Net income (loss)
5,452
Net Income (Loss) Attributable
to ConocoPhillips
5,452
*Includes approximately $3.6 billion of purchased commodities expense for transactions with Non-Obligated Subsidiaries.
Summarized Balance Sheet Data
Millions of Dollars
September 30
December 31
2021
2020
Current assets
$
12,955
8,535
Amounts due from Non-Obligated Subsidiaries, current
1,194
440
Noncurrent assets
59,997
37,180
Amounts due from Non-Obligated Subsidiaries, noncurrent
8,223
7,730
Current liabilities
7,059
3,797
Amounts due to Non-Obligated Subsidiaries,
current
2,778
1,365
Noncurrent liabilities
28,336
18,627
Amounts due to Non-Obligated Subsidiaries,
noncurrent
10,304
3,972
Capital Resources and Liquidity
Table of Contents
55
ConocoPhillips
2021 Q3 10-Q
Contingencies
A number of lawsuits involving a variety
of claims arising in the ordinary course of business
have been filed against
ConocoPhillips.
We also may be required
to remove or mitigate
the effects on the environment
of the placement,
storage, disposal or release of
certain chemical, mineral and petroleum
substances at various
active and inactive
sites.
We regularly assess the need for accounting
recognition or disclosure of these contingencies.
In the case of
all known contingencies (other than those related
to income taxes), we accrue
a liability when the loss is probable,
and the amount is reasonably estimable.
If a range of amounts can be reasonably
estimated and no amount within
the range is a better estimate
than any other amount, then the low end of the range
is accrued.
We do not reduce
these liabilities for potential insurance
or third-party recoveries.
We accrue receivables for
insurance or other
third-party recoveries when applicable.
With respect to income tax-related
contingencies, we use a cumulative
probability-weighted loss accrual
in cases where sustaining a tax
position is less than certain.
Based on currently available information,
we believe it is remote that future
costs related to known
contingent
liability exposures will exceed
current accruals by an amount that
would have a material adverse
impact on our
consolidated financial statements.
See Note 10
.
Legal and Tax
Matters
We are subject to various
lawsuits and claims including but not limited to matters
involving oil and gas royalty
and
severance tax payments,
gas measurement and valuation
methods, contract disputes,
environmental damages,
climate change, personal injury,
and property damage.
Our primary exposures for such matters
relate to alleged
royalty and tax underpayments
on certain federal, state
and privately owned properties, claims
of alleged
environmental contamination
from historic operations,
and other contract disputes.
We will continue to defend
ourselves vigorously in these matters.
Our legal organization
applies its knowledge, experience and professional
judgment to the specific characteristics
of our cases, employing a litigation management
process to manage and monitor the legal
proceedings against us.
Our process facilitates the
early evaluation and quantification
of potential exposures in individual cases.
This
process also enables us to track those cases
that have been scheduled for trial and/or
mediation.
Based on
professional judgment and experience
in using these litigation management
tools and available information
about
current developments in all our cases,
our legal organization regularly
assesses the adequacy of current accruals
and determines if adjustment of existing
accruals, or establishment of new accruals, is
required.
Environmental
We are subject to the same numerous
international, federal,
state and local environmental
laws and regulations as
other companies in our industry.
For a discussion of the most significant of these environmental
laws and
regulations, including those with associated
remediation obligations, see the “Environmental”
section in
Management’s Discussion and Analysis
of Financial Condition and Results of Operations on pages
64–66 of our
2020 Annual Report on Form 10-K.
We occasionally receive requests
for information or notices of potential
liability from the EPA
and state
environmental agencies alleging
that we are a potentially responsible
party under the Federal Comprehensive
Environmental Response,
Compensation and Liability Act (CERCLA) or an equivalent
state statute.
On occasion, we
also have been made a party to cost
recovery litigation by those agencies
or by private parties.
These requests,
notices and lawsuits assert potential liability for
remediation costs at various
sites that typically are not owned by
us, but allegedly contain waste
attributable to our past operations.
As of September 30, 2021, there were 15 sites
around the U.S. in which we were
identified as a potentially responsible
party under CERCLA and comparable state
laws.
At September 30, 2021, our balance sheet included
a total environmental
accrual of $191 million, compared with
$180 million at December 31, 2020, for remediation
activities in the U.S. and Canada.
We expect to incur a
substantial amount of these expe
nditures within the next 30 years.
Capital Resources and Liquidity
Table of Contents
ConocoPhillips
2021 Q3 10-Q
56
Notwithstanding any of the foregoing,
and as with other companies engaged in similar businesses,
environmental
costs and liabilities are inherent
concerns in our operations and products,
and there can be no assurance that
material costs and liabilities will not be incurred.
However,
we currently do not expect any material
adverse effect
upon our results of operations or financial position
as a result of compliance with current environmental
laws and
regulations.
Environmental Litigation
Several Louisiana parishes and the State
of Louisiana have filed 43 lawsuits under Louisiana’s
State and Local
Coastal Resources Management
Act (SLCRMA) against oil and gas
companies, including ConocoPhillips, seeking
compensatory damages for contamination
and erosion of the Louisiana coastline allegedly
caused by historical oil
and gas operations.
ConocoPhillips entities are defendants
in 22 of the lawsuits and will vigorously defend
against
them.
Because Plaintiffs’ SLCRMA theories are
unprecedented, there is uncertainty
about these claims (both as to
scope and damages) and we continue to
evaluate our exposure in these
lawsuits.
Climate Change
Continuing political and social attention
to the issue of global climate change has resulted
in a broad range of
proposed or promulgated
state, national and international
laws focusing on GHG reduction.
These proposed or
promulgated laws apply
or could apply in countries where we have
interests or may have
interests in the future.
Laws in this field continue to evolve,
and while it is not possible to accurately estimate
either a timetable for
implementation or our future compliance costs
relating to implementation, such
laws, if enacted, could have a
material impact on our results of operations
and financial condition.
For examples of legislation or precursors
for
possible regulation and factors
on which the ultimate impact on our financial performance
will depend, see the
“Climate Change” section in Management’s
Discussion and Analysis of Financial Condition and Results
of
Operations on pages 67–69 of our 2020 Annual
Report on Form 10-K.
Climate Change Litigation
Beginning in 2017, governmental and
other entities in several states
in the U.S. have filed lawsuits against
oil and
gas companies, including ConocoPhillips,
seeking compensatory damages and equitable relief
to abate alleged
climate change impacts.
Additional lawsuits with similar allegations
are expected to be filed.
The amounts
claimed by plaintiffs are unspecified and
the legal and factual issues involved
in these cases are unprecedented.
ConocoPhillips believes these lawsuits are
factually and legally meritless and are
an inappropriate vehicle to
address the challenges associated with climate
change and will vigorously defend
against such lawsuits.
Company Response to Climate
-Related Risks
The company has responded by putting
in place a Sustainable Development Risk Management
Standard covering
the assessment and registering of significant
and high sustainable development risks
based on their consequence
and likelihood of occurrence.
We have developed a
company-wide Climate Change Action Plan
with the goal of
tracking mitigation activities for
each climate-related risk included in the corporate
Sustainable Development Risk
Register.
The risks addressed in our Climate Change Action
Plan fall into four broad
categories:
●
GHG-related legislation and regulation.
●
GHG emissions management.
●
Physical climate-related
impacts.
●
Climate-related disclosure
and reporting.
Emissions are categorized
into three different
scopes.
Gross operated scope
1 and scope 2 GHG emissions help us
understand our climate transition
risk.
●
Scope 1 emissions are direct GHG emissions from
sources that we own or control.
●
Scope 2 emissions are GHG emissions from the generation
of purchased electricity or steam that
we
consume.
Scope 3 emissions are indirect emissions from
sources that we neither own nor control.
Capital Resources and Liquidity
Table of Contents
57
ConocoPhillips
2021 Q3 10-Q
We announced in October 2020 the adoption
of a Paris-aligned climate risk framework
with the objective of
implementing a coherent set of choices designed
to facilitate the success
of our existing exploration
and
production business through the energy transition.
Given the uncertainties remaining about
how the energy
transition
will evolve, the strategy aims to
be robust across a range of potential
future outcomes.
The strategy is comprised of four
pillars:
●
Targets
:
Our target framework
consists of a hierarchy
of targets, from a long-term ambition
that sets the
direction and aim of the strategy,
to a medium-term performance target
for GHG emissions intensity,
to
shorter-term targets for
flaring and methane intensity reductions.
These performance targets are
supported by lower-level internal
business unit goals to enable the company to
achieve the company-
wide targets.
In September 2021, we increased our interim
operational target and
have set it to reduce
our gross operated and net
equity (scope 1 and 2) emissions intensity by
40 to 50 percent from 2016
levels by 2030, an improvement from
the previously announced target
of 35 to 45 percent on only a gross
operated basis,
with an ambition to achieve net-zero
operated emissions by 2050.
We have joined the
World Bank Flaring Initiative to
work towards zero
routine flaring of associated gas
by 2030, with an
ambition to meet that goal by 2025.
●
Technology choices:
We expanded our Marginal
Abatement Cost Curve process
to provide a broader
range of opportunities for emission
reduction technology.
●
Portfolio choices: Our corporate
authorization process requires
all qualifying projects to include a GHG
price in their project approval economics.
Different GHG prices are used
depending on the region or
jurisdiction.
Projects in jurisdictions with existing GHG pricing regimes
incorporate the existing
GHG price
and forecast into
their economics.
Projects where no existing GHG pricing regime
exists utilize a scenario
forecast from our internally
consistent World
Energy Model.
In this way,
both existing and emerging
regulatory requirements are
considered in our decision-making.
The company does not use an estimated
market cost of GHG emissions when assessing
reserves in jurisdictions without existing GHG regulations.
●
External engagement:
Our external engagement aims to
differentiate ConocoPhillips
within the oil and
gas sector with our approach to managing
climate-related risk.
We are a Founding Member of the
Climate Leadership Council (CLC), an international
policy institute founded in collaboration
with business
and environmental interests
to develop a carbon dividend plan.
Participation in the CLC provides
another
opportunity for ongoing dialogue about carbon
pricing and framing the issues in alignment with our public
policy principles.
We also belong to and fund Americans For
Carbon Dividends, the education and
advocacy branch of the CLC.
Cautionary Statement for the Purposes of the “Safe Harbor” Provisions of the
Private Securities Litigation Reform Act
of 1995
This report includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934.
All statements other than
statements of historical
fact
included or incorporated by
reference in this report, including, without
limitation, statements
regarding our future
financial position, business strategy,
budgets, projected revenues,
projected costs and plans, objectives
of
management for future operations,
the anticipated benefits of the transaction
between us and Concho Resources
Inc. (Concho), including the expected amount and
the timing of synergies from such transaction,
the anticipated
closing of the acquisition of assets from Shell Enterprises
LLC (Shell), and the anticipated impact of the Concho
and
Shell transactions on the combined company’s
business and future financial and operating results
are forward-
looking statements.
Examples of forward-looking statements
contained in this report include our expected
production growth and outlook on the business
environment generally,
our expected capital budget
and capital
expenditures, and discussions concerning future
dividends.
You can often
identify our forward-looking statements
by the words “anticipate,”
“believe,” “budget,”
“continue,”
“could,”
“effort,”
“estimate,”
“expect,”
“forecast,”
“intend,”
“goal,”
“guidance,”
“may,”
“objective,”
“outlook,”
“plan,” “potential,”
“predict,” “projection,”
“seek,”
“should,”
“target,”
“will,” “would” and similar
expressions.
Table of Contents
ConocoPhillips
2021 Q3 10-Q
58
We based the forward-looking
statements on our current
expectations, estimates and
projections about ourselves
and the industries in which we operate in
general.
We caution you these
statements are not guarantees
of future
performance as they involve
assumptions that, while made in good faith, may
prove to be incorrect, and involve
risks and uncertainties we cannot predict.
In addition, we based many of these forward
-looking statements on
assumptions about future events
that may prove to be inaccurate.
Accordingly,
our actual outcomes and results
may differ materially from
what we have expressed
or forecast in the forward
-looking statements.
Any differences
could result from a variety of factors
and uncertainties, including, but not limited to,
the following:
●
The impact of public health crises, including pandemics (such as COVID
-19) and epidemics and any related
company or government policies
or actions.
●
Global and regional changes in the demand, supply,
prices, differentials or other market
conditions
affecting oil and gas, including changes
resulting from a public health crisis or from the imposition
or
lifting of crude oil production quotas or other actions
that might be imposed by OPEC and other producing
countries and the resulting company
or third-party actions in response to such changes.
●
Fluctuations in crude oil, bitumen, natural gas,
LNG and NGLs prices, including a prolonged decline in
these prices relative to historical
or future expected levels.
●
The impact of significant declines in prices for crude oil,
bitumen, natural gas, LNG and NGLs, which may
result in recognition of impairment charges
on our long-lived assets, leaseholds and nonconsolidated
equity investments.
●
Potential failures or delays
in achieving expected reserve or production
levels from existing and future
oil
and gas developments, including due to
operating hazards, drilling risks
and the inherent uncertainties in
predicting reserves and reservoir performance.
●
Reductions in reserves replacement rates,
whether as a result of the significant declines in
commodity
prices or otherwise.
●
Unsuccessful exploratory drilling
activities or the inability to obtain access to exploratory
acreage.
●
Unexpected changes in costs or technical
requirements for constructing,
modifying or operating E&P
facilities.
●
Legislative and regulatory initiatives
addressing environmental concerns,
including initiatives addressing
the impact of global climate change or further regulating
hydraulic fracturing, methane
emissions, flaring
or water disposal.
●
Lack of, or disruptions
in, adequate and reliable transportation
for our crude oil, bitumen, natural gas,
LNG and NGLs.
●
Inability to timely obtain or maintain
permits, including those necessary for construction, drilling
and/or
development, or inability to make
capital expenditures required
to maintain compliance with any
necessary permits or applicable laws or regulations.
●
Failure to complete definitive
agreements and feasibility studies
for,
and to complete construction of,
announced and future E&P and LNG development in a timely
manner (if at all) or on budget.
●
Potential disruption or interruption
of our operations due to accidents, extraordinary
weather events, civil
unrest, political events,
war, terrorism,
cyber attacks, and information
technology failures, constraints
or
disruptions.
●
Changes in international monetary
conditions and foreign currency exchange
rate fluctuations.
●
Changes in international trade relationships,
including the imposition of trade restrictions or
tariffs
relating to crude oil, bitumen, natural
gas, LNG, NGLs and any materials or products
(such as aluminum
and steel) used in the operation of our business.
●
Substantial investment
in and development use of, competing
or alternative energy sources, including
as
a result of existing or future environmental
rules and regulations.
●
Liability for remedial actions, including removal
and reclamation obligations,
under existing and future
environmental regulations
and litigation.
●
Significant operational or investment
changes imposed by existing or future
environmental statutes
and
regulations, including international
agreements and national or regional legislation
and regulatory
measures to limit or reduce GHG emissions.
Table of Contents
59
ConocoPhillips
2021 Q3 10-Q
●
Liability resulting from litigation,
including litigation related to
the transaction with Concho, or our failure
to comply with applicable laws and regulations.
●
General domestic and international
economic and political developments, including armed
hostilities;
expropriation of assets; changes in governmental
policies relating to crude oil, bitumen, natural
gas, LNG
and NGLs pricing; regulation or taxation;
and other political, economic or diplomatic developments.
●
Volatility in the commodity futures
markets.
●
Changes in tax and other laws, regulations
(including alternative energy mandates),
or royalty rules
applicable to our business.
●
Competition and consolidation in the oil and gas
E&P industry.
●
Any limitations on our access to capital
or increase in our cost of capital, including
as a result of illiquidity
or uncertainty in domestic or international
financial markets or investment
sentiment.
●
Our inability to execute, or delays
in the completion, of any asset dispositions or acquisitions
we elect to
pursue.
●
Potential failure to obtain,
or delays in obtaining, any necessary
regulatory approvals
for pending or
future asset dispositions or acquisitions, or that such
approvals may require modification
to the terms of
the transactions or the operation
of our remaining business.
●
Potential disruption of our operations
as a result of pending or future asset dispositions or acquisitions,
including the diversion of management time and
attention.
●
Our inability to deploy the net proceeds from any
asset dispositions that are pending or that we elect
to
undertake in the future in the manner and
timeframe we currently anticipate,
if at all.
●
Our inability to liquidate the common stock
issued to us by Cenovus Energy as part of our sale of certain
assets in western Canada at prices we deem acceptable,
or at all.
●
The operation and financing of our joint ve
ntures.
●
The ability of our customers and other contractual
counterparties to satisfy their obligations
to us,
including our ability to collect payments
when due from the government of Venezuela
or PDVSA.
●
Our inability to realize anticipated
cost savings and capital expenditure
reductions.
●
The inadequacy of storage capacity
for our products, and ensuing curtailments,
whether voluntary or
involuntary,
required to mitigate this physical
constraint.
●
Our ability to successfully integrate
Concho’s business and
fully achieve the expected benefits and cost
reductions associated with the transaction
with Concho in a timely manner or at all.
●
The risk that we will be unable to retain
and hire key personnel.
●
Unanticipated difficulties or expenditures
relating to integration with Concho.
●
The risk that the conditions to close the acquisition
of assets from Shell are not satisfied on
a timely basis
or at all, or the failure of the transaction
to close for any reason.
●
The risk that any regulatory
approval, consent or authorization
that may be required for
the proposed
acquisition of assets from Shell is not obtained
or is obtained subject to conditions that are not
anticipated.
●
Unanticipated integration
issues relating to the proposed acquisition
of assets from Shell, such as
potential disruptions of our ongoing business and
higher than anticipated integration
costs.
●
Uncertainty as to the long-term value of our
common stock.
●
The diversion of management time on integration
-related matters.
●
The factors generally described
in Part I—Item 1A in our 2020 Annual Report
on Form 10-K and any
additional risks described in our other filings with the SEC.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Information about market
risks for the nine months ended September
30, 2021, does not differ materially from
that discussed under Item 7A in our 2020 Annual Report
on Form 10-K.
Table of Contents
ConocoPhillips
2021 Q3 10-Q
60
Item 4.
Controls and Procedures
We maintain disclosure
controls and procedures
designed to ensure information required
to be disclosed in
reports we file or submit under the Securities Exchange
Act of 1934, as amended (the Act), is recorded, processed,
summarized and reported within the
time periods specified in SEC rules and forms, and
that such information is
accumulated and communicated
to management, including our principal executive
and principal financial officers,
as appropriate, to allow timely decisions
regarding required disclosure.
At September 30, 2021, with the
participation of our management, our Chairman and
Chief Executive Officer (principal executive
officer) and our
Executive Vice President and Chief
Financial Officer (principal financial officer) carried
out an evaluation, pursuant
to Rule 13a-15(b) of the Act, of ConocoPhillips’ disclosure
controls and procedures
(as defined in Rule 13a-15(e) of
the Act).
Based upon that evaluation, our Chairman
and Chief Executive Officer and our Executive
Vice President
and Chief Financial Officer concluded our disclosure
controls and procedures were
operating effectively
at
September 30, 2021.
There have been no changes in our internal
control over financial reporting, as defined in
Rule 13a-15(f) of the Act,
in the period covered by this report that
have materially affected,
or are reasonably likely to
materially affect, our
internal control over financial
reporting.
PART
II.
Other Information
Item 1.
Legal Proceedings
The interim-period financial information
presented in the financial statements
included in this report is unaudited.
There are no new material legal
proceedings or material developments
with respect to matters
previously
disclosed in Item 3 of our 2020 Annual Report on Form
10-K.
Item 1A.
Risk Factors
Other than the risk factors set forth
below, there
have been no material changes
to the risk factors disclosed
in our
Annual Report on Form 10-K for the
fiscal year ended December 31, 2020.
Risks Related to the Proposed Shell Permian
Acquisition
Our ability to complete the Shell Permian
Acquisition is subject to various closing conditions,
including regulatory
clearance, which may impose conditions that could adversely
affect us or cause the acquisition not to be
completed.
The Shell Permian Acquisition is subject to a number of conditions
to closing as specified in the definitive
agreement signed on September 20, 2021 (Purchase
Agreement), including but not limited to
the expiration or
termination of the waiting period under the Hart-Scott
-Rodino Antitrust Improvements
Act of 1976, as
amended. No assurance can be given that
the required regulatory clearance
will be obtained or that the other
required conditions to closing will be satisfied,
and, if the regulatory clearance is obtained
and the required
conditions are satisfied, no assurance
can be given as to the terms, conditions and
timing of such clearance,
including whether any required conditions
will materially adversely affect
ConocoPhillips following the Shell
Permian Acquisition.
Any delay in closing the Shell Permian
Acquisition could cause ConocoPhillips not to
realize,
or to be delayed in realizing, some or all of the benefits that
we expect to achieve if the Shell Permian
Acquisition
is successfully closed within its expected time frame.
Table of Contents
61
ConocoPhillips
2021 Q3 10-Q
The termination of the Purchase Agreement could negatively
impact our business and in some circumstances, we
could forfeit a portion of the purchase price.
If the Shell Permian Acquisition is not completed
for any reason, including if the above
closing conditions are not
satisfied, our ongoing business may be adversely
affected and, without realizing
any of the expected benefits of
having completed the Shell Permian
Acquisition, we would be subject to a number
of risks, including the following:
●
We may experience negative
reactions from the financial markets,
including negative impacts on the
trading price of our common stock; and
●
We will be required to pay
our costs relating to the Shell Permian Acquisition,
such as legal and
accounting costs and associated
fees and expenses, whether or not the Shell Permian
Acquisition is
completed.
Additionally, upon
entry into the Purchase Agreement, 5%
(the Deposit) of the $9.5 billion (Base Purchase Price)
was paid to Shell.
If the Purchase Agreement is terminated
solely as a result of the material breach or failure
of
any of our representations,
warranties or covenants
included in the Purchase Agreement, the Deposit will not
be
refunded.
Integrating the assets acquired in the Shell Permian Acquisition
may be more difficult, costly or time-consuming
than expected and we may fail to realize
the full anticipated benefits of the transaction, which may adversely
affect our business results and negatively affect the value of our common stock.
We may encounter difficulties
integrating the assets acquired
from Shell into our business and realizing the
anticipated benefits of the transaction
or such benefits may take longer
to realize than expected.
The Shell
Permian Acquisition is expected to
add approximately 225,000 net acres,
thereby increasing our unconventional
position in Permian by nearly 30 percent.
There are a large number of processes,
policies, procedures, operations
and technologies and systems
that must be integrated
in connection with the Shell Permian Acquisition and the
integration of Shell’s
assets.
It is possible that the integration process
could result in the disruption of our ongoing
business; inconsistencies in standards,
controls, procedures and
policies; unexpected integration
issues; higher
than expected integration
costs and an overall post
-completion integration process
that takes longer than
originally anticipated.
We will be required to devote
management attention
and resources to integrating
the
business practices and operations,
and prior to closing the transaction, management attention
and resources will
be required to plan for such integration.
An inability to realize the full extent
of the anticipated benefits of the
Shell Permian Acquisition, as well as any delays
encountered in the integration
process, could have an adverse
effect on our revenues or
on our level of expenses and operating
results, which may adversely affect
the value of
our common stock.
In addition, the actual integration may
result in additional and unforeseen expenses.
Although
we expect that the strategic
benefits, and additional income, as well as the realization
of other efficiencies related
to the integration of the Shell assets,
may offset incremental
transaction-related costs
over time, if we are not able
to adequately address integration
challenges, we may be unable to successfully
integrate operations
or realize the
anticipated benefits of the integration
of the Shell assets.
Table of Contents
ConocoPhillips
2021 Q3 10-Q
62
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Millions of Dollars
Period
Total
Number of
Shares
Purchased
*
Average Price Paid
per Share
Total
Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares That
May Yet Be Purchased
Under the Plans or
Programs
July 1-31, 2021
7,118,526
$
58.18
7,118,526
$
13,088
August 1-31, 2021
7,530,282
55.61
7,530,282
12,669
September 1-30, 2021
6,990,322
58.70
6,990,322
12,259
21,639,130
21,639,130
*There were no repurchases of common stock from company employees in connection with the company's broad-based
employee incentive plans.
In late 2016, we initiated our current
share repurchase program,
which has a total program authorization
of $25
billion of our common stock.
At September 30, 2021, we had repurchased
$12.7 billion of shares, with $12.3
billion remaining under our current authorization.
Repurchases are made at management’s
discretion, at
prevailing prices, subject to market
conditions and other factors.
Except as limited by applicable legal
requirements, repurchases
may be increased, decreased or discontinued
at any time without prior notice.
Shares
of stock repurchased under the plan are
held as treasury shares.
See the “Our ability to declare and pay
dividends
and repurchase shares is subject to certain
considerations” section in Risk Factors
on page 31 of our 2020 Annual
Report on Form 10-K.
Table of Contents
63
ConocoPhillips
2021 Q3 10-Q
Item 6.
Exhibits
10.1*
Purchase and Sale Agreement, dated as of September 20, 2021, by and between Shell Enterprises
LLC and ConocoPhillips Company.
31.1*
31.2*
32*
Certifications pursuant to 18 U.S.C. Section 1350.
101.INS*
Inline XBRL Instance Document.
101.SCH*
Inline XBRL Schema Document.
101.CAL*
Inline XBRL Calculation Linkbase Document.
101.LAB*
Inline XBRL Labels Linkbase Document.
101.PRE*
Inline XBRL Presentation Linkbase Document.
101.DEF*
Inline XBRL Definition Linkbase Document.
104*
Cover Page Interactive
Data File (formatted
as Inline XBRL and contained in Exhibit 101).
* Filed herewith.
Table of Contents
ConocoPhillips
2021 Q3 10-Q
64
Signature
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant
has duly caused this report to
be signed on its behalf by the undersigned thereunto
duly authorized.
CONOCOPHILLIPS
/s/ Kontessa S. Haynes-Welsh
Kontessa S. Haynes-Welsh
Chief Accounting Officer
November 4, 2021
d093021dex101
Exhibit 10.1
Execution Version
PURCHASE AND SALE AGREEMENT
dated as of
September 20, 2021
by and between
SHELL ENTERPRISES LLC
(as Seller)
and
CONOCOPHILLIPS COMPANY
(as Buyer)
Exhibit 10.1
i
TABLE
OF CONTENTS
ARTICLE 1 DEFINITIONS AND INTERPRETATION ........................................................ 1
Section 1.1
Defined Terms ....................................................................................................... 1
Section 1.2
References and Rules of Construction
................................................................... 1
ARTICLE 2 PURCHASE AND SALE ......................................................................................
2
Section 2.1
Purchase and Sale .................................................................................................. 2
Section 2.2
Effective Time; Proration of Revenues
.................................................................. 2
Section 2.3
Procedures
.............................................................................................................. 3
Section 2.4
Purchase Price
........................................................................................................ 4
Section 2.5
Adjustments to the Base Purchase Price
................................................................ 4
Section 2.6
Indebtedness Free................................................................................................... 5
Section 2.7
Deposit
................................................................................................................... 5
Section 2.8
Withholding ........................................................................................................... 5
ARTICLE 3 REPRESENTATIONS
AND WARRANTIES
OF SELLER ............................ 6
Section 3.1
Generally
................................................................................................................ 6
Section 3.2
Existence and Qualification
................................................................................... 6
Section 3.3
Organizational Power............................................................................................. 6
Section 3.4
Authorization and Enforceability
........................................................................... 7
Section 3.5
No Conflicts
........................................................................................................... 7
Section 3.6
Liability for Brokers’ Fees
..................................................................................... 8
Section 3.7
Litigation
................................................................................................................ 8
Section 3.8
Taxes ......................................................................................................................
8
Section 3.9
Capital Commitments and Expenditures ............................................................. 11
Section 3.10
Compliance with Laws ........................................................................................ 11
Section 3.11
Material Contracts
................................................................................................ 11
Section 3.12
Payments for Production and Imbalances
............................................................ 13
Section 3.13
Consents and Preferential Rights
......................................................................... 13
Section 3.14
Non-Consent Operations; Payout Status
.............................................................. 14
Section 3.15
Environmental Matters......................................................................................... 14
Section 3.16
Suspense Funds
.................................................................................................... 15
Section 3.17
Bankruptcy
........................................................................................................... 15
Section 3.18
Ownership Structure and Interests
....................................................................... 15
Section 3.19
Wells .................................................................................................................... 15
Section 3.20
Special Warranty of Title .....................................................................................
16
Section 3.21
Permits .................................................................................................................
16
Section 3.22
Royalties .............................................................................................................. 17
Section 3.23
Bonds, Letters of Credit and Guarantees
............................................................. 17
Section 3.24
Indebtedness
......................................................................................................... 17
Section 3.25
Condemnation
...................................................................................................... 17
Section 3.26
Powers of Attorney; Bank Accounts.................................................................... 17
Section 3.27
Anti-Corruption; Trade Controls ......................................................................... 17
Section 3.28
Leases
................................................................................................................... 18
Section 3.29
Employment Matters
............................................................................................ 18
Exhibit 10.1
ii
Section 3.30
Operatorship
......................................................................................................... 18
Section 3.31
Intellectual Property
............................................................................................. 18
Section 3.32
Certain Disclaimers
.............................................................................................. 18
ARTICLE 4 REPRESENTATIONS
AND WARRANTIES
OF BUYER
............................ 21
Section 4.1
Generally
.............................................................................................................. 21
Section 4.2
Existence and Qualification
................................................................................. 21
Section 4.3
Organizational Power........................................................................................... 21
Section 4.4
Authorization and Enforceability
......................................................................... 21
Section 4.5
No Conflicts
......................................................................................................... 22
Section 4.6
Liability for Brokers’ Fees
................................................................................... 22
Section 4.7
Litigation
.............................................................................................................. 22
Section 4.8
Financing.............................................................................................................. 22
Section 4.9
Investment Intent ................................................................................................. 22
Section 4.10
Independent Evaluation ....................................................................................... 22
Section 4.11
Consents, Approvals or Waivers.......................................................................... 23
Section 4.12
Bankruptcy
........................................................................................................... 23
Section 4.13
Anti-Corruption; Trade Controls. ........................................................................ 23
ARTICLE 5 COVENANTS OF THE PARTIES .................................................................... 23
Section 5.1
Access. .................................................................................................................
23
Section 5.2
Government Reviews
........................................................................................... 25
Section 5.3
Public Announcements; Confidentiality
.............................................................. 26
Section 5.4
Operation of Business
.......................................................................................... 27
Section 5.5
Amendment to Schedules .................................................................................... 30
Section 5.6
Further Assurances............................................................................................... 31
Section 5.7
Related Party Contracts........................................................................................ 31
Section 5.8
Conduct of Buyer
................................................................................................. 31
Section 5.9
Employee Matters
................................................................................................ 31
Section 5.10
Bonds, Letters of Credit and Guarantees
............................................................. 31
Section 5.11
Transition Services Agreement
............................................................................ 31
Section 5.12
Use of Name ........................................................................................................ 31
Section 5.13
Records. ............................................................................................................... 32
Section 5.14
Insurance
.............................................................................................................. 32
Section 5.15
Anti-Bribery and Corruption................................................................................ 33
Section 5.16
Required Consents ...............................................................................................
35
Section 5.17
Defense of Retained Litigation
............................................................................ 36
Section 5.18
Seller Parent Guaranty
......................................................................................... 36
Section 5.19
Reorganization
..................................................................................................... 36
Section 5.20
Name Change and Reorganization....................................................................... 37
Section 5.21
Notice to Third Persons ....................................................................................... 37
Section 5.22
Seismic Data ........................................................................................................
37
Section 5.23
Supplemental Information ................................................................................... 38
Section 5.24
Operational Technology....................................................................................... 38
ARTICLE 6 CONDITIONS TO CLOSING ........................................................................... 38
Exhibit 10.1
iii
Section 6.1
Seller’s Conditions to Closing .............................................................................
38
Section 6.2
Buyer’s Conditions to Closing
............................................................................. 39
ARTICLE 7 CLOSING
............................................................................................................. 40
Section 7.1
Time and Place of Closing
................................................................................... 40
Section 7.2
Obligations of Seller at Closing
........................................................................... 40
Section 7.3
Obligations of Buyer at Closing .......................................................................... 41
Section 7.4
Closing Payment and Post-Closing Purchase Price Adjustments
........................ 42
ARTICLE 8 TERMINATION
.................................................................................................. 43
Section 8.1
Termination
.......................................................................................................... 43
Section 8.2
Effect of Termination
........................................................................................... 43
ARTICLE 9 INDEMNIFICATION ......................................................................................... 45
Section 9.1
Indemnification
.................................................................................................... 45
Section 9.2
Indemnity Actions
................................................................................................ 48
Section 9.3
Limitation on Actions ..........................................................................................
50
ARTICLE 10 TAX
MATTERS ................................................................................................
52
Section 10.1
Tax Allocations; Tax
Returns
.............................................................................. 52
Section 10.2
Tax Refunds .........................................................................................................
54
Section 10.3
Tax Cooperation................................................................................................... 54
Section 10.4
Characterization of Certain Payments ................................................................. 54
Section 10.5
Transfer Taxes ..................................................................................................... 55
Section 10.6
Termination of Tax
Agreements
.......................................................................... 55
Section 10.7
Purchase Price Allocation
.................................................................................... 55
Section 10.8
Amended Returns................................................................................................. 55
ARTICLE 11
MISCELLANEOUS
.......................................................................................... 56
Section 11.1
Counterparts
......................................................................................................... 56
Section 11.2
Notice
................................................................................................................... 56
Section 11.3
Newco Transaction Expenses ..............................................................................
57
Section 11.4
Governing Law ....................................................................................................
57
Section 11.5
Waivers ................................................................................................................ 58
Section 11.6
Assignment .......................................................................................................... 58
Section 11.7
Entire Agreement
................................................................................................. 58
Section 11.8
Amendment
.......................................................................................................... 58
Section 11.9
No Third Party Beneficiaries ...............................................................................
58
Section 11.10
Construction
......................................................................................................... 58
Section 11.11
Limitation on Damages
........................................................................................ 59
Section 11.12
Conspicuous
......................................................................................................... 59
Section 11.13
Affiliate Liability .................................................................................................
59
Section 11.14
Time of Essence
................................................................................................... 60
Section 11.15
Severability ..........................................................................................................
60
Section 11.16
Specific Performance
........................................................................................... 60
Exhibit 10.1
iv
APPENDICES:
Appendix A
-
Definitions
EXHIBITS:
Exhibit A
-
Form of Assignment Agreement
Exhibit B
-
Allocated Values
Exhibit C
-
Transition Services Agreement
Exhibit D
-
Seller Parent Guaranty
SCHEDULES:
Schedule 1.1(a)
-
Real Property Interests
Schedule 1.1(b)
-
Wells
Schedule 1.1(c)
-
Surface Contracts
Schedule 3.1
-
Seller Knowledge Individuals
Schedule 3.7(a)
-
Pending Litigation
Schedule 3.7(b)
-
Pending Actions
Schedule 3.8
-
Taxes
Schedule 3.9
-
Capital Commitments
Schedule 3.11(a)
-
Material Contracts
Schedule 3.12
-
Imbalances
Schedule 3.13
-
Required Consents
Schedule 3.14
-
Non-Consent Operations; Payout Status
Schedule 3.15
-
Environmental Matters
Schedule 3.16
-
Suspense Funds
Schedule 3.19
-
Wells
Schedule 3.21
-
Permits
Schedule 3.22
-
Royalties
Schedule 3.23
-
Bonds, Letters of Credit, and Guaranties
Schedule 3.24
-
Permitted Indebtedness
Schedule 3.28
-
Leases
Schedule 4.1
-
Buyer Knowledge Individuals
Schedule 5.4
-
Operation of Business
Schedule 5.7
-
Allocated Related Party Contracts
Schedule 5.9(a)
-
Employee Matters
Schedule 5.9(b)
-
Personal Data
Schedule 5.17
-
Retained Litigation
Schedule 5.23
-
Supplemental Information
Schedule A-1
-
Previously-Divested Properties
Exhibit 10.1
- 1 -
PURCHASE AND SALE AGREEMENT
This
Purchase
and
Sale
Agreement
(as
may
be
amended,
restated,
supplemented
or
otherwise modified from
time to time,
this “Agreement”) is
dated as of
September 20, 2021
(the
“Execution Date”), by and between
Shell Enterprises LLC, a Delaware
limited liability company
(“Seller”), on the
one part,
and ConocoPhillips
Company,
a Delaware
corporation (“Buyer”),
on
the other
part. Seller
and
Buyer are
sometimes referred
to herein
individually
as a
“Party”
and,
collectively, as the “Parties.”
RECITALS:
WHEREAS,
SWEPI
LP,
a
Delaware
limited
partnership
(“SWEPI”),
owns
the
Assets,
which are located in the Permian Basin in western Texas;
WHEREAS, Seller
will complete
the Reorganization
whereby,
after effecting
a statutory
merger,
(a) Seller will
own 100 percent
of the membership
interests in Non-Permian
Newco, (b)
Non-Permian Newco
will own
100 percent
of the
membership interests
in Newco
(the “Subject
Interests”) and (c) the Assets will be owned by Newco; and
WHEREAS, the Parties desire that, at the
Closing, Seller shall cause Non-Permian Newco
to
sell
and
transfer
to
Buyer,
and
Buyer
shall
purchase
from
Non-Permian
Newco,
the
Subject
Interests, upon the terms, and subject to the conditions, set forth herein.
NOW,
THEREFORE,
in
consideration
of
the
premises
and
of
the
mutual
promises,
representations, warranties, covenants, conditions and agreements contained herein, and for other
valuable consideration, the receipt
and sufficiency of which are
hereby acknowledged, the Parties,
intending to be legally bound by the terms hereof, agree as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
Section 1.1
Defined
Terms.
In
addition
to
the
terms
defined
in
the
Preamble
and
the
Recitals
of
this
Agreement,
for
purposes
hereof,
the
capitalized
terms
used
herein
and
not
otherwise defined shall have the
meanings set forth in Appendix
A. A defined term has
its defined
meaning
throughout
this
Agreement
regardless
of
whether
it
appears
before
or
after
the
place
where it is defined, and its other grammatical forms have corresponding meanings.
Section 1.2
References and Rules of
Construction. All references in
this Agreement to
Exhibits, Schedules, Appendices,
Articles, Sections,
subsections, clauses, and
other subdivisions
refer
to
the
corresponding
Exhibits,
Schedules,
Appendices,
Articles,
Sections,
subsections,
clauses, and other
subdivisions of or
to this Agreement
unless expressly provided
otherwise. Titles
appearing at
the beginning
of any
Exhibits, Schedules,
Appendices, Articles,
Sections, subsections,
clauses, and other subdivisions of this Agreement are for convenience only,
do not constitute any
part of this Agreement, and shall be disregarded in construing the language hereof. All references
to “$” shall
be deemed
references to
Dollars. Each
accounting term not
defined herein will
have
the meaning given
to it
under GAAP as
interpreted as
of the Execution
Date, and, as
applicable,
as consistently applied in the oil and gas
industry. Unless the context requires otherwise, the word
“or” is not
exclusive. As used
herein, the word
(a) “day” means
calendar day; (b)
“extent” in the
Exhibit 10.1
- 2 -
phrase “to
the extent”
shall mean
the degree
to which
a subject
or other
thing extends,
and such
phrase
shall
not
mean
simply
“if”;
(c)
“this
Agreement,”
“herein,”
“hereby,”
“hereunder,”
and
“hereof,” and words of
similar import, refer to this
Agreement as a whole
and not to any
particular
Article,
Section,
subsection,
clause,
or
other
subdivision
unless
expressly
so
limited;
(d)
“this
Article,” “this Section,” “this subsection,”
“this clause,” and words
of similar import, refer
only to
the Article, Section, subsection, and clause hereof
in which such words occur; and (e)
“including”
(in
its
various
forms)
means
including
without
limitation.
Pronouns
in
masculine,
feminine,
or
neuter genders
shall
be
construed to
state
and
include
any
other
gender,
and
words,
terms,
and
titles (including terms defined herein) in the singular form shall be construed to include the plural
and vice
versa, unless
the context
otherwise requires.
Appendices, Exhibits,
and Schedules
referred
to herein are attached
to this Agreement and
by this reference incorporated
herein for all purposes.
Reference herein
to any
federal, state,
local, or
foreign Law
shall be
deemed to
also refer
to all
rules and regulations
promulgated thereunder, unless the context
requires otherwise, and
shall also
be deemed
to refer
to such
Laws as
in effect
as of
the Execution
Date or
as hereafter
amended.
Examples are not
to be
construed to
limit, expressly
or by implication,
the matter they
illustrate.
References to a specific time shall refer to prevailing Central Time,
unless otherwise indicated. If
any period of
days referred to
in this Agreement
shall end on a
day that is not
a Business Day, then
the expiration of such period
shall be automatically extended until
the end of the first
succeeding
Business
Day.
Except
as
otherwise
specifically
provided
in
this
Agreement,
any
agreement,
instrument, or writing defined or referred to herein means such agreement, instrument, or writing,
as from time to time amended, supplemented, or modified prior to the Execution Date.
ARTICLE 2
PURCHASE AND SALE
Section 2.1
Purchase
and
Sale.
At
the
Closing,
upon
the
terms
and
subject
to
the
conditions
of
this
Agreement,
Seller
agrees
to
cause
Non-Permian
Newco
to
sell,
transfer,
and
convey the Subject Interests to Buyer, free and clear of any Encumbrances (other than restrictions
on transfer
that may be
imposed by state
or federal securities
Laws), and Buyer
agrees to purchase,
accept, and pay for the Subject Interests.
Section 2.2
Effective Time; Proration of Revenues.
(a)
Newco
shall
be
entitled
to
(i) all
production
of
Hydrocarbons
from
or
attributable to the Properties after 7:00 a.m.,
Central Time, on July 1, 2021 (the “Effective Time”)
and all products and proceeds attributable thereto and (ii) all other income, proceeds, receipts and
credits earned with respect to the Assets after the Effective Time, and Newco shall be responsible
for, and entitled
to any refunds with respect
to, all Property Costs
incurred and attributable to the
period
after
the
Effective
Time
and
all
Asset
Taxes
apportioned
to
Buyer
pursuant
to
Section
10.1(a).
(b)
Seller
shall
be
entitled
to
(i) all
production
of
Hydrocarbons
from
or
attributable
to
the
Properties
prior
to
and
at
the
Effective
Time
and
all
products
and
proceeds
attributable thereto and (ii) all other income, proceeds,
receipts and credits earned with respect
to
the Assets
prior to
and at
the Effective
Time,
and Seller
shall be
responsible for,
and entitled
to
any refunds with respect to, all Property Costs
incurred and attributable to the period prior
to and
at the Effective Time and all Asset Taxes
apportioned to Seller pursuant to Section 10.1(a).
Exhibit 10.1
- 3 -
(c)
Should Buyer or any of its Affiliates receive after the Closing any amounts
to which Seller
is entitled under Section
2.2(b), Buyer shall, and
shall cause its
relevant Affiliate
to, fully disclose,
account for and
promptly remit the
same to Seller.
If, after the
Closing, Seller
or any of
its Affiliates receives any
amount to which Newco
is entitled under Section
2.2(a), Seller
shall, and shall
cause its
relevant Affiliate
to, fully
disclose, account for,
and promptly
remit the
same to Buyer.
(d)
Should
Buyer
or
any
of
its
Affiliates
pay
after
the
Closing
any
Property
Costs or
Asset Taxes
for which Seller
is responsible under
Section 2.2(b), Seller
shall reimburse
Buyer or its
relevant Affiliate promptly
after receipt from such
party of an invoice,
accompanied
by
copies
of
the
relevant
vendor
or
other
invoice
and
proof
of
payment,
with
respect
to
such
Property Costs
or Asset
Taxes.
Should
Seller or
any of
its
Affiliates
pay
after the
Closing
any
Property Costs or Asset Taxes
for which Newco is responsible
under Section 2.2(a), Buyer shall,
or shall cause Newco
to, reimburse Seller or its relevant
Affiliate promptly after receipt from such
party of
an invoice,
accompanied by
copies of
the relevant
vendor or
other invoice
and proof
of
payment, with respect to such Property Costs or Asset Taxes.
(e)
Notwithstanding the
foregoing, Seller
shall have
no further
entitlement to
amounts earned
from the
sale of
Hydrocarbons produced
from or
attributable
to the
Assets and
other income
earned
with respect
to the
Assets
and
no further
responsibility
for Property
Costs
incurred with respect to the Assets following the final determination and payment
of the Purchase
Price in accordance with Section 7.4.
(f)
Right-of-way
fees,
insurance premiums
and
other
Property
Costs
that
are
paid periodically
shall be
prorated based
on the
number of
days in
the applicable
period falling
before, and the number of days in
the applicable period falling on or
after, the day of the Effective
Time.
Asset Taxes shall be apportioned as set forth in Section 10.1(a).
(g)
Settlement between
Buyer and
Seller of
receipts and
disbursements under
Section 2.2(c) and
Section 2.2(d) shall
be made no
less frequently than
monthly on or
before the
20
th
day of the month following the month of such receipt or disbursement.
Section 2.3
Procedures.
(a)
For purposes of allocating production and accounts receivable with respect
thereto under Section 2.2, (i) liquid Hydrocarbons shall be deemed to be “from
or attributable to”
the Properties when they
pass through the
inlet flange of the
pipeline connecting into
the storage
facilities into which they are run or, if there are no such storage facilities, when they pass through
the lease automatic
custody transfer meters
or similar meters
at the point
of entry into
the pipelines
through which they are transported from the field and (ii) gaseous Hydrocarbons shall
be deemed
to be “from
or attributable to”
the Properties when
they pass through
the custody transfer
meters
on the
pipelines through
which they
are transported
(or whichever
meter
is closest
to the
well).
Seller shall
utilize reasonable
interpolative procedures
to arrive
at an
allocation of
production when
exact
meter
readings
or
gauging
and
strapping
data
is
not
available.
The
terms
“earned”
and
“incurred” shall be interpreted
in accordance with
GAAP and Council of
Petroleum Accountants
Society
(“COPAS”)
standards,
and
expenditures
that
are
incurred
pursuant
to
an
operating
agreement, unit agreement
or similar agreement shall
be deemed incurred when
expended by the
Exhibit 10.1
- 4 -
operator
of
the
applicable
Property
in
accordance
with
or
allowed
under
the
applicable
joint
operating agreement.
(b)
Seller shall be entitled to
handle all joint interest audits
and other audits of
Property Costs
covering the
period for
which Seller
is in
whole or
in part
responsible under
Section
2.2;
provided
,
however
,
that Seller shall not agree to any adjustments to previously assessed costs
for which
Buyer or
Newco is
liable, or
any compromise
of any
audit claims
to which
Buyer or
Newco would
be entitled
or that
may otherwise
materially and
adversely affect
Newco, without
the prior written consent of
Buyer, which consent shall not be unreasonably
withheld, conditioned
or delayed. Each Party shall provide the
other Party with a copy of all
applicable audit reports and
written audit agreements received by such Party or its
Affiliates and relating to periods for which
such other Party is partially responsible.
Section 2.4
Purchase Price. The
total consideration
to be paid
for the Subject
Interests
shall be
comprised of
cash in
the amount
of $9,500,000,000
(the “Base
Purchase Price”
and, as
adjusted pursuant to this Agreement, the “Purchase Price”).
Section 2.5
Adjustments
to
the
Base
Purchase
Price.
All
adjustments
to
the
Base
Purchase Price shall
be made (x) in accordance
with the terms of
this Agreement and, to
the extent
not
inconsistent
with
this
Agreement,
in
accordance
with
GAAP
and
COPAS
standards,
as
applicable, as consistently applied in
the oil and gas industry and
(y) in the case of all matters
set
forth in Section 2.5(a) and Section 2.5(b), only with respect to adjustments
identified on or before
the 180
th
day after the Closing (the
“Cut-off Date”).
Each adjustment to the
Base Purchase Price
described in
Section
2.5(a)
and
Section
2.5(b)
shall
be
allocated to
the
Assets
affected
by
such
adjustment.
Without limiting the foregoing, the Base Purchase Price shall be adjusted as follows,
with the adjustments to such Base Purchase Price resulting in the “Purchase Price”:
(a)
The
Base
Purchase
Price
shall
be
adjusted
upward
by
the
following
amounts, without duplication:
(i)
an amount equal to all
Property Costs attributable to
the ownership
and operation
of the
Assets or
the production
of Hydrocarbons
therefrom that
are
incurred
after
the
Effective
Time
or
Asset
Taxes
for
which
Buyer
is
responsible
pursuant to Section 10.1(a) but
that have been paid by
Seller or any of its
Affiliates
(other
than
Newco),
as
is
consistent
with
Section
2.2(a)
and
Section
2.2(b),
but
excluding any amounts
previously reimbursed to
Seller or any
such Affiliate
by a
Third Party or pursuant to Section 2.2(d);
(ii)
an amount equal to all proceeds to
which Seller is entitled pursuant
to Section 2.2(b), to the
extent that such proceeds have
been received by Buyer or
any of its
Affiliates, and
not remitted or
paid to Seller
or any of
its Affiliates
(net
of
any
Royalties
paid
by
Buyer
or
its
Affiliates
to
Third
Parties,
gathering,
processing
and
transportation
costs
and
any
Hydrocarbon
production,
severance,
sales or excise Taxes
not reimbursed to Buyer
or its Affiliates
by the purchaser of
Hydrocarbon production); and
Exhibit 10.1
- 5 -
(iii)
any
other
amount
provided
for
elsewhere
in
this
Agreement
or
otherwise
agreed
upon
in
writing
by
the
Parties
as
an
upward
adjustment
to
the
Base Purchase Price.
(b)
The
Base
Purchase
Price
shall
be
adjusted
downward
by
the
following
amounts, without duplication:
(i)
an amount equal to all
Property Costs attributable to
the ownership
and operation
of the
Assets or
the production
of Hydrocarbons
therefrom that
are
incurred
prior
to
and
at
the
Effective
Time
or
Asset
Taxes
for
which
Seller
is
responsible pursuant to Section 10.1(a) but that have been paid by Buyer or any of
its Affiliates, as is consistent with Section 2.2(a) and Section 2.2(b),
but excluding
any
amounts
previously
reimbursed
to
Buyer
or
its
relevant
Affiliate
by
a
Third
Party or pursuant to Section 2.2(d);
(ii)
an amount equal
to all proceeds
to which Newco
is entitled pursuant
to Section 2.2(a),
to the
extent that such
amounts have
been received
by Seller
or
any of
its Affiliates
and not
remitted or
paid to
Newco (net of
any Royalties
paid
by Seller or its Affiliates to Third Parties,
gathering, processing and transportation
costs
and
any
Hydrocarbon
production,
severance,
sales
or
excise
Taxes
not
reimbursed to Seller or its Affiliates by the purchaser of Hydrocarbon production);
(iii)
the amount of
funds in suspense
listed on Schedule
3.16 that are
still
in suspense on the Closing Date; and
(iv)
any
other
amount
provided
for
elsewhere
in
this
Agreement
or
otherwise agreed
upon in
writing by
the Parties
as a
downward adjustment
to the
Base Purchase Price.
Section 2.6
Indebtedness Free.
At the
Closing, Newco
will not
be responsible
for any
obligations to repay Indebtedness.
Section 2.7
Deposit.
No
later
than
5:00
p.m.
Central
Time
on
September
21,
2021,
Buyer
shall
pay
to
Shell
US
E&P
Investments
LLC,
in
immediately
available
funds
by
wire
transfer
to
an
account
designated
by
Seller,
an
amount
equal
to
five
percent
(5%)
of
the
Base
Purchase
Price
(the
“Deposit”).
In
the
event
that
the
Deposit
is
not
paid
to
Shell
US
E&P
Investments LLC within
the required time
period, in addition
to any other
remedy available
at Law
or in equity, Seller shall have the
right to terminate this Agreement
pursuant to Section 8.1(b), and
any
rights
or
remedies
Seller
may
have
under
this
Agreement
in
relation
to
such
breach
shall
survive such termination. The Deposit
shall be distributed in accordance
with the terms of Section
8.2(b) or Section 8.2(c), as applicable.
Section 2.8
Withholding.
Buyer
and
its
Affiliates
(and
any
Person
acting
on
their
behalf)
shall
be
entitled
to
deduct
and
withhold
from
any
consideration
otherwise
payable
or
deliverable to Non-Permian Newco
such amounts as may
be required to be
deducted or withheld
therefrom
pursuant
to
applicable
Law.
If
the
applicable
withholding
agent
intends
to
withhold
from any
amounts payable
to
Non-Permian Newco
(other than
with
respect to
any
withholding
relating
to
a
failure
by
Seller
to
deliver
to
Buyer,
at
or
prior
to
the
Closing,
the
deliverable
Exhibit 10.1
- 6 -
contemplated
in
Section
7.2(b)),
the
applicable
withholding
agent
shall
use
commercially
reasonable
efforts
to
provide
prior
notice
of
such
withholding
to
Seller
as
soon
as
reasonably
practicable after
it
determines withholding
is required
and to
reasonably
cooperate to
reduce or
eliminate
such
withholding
to
the
extent
permissible
under
applicable
Law.
To
the
extent
such
amounts are
so deducted
or withheld
and remitted
to the
appropriate Governmental
Authority, such
amounts shall be
treated for
all purposes
of this Agreement
as having been
paid to the
Person to
whom such amounts would otherwise have been paid absent such deduction or withholding.
ARTICLE 3
REPRESENTATIONS
AND WARRANTIES
OF SELLER
Section 3.1
Generally.
(a)
Any representation
or warranty qualified
by the
“Knowledge of Seller”
or
“to Seller’s Knowledge”
or with any
similar knowledge qualification is
limited to matters
within
the Knowledge of the individuals listed in Schedule 3.1.
(b)
Subject to the disclaimers and waivers contained
in and the other terms and
conditions of this
Agreement, and the exceptions
and matters set forth
on the Schedules attached
to this Agreement, Seller represents and warrants
to Buyer the matters set forth in this Article
3 as
of the Execution Date (except for the representations and warranties that
refer to a specified date,
which will be deemed made as of such date).
(c)
The
disclosure
of
any
matter
in
any
Schedule
to
a
representation
and
warranty
of
Seller
set
forth
in
this
Article
3
shall
be
deemed
to
be
a
disclosure
for
all
representations
and
warranties
in
respect
of
which
it
is
evident
such
matter
relates,
but
shall
expressly not be deemed to
constitute an admission by Seller
to otherwise imply that such
matter
is material for the purposes of this Agreement.
Section 3.2
Existence and Qualification.
(a)
Seller is a limited liability
company duly organized, validly existing, and
in
good standing under the Laws
of the State of Delaware
and is duly qualified to
do business in all
jurisdictions
in
which
its
ownership
of
property
or
conduct
of
business
requires
Seller
to
be
qualified except where
the failure to
be so qualified
or licensed or in
good standing, individually
or in the aggregate, has not been and would not reasonably be expected to be material to Seller.
(b)
As of the Closing, following the Merger,
each of Non-Permian Newco and
Newco will be a
limited liability company duly
organized, validly existing,
and in good standing
under the Laws of the
State of Texas
and will be duly
qualified to do business
in all jurisdictions
in which its ownership of property or conduct of
business requires it to be qualified, except where
the failure
to be
so qualified
or licensed
or in
good standing,
individually or
in the
aggregate, would
not reasonably be expected to be material to it.
Section 3.3
Organizational
Power.
Seller
has
all
requisite
limited
liability
company
power to enter into
and perform this
Agreement and each Transaction
Document to which
Seller
is or will be a
party and to consummate the
transactions contemplated by this Agreement
and such
other Transaction Documents.
As of the
Closing, following the
Merger, Non-Permian Newco will
Exhibit 10.1
- 7 -
have all requisite limited liability company power
to own the Subject Interests and to
carry on its
business as
being conducted
except where
the failure
to have
such power,
individually or
in the
aggregate,
has
not
been
and
would
not
reasonably
be
expected
to
be
material
to
Non-Permian
Newco.
As of
the Closing,
following the
Merger,
Newco will
have all requisite
limited liability
company power to own, lease, and operate its properties and
to carry on its business as now being
conducted
by
SWEPI
with
respect
to
the
Assets,
except
where
the
failure
to
have
such
power,
individually or in the aggregate, would not reasonably be expected to be material to Newco.
Section 3.4
Authorization and Enforceability.
(a)
The execution, delivery, and performance
of this Agreement, all
documents
required to be executed and delivered
by Seller at Closing and all
other Transaction Documents to
which Seller
is or
will be
a party,
and the
performance of
the transactions
contemplated hereby
and
thereby,
have
been
duly
and
validly
authorized
by
all
necessary
limited
liability
company
action on the part of
Seller. This
Agreement has been duly executed
and delivered by Seller
(and
all documents required
hereunder to be
executed and delivered
by Seller at
Closing and all
other
Transaction
Documents
will
be
duly
executed
and
delivered
by
Seller)
and
this
Agreement
constitutes, and
at the
Closing such
documents will
constitute, the
valid and
binding obligations
of Seller, enforceable in accordance with their terms except as such enforceability may be limited
by
applicable
bankruptcy
or
other
similar
Laws
affecting
the
rights
and
remedies
of
creditors
generally as
well as
by general
principles of
equity (regardless
of whether
such enforceability
is
considered in a proceeding in equity or at Law).
(b)
All
documents
required
to
be
executed
and
delivered
by
Non-Permian
Newco at
Closing and
all other
Transaction Documents
to which
Non-Permian Newco
will be
a
party,
and
the
performance
of
the
transactions
contemplated
thereby,
will
have
been
duly
and
validly authorized
by all
necessary limited
liability company
action on
the part
of Non-Permian
Newco
and
such
documents
will
constitute,
the
valid
and
binding
obligations
of
Non-Permian
Newco, enforceable in
accordance with
their terms
except as such
enforceability may
be limited
by
applicable
bankruptcy
or
other
similar
Laws
affecting
the
rights
and
remedies
of
creditors
generally as
well as
by general
principles of
equity (regardless
of whether
such enforceability
is
considered in a proceeding in equity or at Law).
Section 3.5
No
Conflicts.
Subject
to
compliance
with
the
HSR
Act,
the
execution,
delivery, and performance of this Agreement and the other Transaction
Documents by Seller, and
the
transactions
contemplated
hereby
and
thereby,
will
not
(a)
violate
any
provision
of
the
Organizational
Documents
of
Seller,
SWEPI,
Non-Permian
Newco
or
Newco,
(b)
result
in
a
material default (with or without due notice or lapse of time or both) or the creation of any lien or
encumbrance or give rise to any right of
termination, cancellation or acceleration under any note,
bond, mortgage,
indenture, or
other financing
instrument to
which Seller,
SWEPI, Non-Permian
Newco
or
Newco
is
a
party
or
that
affects
the
Assets
or
the
Subject
Interests,
(c)
violate
any
judgment,
order,
writ,
injunction,
ruling,
or
decree
in
any
material
respect
applicable
to
Seller,
SWEPI, Non-Permian Newco, Newco, or any of the Assets or the Subject Interests, or (d)
violate
any Laws
in any
material respect
applicable to
Seller,
SWEPI, Non-Permian
Newco, Newco,
or
any of the Assets or the Subject Interests.
Exhibit 10.1
- 8 -
Section 3.6
Liability
for Brokers’
Fees. None
of Buyer,
its
Affiliates,
or Newco
shall
directly or
indirectly have
any responsibility,
liability or
expense, as
a result
of undertakings
or
agreements
of
Seller
or
its
respective
Affiliates,
for
brokerage
fees,
finder’s
fees,
agent’s
commissions
or other
similar forms
of compensation
in connection
with this
Agreement or
any
agreement or transaction contemplated hereby.
Section 3.7
Litigation.
(a)
Except
as
set
forth
on
Schedule
3.7(a),
there
are
no
actions,
suits
or
proceedings against
SWEPI, Seller,
Non-Permian Newco
or Newco
pending with
or before
any
Governmental
Authority
or
arbitrator,
or,
to
Seller’s
Knowledge,
threatened
in
writing
(i)
with
respect
to
or
affecting
the
Assets,
the
Subject
Interests,
or
Newco
that
would
reasonably
be
expected to be material to Newco or the ownership, operation, exploration or development of any
of the
Assets or
(ii) that
would materially
impair,
hinder,
or delay
Seller’s
ability to
perform its
obligations under this Agreement or any Transaction
Document or Non-Permian Newco’s
ability
to perform those
actions that Seller
is required to
cause Non-Permian Newco to
perform under this
Agreement.
(b)
There is no outstanding judgment, order, writ, injunction, ruling, or decree,
or pending or, to
the Knowledge of
Seller, threatened material investigation,
by any Governmental
Authority
relating
to
Newco,
the
Subject
Interests,
any
of
the
Assets,
or
the
transactions
contemplated by
this Agreement. Except
as set
forth on
Schedule 3.7(b),
there is
no action,
suit,
or proceeding
(i) by
SWEPI pending, or
for which SWEPI
has commenced preparations
to initiate,
against any other
Person with respect
to the Subject Interests
or the Assets,
(ii) by Newco
pending,
or for which Newco
has commenced preparations
to initiate, against
any other Person, or
(iii) by
any Third
Party (including any
Representative of
Seller or any
of its Affiliates
(excluding Newco))
pending in connection with
the ownership or operation
of the Assets that
is financed by
Seller or
Newco or for which
Seller or any of its
Affiliates (including Newco) is (or
will be) responsible for
any
portion
of
the
costs,
expenses or
liabilities
thereof.
Except
as
set
forth
on
Schedule
3.7(b),
during the
past two
years prior
to the
Execution Date,
there have
been no claims
for personal
injury
or
death
of
any
Person
in
connection
with
the
ownership
or
operation
of
the
Assets
for
which
Newco
would
have
any
liability
in
any
respect
after
the
Closing
Date.
Notwithstanding
the
foregoing, with
respect to
matters pertaining
to
Assets that
are operated
by a
Person other
than
Seller
or
its
Affiliates
(including
Newco),
the
representations
and
warranties
set
forth
in
this
Section 3.7(b) are limited to the Knowledge of Seller.
Section 3.8
Taxes.
(a)
All
income
and
franchise
Taxes
and
all
other
material
Taxes
that
have
become due or
payable by
or with respect
to Newco
or the
Assets or the
ownership or operation
thereof (whether or not shown or required to be shown on any Tax Return) have been paid in full.
(b)
All material Tax Returns that were required to
be filed by or with
respect to
Newco
or
the
Assets
or
the
ownership
or
operation
thereof
have
been
duly
filed
(taking
into
account any extension
of time
within which to
file), and
all such Tax
Returns are
true, complete
and correct in all material respects.
Exhibit 10.1
- 9 -
(c)
The
Taxes
reflected
on
the
Tax
Returns
that
will
be
filed
under
Section
10.1(d) and are set
forth on Schedule 3.8(c)
will be the only
Income Taxes
payable by Newco or
SWEPI for the taxable periods covered by such Tax Returns.
(d)
Except
as
set
forth
on
Schedule
3.8(d),
no
audits,
examinations,
investigations
or
proceedings
are
pending,
in
progress
or,
to
Seller’s
Knowledge,
have
been
threatened with respect
to any Taxes
or Tax
Returns relating
to SWEPI or
Newco or
the Assets.
Neither SWEPI
nor Newco
has consented
to, or
entered into
any agreement
with respect
to, and
there is
not currently
in effect
with respect
to any
of the
Assets, any
waiver or
extension of
any
statute of
limitations related
to the assessment,
determination or
collection of
any Taxes. No power
of attorney granted by or with respect
to SWEPI or Newco in respect of
any Taxes is in effect that
will not be revoked or cancelled at or prior to the Closing.
(e)
None
of
the
Assets
is
subject
to
any
tax
partnership
agreement
or
is
otherwise
treated,
or
required
to
be
treated,
as
held
in
an
arrangement
requiring
a
partnership
income Tax Return to
be filed or
otherwise treated, or
required to be
treated, as a
partnership under
Subchapter K of Chapter 1 of Subtitle A of the Code or any similar state or local Law.
(f)
No deficiency for any
material amount of Tax has been
asserted or assessed
by any
Governmental Authority
against SWEPI
or Newco
or with
respect to
any of
the Assets,
which deficiency has not been fully satisfied by payment, settled or withdrawn.
(g)
No claim
has been made
by any
Governmental Authority in
any jurisdiction
in which SWEPI or
Newco does not
file Tax
Returns that any
material Tax
Return is required to
be filed
or any
material
Taxes
are required
to be
paid in
such jurisdiction
by or
with respect
to
SWEPI or Newco.
(h)
There are no Encumbrances for Taxes
(other than liens described in clause
(d) of the definition of Permitted Encumbrances) on any of the Assets.
(i)
SWEPI
has
not
since
2007,
and
Newco
has
never,
been
a
member
of
an
affiliated
group
of
corporations
within
the
meaning
of
Section
1504
of
the
Code
filing
a
consolidated
U.S.
federal
income
Tax
Return,
or
a
member
of
an
aggregate,
combined,
consolidated, unitary
or other
similar group
for state,
local or
foreign Tax
purposes. SWEPI
has
not since 2007, and Newco has never, had any liability for the Taxes
of any Person under Section
1.1502-6 of the Treasury
Regulations or any similar provision
of state, local or
foreign Law,
as a
transferee or
successor,
by contract
or other
agreement or
arrangement (other
than pursuant
to a
Customary
Arrangement),
by
operation
of
Law
or
otherwise.
Each
of
SWEPI
and
Newco
has
timely paid all material amounts of Taxes required to be paid by or on behalf of it pursuant to any
Customary Agreement.
(j)
For U.S. federal
income Tax purposes and all applicable
state and local Tax
purposes, SWEPI and
Newco are currently
properly classified as
disregarded entities, as
described
in
Treasury
Regulation
Section
301.7701-3(b)(1)(ii),
and
no
election
has
been
filed
or
made
to
change such
classification for
U.S. federal
income tax
purposes (or
applicable state
or local
Tax
purposes).
Exhibit 10.1
- 10 -
(k)
Neither SWEPI nor Newco
has distributed stock of
another Person, or had
its
stock
distributed
by
another
Person,
in
a
transaction
that
was
purported
or
intended
to
be
governed in whole or in part by Section
355 or Section 361 of the Code
(or any similar provision
of state, local or non-U.S. Law).
(l)
Neither SWEPI nor
Newco is, or has
ever been, a party
to, or bound by, any
agreement or
arrangement relating
to the
sharing, indemnification
or allocation
of Tax
liabilities
(or any similar
agreement or arrangement)
between or among
Persons, in each
case, other than
a
Customary Agreement.
(m)
Except
as
set
forth
on
Schedule
3.8(m),
SWEPI
and
Newco
have
not
requested or received any rulings from, or entered into any arrangements with, any Governmental
Authority,
or received or
benefited from any Tax
exemption, Tax
holiday or other Tax
reduction
agreement or order
or other special
Tax
regime (each a
“Tax
Incentive”). Neither Buyer
nor any
of its
Affiliates will
be liable
to any
Governmental Authority
after the
Closing for
any amounts
benefiting SWEPI or Newco before the Closing
under or with respect to any
such Tax
Incentives
(including as a result of a termination thereof or disqualification therefrom).
(n)
Neither SWEPI nor Newco has
participated in, or been a party
to, a “listed
transaction”
as
this
term
is
defined
in
Treasury
Regulations
Section 1.6011-4(b)
(or
any
predecessor provision).
(o)
Neither
SWEPI
nor
Newco
(i)
has
ever
been
subject
to
Tax
in
a
country
outside of the country in which it
is organized, or (ii) has
ever had a permanent establishment (as
defined in
any applicable
Tax
treaty or
convention) or other
fixed place
of business
in a
country
other than the country in which it is organized. SWEPI and
Newco do not currently own and have
not ever owned an interest in any entity that is
not a “United States person” within the meaning of
Section 7701(a)(30) of the Code.
(p)
SWEPI (with
respect to
the Assets
or the
ownership or
operation thereof)
and Newco have
properly collected and
remitted all material
amounts of sales,
use, value added,
and
similar
Taxes
with
respect
to
sales
or
leases
made
to,
purchases
made
from,
or
services
provided to their
customers or have
properly received and
retained any appropriate
Tax exemption
certificates and
other documentation
for all
services provided,
or sales,
leases, purchases
made,
without
charging
or
remitting
sales,
use,
value
added,
or
similar
Taxes
that
qualify
such
sales,
leases, purchases, or services as exempt from sales, use, value added, and similar Taxes.
(q)
The
consummation
of
the
transactions
contemplated
by
this
Agreement
(whether alone or in combination with a subsequent event) will
not result in the loss of deduction
to Buyer or Newco under Section 280G of the Code.
(r)
Notwithstanding
anything
to
the
contrary
in
this
Agreement,
(i)
the
representations
and
warranties
in
this
Section
3.8
and
in
Section
3.29
(to
the
extent
relating
to
Taxes)
are
the
only
representations
and
warranties
in
this
Agreement
with
respect
to
the
Tax
matters of SWEPI and Newco, and (ii) Seller makes no representation or warranty with respect to
the existence,
availability,
amount, usability
or limitations
(or lack
thereof) of
any net
operating
loss, net operating loss carryforward, capital loss, capital loss carryforward,
basis amount or other
Exhibit 10.1
- 11 -
Tax
attribute of
Newco after
the Closing
Date, except
for the
representations and
warranties set
forth
in
Section
3.8(j)
and
Section
3.8(q),
and
(iii)
Buyer
acknowledges
and
agrees
that
Buyer
cannot
rely
on
Seller’s
methodologies
for
the
determination
and
reporting
of
Taxes
that
were
utilized for
any Tax
period (or portion
thereof) beginning
prior to the
Closing Date for
purposes
of calculating
and reporting
Taxes
attributable to
any Tax
period (or
portion thereof)
beginning
after the Closing Date.
Section 3.9
Capital
Commitments
and
Expenditures.
Except
as
set
forth
on
Schedule 3.9, as of the Effective
Time, with respect
to the Assets, there are
no outstanding AFEs
or
other
commitments
to
conduct
any
operations
or
expend
any
amount
of
money
on
or
with
respect to
the Assets
which are
binding on
SWEPI that
could reasonably
be expected
to require
expenditures in excess of $2,500,000, individually or in the aggregate, net to SWEPI’s interest.
Section 3.10
Compliance with Laws. With
respect to its ownership
and operation of the
Assets, SWEPI
is (and,
as of
the Closing
Date, Newco
will
be) in
material compliance
with all
applicable Laws
and, to
Seller’s
Knowledge, no
Third Party
operator is
in material
violation
of
any applicable
Laws with
respect to
the Assets.
As of
the Execution
Date, SWEPI
has not
received,
and
to
Seller’s
Knowledge,
no
Third
Party
operator
of
any
of
the
Assets
has
received,
written
notice of any material
violation in any
respect of any applicable
Law relating to
its ownership or
operation
of
the
Assets.
As
of
the
Execution
Date,
SWEPI
has
not
received,
and,
to
Seller’s
Knowledge,
no
Third
Party
operator
of
any
of
the
Assets
has
received,
written
notice
that
it
is
under investigation
by any
Governmental Authority
for potential
non-compliance with
any Law
relating to
its ownership
or operation
of the
Assets in
a material
respect. This
Section 3.10
does
not include any
matters with respect
to Environmental Laws,
which are exclusively
addressed in
Section 3.15, or Taxes, which are exclusively addressed in Section 3.8
and in Section 3.29 (to the
extent relating to Taxes).
Section 3.11
Material Contracts.
(a)
Schedule 3.11(a) sets
forth all
Contracts as
of the
Execution Date
of the
type
described below to
which SWEPI is
a party or
by which SWEPI
or any of
the Assets are
bound,
in each case, that will be binding on Newco after Closing in accordance with
Section 5.19(b), but
excluding, in each case,
(x) those Contracts that are
cancelable without penalty on 30
days’ or less
prior
written
notice
and
(y)
any
Contract
to
which
a
Third
Party
operator
of
the
Assets
is
(but
SWEPI is not) a party
and by which SWEPI and any
of the Assets are bound (for
the avoidance of
doubt, for purposes of
this Section 3.11,
Newco will be deemed
to be bound after
Closing to any
Contract subject
to a Required
Consent that SWEPI
retains as a
Retained Asset pursuant
to Section
5.16(c)) (the “Material Contracts”):
(i)
any
Contract
(excluding
customary
joint
operating
agreements
substantially
in
the
form
of
the
AAPL
promulgated
joint
operating
agreement
forms) that can reasonably be expected to result in
aggregate payments by SWEPI
before Closing
or Newco
after Closing
of more
than $2,500,000
(net to
SWEPI’s
(or, as of the consummation
of the Merger, Newco’s) interest) during the current
or
any
subsequent
calendar
year
(based
solely
on
the
terms
thereof
and
current
volumes, without regard to any expected increase in volumes or revenues);
Exhibit 10.1
- 12 -
(ii)
any Contract that can
reasonably be expected to
result in aggregate
revenues to
SWEPI before
Closing or
Newco after
Closing of
more than
$2,500,000
during
the
current
or
any
subsequent
calendar
year
(based
solely
on
the
terms
thereof and
current volumes,
without regard
to any
expected increase
in volumes
or revenues);
(iii)
any
Hydrocarbon
or
water
(produced
or
fresh)
purchase
and
sale,
acreage
dedication,
volume
commitment,
storage,
marketing,
transportation,
processing, gathering, treatment,
separation, compression,
balancing, fractionation,
disposal,
handling,
or
similar
Contract
with
respect
to
Hydrocarbons
or
water
(produced or fresh)
produced from or attributable
to SWEPI’s interest in the Assets
that is
not terminable
without penalty
or other
payment upon
60 days’
or less
notice;
(iv)
any indenture, mortgage, deed of trust, loan, credit or
note purchase
agreements, or sale-leaseback agreements, guaranties, bonds
(other than operator’s
bonds
required
by
the
Railroad
Commission
of
Texas
or
any
other
applicable
regulatory governmental
authority), letters
of credit,
or similar
financial agreements
or other agreements or instruments governing Indebtedness affecting the Assets
or
that will affect Newco at Closing;
(v)
any
Contract
that
constitutes
a
lease
under
which
SWEPI
is
the
lessor
or
the
lessee
of
real
or
personal
property
which
lease
(A)
cannot
be
terminated by
SWEPI without
penalty or
other payment
upon 60
days’ or
less notice
and (B) involves an annual base rental of more than $2,500,000;
(vi)
any
farmout
or
farmin
agreement,
participation
agreement,
exploration
agreement,
development
agreement,
joint
operating
agreement,
unit
agreement, or purchase and sale agreement, or other Contract
that provides for the
purchase,
exchange,
farmin,
or
earning
by
SWEPI
of
any
oil
and
gas
lease
or
mineral rights, other than
customary joint operating agreements
substantially in the
form of the AAPL promulgated joint operating agreement forms;
(vii)
any agreement
regarding any
partnership, Tax
partnership, or
joint
venture, or regarding
any option, put or
call, or right
of first refusal
triggered by the
transactions
contemplated
by
this
Agreement,
with
respect
to
the
Assets
or
the
Subject Interests;
(viii)
any
Contract
that
(A)
contains
or
constitutes
an
existing
area
of
mutual
interest
agreement,
(B)
includes
non-competition
or
non-solicitation
restrictions or
other similar
restrictions on
SWEPI’s doing business,
or (C)
involves
the
settlement,
waiver,
or
release
of
any
material
rights
of
SWEPI
or
the
counterparty;
(ix)
any Contract to sell, lease, exchange,
transfer, or otherwise
dispose
of
all
or
any
part
of
the
Assets
(other
than
with
respect
to
production
of
Hydrocarbons
in
the
ordinary
course)
from
and
after
the
Effective
Time,
but
Exhibit 10.1
- 13 -
excluding
rights
of
reassignment
upon
intent
to
abandon
or
release
a
Well
or
a
Lease;
(x)
any Contract
under which
SWEPI has
the right
to be
“carried” by
another Person (i.e.,
have another Person
pay its share
of costs and expenses)
or the
obligation
to
“carry” another
Person
(i.e.,
pay
the
costs
and
expenses
of
another
Person)
with
respect
to,
or
in
connection
with,
the
ownership,
operation,
or
development of the Properties or
any other assets or
properties (or future assets
or
properties);
(xi)
any Related Party Contract set forth on Schedule 5.7;
and
(xii)
any agreement the primary purpose of which is the
indemnification
of another Person.
(b)
The Material
Contracts are
in full
force and
effect as
to SWEPI
(as of
the
Execution Date) and
Newco (as of
the Closing Date)
and, to Seller’s Knowledge,
are binding upon
the counterparties
thereto
in accordance
with their
terms. SWEPI
is not
(and, as
of the
Closing
Date, Newco will
not be) in material
breach or default
under any Material
Contract, and to
Seller’s
Knowledge,
no
other
Person
that
is
a
party
thereto
is
in
material
breach
or
default
under
any
Material Contract.
To
Seller’s Knowledge,
no event
has occurred,
which after
notice or
lapse of
time, or both,
would constitute a
material default under any
Material Contract. No
written notice
of default
or breach
has been
received or
delivered by
SWEPI under
any Material
Contract, the
resolution
of
which
is
outstanding
as
of
the
Execution
Date,
and
there
are
no
current
notices
received by SWEPI
or Newco of
the exercise of
any premature termination,
price redetermination,
market-out, or curtailment of any such Material Contract. Prior to the Execution Date, and except
to the extent not permitted due to confidentiality obligations, true,
complete, and correct copies of
all
Material
Contracts
have
been
made
available
to
Buyer,
including
all
amendments
or
modifications thereto.
Section 3.12
Payments for
Production and
Imbalances. As
of the
Execution Date,
SWEPI
is
not
(and,
as
of
the
Closing
Date,
Newco
will
not
be)
obligated
by
virtue
of
any
take-or-pay
payment, advance payment,
or other similar
payment (other than
Royalties reflected in
the Leases)
to deliver Hydrocarbons, or proceeds from
the sale thereof, attributable to SWEPI’s
(or, as of
the
consummation
of
the
Merger,
Newco’s)
interest
in
the
Properties
at
some
future
time
without
receiving payment therefor
at or after
the time of
delivery.
Except as set
forth on
Schedule 3.12,
there are no material Imbalances attributable to the Properties.
Section 3.13
Consents and Preferential Rights. Except as set forth on Schedule 3.13 (the
“Required
Consents”),
and
subject
to
compliance
with
the
HSR
Act,
(a)
none
of
the
Subject
Interests, the Assets or any portion of
any of the foregoing, is subject
to any Consents, except for
Customary Post-Closing Consents,
and (b)
there are no
Consents required
to be obtained,
provided
or submitted by SWEPI in connection with the
sale of the Subject Interests by Seller
to Buyer, the
Reorganization,
the
execution,
delivery
and
performance
of
this
Agreement
or
the
other
Transaction Documents, or the consummation of
the transactions contemplated hereby
or thereby.
None of the
Subject Interests, the
Assets or any
portion of
any of the
foregoing is
subject to any
Exhibit 10.1
- 14 -
Preferential Rights
or tag-along rights,
drag-along rights
or similar
rights that may
be applicable
to the transactions contemplated by this Agreement.
Section 3.14
Non-Consent
Operations;
Payout
Status.
Except
as
set
forth
on
Schedule 3.14,
prior
to
the
Closing
Date,
SWEPI
has
not
(and,
as
of
the
Closing
Date,
neither
Newco nor SWEPI will have, except as approved by
Buyer pursuant to Section 5.4) elected not to
participate in any operation or activity proposed with
respect to the Properties that could result in
any of SWEPI’s
(or, as of
the consummation of the
Merger, Newco’s)
interest in such Properties
becoming subject
to a
penalty or
forfeiture as
a result
of such
election not
to participate
in such
operation or activity. To
Seller’s Knowledge, Schedule 3.14 contains a complete and accurate list
of the status
of any payout
balances, as of
the date set
forth on such
Schedule, for each
Property
that
is
subject
to
a
reversion
or
other
adjustment
at
any
level
of
cost
recovery
or
payout
or
Hydrocarbon production from
or attributable to
such Property (or
passage of
time or other
event
other than termination
of an Property
by its
terms), as of
the dates
shown on
such schedule with
respect to each Property.
Section 3.15
Environmental Matters. Except as set forth on Schedule 3.15:
(a)
Neither SWEPI nor Newco has
entered into, or is subject
to, any agreement
with,
or
consent,
order,
injunction,
decree
or
judgment
of,
any
Governmental
Authority
issued
pursuant to Environmental Laws
that requires any Remediation
of or with respect
to, or relating to
the ownership or operation
of, any of the
Assets, that imposes material
obligations or liability
on
SWEPI or Newco,
or that would
reasonably be expected
to be material
to SWEPI, Newco
or the
ownership, operation, exploration or development of any of the Assets.
(b)
There is no material action, suit,
or proceeding by any Third
Party pending,
or to the Knowledge of Seller,
threatened in writing, in connection with
the ownership, operation
or use of the Assets arising under Environmental Laws.
(c)
To Seller’s Knowledge, there is
no outstanding investigation
or information
request
made
in
writing
by
or
claims
or
other
pending
actions
initiated
by
a
Governmental
Authority related
to Environmental
Laws with
respect to
the Assets
and any
act or
omission by
SWEPI or
Newco.
To
Seller’s Knowledge,
there is
no outstanding
investigation or
information
request
made
in
writing
by,
or
claims
or
other
actions
initiated
by,
a
Governmental
Authority
related to
Environmental
Laws
with
respect to
the
Assets
and
the
act
or
omission
of
any
Third
Party.
(d)
As of the Execution Date, neither SWEPI (nor, to
Seller’s Knowledge, any
Third
Party
operator
of
the
Assets)
has
received
written
notice
that
remains
unresolved
of
any
condition
on
or
with
respect
to
any
Asset,
including
notice
of
liability
with
respect
to
off-site
transportation,
storage,
treatment,
recycling
or
disposal
of
Hazardous
Substances,
that,
if
true,
would constitute
a material
violation of,
require material
Remediation after
the Closing
Date, or
give rise to material obligations
or liability under,
any Environmental Laws or the
environmental
provisions of any of the Leases or Contracts, in each case, by either SWEPI or Newco.
(e)
To
Seller’s
Knowledge, as
of the
Execution Date,
SWEPI has
(and, as
of
the Closing Date,
Newco will have)
all material Permits
required under Environmental
Laws for
Exhibit 10.1
- 15 -
the ownership
or operation of
the Assets, and
all such Permits
are in
full force and
effect, including
the timely filing of any renewal applications.
(f)
To Seller’s Knowledge, during
SWEPI’s and Newco’s period of
ownership,
the
Assets
have
been
owned
and
operated
by
SWEPI
and
Newco
in
compliance
in
all
material
respects
with
all
applicable
Environmental
Laws
and
the
terms
of
any
Permits
issued
pursuant
thereto
and
with
the
environmental
provisions
of
the
Leases
and
Contracts,
except
for
prior
instances of non-compliance that have been fully and finally resolved.
(g)
To
Seller’s
Knowledge,
except
as
would
not
constitute
a
Seller
Material
Adverse Effect, no Environmental Condition exists with respect to the Assets or to the operations
of SWEPI or Newco with respect to the Assets.
(h)
Prior
to
the
Execution
Date,
Seller
has
provided
Buyer
with
all
material
written
environmental
assessments,
reports
and
audits
and
written
notices
from
Governmental
Authorities
relating
to
Environmental
Laws
in
its
possession
or
under
its
control
as
of
the
Execution Date relating to the Assets.
Notwithstanding
anything
to
the
contrary
herein,
with
respect
to
Assets
that
are
operated
by
a
Person other
than SWEPI
or Newco,
the representations
and warranties
set forth
in this
Section
3.15 are limited to the Knowledge of Seller.
The representations and warranties set forth in this Section
3.15 and in Section 3.19 represent the
sole and exclusive representations and warranties of Seller with respect to environmental matters,
including SWEPI’s and Newco’s
compliance with Environmental Laws.
Section 3.16
Suspense Funds. As
of September 10,
2021 and as
of the date
that is three
(3) days
prior to
the Closing
Date, to
Seller’s
Knowledge, except
as set
forth
on
Schedule 3.16
(which Schedule 3.16 shall be
updated by Seller,
on or prior to Closing,
to reflect any changes to
such Schedule
3.16 as
of the
date that
is three
(3) days
prior to
Closing), neither
SWEPI nor Newco
holds any Third Party funds
in suspense with respect to
production of Hydrocarbons from
any of
the Assets other
than amounts
less than the
statutory minimum amount
that SWEPI or
Newco is
permitted to accumulate prior to payment.
Section 3.17
Bankruptcy.
There
are
no
bankruptcy,
insolvency,
reorganization,
receivership
or
similar
proceedings
pending
against,
being
contemplated
by
or,
to
Seller’s
Knowledge, threatened against Seller or any Affiliate of Seller (including Newco).
Section 3.18
Ownership Structure and
Interests.
Following the Merger,
there will be
no
Interests in Newco other
than the Subject Interests, and
Non-Permian Newco will own,
of record
and beneficially,
100 percent
of the
Subject Interests
free and
clear of
any Encumbrance,
and at
the Closing,
Buyer will
obtain good
and valid
title to
the Subject
Interests free
and clear
of any
Encumbrance. Seller is
not, and at
the Closing Seller and
Non-Permian Newco will
not be, party
to any voting
trust or other
agreement or understanding with
respect to the
voting, transfer or other
disposition of the Subject Interests. The rights
and privileges of the Subject Interests will be
as set
forth in Newco’s Organizational Documents.
Section 3.19
Wells.
Except as set forth on Schedule 3.19:
Exhibit 10.1
- 16 -
(a)
all Wells
have been drilled and completed at
legal locations and within the
limits permitted by all applicable Leases, Contracts, and/or pooling or unit agreements;
(b)
no Well is subject to penalties
on allowables because
of any overproduction
or any other violation of Laws;
(c)
(i) neither SWEPI nor Newco has received
any written notices or demands
from Governmental Authorities or other Third Parties to plug or abandon any Wells
and (ii) there
are no Wells
(a) that SWEPI or Newco as operator is currently obligated
(directly or indirectly as
a working
interest owner)
by Law
or Contract
to plug
or abandon
that have
not been
plugged and/or
abandoned,
as
applicable,
in
accordance
in
all
material
respects
with
all
applicable
Laws
and
Contracts, as
applicable, (b)
to the
Knowledge of
Seller,
that a
Third Party
operator is
currently
obligated (directly or indirectly as a working
interest owner) by Law, Lease or Contract to plug or
abandon that have not
been plugged and/or abandoned,
as applicable, in accordance
in all material
respects with all applicable Laws, Leases and Contracts, as applicable, (c) that have been plugged
or abandoned by Seller or its Affiliates (including Newco)
(or to Seller’s Knowledge by any other
Person) in a manner that does not comply
in all material respects with all applicable Laws,
Leases
and Contracts, and (d) that are currently
subject to exceptions to a requirement to plug or
abandon
issued by a Governmental Authority;
provided
,
however
that any extension for the period
to plug
and abandon any Well
resulting from the
filing of Form W-3C
with the Railroad
Commission of
Texas shall not constitute such an exception;
(d)
As of the Execution Date, SWEPI has (and, as of the Closing Date, Newco
will
have)
(i)
title
to
the
Equipment
free
and
clear
of
Encumbrances,
other
than
Permitted
Encumbrances, or
(ii) with
respect to
rented Equipment,
a good
and valid
leasehold interest
in such
Equipment;
provided
,
however
, that, with
respect to Assets
that are operated
by a Person
other than Seller
or
its Affiliates
(including Newco),
the representations
and warranties set
forth in
this Section
3.19
are limited to the Knowledge of Seller.
Section 3.20
Special Warranty
of Title.
Subject to
the Permitted
Encumbrances, Seller
warrants that (a) the Leases
and Wells are free and clear of any
Encumbrance made by, through or
under
SWEPI,
Newco,
or
any
of
their
respective
Affiliates
prior
to
the
Closing
Date,
but
not
otherwise
(provided,
if
any
such
Encumbrance
would
also
result
in
a
breach
of
any
other
representation
and
warranty
of
Seller
set
forth
in
this
Article
3
(without
giving
effect
to
the
indemnity
limitations
set
forth
in
Article
9),
Buyer
shall
be
precluded
from
asserting
such
Encumbrance as a breach of this Section 3.20(a)), and (b) none of SWEPI, Newco, or any of their
respective Affiliates have
conveyed any
Leases or
Wells prior to the
Execution Date
or the
Closing
Date to anyone outside of
Newco;
provided, however
, that any Buyer claim
for indemnification or
defense
pursuant
to
Section
9.1(b)(ii)
for
Damages
or
Proceedings,
as
applicable,
caused
by,
related to, arising out of, or resulting from any breach of this Section 3.20 shall be limited to such
Damages or
Proceedings,
as
applicable, caused
by,
relating
to,
arising
out of,
or
resulting
from
Third Person Claims.
Section 3.21
Permits.
Except
as
set
forth
on
Schedule
3.21,
as
of
the
Execution
Date,
SWEPI has (and,
as of
the Closing
Date, Newco will
have) all, and,
to the
Knowledge of Seller,
Exhibit 10.1
- 17 -
each Third Party operator has
all, material Permits required to permit
the ownership and operation
of
the
Assets
as
presently
owned
and
operated
by
SWEPI
or
such
Third
Party
operator,
as
applicable, and each is
in full force and effect and
has been duly and
validly issued. The execution
and
delivery
of
this
Agreement
and
the
consummation
of
the
transactions
contemplated hereby
will
not
result
in
any
revocation,
cancellation,
suspension
or
modification
of
any
such
Permit.
There is no outstanding violation in
any material respect of any
of the Permits by either
SWEPI or
Newco and, to
the Knowledge of
Seller, there
is no outstanding
violation in any
material respect
of any of the Permits by any Third Party
operator of the Assets. Section 3.21 does not include any
matters with respect to Environmental
Laws, which are exclusively
addressed in Section 3.15,
or
Taxes,
which are
exclusively addressed in
Section 3.8
and in Section
3.29 (to
the extent
relating
to Taxes).
Section 3.22
Royalties. Except as set
forth on Schedule 3.22
and for such items
that are
being held
in suspense
as permitted
pursuant to
applicable Law,
each of
SWEPI and
Newco has
timely
paid
in
all
material
respects
all
Royalties
due
by
SWEPI
or
Newco,
as
applicable,
with
respect to the Assets.
Section 3.23
Bonds, Letters of Credit and
Guarantees. As of the Execution
Date, SWEPI
has all
bonds, letters
of
credit, guarantees,
and other
similar security
arrangements necessary
to
own the Assets
and, with respect
to all Assets
operated by any
Third Party,
to the Knowledge
of
Seller,
such
Third
Party
has
all
bonds,
letters
of
credit,
guarantees,
and
other
similar
security
arrangements
necessary
to
operate
such
operated
Assets.
Such
arrangements
are
set
forth
on
Schedule 3.23.
Section 3.24
Indebtedness.
Except as set forth on Schedule 3.24, as of the Closing Date,
(a) Newco
will not
have any
Indebtedness, and
(b) no
Asset will
be burdened
by any
Encumbrances
for Indebtedness created by Seller or its Affiliates (including Newco).
Section 3.25
Condemnation.
There
is
no
pending
or,
to
the
Knowledge
of
Seller,
threatened in
writing,
taking
(whether permanent,
temporary,
whole,
or
partial)
of
any
material
part of the Assets by reason of condemnation or the threat of condemnation.
Section 3.26
Powers of
Attorney; Bank
Accounts. Newco
will not
have any
(a) powers
of
attorney
or
comparable
delegations
of
authority
outstanding
or
(b) accounts
or
safe-deposit
boxes with
any banks,
trust companies,
savings and
loan associations
or other
financial institutions.
Section 3.27
Anti-Corruption; Trade Controls.
(a)
With respect to Seller,
Newco, the Subject Interests and the Assets, neither
Seller, Newco
nor their
respective officers
and directors
nor, to their
Knowledge, any
Person acting
on behalf of
them (i) has
violated Anti-Corruption Laws
or Trade Control Laws,
(ii) is a
Restricted
Party,
or
(iii)
whether
directly
or
indirectly,
has
made,
offered,
authorized
or
accepted
any
payment, gift, promise, or
other advantage, to or for
the use or benefit
of any Government Official
or
any
other
Person
where
that
payment,
gift,
promise,
or
other
advantage
would
comprise
a
facilitation payment or
otherwise violate the
Anti-Corruption Laws or
any other applicable
Law,
or that would cause Buyer to be in breach of any Anti-Corruption Laws.
Exhibit 10.1
- 18 -
(b)
Seller maintains
(i) adequate
written policies
and procedures
to comply
with
Anti-Corruption Laws and
Trade Control Laws and (ii)
adequate internal controls, including
using
reasonable efforts to ensure
that all transactions are accurately recorded
and reported in its books
and
records
to
reflect
truly
the
activities
to
which
they
pertain,
such
as
the
purpose
of
each
transaction, with whom it was entered into, for whom it was undertaken, or what was exchanged.
Section 3.28
Leases.
Except as set forth
on Schedule 3.22, SWEPI
is not (and, as
of the
Closing
Date, Newco
will
not be)
in material
breach of
any
terms
and condition
of the
Leases.
Schedule 3.28 contains a true,
correct, and complete list of
all Leases that (a) are
currently held by
payment
of
shut-in
royalties,
reworking
operations,
any
substitute
for
production
in
paying
quantities,
or
any
other
means
other
than
production
in
paying
quantities,
and
(b)
will
expire,
terminate, or otherwise be materially
impaired absent actions by or
on behalf of SWEPI or
Newco
(other than continued production
in paying quantities) on
or before a date
that is 180 days after
the
Closing Date.
Section 3.29
Employment
Matters.
Newco
does
not
employ,
and
has
never
employed,
any individual as
an employee. Newco
does not
sponsor or
contribute to,
or have any
obligation
to contribute to, and has never sponsored or contributed to, or had any obligation to contribute to,
any Benefit
Plan. There
does not
now exist,
nor do
any circumstances
exist that
could result
in,
any Controlled Group Liability of Seller, Newco or any ERISA Affiliate that could reasonably be
expected to be a liability of the Buyer or its Affiliates (including Newco) following the Closing.
Section 3.30
Operatorship. As
of
the
Execution Date,
SWEPI
has not
received
written
notice pursuant to
and in accordance
with the terms of
any operating agreement with
respect to the
Assets under which SWEPI is currently designated as the operator
or, to the Knowledge of Seller,
any other notice with respect to any pending vote to remove SWEPI or
any of its Affiliates as the
named “operator” of any of the Assets
for which SWEPI or such Affiliate
is currently designated
as “operator.”
With
respect to
those swaps
of Assets
that SWEPI
operates that
are contemplated
and set forth on Schedule 3.11(a) or Schedule 5.4, Buyer acknowledges that operatorship
for such
Assets may change pursuant
to and upon
the consummation of such
swaps, and any such
change
in operatorship shall not constitute a breach of this Section 3.30.
Section 3.31
Intellectual
Property.
Neither
SWEPI
nor
Newco
own
any
Intellectual
Property relating
to the
Assets. None
of Seller
or its
Affiliates (including
Newco) has
interfered
with,
infringed
upon,
misappropriated,
or
violated
any
material
Intellectual
Property
Rights
of
Third Parties in
any material respect,
and none of
Seller or its
Affiliates (including
Newco) have
received
any
written
notice
asserting
that
the
conduct
of
SWEPI’s
or
Newco’s
operations
with
respect
to
the
Assets
materially
infringes
upon
or
materially
violates
any
Intellectual
Property
Rights of any Person.
Section 3.32
Certain Disclaimers.
(a)
EXCEPT AS AND
TO THE EXTENT EXPRESSLY REPRESENTED
AND
WARRANTED
OTHERWISE
IN
THIS
ARTICLE
3,
THE
ASSIGNMENT
AGREEMENT,
THE
CERTIFICATE
OF
SELLER
TO
BE
DELIVERED
AT
THE
CLOSING
PURSUANT
TO
SECTION
7.2(c)
OR
ANY
ASSIGNMENT
SELLER
DELIVERS
TO
NEWCO
PURSUANT
TO
SECTION
5.16(c),
SELLER
EXPRESSLY
Exhibit 10.1
- 19 -
DISCLAIMS,
AND
BUYER
WAIVES
ANY
REPRESENTATION
OR
WARRANTY,
EXPRESS,
STATUTORY
OR
IMPLIED,
IN
THIS
OR
ANY
OTHER
INSTRUMENT,
AGREEMENT
OR
CONTRACT
DELIVERED
HEREUNDER
OR
IN
CONNECTION
WITH
THE
TRANSACTIONS
CONTEMPLATED
HEREUNDER
OR
THEREUNDER,
INCLUDING ANY
REPRESENTATION
OR WARRANTY, ORAL OR WRITTEN, AS
TO
(I)
TITLE
TO
ANY
OF
THE
SUBJECT
INTERESTS
OR
THE
ASSETS,
(II)
THE
CONTENTS,
CHARACTER
OR
NATURE
OF
ANY
DESCRIPTIVE
MEMORANDUM,
ANY
REPORT
OF
ANY
PETROLEUM
ENGINEERING
CONSULTANT
OR
ANY
GEOLOGICAL, SEISMIC
DATA,
RESERVE
DATA,
RESERVE
REPORTS,
RESERVE
INFORMATION (ANY ANALYSIS OR INTERPRETATION THEREOF) RELATING TO
THE
ASSETS,
(III)
THE
QUANTITY,
QUALITY
OR
RECOVERABILITY
OF
HYDROCARBONS
IN
OR
FROM
THE
ASSETS,
(IV)
THE
EXISTENCE
OF
ANY
PROSPECT, RECOMPLETION, INFILL OR STEP-OUT
DRILLING OPPORTUNITIES,
(V)
ANY
ESTIMATES
OF
THE
VALUE
OF
THE
SUBJECT
INTERESTS
OR
THE
ASSETS
OR
FUTURE
REVENUES
GENERATED
BY
SWEPI
OR
THE
ASSETS,
(VI)
THE
PRODUCTION
OF
PETROLEUM
SUBSTANCES
FROM
THE
ASSETS,
OR
WHETHER PRODUCTION HAS
BEEN CONTINUOUS OR
IN PAYING
QUANTITIES,
OR ANY PRODUCTION
OR DECLINE
RATES,
(VII) THE MAINTENANCE,
REPAIR,
CONDITION,
QUALITY,
SUITABILITY,
DESIGN
OR
MARKETABILITY
OF
THE
ASSETS, (VIII)
INFRINGEMENT OF
ANY INTELLECTUAL
PROPERTY RIGHT,
OR
(IX)
ANY
OTHER
RECORD,
FILES
OR
MATERIALS
OR
INFORMATION
(INCLUDING
AS
TO
THE
ACCURACY,
COMPLETENESS
OR
CONTENTS
OF
THE
RECORDS) THAT MAY
HAVE
BEEN MADE AVAILABLE
OR COMMUNICATED TO
BUYER
OR
ITS
AFFILIATES,
OR
ITS
OR
THEIR
EMPLOYEES,
AGENTS,
CONSULTANTS,
REPRESENTATIVES
OR ADVISORS IN CONNECTION WITH
THE
TRANSACTIONS
CONTEMPLATED
BY
THIS
AGREEMENT
OR ANY
DISCUSSION
OR
PRESENTATION
RELATING
THERETO
(INCLUDING
ANY
ITEMS
PROVIDED
IN
CONNECTION
WITH
SECTION
5.1);
AND
EXCEPT
AS
AND
TO
THE
EXTENT
EXPRESSLY REPRESENTED AND WARRANTED
OTHERWISE IN THIS ARTICLE 3,
THE
ASSIGNMENT
AGREEMENT,
THE
CERTIFICATE
OF
SELLER
TO
BE
DELIVERED
AT
THE
CLOSING
PURSUANT
TO
SECTION
7.2(c)
OR
ANY
ASSIGNMENT
SELLER
DELIVERS
TO
NEWCO
PURSUANT
TO
SECTION
5.16(c),
SELLER
FURTHER
DISCLAIMS,
AND
BUYER
WAIVES,
ANY
REPRESENTATION
OR WARRANTY,
EXPRESS,
STATUTORY
OR IMPLIED,
OF MERCHANTABILITY,
FITNESS
FOR
A
PARTICULAR
PURPOSE
OR
CONFORMITY
TO
MODELS
OR
SAMPLES
OF
MATERIALS
OR
ANY
EQUIPMENT,
IT
BEING
EXPRESSLY
UNDERSTOOD AND
AGREED BY
THE PARTIES
HERETO THAT
EXCEPT AS
AND
TO THE EXTENT EXPRESSLY REPRESENTED AND WARRANTED
OTHERWISE IN
THIS
ARTICLE
3,
THE
ASSIGNMENT
AGREEMENT,
THE
CERTIFICATE
OF
SELLER TO BE DELIVERED
AT
THE CLOSING PURSUANT TO
SECTION 7.2(c) OR
ANY
ASSIGNMENT
SELLER
DELIVERS
TO
NEWCO
PURSUANT
TO
SECTION
5.16(c),
AND
WITHOUT
LIMITATIONS
OF
THE
RIGHTS
AND
OBLIGATIONS
IN
ARTICLE
9,
THE
ASSETS
ARE
BEING
TRANSFERRED
“
AS
IS,
WHERE
IS
,”
WITH
ALL FAULTS
AND DEFECTS, AND THAT,
AS OF CLOSING, BUYER HAS MADE OR
CAUSED TO BE MADE SUCH INSPECTIONS AS BUYER DEEMS APPROPRIATE.
Exhibit 10.1
- 20 -
(b)
EXCEPT AS AND TO THE
EXTENT EXPRESSLY
SET FORTH IN
THIS AGREEMENT, SELLER SHALL NOT
HAVE
ANY LIABILITY IN
CONNECTION
WITH
AND
HAS
NOT
AND
WILL
NOT
MAKE
(AND
HEREBY
DISCLAIMS)
ANY
REPRESENTATION
OR
WARRANTY
REGARDING
ANY
MATTER
OR
CIRCUMSTANCE
RELATING
TO
ENVIRONMENTAL
LAWS,
ENVIRONMENTAL
CONDITIONS,
ENVIRONMENTAL
LIABILITIES,
THE
RELEASE
OF
HAZARDOUS
SUBSTANCES,
HYDROCARBONS
OR
NORM
INTO
THE
ENVIRONMENT
OR
THE
PROTECTION
OF
HUMAN
HEALTH,
SAFETY,
NATURAL
RESOURCES
OR
THE
ENVIRONMENT,
OR
ANY
OTHER
ENVIRONMENTAL
CONDITION
OF
THE
ASSETS, AND EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN THIS
AGREEMENT NOTHING IN
THIS AGREEMENT SHALL
BE CONSTRUED AS
SUCH
A
REPRESENTATION
OR
WARRANTY,
AND
BUYER
SHALL
BE
DEEMED
TO
BE
TAKING
THE
SUBJECT
INTERESTS
AND
ASSETS
“
AS
IS,
WHERE
IS
”
FOR
PURPOSES
OF
THEIR
ENVIRONMENTAL
CONDITION.
BUYER
SHALL
HAVE
INSPECTED,
OR
WAIVED
(AND
UPON
CLOSING
SHALL
BE
DEEMED
TO
HAVE
WAIVED)
ITS
RIGHT
TO
INSPECT,
THE
ASSETS
FOR
ALL
PURPOSES,
AND
SATISFIED ITSELF AS TO
THEIR PHYSICAL
AND ENVIRONMENTAL CONDITION,
BOTH
SURFACE
AND
SUBSURFACE,
INCLUDING
CONDITIONS
SPECIFICALLY
RELATING
TO
THE
PRESENCE,
RELEASE,
OR
DISPOSAL
OF
HAZARDOUS
SUBSTANCES,
SOLID
WASTES,
ASBESTOS,
AND
NORM.
BUYER
IS
RELYING
SOLELY
UPON
THE
TERMS
OF
THIS
AGREEMENT,
EACH
TRANSACTION
DOCUMENT,
AND
ITS
OWN
INSPECTION
OF
THE
ASSETS.
AS
OF
CLOSING,
BUYER HAS MADE ALL
SUCH REVIEWS AND INSPECTIONS
OF THE ASSETS AND
THE
RECORDS
AS
BUYER
HAS
DEEMED
NECESSARY
OR
APPROPRIATE
TO
CONSUMMATE THE TRANSACTION CONTEMPLATED
BY THIS AGREEMENT.
(c)
WITHOUT
LIMITING
SELLER’S
INDEMNITY
AND
DEFENSE
OBLIGATIONS SET
FORTH IN SECTION 9.1(b), BUYER SHALL ASSUME ALL RISK
OF LOSS WITH
RESPECT TO (i) CHANGES
IN COMMODITY OR
PRODUCT PRICES
AND
ANY
OTHER
MARKET
FACTORS
OR
CONDITIONS
FROM
AND
AFTER
CLOSING;
(ii)
PRODUCTION
DECLINES
OR
ANY
ADVERSE
CHANGE
IN
THE
PRODUCTION CHARACTERISTICS
OR DOWNHOLE
CONDITION OF
ANY WELL,
INCLUDING
ANY
WELL
WATERING
OUT,
OR
EXPERIENCING
A
COLLAPSE
IN
THE
CASING
OR
SAND
INFILTRATION,
FROM
AND
AFTER
CLOSING,
AND
(iii)
DEPRECIATION
OF
ANY
ASSETS
THAT
CONSTITUTE
PERSONAL
PROPERTY
THROUGH ORDINARY WEAR AND TEAR.
(d)
SELLER
AND
BUYER
AGREE
THAT,
TO
THE
EXTENT
REQUIRED
BY
APPLICABLE
LAW
TO
BE
EFFECTIVE
OR
ENFORCEABLE,
THE
DISCLAIMERS
OF
CERTAIN
REPRESENTATIONS
AND
WARRANTIES
CONTAINED
IN
THIS
ARTICLE
3
AND
THE
REST
OF
THIS
AGREEMENT
ARE
“
CONSPICUOUS
” DISCLAIMERS FOR THE PURPOSE OF ANY APPLICABLE LAW.
(e)
SELLER
EXPRESSLY
DISCLAIMS,
AND
BUYER
WAIVES
ANY
REPRESENTATION
,
WARRANTY,
OR
ASSURANCE,
EXPRESS,
STATUTORY
OR
IMPLIED, IN THIS
AGREEMENT OR ANY
OTHER INSTRUMENT, AGREEMENT OR
CONTRACT
DELIVERED
HEREUNDER
OR
IN
CONNECTION
WITH
THE
Exhibit 10.1
- 21 -
TRANSACTIONS
CONTEMPLATED
HEREUNDER
OR
THEREUNDER,
ORAL
OR
WRITTEN,
REGARDING
THE
OPERATORSHIP
OF
ANY
PORTION
OF
THE
PROPERTIES.
ARTICLE 4
REPRESENTATIONS
AND WARRANTIES
OF BUYER
Section 4.1
Generally.
(a)
Any representation or
warranty qualified by
the “Knowledge of
Buyer” or
“to Buyer’s Knowledge” or
with any similar knowledge qualification
is limited to matters within
the Knowledge of the individuals listed in Schedule 4.1.
(b)
Buyer represents and warrants
to Seller the matters
set forth in this
Article
4 as of
the Execution Date
(except for the representations
and warranties that refer
to a specified
date, which will be deemed made as of such date).
(c)
The disclosure
of any
matter in any
section of
a Schedule
to a representation
and warranty of
Buyer set
forth in this
Article 4
shall be deemed
to be
a disclosure for
all other
sections in respect of which it is evident
such matter relates, but shall expressly not
be deemed to
constitute an admission by Buyer to otherwise imply
that such matter is material for the purposes
of this Agreement.
Section 4.2
Existence
and
Qualification.
Buyer
is
an
entity
duly
organized,
validly
existing, and
in good
standing under
the Laws
of the
jurisdiction of
its organization
and is
duly
qualified to do
business in each
jurisdiction in which
the nature of
its business or
the ownership,
leasing or
operation of
its properties
makes such
qualification or licensing
necessary, except where
the failure to be so
qualified or licensed or in good
standing, individually or in the
aggregate, has
not been and would not reasonably be expected to be material to Buyer.
Section 4.3
Organizational Power. Buyer has the requisite
corporate power to
enter into
and perform this Agreement and
each Transaction Document
to which it is or
will be a party and
to
consummate
the
transactions
contemplated
by
this
Agreement
and
such
other
Transaction
Documents except, where the failure to have such power, individually or in the aggregate, has not
been and would not reasonably be expected to be material to Buyer.
Section 4.4
Authorization and
Enforceability. The execution,
delivery, and performance
of this Agreement,
all documents required
to be executed
and delivered by
Buyer at Closing
and
all other Transaction Documents
to which Buyer is or will be
a party,
and the performance of the
transactions
contemplated
hereby
and
thereby,
have
been
duly
and
validly
authorized
by
all
necessary
corporate
action
on
the
part
of
Buyer.
This
Agreement
has
been
duly
executed
and
delivered by Buyer (and all documents required hereunder to be executed and delivered by Buyer
at Closing and
all other
Transaction Documents will be
duly executed and
delivered by Buyer)
and
this
Agreement
constitutes,
and
at
the
Closing
such
documents
will
constitute,
the
valid
and
binding
obligations
of
Buyer,
enforceable
in
accordance
with
their
terms
except
as
such
enforceability may be limited by
applicable bankruptcy or other similar Laws
affecting the rights
and remedies
of creditors
generally as
well as
by general
principles of
equity (regardless
of whether
such enforceability is considered in a proceeding in equity or at Law).
Exhibit 10.1
- 22 -
Section 4.5
No
Conflicts.
Subject
to
compliance
with
the
HSR
Act,
the
execution,
delivery, and performance of this Agreement and the other Transaction Documents by Buyer, and
the
transactions
contemplated
hereby
and
thereby,
will
not
(a)
violate
any
provision
of
the
Organizational Documents of Buyer, (b) result in a material default (with or without due notice
or
lapse
of
time
or
both)
or
the
creation
of
any
lien
or
encumbrance
or
give
rise
to
any
right
of
termination, cancellation
or acceleration
under any
material note,
bond, mortgage,
indenture, or
other
financing
instrument
to
which
Buyer
is
a
party,
(c)
violate
any
judgment,
order,
writ,
injunction, ruling,
or decree in
any material respect
applicable to Buyer,
or (d) violate
any Laws
in any material respect applicable to Buyer or any of its assets.
Section 4.6
Liability
for
Brokers’
Fees.
None
of
Seller
or
its
Affiliates
(including
SWEPI and Non-Permian
Newco) shall directly
or indirectly have
any responsibility,
liability or
expense, as
a result
of undertakings
or agreements
of Buyer
or its
Affiliates, for
brokerage fees,
finder’s fees, agent’s commissions or other similar forms of compensation in connection with this
Agreement or any agreement or transaction contemplated hereby.
Section 4.7
Litigation. There
are no
actions, suits,
or proceedings
against Buyer
pending
with or
before any
Governmental Authority
or arbitrator,
or,
to Buyer’s
Knowledge, threatened
(a) with respect
to or affecting the assets
of Buyer or any
of its Subsidiaries other
than any actions,
suits or proceedings that, individually or in the aggregate, have not had and would not reasonably
be expected to have, a Buyer Material
Adverse Effect, or (b) that would materially impair, hinder,
or
delay
Buyer’s
ability
to
perform
its
obligations
under
this
Agreement
or
any
Transaction
Document.
Section 4.8
Financing.
Buyer
will
have
at
Closing
sufficient
cash,
available
lines
of
credit
or
other
sources
of
immediately
available
funds
(in
Dollars)
to
enable
Buyer
to
pay
the
Purchase Price to Seller at the Closing.
Section 4.9
Investment Intent.
Buyer is an
“accredited investor,” as
such term
is defined
in Regulation D
of the Securities
Act and will
acquire the Subject
Interests for its
own account and
not with
a view
to a
sale or
distribution thereof
in violation
of the
Securities Act,
and any
applicable
state blue sky Laws or any other applicable securities Laws.
Section 4.10
Independent Evaluation.
(a)
Buyer
is
knowledgeable
of
the
oil
and
gas
business
and
of
the
usual
and
customary practices of oil and gas producers, has retained
and taken advice concerning the Assets
and transactions herein from advisors and consultants which
are knowledgeable about the oil and
gas business, and is aware of the risks inherent in the oil and gas business.
(b)
Buyer is
a party
capable of
making such
investigation, inspection,
review
and evaluation of Newco and
the Assets as a prudent purchaser
would deem appropriate under the
circumstances including
with respect
to all
matters
relating to
the Assets,
their value,
operation
and suitability.
(c)
In making
the
decision to
enter into
this
Agreement
and
consummate the
transactions contemplated hereby, Buyer has relied solely on the basis of its own independent due
diligence investigation of Newco and the
Assets and the terms
and conditions of this Agreement,
Exhibit 10.1
- 23 -
and Buyer has not
relied on any
representation or warranty,
express, statutory or
implied, oral or
written,
or
any
other
statement,
oral
or
written,
other
than
the
representations
and
warranties
contained in
Article
3,
the
Assignment
Agreement
or
any
assignment
Seller
delivers
to
Newco
pursuant to Section 5.16(c) or
confirmed in the certificate
of Seller to be delivered
at the Closing
pursuant to Section 7.2(c).
Section 4.11
Consents, Approvals or Waivers.
Subject to compliance with
the HSR Act
and the matters
set forth in
Section 5.2, the
Buyer’s execution,
delivery,
and performance of
this
Agreement (and the other Transaction Documents to be executed and delivered by Buyer, and the
transactions
contemplated
hereby
and
thereby)
is
not
and
will
not
be
subject
to
any
consent,
approval, or
waiver
from
any
Third
Party
(other
than
any
Governmental
Authority),
except
for
Customary Post-Closing Consents.
Section 4.12
Bankruptcy.
There
are
no
bankruptcy,
insolvency,
reorganization
or
receivership proceedings pending against, being contemplated by, or, to the Knowledge of Buyer,
threatened against Buyer or any of its Affiliates.
Section 4.13
Anti-Corruption; Trade Controls.
(a)
Buyer
nor
any
of
its
officers
and
directors
nor,
to
their
Knowledge,
any
Person acting on behalf
of them (i) has violated
Anti-Corruption Laws or Trade Control Laws, (ii)
is
a
Restricted
Party,
or
(iii)
whether
directly
or
indirectly,
has
made,
offered,
authorized
or
accepted
any
payment,
gift,
promise,
or
other
advantage,
to
or
for
the
use
or
benefit
of
any
Government Official
or any
other Person
where that
payment, gift,
promise, or
other advantage
would comprise a facilitation payment
or otherwise violate the
Anti-Corruption Laws or any
other
Applicable Law, or that would cause Seller to be in breach of any Anti-Corruption Laws.
(b)
Buyer
and
its
Affiliates
maintain
(i)
adequate
written
policies
and
procedures
to
comply
with
Anti-Corruption
Laws
and
Trade
Control
Laws
and
(ii)
adequate
internal controls,
including using
reasonable efforts
to ensure
that all
transactions are
accurately
recorded and reported in its books and records
to reflect truly the activities to
which they pertain,
such
as
the
purpose
of
each
transaction,
with
whom
it
was
entered
into,
for
whom
it
was
undertaken, or what was exchanged.
ARTICLE 5
COVENANTS OF THE PARTIES
Section 5.1
Access.
(a)
Between the Execution Date
and the Closing Date
(or earlier termination of
this Agreement), Seller will, and will cause its
Affiliates (including Newco) to, give Buyer and its
Representatives reasonable access to the Assets in Seller’s or its
Affiliates’ possession or control,
Seller’s
and its
Affiliates’
personnel knowledgeable
about the
Assets, the
Subject Interests,
and
Newco, and access to and the right
to copy (or electronic copies of),
at Buyer’s sole cost, risk, and
expense, the
books and
records of
Seller, SWEPI and
Newco in
Seller’s or
its Affiliates’
possession
or control (including any
other information in Seller’s
or its Affiliates’
possession or control that
is reasonably
requested by
Buyer), for
the purpose
of conducting
a reasonable
due diligence
review
of the Assets, the Subject Interests, and Newco, except to the extent that Seller may not do so due
Exhibit 10.1
- 24 -
to any obligations to any
Third Party after the
use of commercially reasonable efforts
to have such
obligations waived.
Buyer shall
be entitled
to conduct
a Phase
I Environmental
Site Assessment
of the
Assets
in SWEPI’s
possession or
control and
may conduct
visual inspections
and
record
reviews
relating
to
the
Assets
in
SWEPI’s
possession
or
control,
including
their
condition
and
compliance
with
Environmental
Laws,
provided
,
that
Buyer
(and
its
Representatives)
shall
not
operate any equipment
or conduct any
invasive testing or
sampling of soil,
groundwater or other
materials (including any testing or sampling for Hazardous
Substances, Hydrocarbons or NORM)
on or with
respect to the
Assets without the
prior written consent
of Seller,
which consent Seller
may grant or deny
in its sole discretion.
Further, Buyer shall provide Seller
with a copy of
Buyer’s
Phase I Environmental Site Assessment.
(b)
Buyer’s
investigation
shall
be
conducted
in
a
manner
that
minimizes
interference with the
operation of
the Assets.
Buyer shall
coordinate its
access rights with
Seller
to reasonably minimize any inconvenience to or interruption of the conduct of business by Seller,
and
Seller
shall
have
the
right
to
accompany
Buyer
(and
any
Representative
of
Buyer)
in
connection with any physical inspection of the Assets.
(c)
Buyer acknowledges
that, pursuant
to its
right of
access to
the Assets,
Buyer
will become privy
to confidential
and other information
of Seller and
its Affiliates
and that such
confidential information (which
includes Buyer’s conclusions with
respect to its
evaluations) shall
be held confidential by Buyer in accordance with the terms of
the Confidentiality Agreement and
Section 5.3(b) and any applicable privacy Laws regarding personal information.
(d)
In connection
with the
rights of
physical access, examination
and inspection
granted to Buyer under
this Section 5.1,
WITHOUT PREJUDICE TO ANY
BUYER CLAIMS
FOR
INDEMNIFICATION
OR
DEFENSE
PURSUANT
TO
SECTION
9.1(b)
(INCLUDING SUCH
CLAIMS RELATED
TO SELLER’S
BREACH OF
SECTION 3.15)
OR
OTHERWISE
UNDER
THIS
AGREEMENT,
BUYER
HEREBY
AGREES
TO
INDEMNIFY
AND
HOLD
HARMLESS,
AND
DEFEND,
SELLER,
ITS
AFFILIATES,
AND
EACH
OF
THEIR
RESPECTIVE
OFFICERS,
DIRECTORS,
EMPLOYEES,
AGENTS, ADVISORS AND
OTHER REPRESENTATIVES
FROM AND
AGAINST (AND
BUYER AGREES
TO WAIVE, AND RELEASE
SUCH PERSONS
FROM AND
AGAINST,
ANY CLAIMS
BUYER MAY
HAVE
AGAINST SUCH
PERSONS FOR)
ANY AND
ALL
DAMAGES OR PROCEEDINGS,
AS APPLICABLE, ATTRIBUTABLE
TO PERSONAL
INJURY,
DEATH
OR
PHYSICAL
PROPERTY
DAMAGE,
ARISING
OUT
OF,
RESULTING
FROM
OR
RELATING
TO
ANY
FIELD
VISIT
OR
OTHER
DUE
DILIGENCE ACTIVITY CONDUCTED BY BUYER WITH RESPECT TO THE ASSETS
OR
TO
ANY
VIOLATION
OF
ANY
OF
THE
FOREGOING
PERSON’S
RULES,
REGULATIONS,
OR
OPERATING
POLICIES
(PROVIDED
THAT
SUCH
RULES,
REGULATIONS OR OPERATING
POLICIES ARE MADE AVAILABLE
TO BUYER IN
ADVANCE
OF
OR
DURING
BUYER’S
DUE
DILIGENCE
EVALUATION),
EVEN
IF
SUCH LIABILITIES ARISE OUT OF OR RESULT FROM, SOLELY
OR IN PART,
THE
SOLE,
ACTIVE,
PASSIVE,
CONCURRENT,
OR
COMPARATIVE
NEGLIGENCE,
STRICT LIABILITY OR
OTHER FAULT
OR VIOLATION
OF LAW
BY SELLER,
ITS
AFFILIATES,
EACH
OF
THEIR
RESPECTIVE
OFFICERS,
DIRECTORS,
EMPLOYEES, AGENTS, ADVISORS AND OTHER REPRESENTATIVES,
BUT SHALL
EXCLUDE: (i)
LIABILITIES CAUSED
BY THE
GROSS NEGLIGENCE OR
WILLFUL
Exhibit 10.1
- 25 -
MISCONDUCT
OF
THE
APPLICABLE
INDEMNIFIED
PERSON,
OR
(ii)
ANY
ENVIRONMENTAL LIABILITIES DISCOVERED OR UNCOVERED
AS A RESULT OF
SUCH
EXAMINATION
OR
INSPECTION
TO
THE
EXTENT
THE
PHYSICAL
CONDITIONS GIVING RISE
TO ANY SUCH
ENVIRONMENTAL LIABILITIES WERE
NOT EXACERBATED BY SUCH EXAMINATION
OR INSPECTION.
Section 5.2
Government
Reviews.
In
a
timely
manner,
the
Parties
shall
(a)
make
all
required
filings,
prepare
all
required
applications
and
conduct
negotiations
with
each
Governmental
Authority
as
to
which
such
filings,
applications
or
negotiations
are
necessary
or
appropriate
in
the
consummation
of
the
transactions
contemplated hereby
and
(b)
provide
such
information as
each may
reasonably request
to make
such filings,
prepare such
applications and
conduct
such
negotiations.
Each
Party
shall
reasonably
cooperate
with
and
use
all
reasonable
efforts
to
assist
the
other
with
respect
to
such
filings,
applications,
and
negotiations.
Without
limiting the
foregoing, in
the event
the Parties
determine that
filings by
the Parties
are required
under the HSR Act,
then within ten Business Days following
the execution by Buyer and
Seller of
this Agreement, Buyer and Seller will each prepare
and simultaneously file with the DOJ and the
FTC the notification
and report form
required by
the HSR Act
for the transactions
contemplated
by
this
Agreement,
and
request
early
termination
of
the
waiting
period
thereunder.
Buyer
and
Seller agree to
respond promptly to
any inquiries from
the DOJ or
the FTC concerning
such filings
and
to
comply
in
all
material
respects
with
the
filing
requirements
of
the
HSR
Act.
Buyer
and
Seller shall cooperate with each
other and shall promptly furnish all
information to the other Party
that is necessary in connection
with Buyer’s and Seller’s compliance with the
HSR Act;
provided,
however
, that
(i) any
materials concerning
valuation of
the transaction
may be
redacted, and
(ii)
each
of
the
Parties,
as
each
deem
advisable
and
necessary,
may
reasonably
designate
any
competitively sensitive material
provided to the
other under
this Section 5.2
as “counsel
only” and,
in such
event, such
material and
the information
contained therein
shall be
given only
to the
outside
legal counsel
of
the
recipient and
shall not
be
disclosed by
such
counsel
to non-legal
directors,
officers,
employees
or
other
advisors
or
representatives
of
the
recipient
unless
prior
consent
is
obtained in
advance from
the source
of the
materials or
its legal
counsel. Buyer
and Seller
shall
keep each other fully advised with respect
to any requests from or communications
with the DOJ
or
FTC
concerning
such
filings
and
shall
consult
with
each
other
with
respect
to
all
responses
thereto. Buyer and Seller agree not to participate, or to
permit their Affiliates or representatives to
participate,
in
any
substantive
meeting
or
discussion
with
any
Governmental
Authority
in
connection with
the
transactions
contemplated by
this
Agreement unless
it
so consults
with the
other Party
in advance
and, to
the extent
not prohibited
by such
Governmental Authority,
gives
the other Party
the opportunity to
attend and participate
duly represented by
its external counsel.
The Parties shall use their reasonable efforts in connection with any HSR Act filing and to secure
any required
approval from
the antitrust
agencies to
consummate the
transactions
contemplated
hereby;
provided,
however,
that
nothing
in
this
Agreement
shall
require
Buyer
or
any
of
its
Affiliates to take any action
to, consent or proffer
to divest, hold separate, or
enter into any license
or similar
agreement with
respect to,
or agree
to restrict
the ownership
or operation
of, any
business
or assets of Buyer,
Newco, Seller, or
any of their respective Affiliates. Notwithstanding
anything
to the
contrary herein,
in no
event shall
Buyer or
any of
its Affiliates
be obligated
to litigate
or
participate
in
the
litigation
of
any
action,
whether
judicial
or
administrative,
brought
by
any
Governmental
Authority
or
appeal
any
order
challenging
or
seeking
to
make
illegal,
delaying
materially or
otherwise directly
or indirectly
restraining or
prohibiting the
consummation of
the
Exhibit 10.1
- 26 -
transactions contemplated hereby. All
filing fees incurred in connection with the HSR
Act filings
made pursuant to this Section 5.2 shall be paid by Buyer.
Section 5.3
Public Announcements; Confidentiality.
(a)
From and after the Execution
Date and through the Closing
Date, no Party
shall
make
(or
cause
any
Affiliate
or
Newco
to
make)
any
press
release
or
other
public
announcement, including
any press
release or
other public
announcement through
social media,
regarding the
existence
of this
Agreement, the
contents
hereof or
the transactions
contemplated
hereby
without
the
prior
written
consent
of
the
other
Party
(collectively,
the
“Public
Announcement Restrictions”), which consent shall
be requested no fewer
than five Business Days
prior to the date on which the relevant press release or other public announcement is desired to be
made.
The
Public
Announcement
Restrictions
shall
not
restrict
disclosures
to
the
extent
(i)
necessary
for
a
Party
to
perform
this
Agreement
(including
disclosures
to
Governmental
Authorities or Third Parties holding rights of consent or other rights that may be applicable to the
transaction
contemplated
by
this
Agreement,
as
reasonably
necessary
to
provide
notices,
seek
waivers,
amendments
or
termination
of
such
rights,
or
seek
such
consents),
(ii)
required
(upon
advice of counsel) by applicable
securities or other Laws or
regulations or the applicable rules
of
any
stock
exchange
having
jurisdiction
over
the
Parties
or
their
respective
Affiliates,
or
(iii)
consistent with prior press
releases or other public
announcements agreed in writing
by the other
Party
or
otherwise
made
in
compliance
with
this
Section
5.3(a)
or
any
presentation,
communication
plan
or
strategy
previously
agreed
to
in
writing
by
the
other
Party
(for
the
avoidance of doubt, the Public
Announcement Restrictions shall not (x)
restrict disclosures made
in an earnings release, earnings call,
or other communication with current
or potential investors or
financial analysts
that is
consistent with
any such
press release,
public announcement,
presentation,
communication plan or strategy that is permitted pursuant to subsection (iii) of this Section 5.3(a)
or (y)
restrict Buyer
from communicating
with any
counterparty to
a Lease,
Surface Contract
or
Contract about any
matter that Buyer
is permitted to disclose
pursuant to this
Section 5.3(a) or
that
is not otherwise
subject to a
Confidentiality Restriction).
In the case
of the disclosures
described
under subsections (i) and
(ii) of this Section 5.3(a),
each Party shall use its
best efforts to consult
with the other
Party regarding the
contents of any
such release or announcement
prior to making
such release or announcement.
(b)
The
Parties
shall
keep
all
information
and
data
relating
to
(i)
this
Agreement, the
contents hereof,
and the
transactions contemplated
hereby and
(ii) the
Assets, in
each case,
strictly
confidential
(and shall
cause its
Affiliates
to
keep such
information
and
data
confidential) except
for (i)
disclosures to
Representatives of
the Parties
(
provided
,
however
, that
such
Representatives
are
first
directed
by
the
disclosing
Party
to
treat
such
information
in
accordance
with
the
terms
of
this
Agreement
and,
in
each
case,
the
disclosing
Party
will
be
responsible for making sure that the Representatives keep such information and
data confidential)
to the extent
required to perform
this Agreement, (ii)
disclosures by Seller
of such information
and
data to its Affiliate or to the employees, officers, directors, members, equity owners or counsel of
Seller or any of its
Affiliates to the
extent necessary for use in
internal operations by Seller
or its
Affiliates
(
provided
,
however
, that
Seller will
be
responsible for
making
sure that
such Persons
keep such
information and
data confidential),
and (iii)
information that
is or
becomes known
to
the public other
than as
a result
of a breach
of this
Agreement (collectively,
the “Confidentiality
Restrictions”).
Exhibit 10.1
- 27 -
(c)
The
Confidentiality
Restrictions
shall
not
restrict
disclosures
that
are
(i)
required
(upon
advice
of
counsel)
by
applicable
securities
or
other
Laws
or
regulations
or
the
applicable
rules
of
any
stock
exchange
having
jurisdiction
over
the
Parties
or
their
respective
Affiliates;
(ii)
necessary
for
a
Party
to
perform
this
Agreement
(including
disclosures
to
Governmental Authorities
or Third
Parties holding
rights of
consent or
other rights
that may
be
applicable to the transaction contemplated by this Agreement, as reasonably necessary to
provide
notices,
seek
waivers,
amendments
or
termination
of
such
rights,
or
seek
such
consents);
(iii)
necessary for a Party to enforce its rights under this Agreement or to defend any claim brought or
threatened by any
other Party to
this Agreement, or such
Party’s Affiliates; or (iv) permitted or
not
restricted pursuant to Section 5.3(a). In the case of the disclosures described under subsections (i)
and (ii) of
this Section 5.3(c),
each Party shall
use its commercially
reasonable efforts to
consult
with the other Party
regarding the contents of
any such disclosure prior
to making such disclosure.
(d)
To the
extent that the foregoing provisions of this Section 5.3 conflict with
the provisions
of the
Confidentiality Agreement,
the provisions
of this
Section 5.3
shall prevail
and control to the extent of such
conflict. If Closing should occur,
the Confidentiality Agreement
shall terminate as
of the Closing
and the Confidentiality
Restrictions set forth
in this
Section 5.3
shall terminate as to Buyer and its Affiliates (including Newco) at Closing.
Section 5.4
Operation
of
Business.
Except
(i)
for
the
operations
set
forth
on
Schedule 3.9 or Schedule
5.4, (ii) as required
in the event of
an emergency to protect life,
property
or the environment, (iii) as
may be required by
Law,
(iv) as permitted or otherwise
contemplated
by this Agreement, or (v) as otherwise approved in writing by Buyer, which approval shall not be
unreasonably
withheld,
conditioned,
or
delayed
and
without
limiting
any
disclaimer
expressly
made by Seller
in this Agreement,
from the Execution Date
until the Closing
Date, Seller shall
and
shall cause SWEPI and Newco (following the Merger) to:
(a)
conduct
its
business,
in
accordance
with
its
ordinary
course
of
business,
consistent with past
practice, and
subject to interruptions
resulting from
force majeure,
mechanical
breakdown or planned maintenance,
and conduct its
business related to the
Assets in compliance
with the Leases, Contracts and all applicable Laws;
(b)
not resign
SWEPI’s
or Newco’s,
as the
case may
be, position
as operator
with respect to any of the Assets, or abandon any of the Assets, other than as required pursuant to
the terms of any agreement or as required by applicable Law;
(c)
except
for
(i)
those
capital
expenditures
by
SWEPI
provided
for
in
the
capital expenditure budget
set forth on
Schedule 5.4, and
(ii) capital expenditures
to repair damage
resulting
from
insured
casualty
events
or
required
on
an
emergency
basis
for
the
safety
of
individuals,
assets
or
the
environment,
not
authorize,
propose,
or
commit
to
any
operation
reasonably anticipated by Seller
to cost the owner
of the Assets
more than $2,500,000 per
activity,
net to SWEPI’s (or,
as of the consummation of the Merger, Newco’s)
interest;
(d)
(i) not
take any
affirmative action
to terminate,
materially amend, execute
or
extend
any
Leases
(except
as
specifically
described
on
Schedule
5.4),
(ii)
except
for
those
amendments, waivers, modifications
or extensions to
Material Contracts resulting
from operations
set forth on
Schedule 5.4 (to
the extent the terms
of such amendments, waivers,
modifications or
Exhibit 10.1
- 28 -
extensions
are
expressly
set
forth
on
Schedule
5.4),
not
terminate,
materially
amend,
waive,
modify,
or extend any
Material Contracts, and
(iii) not enter
into any
new contract
which would
constitute a Material Contract if executed prior to the Execution Date or amend a
Contract that by
virtue of
the
amendment
makes such
Contract
a
Material Contract;
in each
case, other
than
the
execution or extension
of a Contract
for the sale,
exchange, or marketing
of oil, gas
and/or other
Hydrocarbons in
the ordinary
course of
business and
terminable without
penalty on
60 days’
or
shorter notice;
(e)
not enter into or extend any Surface Contract other
than (i) the extension of
the term of those
Surface Contracts described
in Schedule 5.4
and (ii) the
execution of a
Surface
Contract that
(x) contains
terms typically
and customarily
included in
similar instruments
in the
oil and gas industry and (y) would not reasonably
be expected to result in aggregate payments by
Newco after Closing
of more than
$250,000 (net to
SWEPI’s (or,
as of the
consummation of the
Merger, Newco’s)
interest) during the current or any subsequent calendar year;
(f)
maintain
all
material
insurance
policies
in
the
amounts
and
of
the
types
presently in force with respect to the Assets and the operations and activities of SWEPI and, as of
the consummation of the Merger, Newco;
(g)
maintain
the
books,
accounts
and
records
of
SWEPI
with
respect
to
the
Assets
and,
upon
consummation
of
the
Merger,
Newco
in
the
ordinary
course
of
business
consistent
with
past
practice
and
in
compliance
with
all
applicable
Laws
and
contractual
obligations;
(h)
promptly
notify
Buyer
of
any
material
emergency
affecting
Newco’s
business or the Assets;
(i)
promptly
notify
Buyer
of,
and
not
settle
or
compromise,
any
material
actions,
suits
or
proceedings
filed
with
any
Governmental
Authority,
or
threatened
in
writing
against SWEPI or
Newco with respect
to the Assets,
Newco or the
transactions contemplated by
this Agreement;
(j)
not amend or otherwise change the Organizational Documents of Newco;
(k)
maintain all Permits,
approvals, bonds and guaranties
affecting the Assets,
and make all filings
that Seller and its
Affiliates are required to
make under applicable Law
with
respect to the Assets;
(l)
not transfer, sell, hypothecate,
encumber or otherwise
dispose of any
Assets
except
for
(i)
sales
and
dispositions
of
Hydrocarbons
or
equipment
and
materials
made
in
the
ordinary
course
of
business
consistent
with
past
practices,
which
in
the
case
of
equipment
and
materials, are replaced
with equipment and
materials of comparable
or better value
and utility in
connection
with
the
maintenance,
repair,
and
operation
of
the
Assets
and
(ii)
other
sales
and
dispositions of the Assets (other than Properties and Surface
Contracts) not exceeding $1,000,000
in the aggregate;
(m)
promptly notify Buyer of any written notice
received by Seller, SWEPI,
or
Newco of
any material
violation of
any Environmental
Laws relating
to Newco
or the
Assets where
Exhibit 10.1
- 29 -
such violation
has not
been previously
cured or
otherwise resolved
to the
written satisfaction
of
the relevant Governmental Authority;
(n)
not issue,
sell, pledge,
transfer,
or dispose
of, or
otherwise subject
to any
Encumbrance, any
of the
Subject Interests
or any
other Interest
of Newco,
or any
options, warrants,
convertible securities or other rights of any
kind to acquire any such Subject Interests
or any other
Interest of Newco;
(o)
not
declare,
set
aside
or
pay
any
dividends
on,
or
make
any
other
distributions (whether in cash, stock or property) in respect of, the Subject Interests;
(p)
not reclassify, combine,
split, subdivide
or redeem,
or purchase
or otherwise
acquire,
directly
or
indirectly,
the
Subject
Interests,
or
make
any
other
change
with
respect
to
Newco’s capital structure;
(q)
not
acquire
any
Interest
in
any
corporation,
partnership,
limited
liability
company, other business organization
or division thereof
or any
material amount of
assets, or enter
into any joint venture, strategic
alliance, exclusive dealing, noncompetition
or similar contract or
arrangement other than acquisitions as to which
the aggregate amount of the consideration
paid or
transferred by
Newco
in
connection
with
all
such
acquisitions
would
not exceed
$2,500,000
or
would be permitted under Section 5.4(d);
(r)
not
adopt
any
plan
or
agreement
of
complete
or
partial
liquidation,
dissolution,
restructuring,
recapitalization,
merger,
consolidation
or
other
reorganization
or
otherwise effect any transaction that would alter Newco’s limited liability company structure;
(s)
not incur any
Indebtedness or
issue any
debt securities or
assume, guarantee
or endorse, or otherwise become responsible
for, the obligations of any Person, or make any loans
or advances;
(t)
not
make,
compromise
or
forgive
any
loans,
advances,
or
capital
contributions to, or investments in, any other Person;
(u)
not make any
change in any
method of accounting
or accounting practice
or
policy, except as required by GAAP;
(v)
except in
the ordinary
course of
business (and,
in each
case, as
would not
materially
affect
Buyer
or
any
of
its
Affiliates,
Newco
or
the
Assets),
not
(i)
make,
change
or
revoke any Tax election (including making any election for Newco to be treated as an association
taxable
as
a
corporation
for
U.S.
federal
income
tax
purposes
or
applicable
state
or
local
Tax
purposes), (ii)
change any
annual Tax
accounting period,
(iii) change
any method
of accounting
for Tax purposes, (iv) commence, settle, or compromise any
claim or assessment in respect
of any
Taxes
or
any
other
Tax
Proceeding,
(v)
file
any
Tax
Returns
other
than
in
a
manner
that
is
consistent with
past practice,
except to
the extent
required by
applicable Law, (vi)
file any
amended
Tax
Return, (vii)
agree to
an extension
or waiver
of the
statute of
limitations with
respect to
the
assessment, collection or determination of any Taxes, (viii) enter into any closing agreement with
respect to
any
Taxes,
(ix)
grant
any power
of
attorney with
respect to
Taxes,
(x)
surrender
any
right to claim a Tax refund, or (xi) enter into any Tax allocation, Tax sharing, Tax receivable, Tax
Exhibit 10.1
- 30 -
indemnity agreement
or other
similar agreement
or arrangement,
or any
closing or
other agreement
relating to Taxes;
(w)
not take any action that
would or would reasonably
be expected to prevent
or
materially
delay
the
Closing
and
the
consummation of
the
transactions
contemplated by
this
Agreement; and
(x)
not
enter
into
an
agreement
or
commitment
that
would
cause
Newco
to
violate any of the foregoing clauses (a) through (w).
Requests for
approval of
any action
restricted by
this Section
5.4 shall
be delivered
to the
following
individual, who shall
have full authority to
grant or deny
such requests for
approval on behalf of
Buyer;
provided
, that such approval shall not be unreasonably withheld, conditioned or delayed:
Danny Yick
Sr. Director
Acquisitions & Divestitures
925 N. Eldridge Parkway
Houston, Texas 77079
SP1-21-21-N096
Danny.H.Yick@conocophillips.com
Buyer’s approval of
any action restricted
by this Section
5.4 shall be
considered granted within
ten
days
after
Seller’s
notice
to
Buyer
requesting
such
consent
unless
Buyer
notifies
Seller
to
the
contrary during that period. In the event
of an emergency,
Seller (or SWEPI or Newco) may
take
such action as a
reasonably prudent owner or
operator would take and
shall notify Buyer of
such
action
promptly
thereafter.
In
cases
in
which
neither
Seller
nor
any
of
its
Affiliates
(including
SWEPI
and
Newco)
is
the
operator
of
any
portion
of
the
Assets,
to
the
extent
that
the
actions
described
in
this
Section
5.4
may
only
be
taken
by
(or
are
the
primary
responsibility
of)
the
operator of such
Assets, the provisions
of this
Section 5.4 shall
be construed to
require only that
Seller use,
or cause Newco
to use, commercially
reasonable efforts to
cause the operator(s)
of such
Assets to take such
actions within the constraints
of the applicable operating
agreements and other
applicable agreements.
Section 5.5
Amendment to
Schedules. At
any point
prior to
the date
that is
five Business
Days
prior
to
Closing,
Seller
shall
have
the
right
to
supplement
its
Schedules
relating
to
the
representations
and
warranties
set
forth
in
Article
3
with
respect
to
any
matters
first
occurring
subsequent
to
the
Execution
Date
(including
with
respect
to
any
matters
taken
by
Seller
in
accordance with, but not in
violation of, Section 5.4).
However, all such supplements (except with
respect
to
matters
taken
by
Seller
in
accordance
with
Section
5.4)
shall
be
disregarded
for
all
purposes,
including
determining
whether
the
conditions
to
Buyer’s
obligation
to
close
the
transaction pursuant to Section
6.2(a) and Section
6.2(b) have been satisfied;
provided
,
however
,
if Seller has supplemented
its Schedules pursuant to
this Section 5.5, and
based upon the matters
relating to such
supplements (other than matters
taken by Seller
in accordance with
Section 5.4),
Buyer’s obligation to close the transactions pursuant to Section 6.2(a)
and Section 6.2(b) have not
been
satisfied
but
Buyer
nevertheless
elects
to
close
the
transactions
contemplated
hereunder,
Buyer will be deemed to have waived only the matters
disclosed pursuant to any such supplement
Exhibit 10.1
- 31 -
which gave rise to Buyer’s right
to not close the transactions contemplated
by this Agreement (for
the avoidance of doubt, no
matter set forth in any
such supplement will be taken
into account for
purposes
of,
and
will
not
affect
Buyer’s
remedies
under,
Section
9.1(b)(ii)
with
respect
to
any
breaches of Seller’s representations and
warranties related to the
Assets that do not
individually or
in the
aggregate give
rise to
a failure
of a
condition precedent
to Buyer’s
obligation to
close the
transaction contemplated by this Agreement contained in Section 6.2(a)).
Section 5.6
Further
Assurances.
After
Closing,
the
Parties
agree
to
take
such
further
actions
and
to
execute,
acknowledge
and
deliver
all
such
further
documents
as
are
reasonably
requested
by
the
other
Party
for
carrying
out
the
purposes
of
this
Agreement
or
any
other
Transaction Document.
Section 5.7
Related
Party
Contracts.
Except
as
set
forth
on
Schedule
5.7,
no
Related
Party Contracts shall be allocated to Newco or included in the Assets.
Section 5.8
Conduct of Buyer. Except with the prior written consent of Seller, from the
Execution Date until the Closing, Buyer shall not take any action that would or would reasonably
be expected to
prevent or materially
delay the Closing
and the consummation
of the transactions
contemplated by this Agreement.
Section 5.9
Employee
Matters.
Seller
and
Buyer
shall
comply
with
the
terms
and
conditions
with
respect
to
employee
matters
and
personal
data
protection
set
forth
in
Schedule
5.9(a) and Schedule 5.9(b), respectively.
Section 5.10
Bonds,
Letters
of
Credit
and
Guarantees.
The
Parties
acknowledge
and
agree that none of the bonds,
letters of credit and guarantees listed
on Schedule 3.23, which have
been posted
by Seller
or its
Affiliates (other
than Newco)
with Governmental
Authorities and
relate
to the Assets
for the benefit
of Newco, may
be transferable to
Buyer.
Promptly following Closing,
Buyer shall obtain,
or cause
to be obtained
in the name
of Buyer
or its Affiliate
(including Newco),
as
applicable,
replacements
for
such
bonds,
letters
of
credit
and
guarantees,
to
the
extent
such
replacements are necessary to permit cancellations of
such bonds, letters of credit and
guarantees
posted by Seller or its
Affiliates (other than Newco)
with respect to the Assets
or to consummate
the transactions contemplated by this Agreement.
Section 5.11
Transition Services Agreement. From the Execution
Date until the Closing
Buyer
and
Seller
shall
take
commercially
reasonable
efforts
to
negotiate
a
transition
services
agreement that contains terms
substantially similar to those
set forth on Exhibit
C and such other
terms that
are mutually
acceptable to
the Parties
(the “Transition
Services Agreement”).
For the
avoidance of doubt, the
Parties’ covenants and obligations
pursuant to this Section
5.11 shall
not
be conditions
precedent to
Closing pursuant
to Section
6.1 and
Section 6.2
or be
the basis
upon
which either Party may terminate this Agreement pursuant to Section 8.1.
Section 5.12
Use of
Name. On
or before
90 days
after Closing
(or earlier
to the
extent
required by Laws), at
Buyer’s cost, Buyer
will remove, or cause
to be removed, from
the Assets,
the
name,
logo
and
service
mark
of
Seller
and
its
Affiliates,
and
all
variations
and
derivations
thereof (including any reference to “Shell”) and will not thereafter make use thereof.
Exhibit 10.1
- 32 -
Section 5.13
Records. Subject to
the limitations contained
in this Agreement,
Seller shall
deliver to Buyer
copies of the Records,
in the current written
or electronic format of
such Records,
to the extent
possible at Closing,
but in any event,
within 90 days
after Closing, to the
extent not
already
delivered
by
Seller.
Any
electronic
information
or
data
provided
shall
be
in
the
same
format as that
then currently used
by Seller,
and Seller shall
not be required
to perform or
create
additional programming or system support in connection
therewith. Seller may exercise or redact
Records to remove information
that does not constitute
a Record. Seller
may retain photocopies or
electronic images of
the Records;
provided
, that Seller
shall keep confidential
and not disclose
any
such Records that
are not public
information pursuant to
the terms of
Section 5.3. Seller
and Buyer
shall each appoint one focal point for coordination of the transfer of the Records.
Section 5.14
Insurance.
(a)
Buyer acknowledges and
agrees that (i)
no insurance policies
arranged for
the
benefit
of,
or
provided
to,
Seller
or
any
member of
the
Seller
Group,
including
any
current
insurance policies relating
to the business
or assets of
the Seller shall
continue after Closing,
(ii)
Buyer
shall
not,
and
shall
procure
that
no
member
of
the
Buyer
Group
shall,
make
any
claims
under
any
such
insurance
policies
or
insurance
coverage
in
respect
of
facts,
events
or
circumstances
arising
prior
to
the
Closing
and
(iii)
from
the
Execution
Date
and
until
Closing,
Seller shall ensure that all policies of insurance
relating to the business or Assets in force
as of the
Execution
Date
are
kept
in
force
in
accordance
with
past
practices
(the
“Current
Insurance
Policies”). In the
event Seller becomes
aware of any
fact, event or
circumstance arising after
the
Execution Date and
prior to
Closing in respect
of which a
claim may be
made under the
Current
Insurance Policies, Seller shall (i) file
a claim in respect of such
event or circumstance and (ii) use
reasonable endeavours to
have such claim
paid at or
prior to Closing,
in each case
in accordance
with
its
customary
past
practices.
In
the
event
that
such
a
claim
is
not
paid
prior
to
Closing,
notwithstanding anything
else in
this Section
5.14, Seller
shall use
reasonable endeavours
to pursue
payment in
respect of
such a
claim on
behalf of
Buyer and
Buyer shall
have the
right to
receive
any
payment
made
in
respect
of
any
such
claim
made
prior
to
the
Closing
as,
when
and
to
the
extent such claim shall be paid.
(b)
In
the
event
any
tangible
assets
of
Newco
are
destroyed
or
damaged,
in
whole or in part, by
fire or other casualty prior
to the Closing Date, then, in
lieu of making a claim
in accordance with this Section 5.14, Seller shall have the option to repair
or replace (with similar
grade
and
quality)
such
damaged
assets
on
or
before
the
Closing
Date,
in
which
case,
neither
Newco nor Buyer shall have any right, claim or title to any insurance proceeds.
(c)
Buyer
further
hereby
acknowledges
and
agrees
that
no
historic
insurance
coverage provided
by
or
to
Seller
or
Newco,
including
the
Current
Insurance Policies,
shall
be
available to the Buyer
or Newco after Closing, with
the exception of insurance
coverages required
by statute
or law
and, in
such limited
instances, only
to the
extent that
the policies
provide such
historical coverage. Buyer further acknowledges and agrees
that it has no right, title
or interest in
any unearned premiums on any policies maintained by
or for the benefit of Seller or
any member
of the Seller Group.
Exhibit 10.1
- 33 -
Section 5.15
Anti-Bribery and Corruption.
(a)
Without limitation to Section 3.10 or Section 3.27, Seller:
(i)
is aware
of, during
the period
between the
Execution Date
and the
Closing
Date
will
comply
with,
and
has
not
violated,
Anti-Corruption
Laws
or
Trade Control Laws and is not a Restricted Party;
(ii)
whether directly or
indirectly,
has not made,
offered, authorized
or
accepted and will not make, offer, authorize, or accept any payment, gift, promise,
or other advantage, to
or for the
use or benefit
of any Government
Official or any
other Person where
that payment, gift,
promise, or other
advantage would comprise
a facilitation payment
or otherwise violate
the Anti-Corruption Laws
or any other
applicable Law, or
that would cause Buyer to be
in breach of any Anti-Corruption
Laws;
(iii)
has
maintained
and
will
maintain
adequate
written
policies
and
procedures to comply with Anti-Corruption Laws;
(iv)
has
maintained
and
will
maintain
adequate
internal
controls,
including
using
reasonable
efforts
to
ensure
that
all
transactions
are
accurately
recorded and reported
in its books
and records
to reflect truly
the activities to
which
they
pertain,
such
as
the
purpose
of
each
transaction,
with
whom
it
was
entered
into, for whom it was undertaken, or what was exchanged;
(v)
will, to its Knowledge, retain such books and records for the period
required by applicable Law or Seller’s own retention
policies, whichever is longer;
(vi)
is
not
a
Government
Official,
and
to
the
best
of
its
Knowledge
exercising reasonable diligence,
no officer, agent or employee
engaged by Seller
or
acting on Seller’s behalf is a Government Official;
(vii)
will, in the
event Seller
becomes aware it
has breached an
obligation
in
this
paragraph,
promptly
notify
Buyer,
subject
to
the
preservation
of
legal
privilege; and
(viii)
shall
make
payments
to
Buyer,
except
with
Buyer’s
prior
written
consent.
(b)
Without limitation to Section 4.13, Buyer:
(i)
is aware
of, during
the period
between the
Execution Date
and the
Closing
Date
will
comply
with,
and
has
not
violated,
Anti-Corruption
Laws
or
Trade
Control Laws and is not a Restricted Party;
(ii)
whether directly or indirectly,
has not made, offered, authorized, or
accepted and will
not make, offer, authorize, or accept
any payment, gift, promise,
or other
advantage,
to
or
for
the
use
or
benefit
of
any
Government
Official
or
any
other
Person
Exhibit 10.1
- 34 -
where
that
payment,
gift,
promise,
or
other
advantage
would
comprise
a
facilitation
payment or
otherwise violate
the Anti-Corruption
Laws or
any other
applicable Law,
or
which would cause Seller to be in breach of any Anti-Corruption Laws;
(iii)
has
maintained
and
will
maintain
adequate
written
policies
and
procedures to comply with Anti-Corruption Laws;
(iv)
has
maintained
and
will
maintain
adequate
internal
controls,
including using
reasonable
efforts
to
ensure that
all transactions
are
accurately recorded
and reported
in its
books and
records to
reflect truly
the activities
to which
they pertain,
such as
the purpose
of each
transaction, with
whom it
was entered into,
for whom
it was
undertaken, or what was exchanged;
(v)
will, to its Knowledge, retain such books and records for the period
required by applicable Law or Buyer’s own retention policies, whichever is longer;
(vi)
is
not
a
Government
Official,
and
to
the
best
of
its
Knowledge
exercising reasonable diligence, no officer, agent or employee engaged by Buyer or
acting
on Buyer’s behalf is a Government Official;
(vii)
will, in the
event it becomes aware
it has breached
an obligation in
this paragraph, promptly notify Seller, subject to the preservation of legal privilege;
(viii)
and any Person
who has acted
on its behalf
in connection with
this
Agreement has
not been
and is
not now
involved in
internal or
external investigations
or
discussions
with
any
Governmental
Authority
related
to
potential
or
actual
breaches
of
Trade Control Laws or Anti-Corruption Laws;
(ix)
warrants
that
all
information
provided
by
Buyer
to
Seller
in
connection with Seller’s integrity due diligence is accurate; and
(x)
shall
make
payments
to
Seller,
except
with
Seller’s
prior
written
consent.
(c)
Prior to
Closing and
notwithstanding any
other provision
of this
Agreement,
if
a
Party
becomes
a
Restricted
Party,
is
listed
on
the
Restricted
Party
list,
or
is
held
liable
for
violation
of Anti-Corruption
Laws or
Trade
Control
Laws, in
each case,
in
connection with
the
transaction contemplated by this Agreement, then this Agreement
shall terminate upon a notice of
termination being provided
by the other
Party to
such Party.
For the
avoidance of
doubt, a
Party
becoming
a
Restricted
Party,
being
listed
on
the
Restricted
Party
list,
or
being
held
liable
for
violation
of Anti-Corruption
Laws or
Trade
Control
Laws, in
each case,
in
connection with
the
transaction contemplated
by
this
Agreement, shall
constitute
a
material
breach
or
failure
of
the
relevant Party’s
representations,
warranties, or
covenants hereunder
in
accordance
with
Section
8.2(b)(i) or Section 8.2(c)(ii), as applicable.
Exhibit 10.1
- 35 -
Section 5.16
Required Consents.
(a)
Promptly after the Execution Date, Seller shall prepare and send notices (i)
to the holders
of any Required Consents,
in compliance with the
terms of such Required
Consents,
requesting
consents
to
the
transactions
contemplated
hereby
or
waivers
of
the
applicable
rights
related to such
Consents. Seller
shall use
commercially reasonable
efforts (at
no material
cost to
Seller) to
cause such
Required
Consents to
be
waived or
obtained,
as
applicable, and
delivered
prior to
the
Closing.
As
applicable, Buyer
shall
reasonably
cooperate
with, or
(after
Closing,
if
applicable) cause Newco to reasonably
cooperate with, Seller in seeking
to obtain consents to, or
to comply with,
such Required Consents
and will provide
any additional collateral
or security to
meet
reasonable
financial
requirements
requested
by
counterparties
in
order
to
satisfy
the
applicable Required Consent.
(b)
In the event a Soft
Required Consent that is triggered by
the Merger or the
Closing is not satisfied
prior to the Merger,
then the applicable Required
Consent Asset shall not
be excluded from the Assets
to be allocated to Newco
pursuant to the Merger
on the basis of this
Section 5.16, and Seller shall continue to use commercially reasonable efforts (at no material cost
to
Seller)
for
a
period
of
one
year
after
Closing
to
obtain
the
Consent
for
such
Soft
Required
Consent.
Seller shall not otherwise be
liable to Buyer or
Newco after Closing for
the inability to
obtain the
Consent for
such Soft
Required Consent
and BUYER
SHALL INDEMNIFY, DEFEND,
AND HOLD
EACH MEMBER
OF SELLER
GROUP HARMLESS
FROM ANY
CLAIM MADE
AGAINST
SUCH
MEMBER
BY
THE
HOLDER
OF
SUCH
SOFT
REQUIRED
CONSENT
WITH
RESPECT
TO
THE
FAILURE
TO
OBTAIN
THE
CONSENT
FOR
SUCH
SOFT
REQUIRED CONSENT.
(c)
In the event a Hard Required Consent that is triggered by the
Merger or the
Closing is
not satisfied
prior to
the consummation
of the
Merger,
then (i) the
Required Consent
Asset
subject
to
such
Hard
Required
Consent
shall
not
be
allocated
to
Newco
pursuant
to
the
Merger
and,
to
the
extent
such
Required
Consent
Asset
is
a
Property,
SWEPI
shall
retain
such
Required Consent
Asset as
a “Retained
Asset” for
all purposes
hereunder, (ii)
to the
extent such
Required Consent Asset is a Property,
the Base Purchase Price will be adjusted
downward by the
Allocated Value of such Property, (iii) to the
extent such
Required Consent
Asset is not
a Property,
until the Consent for such
Hard Required Consent is obtained
for any combination of the
Merger
and the Closing
that triggered such
Hard Required Consent (A)
such Required Consent
Asset shall
be held
by SWEPI
for the
benefit of
Newco (which
benefit shall
include the
right for
Newco to
receive any
and all
proceeds related
to such
Required Consent
Asset during
the period
after Closing
that are attributable to the period from
and after the Effective Time),
(B) SWEPI shall not amend
or take any action under
or with respect to such
Required Consent Asset without
Buyer’s written
consent
(which
may
be
withheld
in
Buyer’s
sole
discretion),
and
(C)
Newco
shall
(1)
pay
all
amounts related to SWEPI’s
interest in such Required
Consent Asset under any
agreement to the
extent such
amounts are
attributable to
the period
from and
after the
Effective
Time,
and (2)
be
responsible
for
the
performance
of
SWEPI’s
obligations
under
any
agreement
related
to
such
Required Consent Asset,
and (iv) SWEPI shall
continue for a
period of one
year after Closing
to
use commercially reasonable
efforts (at no material
cost to Seller
or SWEPI) to
obtain the Consent
for such Hard Required
Consent, and upon receiving the
Consent for such Hard
Required Consent
applicable to
each of
the
Merger
and the
Closing,
(A) SWEPI shall
promptly
convey to
Newco
such Required
Consent Asset
subject to
the warranty
of title
set forth
in Section
3.20, (B)
if the
Exhibit 10.1
- 36 -
Required Consent Asset
is a Property,
then at the time
of such assignment, Buyer will
pay Seller
an amount equal to the amount by which the Base Purchase Price was adjusted downward, if any,
for such Required
Consent Asset and
(C) upon the
execution and delivery
of such assignment
of
such Required Consent Asset by
SWEPI to Newco, such Required
Consent Asset shall be deemed
to be
an “Asset”
for all
purposes hereunder.
If, following
such one-year
period, the
consent for
such Hard Required Consent is not obtained,
then such Required Consent Asset shall continue
as
a
Retained
Asset,
and
Seller’s
and
SWEPI’s
obligations
pursuant
to
this
Section
5.16
shall
no
longer apply.
Section 5.17
Defense
of
Retained
Litigation.
For
the
avoidance
of
doubt,
Seller
or
its
relevant Affiliate (but not
Newco) will (at its sole
cost and expense) continue to
defend and shall
continue to manage in accordance with Section
9.2(d) any actions, suits or proceedings
(including
any
compromise
or
settlement
thereof)
set
forth
on
Schedule
5.17
(such
actions,
suits
or
proceedings,
the
“Retained
Litigation”).
Buyer
will
cooperate
with
Seller’s
reasonable
written
requests to
facilitate such
defense and
management but,
except as otherwise
provided in
Section
9.2(e), shall have no
right to defend or
otherwise control the defense
with respect to such Retained
Litigation.
Section 5.18
Seller Parent Guaranty. At Closing, Seller shall deliver to Buyer a guaranty
in the form attached as Exhibit D (the “Seller Parent Guaranty”) executed by Shell Oil Company.
Section 5.19
Reorganization.
Prior
to
the
Closing
Date,
Seller
shall
cause
each
of
the
following to occur (collectively, the “Reorganization
”):
(a)
SWEPI shall
file a
certificate of
conversion with
each of
the Secretary
of
State of Delaware and the Secretary of State of Texas and shall file a certificate of formation with
the Secretary
of State
of Texas,
in each
case, in
such form
as is
required by
the Texas
Business
Organizations Code
(the “TBOC”)
and the
Delaware Revised
Uniform Limited
Partnership Act,
as
applicable,
for
the
purpose
of
domesticating
SWEPI
in
Texas
as
a
Texas
limited
liability
company (the “Conversion”).
(b)
Following the Conversion, SWEPI shall merge, pursuant to Section 10.003
et.
seq.
of
the
TBOC,
resulting
in
two
entities
(the
“Merger”):
(i)
Shell
Legacy
Holdings
LLC
(“Non-Permian Newco”),
a newly
formed single-member
limited liability
company and
wholly-
owned subsidiary of Seller,
which will have as its
assets and properties the Subject
Interests and,
subject to Section
5.16(c), the Retained
Assets and which
will have as
its liabilities and
obligations
the
Retained
Liabilities
and
Seller
Taxes,
and
(ii)
Permian
Holdings
LLC
(“Newco”),
a
newly
formed single-member
limited
liability company
and wholly-owned
subsidiary of
Non-Permian
Newco, which will have
as its assets and
properties the Assets and
which will have as
its liabilities
and obligations
the Assumed
Liabilities;
provided,
however
, that
if all
Hard Required
Consents
have not
been obtained
by the
Merger,
then SWEPI
shall merge,
pursuant to
Section 10.003
et.
seq. of
the TBOC,
resulting into
three entities:
(i) Non-Permian
Newco, a
newly formed
single-
member limited liability
company and wholly-owned
subsidiary of Seller,
which will have
as its
assets
and
properties
the
Subject
Interests
and
the
Retained
Assets
(other
than
the
Required
Consent
Assets
retained
by
SWEPI
pursuant
to
Section
5.16(c))
and
which
will
have
as
its
liabilities and
obligations the
Retained Liabilities
(other than
those Retained
Liabilities attributable
to
such
Required
Consent
Assets
retained
by
SWEPI)
and
Seller
Taxes,
(ii)
Newco,
a
newly
Exhibit 10.1
- 37 -
formed single-member
limited
liability company
and wholly-owned
subsidiary of
Non-Permian
Newco, which will have
as its assets and
properties the Assets and
which will have as
its liabilities
and
obligations
the
Assumed
Liabilities,
and
(iii)
SWEPI,
as
the
surviving
limited
liability
company, which will remain as
a wholly-owned subsidiary of
Seller and will have
as its assets and
properties the Required
Consent Assets retained
by it pursuant
to Section 5.16(c)
and which will
have as its
liabilities and obligations
the Retained Liabilities
attributable to such
Required Consent
Assets retained by SWEPI.
(c)
Seller
shall
provide
Buyer
with
copies
of
all
documents
and
instruments
related
to
or
used
to
consummate
the
Reorganization,
which
shall
be
in
forms
reasonably
acceptable to Buyer prior to filing.
(d)
Notwithstanding anything to the contrary in this Agreement, Seller will not
be in breach of any provision of this Agreement, nor will any representation or warranty of Seller
be inaccurate
in any
respect solely
by virtue
of any
secondary liability
imposed on
Seller under
TBOC Section
10.008;
provided
,
however
, that
notwithstanding anything
stated herein
to contrary,
the Retained Liabilities shall be deemed to include any obligation or
liability that is not expressly
included as part of the Assumed Liabilities, including any such
successor or secondary liability or
liabilities and
obligations relating to
assets, properties
and businesses
not included
as part
of the
Assets.
Section 5.20
Name Change and Reorganization. Buyer
shall promptly after Closing (and
in any event, no
later than thirty
(30) days after the
Closing Date) execute,
acknowledge, deliver
and file with
the appropriate
Governmental Authority
all documents as
are reasonably requested
by Seller to evidence of record Newco’s ownership and operation of the Assets, or as are required
by any
Governmental Authority, as a
result of
the Reorganization and
the transaction
contemplated
by
this
Agreement
(each
such
document,
a
“Governmental
Transition
Filing”)
that
were
not
otherwise executed and delivered by the Parties pursuant to Sections 7.2(j) and 7.3(f).
Section 5.21
Notice to
Third Persons.
Promptly after
Closing but
in no
event later
than
thirty (30) days
after the Closing
Date, Newco shall
notify all lessors,
royalty owners, operators,
non-operators, purchasers of production, other contract parties and
Governmental Authorities that
Newco
has succeeded to the interests
of Seller by virtue of
the Reorganization, in each case to
the
extent
Newco
is
required
by
any
applicable
Contracts
or
Laws
to
notify
such
Persons
of
the
Reorganization.
Section 5.22
Seismic Data. Prior to Closing, Seller shall provide Buyer
a list of all third-
party
Seismic
Data.
For
any
such
third-party
Seismic
Data
for
which
Buyer
wishes
to
obtain
a
sublicense after Closing,
promptly after receiving
written notice thereof
from Buyer,
Seller shall
sublicense to Buyer such third-party Seismic Data to the extent permitted under the agreement by
which
such
Seismic
Data
is
licensed
to
Seller
or
its
relevant
Affiliate
or,
to
the
extent
not
so
permitted, take commercially reasonable efforts to obtain the necessary consents and approvals to
sublicense to
Buyer such
third-party Seismic
Data. All
out-of-pocket costs
and expenses
associated
with such
sublicense which
are approved
in writing
by Buyer
shall be
for the
account of
Buyer,
and Seller shall have no
further obligations pursuant to this
Section 5.22 to the extent Buyer
fails
to pay any such costs and expenses.
Exhibit 10.1
- 38 -
Section 5.23
Supplemental Information.
Promptly following
the Execution
Date, Seller
shall provide to Buyer supplemental information as described on Schedule 5.23.
Section 5.24
Operational
Technology.
If,
prior
to
Closing,
it
is
determined
that
any
operational technology
systems other
than the
SCADA Systems
are held
for use
exclusively for
the
use
or
operation
of
the
Assets,
and
such
operational
technology
systems
are
not
used
in
connection with Seller or its Affiliates’ business
generally, then Seller
shall reasonably cooperate
with Buyer to transfer such
operational technology systems to
Newco at Closing.
Upon any such
transfer,
such
operational
technology
systems
shall
be
deemed
to
be
“Assets”
for
all
purposes
hereunder.
ARTICLE 6
CONDITIONS TO CLOSING
Section 6.1
Seller’s Conditions to Closing.
The obligations of
Seller to consummate
the
transactions contemplated by
this Agreement are subject
to the satisfaction
(or written waiver by
Seller) on or prior to Closing of each of the following conditions precedent:
(a)
Representations. The
(i) Buyer
Fundamental Representations
shall be
true
and
correct
in
all
material
respects
(and
in
all
respects,
in
case
of
Buyer
Fundamental
Representations
which
are
qualified
by
the
requirement
of
a
materiality
qualifier),
as
of
the
Execution Date
and as
of the
Closing Date,
in each
case as
though made
on and
as of
such date
(except for representations and warranties that expressly refer to a specified date which need only
be
true
and
correct
on
and
as
of
such
specified
date),
and
(ii) the
other
representations
and
warranties of Buyer set forth in Article 4 shall be true and correct as of the Execution Date and as
of the
Closing Date, in
each case as
though made on
and as
of such date
(except for representations
and warranties that expressly refer to a specified
date which need only be true and
correct on and
as
of
such
specified
date),
except
for
breaches,
if
any,
of
such
representations
and
warranties
referenced in this
clause (ii) as would
not, individually or in
the aggregate, reasonably be
expected
to
have
a
Buyer
Material
Adverse
Effect
(without
regard
to
whether
such
representation
or
warranty is qualified in terms of materiality);
(b)
Performance.
Buyer
shall
have
performed
and
observed,
in
all
material
respects, all
covenants and
agreements to
be performed
or observed
by it
under this
Agreement
prior to or on the Closing Date;
(c)
No
Action.
No
injunction,
order
or
award
restraining,
enjoining,
or
otherwise prohibiting the consummation of
the transactions contemplated by this Agreement
shall
have been
issued by
any Governmental
Authority having
jurisdiction over
any Party
and remain
in force;
(d)
Governmental Consents; HSR Act. (i)
All material consents and approvals
of
any
Governmental
Authority
(including
those
required
by
the
HSR
Act)
required
for
the
transactions contemplated under this Agreement,
except consents and approvals by
Governmental
Authorities
that
are
customarily
obtained
after
closing
(including
Customary
Post-Closing
Consents), shall have
been granted or received,
or the necessary waiting
period shall have
expired,
or early
termination of
the waiting
period shall
have been
granted and
(ii) the
consummation of
Exhibit 10.1
- 39 -
the transactions contemplated under the
terms of this Agreement
is not prevented from occurring
by (and the required waiting period, including the period under an
extension or timing agreement,
if
any,
has
expired
under)
the
HSR
Act
and
the
rules
and
regulations
of
the
FTC
and
the
DOJ
thereunder; and
(e)
Deliveries.
Buyer
shall
have
delivered
(or
be
ready,
willing,
and
able
to
deliver
at
Closing)
to
Seller duly
executed counterparts
of
the
documents
and
certificates
to
be
delivered by Buyer under Section 7.3.
Section 6.2
Buyer’s Conditions to
Closing. The
obligations of
Buyer to
consummate the
transactions contemplated by
this Agreement are subject
to the satisfaction
(or written waiver by
Buyer) on or prior to Closing of each of the following conditions precedent:
(a)
Representations. The
(i) Seller
Fundamental Representations
shall be
true
and
correct
in
all
material
respects
(and
in
all
respects,
in
case
of
such
Seller
Fundamental
Representations
which
are
qualified
by
the
requirement
of
a
materiality
qualifier),
as
of
the
Execution Date
and as
of the
Closing Date,
in each
case as
though made
on and
as of
such date
(except for representations and warranties that expressly refer to a specified date which need only
be
true
and
correct
on
and
as
of
such
specified
date),
and
(ii)
the
other
representations
and
warranties of Seller set forth in Article 3 shall be true and correct as
of the Execution Date and as
of the
Closing Date, in
each case as
though made on
and as
of such date
(except for representations
and warranties that refer to a specified date which need only be true and correct on and as of such
specified date), except
for breaches,
if any,
of such
representations and
warranties as
would not,
individually or in the
aggregate, reasonably be expected to
have a Seller Material Adverse
Effect
(without regard to whether such representation or warranty is qualified in terms of materiality);
(b)
Performance.
Seller
shall
have
performed
and
observed,
in
all
material
respects, all
covenants and
agreements to
be performed
or observed
by it
under this
Agreement
prior to or on the Closing Date;
(c)
No
Action.
No
injunction,
order
or
award
restraining,
enjoining,
or
otherwise prohibiting the consummation of
the transactions contemplated by this Agreement
shall
have been
issued by
any Governmental
Authority having
jurisdiction over
any Party
and remain
in force;
(d)
Governmental Consents; HSR Act. (i)
All material consents and approvals
of
any
Governmental
Authority
(including
those
required
by
the
HSR
Act)
required
for
the
transactions contemplated under this Agreement,
except consents and approvals by
Governmental
Authorities
that
are
customarily
obtained
after
closing
(including
Customary
Post-Closing
Consents), shall have
been granted or received,
or the necessary waiting
period shall have
expired,
or early
termination of
the waiting
period shall
have been
granted and
(ii) the
consummation of
the transactions contemplated under the
terms of this Agreement
is not prevented from occurring
by (and the required waiting period, including the period under
an extension or timing agreement,
if
any,
has
expired
under)
the
HSR
Act
and
the
rules
and
regulations
of
the
FTC
and
the
DOJ
thereunder;
Exhibit 10.1
- 40 -
(e)
Deliveries.
Seller
shall
have
delivered
(or
be
ready,
willing,
and
able
to
deliver at
Closing)
to Buyer
duly executed
counterparts of
the
documents
and certificates
to be
delivered by Seller and its Affiliates under Section 7.2; and
(f)
Reorganization.
The Reorganization shall have been consummated.
ARTICLE 7
CLOSING
Section 7.1
Time
and
Place
of
Closing.
Consummation
of
the
purchase
and
sale
contemplated by
this Agreement
(the “Closing”),
shall, unless
otherwise agreed
to in
writing by
Buyer and Seller,
take place at the
offices of Norton
Rose Fulbright US LLP
at 1301 McKinney,
Suite 5100, Houston,
Texas
77010, at
10:00 a.m.,
Central Time,
on the
later of
(a) December 1,
2021,
and
(b) the
fifth
Business
Day
following
the
satisfaction
or,
to
the
extent
permitted
by
applicable Law,
waiver (in
writing) of
all conditions
to the
obligations of the
Parties set
forth in
Article
6
(except
for
any
such
conditions
that
by
their
nature
may
only
be
satisfied
at
or
in
connection
with
the
occurrence
of
Closing,
but
subject
to
the
satisfaction
or
waiver
of
those
conditions),
subject
to
the
rights
of
the
Parties
under
Article
8.
The
date
on
which
the
Closing
occurs is herein referred to as the “Closing Date.”
Section 7.2
Obligations of Seller at
Closing. At the Closing, upon the
terms and subject
to the conditions of this
Agreement, and subject to the
simultaneous performance by Buyer of
its
obligations
pursuant
to
Section
7.3,
Seller
shall
deliver
or
cause
to
be
delivered
to
Buyer,
the
following:
(a)
counterparts of
the Assignment
Agreement transferring
the Subject
Interests
to
Buyer,
duly
executed
by
an
authorized
officer
of
Seller,
acting
as
the
sole
member
of
Non-
Permian Newco;
(b)
a certificate
of non-foreign
status of
Non-Permian Newco
(or its
regarded
owner for U.S. federal
income Tax purposes, if Non-Permian Newco is
an entity disregarded from
its owner
for U.S.
federal income
Tax
purposes), signed
under penalties
of perjury
and dated
no
more
than
30
days
prior
to
the
Closing
Date, meeting
the
requirements
of
Treasury
Regulation
Section 1.1445-2(b)(2)
and
certifying that
Non-Permian Newco
(or its
regarded owner
for U.S.
federal income Tax
purposes, if Non-Permian
Newco is an
entity disregarded from
its owner for
U.S.
federal
income
Tax
purposes)
is
not
a
“foreign
person”
as
defined
in
Section
1445
of
the
Code;
(c)
a
certificate
duly
executed
by
an
authorized
officer
of
Seller,
dated
as
of
Closing, certifying on
behalf of Seller
that the conditions set
forth in Section 6.2(a),
Section 6.2(b)
and Section 6.2(f) have been fulfilled;
(d)
a
certificate
duly
executed
by
the
secretary
or
any
assistant
secretary
of
Seller, dated as of
the Closing, (i) attaching
and certifying on behalf
of Seller complete
and correct
copies
of
the
resolutions
or
unanimous
consent
of
the
board
of
directors,
managers,
members,
partners,
or
other
equivalent
governing
body
of
Seller
authorizing
the
execution,
delivery,
and
performance
by
Seller
of
this
Agreement
and
the
transactions
contemplated
hereby,
and
(ii)
Exhibit 10.1
- 41 -
certifying on behalf
of Seller
the incumbency of
each officer
of Seller
executing this
Agreement
or any document delivered in connection with the Closing;
(e)
where approvals
are received
by Seller
pursuant to
a filing
or application
under Section 5.2, copies of those approvals;
(f)
resignations
effective
as
of
the
Closing
Date
of
each
director,
officer
or
manager of Newco, duly executed by each such director, officer or manager;
(g)
terminations
of
any
powers of
attorney
granted by
Newco to
any
Person,
duly executed by an authorized officer of Newco;
(h)
original certificates of the
applicable Governmental Authorities, dated
as of
a date not
earlier than five
Business Days before
the Closing
Date, evidencing
the existence and
good standing of Newco in the State of its formation and in the State of Texas;
(i)
the Seller Parent Guaranty,
duly executed by an authorized officer of
Shell
Oil Company;
(j)
duly executed counterparts of each Governmental Transition Filing; and
(k)
all
other
instruments,
documents and
other
items
reasonably necessary
to
effectuate the terms of this Agreement, as may be reasonably requested by Buyer.
Section 7.3
Obligations of Buyer
at Closing. At the
Closing, upon the
terms and subject
to the conditions
of this Agreement, and
subject to the
simultaneous performance by Seller
of its
obligations
pursuant
to
Section
7.2,
Buyer
shall
deliver
or
cause
to
be
delivered
to
Seller,
the
following:
(a)
a wire transfer of the Closing Payment in same-day funds to the account of
Non-Permian Newco, as designated by Seller prior to Closing;
(b)
a
certificate
duly
executed
by
an
authorized officer
of
Buyer,
dated
as
of
Closing, certifying
on behalf of
Buyer that
the conditions
set forth
in Section
6.1(a) and
Section
6.1(b) have been fulfilled;
(c)
a
certificate
duly
executed
by
the
secretary
or
any
assistant
secretary
of
Buyer, dated as
of the
Closing, (i)
attaching and
certifying on
behalf of
Buyer complete
and correct
copies
of
the
resolutions
or
unanimous
consent
of
the
board
of
directors,
managers,
members,
partners,
or
other
equivalent
governing
body
of
Buyer
authorizing
the
execution,
delivery,
and
performance
by
Buyer
of
this
Agreement
and
the
transactions
contemplated
hereby,
and
(ii)
certifying on behalf of
Buyer the incumbency of
each officer of Buyer
executing this Agreement
or any document delivered in connection with the Closing;
(d)
duly executed counterparts of the Assignment Agreement;
(e)
where approvals
are received
by Buyer
pursuant to
a filing
or application
under Section 5.2, copies of those approvals;
Exhibit 10.1
- 42 -
(f)
duly executed counterparts of each Governmental Transition Filing; and
(g)
all
other
instruments,
documents and
other
items
reasonably necessary
to
effectuate the terms of this Agreement, as may be reasonably requested by Seller.
Section 7.4
Closing Payment and Post-Closing Purchase Price Adjustments.
(a)
Not later
than ten
days prior
to the
Closing Date,
Seller shall
prepare and
deliver
to
Buyer,
(i)
using
the
best
information
available
to
Seller,
a
preliminary
settlement
statement
estimating
the initial
Purchase Price
after
giving
effect
to
all
adjustments
set
forth
in
Section 2.5 and (ii)
reasonable documentation supporting the
calculation of the amounts
presented
on such statement.
In the
event Buyer
believes that
such statement
does not
accurately set forth
the initial Purchase Price, Buyer
shall communicate to Seller
in writing such inaccuracies
not later
than three
Business Days
prior to
the Closing
Date.
The Parties
shall cooperate in
good faith
to
agree on
the such
inaccuracies as
soon as
possible after
Seller’s receipt
of Buyer’s
written response.
The estimate
delivered in
accordance with
this Section
7.4(a) (with
such
changes thereto
as the
Parties may
agree in connection
with this Section
7.4(a))
less
the Deposit shall
constitute the dollar
amount to be paid by Buyer to Seller at the Closing (the “Closing Payment”).
(b)
As soon
as
reasonably practicable
after
the Closing
but not
later
than the
Cut-off Date,
Seller shall
prepare and
deliver to
Buyer a
statement setting
forth the
final calculation
of
the
Purchase
Price
and
showing
the
calculation
of
each
adjustment
set
forth
in
Section
2.5,
based, to the
extent possible, on
actual credits, charges,
receipts and other
items before and
after
the Effective Time. Concurrently with the delivery of
such statement, Seller shall deliver
to Buyer
documentation in
reasonable detail
reasonably available
to support
any credit,
charge, receipt
or
other
item.
Seller
shall
also
deliver
to
Buyer
such
other
documentation
in
Seller’s
reasonable
possession or control as Buyer
may reasonably request to verify
the adjustments set forth in
such
statement,
which
documentation
shall
be
delivered
by
Seller
to
Buyer
promptly
after
Seller
receives such request. As
soon as reasonably practicable
but not later than
the 30
th
day following
receipt of
Seller’s
statement hereunder,
Buyer shall
deliver to
Seller a
written report
containing
any changes that
Buyer proposes be
made to such
statement.
Seller may
deliver a written
report
to Buyer
during this
same period reflecting
any changes
that Seller
proposes to
be made
to such
statement as a
result of
additional information
received after the
statement was prepared.
Buyer
and
Seller
shall
undertake
to
agree
on
the
final
statement
of
the
Purchase
Price
no
later
than
240 days after the Closing
Date.
In the event that
Buyer and Seller cannot
reach agreement within
such
period
of
time,
either
Buyer
or
Seller
may
refer
the
remaining
matters
in
dispute
to
the
Houston, Texas office
of
Deloitte Touche
Tohmatsu
Limited
(the “Accounting Firm”) for review
and
final
determination
by
arbitration.
The
Accounting
Firm
shall
conduct
the
arbitration
proceedings
in
Houston,
Texas,
in
accordance
with
the
Commercial
Arbitration
Rules
of
the
American Arbitration
Association, to
the extent
such rules
do not
conflict with
the terms
of this
Section 7.4.
Seller and Buyer shall instruct
the Accounting Firm to deliver
to Buyer and Seller a
written
determination
within
30 days
after
submission
of
the
matters
in
dispute,
which
shall
be
final and binding on all Parties, without right of appeal.
In determining the proper amount of any
adjustment to the Base Purchase Price,
the Accounting Firm shall not increase the
Base Purchase
Price more than
the increase proposed
by Seller nor
decrease the Base
Purchase Price more
than
the decrease proposed by Buyer,
as applicable.
The Accounting Firm shall act as an independent
neutral expert
for the
limited purpose
of determining
the specific
disputed matters
submitted by
Exhibit 10.1
- 43 -
Buyer and Seller
and may not
award Damages, interest or
penalties to the
Parties with respect to
any matter.
Buyer and
Seller shall
each bear
its own
legal fees
and other
costs of
presenting its
case.
Seller
shall
bear
one-half
and
Buyer
shall
bear one-half
of
the
costs
and
expenses of
the
Accounting Firm.
Within ten days after the
earlier of (i) the expiration of Buyer’s
30-day review
period without delivery of any
written report by Buyer and
(ii) the date on which Buyer and
Seller
finally
determine
the
Purchase
Price
or
the
Accounting
Firm
finally
determines
the
disputed
matters submitted to it, as applicable, (A) Buyer shall pay to Seller the amount
by which the final
Purchase Price (
less
the Deposit amount)
exceeds the Closing
Payment or (B) Seller
shall pay to
Buyer the
amount by
which the
Closing Payment
exceeds the
final Purchase
Price (
less
the Deposit
amount),
as
applicable.
Any
post-closing
payment
pursuant
to
this
Section
7.4(b)
shall
bear
interest from the Closing Date to the date of
payment at the rate of interest published from time to
time as the “Prime Rate” in the “Money Rates” section of
The Wall
Street Journal
.
(c)
Buyer shall, and
shall cause Newco to,
assist Seller in
the preparation of
the
final
statement
of
the
Purchase
Price
under
Section
7.4(b)
by
furnishing
invoices
and
receipts
reasonably
available
to
Buyer
and
Newco,
reasonable
access
to
personnel,
and
such
other
assistance as may be reasonably requested by Seller to facilitate such process post-Closing.
(d)
All payments
made or
to be
made under
this Agreement
to Seller
shall be
made by
electronic transfer
of immediately
available funds
to the
account designated
by Seller.
All
payments
made
or
to
be
made
hereunder
to
Buyer
shall
be
made
by
electronic
transfer
of
immediately available funds to the account designated by Buyer.
ARTICLE 8
TERMINATION
Section 8.1
Termination.
This
Agreement
may
be
terminated
at
any
time
prior
to
Closing:
(a)
by the mutual prior written consent of the Parties;
(b)
by Seller
if Shell
US E&P
Investments LLC
has not
received the
Deposit
by the date and time provided in Section 2.7;
(c)
by either
Party if
Closing has
not occurred
on or
before the
Outside Date;
or
(d)
in accordance with Section 5.15(c);
provided,
however
, that no
Party shall be
entitled to terminate
this Agreement under
Section 8.1(c)
if
such
Party
is
then
in
material
breach
of
any
of
its
representations,
warranties
or
covenants
contained in this Agreement,
which breach would, individually
or in the aggregate,
give rise to the
failure of a condition set forth in Section 6.1 or Section 6.2, as applicable.
Section 8.2
Effect of Termination.
(a)
If
this
Agreement
is
terminated
pursuant
to
Section
8.1,
this
Agreement
shall become
void and
of no
further force
or effect
(except for
the provisions
of Section
3.6, Section
Exhibit 10.1
- 44 -
4.6, Section
5.1(d), Section
5.3, Section
5.9, Article
8, Article
11,
and Appendix
A, which
shall
continue in full force and effect).
(b)
In the event that
(i) all conditions precedent
to the obligations of
Seller set
forth
in
Section
6.1
have
been
satisfied
or
waived
(in
writing)
by
Seller
(or
would
have
been
satisfied except
for the
breach or
failure of any
of Seller’s representations,
warranties, or
covenants
hereunder and
except for
any such
conditions that
by their
nature may
only be
satisfied at
or in
connection with the occurrence of Closing) and (ii) the Closing has not occurred solely as a result
of the
material breach
or failure
of Seller’s
representations, warranties,
or
covenants hereunder,
including, if and
when required, Seller’s obligations to
consummate the transactions contemplated
hereunder at
Closing (including,
for the
avoidance of
doubt, if
Buyer terminates
this Agreement
pursuant to Section
8.1(c) and
at the
time of termination,
such a
material breach or
failure by Seller
has occurred and is continuing), then
Buyer shall have the right (in its
sole discretion) to promptly
elect in writing, as the
sole and exclusive remedy
of the Buyer Group
against any member of
the
Seller Group for the failure to consummate
the transactions contemplated hereunder at Closing on
account of such
events, to either
(A) exercise its
right to require
Seller’s specific performance
of
this Agreement as provided in Section 11.16,
or (B) terminate this Agreement, receive from Shell
US E&P Investments LLC a refund of the Deposit without any interest accrued thereon, and seek
any other remedy available to Buyer at law on account
of the breach by Seller of this Agreement.
If Buyer elects
the remedy of
specific performance contemplated
by clause (A)
but such remedy
is
not
awarded
by
courts
of
competent
jurisdiction,
the
Buyer
shall
be
entitled
to
the
remedy
contemplated by
clause (B),
in each
case, in
accordance with
the terms
and conditions
set forth
herein. The Parties agree
that specific performance is
a remedy expressly negotiated
by the Parties
and
that
Buyer
shall
not
be
required
to
provide
any
bond
or
other
security
in
connection
with
seeking specific performance as a remedy as described in this Section 8.2(b). The remedy elected
and ultimately awarded under this Section 8.2(b) shall be the sole and exclusive remedy available
to Buyer
prior to
Closing for
Seller’s breach
or failure
of Seller’s
representations, warranties,
or
covenants
hereunder,
including,
if
and
when
required,
Seller’s
obligations
to
consummate
the
transactions contemplated at Closing.
(c)
In the event that (i) all
conditions precedent to the obligations
of Buyer set
forth
in
Section
6.2
have
been
satisfied
or
waived
(in
writing)
by
Buyer
(or
would
have
been
satisfied except
for the
breach or
failure of
any of
Buyer’s representations,
warranties, or
covenants
hereunder and
except for
any such
conditions that
by their
nature may
only be
satisfied at
or in
connection with the occurrence of Closing) and (ii) the Closing has not occurred solely as a result
of
the
material
breach
or
failure
of
any
of
Buyer’s
representations,
warranties,
or
covenants
hereunder,
including, if
and when
required, Buyer’s
obligations to
consummate the
transactions
contemplated hereunder at Closing (including, for the
avoidance of doubt, if Seller terminates
this
Agreement pursuant
to
Section 8.1(c)
and
at
the
time
of
termination,
such
a
material
breach
or
failure
by
Buyer
has
occurred
and
is
continuing),
then
Seller
shall
have
the
right
(in
its
sole
discretion)
to
promptly
elect
in
writing,
as
the
sole
and
exclusive
remedy
of
the
Seller
Group
against
any
member
of
the
Buyer
Group
for
the
failure
to
consummate
the
transactions
contemplated hereunder
at Closing
on account
of
such events,
to either
(A) exercise
its right
to
require
Buyer’s
specific
performance
of
this
Agreement
as
provided
in
Section
11.16,
or
(B)
terminate this
Agreement and
Shell US
E&P Investments LLC
shall retain
the Deposit,
together
with any interest
or income thereon, free
of any claims by
Buyer or any
other Person, as liquidated
damages. If Seller elects the remedy of specific performance
contemplated by clause (A) but such
Exhibit 10.1
- 45 -
remedy is not
awarded by courts
of competent jurisdiction,
Seller shall be
entitled to the
remedy
contemplated by
clause (B),
in each
case, in
accordance with
the terms
and conditions
set forth
herein. The Parties agree
that specific performance is
a remedy expressly negotiated
by the Parties
and
that
Seller
shall
not
be
required
to
provide
any
bond
or
other
security
in
connection
with
seeking specific performance as a remedy as described in this
Section 8.2(c). The remedy elected
and ultimately awarded under this Section 8.2(c) shall be the sole and exclusive remedy available
to Seller prior
to Closing
for Buyer’s
breach or
failure of Buyer’s
representations, warranties, or
covenants
hereunder,
including,
if
and
when
required,
Buyer’s
obligations
to
consummate
the
transactions contemplated at Closing.
(d)
SELLER
AND
BUYER
ACKNOWLEDGE
AND
AGREE
THAT
IF
SELLER RECEIVES LIQUIDATED DAMAGES IN ACCORDANCE WITH SECTION 8.2(C),
THEN (1)
ACTUAL DAMAGES
UPON THE
EVENT OF
A TERMINATION ARE DIFFICULT
TO ASCERTAIN
WITH ANY CERTAINTY,
(2) SUCH LIQUIDATED DAMAGES AMOUNT
IS
A
FAIR
AND
REASONABLE
ESTIMATE
BY
THE
PARTIES
OF
SUCH
AGGREGATE
ACTUAL DAMAGES, AND (3)
SUCH LIQUIDATED
DAMAGES DO NOT CONSTITUTE A
PENALTY.
(e)
Subject to
Section 8.2(b)
and Section
8.2(c), upon
the termination
of this
Agreement in accordance with the
express terms of this Article
8, Seller and Newco shall be
free
immediately
to
enjoy
all
rights
of
ownership
of
Newco
and
the
Assets
and
to
sell,
transfer,
encumber
or
otherwise
dispose
of
the
Assets
to
any
Person
without
any
restriction
under
this
Agreement. Except
to the
extent Seller
terminates
this
Agreement pursuant
to
Section 8.2(c),
if
either Party terminates
this Agreement in
accordance with this
Article 8, Seller
shall promptly (but
in any event
no more
than ten Business
Days after such
termination of this
Agreement) cause Shell
US E&P Investments
LLC to return
the Deposit (without any
interest accrued thereon) to
Buyer.
Following termination of this
Agreement in accordance with
this Article 8, Buyer
shall promptly
(but in any event no
more than ten Business Days
after the termination of this
Agreement) return
or destroy all agreements, Contracts, instruments, books, records, materials and other information
regarding Seller or its Affiliates (including Newco and the Assets) provided to Buyer or any of
its
Affiliates
or
any
of
their
respective
Representatives
in
connection
with
the
transactions
contemplated by this Agreement.
(f)
Notwithstanding
anything
to
the
contrary
in
this
Agreement,
each
Party
acknowledges and
agrees that
if the
Closing fails
to occur
for any
reason, such
Party’s
sole and
exclusive remedy against the other Party shall be
to exercise an applicable remedy set
forth in this
Article 8.
ARTICLE 9
INDEMNIFICATION
Section 9.1
Indemnification.
(a)
From and
after Closing,
Buyer, shall indemnify
and hold
harmless the
Seller
Group from
and against
all Damages
incurred by
or suffered
by such
Persons, and
shall defend
such Persons (in accordance
with Section 9.2) from and
against (and indemnify and hold
harmless
Exhibit 10.1
- 46 -
such Persons from
and against
all Damages incurred
or suffered
by such Persons
with respect to
or related to) all Proceedings asserted against such Persons, that are:
(i)
caused by, related
to, arising
out of,
or resulting
from Buyer’s
breach
of
any
of
such
Buyer’s
covenants
or
agreements
contained
in
this
Agreement,
including in respect of Buyer’s obligations in Section 5.20;
(ii)
caused by, related to, arising out of, or resulting from any breach of
any
of
the
representations
and
warranties
of
Buyer
(including
the
Buyer
Fundamental
Representations)
contained
in
this
Agreement,
or
confirmed
in
the
certificate delivered by
Buyer at Closing pursuant
to Section 7.3(b) (without
regard
to
the
Buyer
Material Adverse
Effect
or
other
materiality
qualifiers
contained
in
such certificate) with respect to such representations and warranties; or
(iii)
subject
to
Seller’s
indemnity
and
defense
obligations
in
Section
9.1(b),
caused
by,
related
to,
arising
out
of,
or
resulting
from
the
Assumed
Liabilities.
(b)
From and
after Closing,
subject to
the limitations
set forth
in Section
9.3,
Seller shall indemnify and hold harmless the Buyer Group from and
against all Damages incurred
by or
suffered by
such Persons,
and shall
defend such
Persons (in
accordance with
Section 9.2)
from and
against (and
indemnify and
hold harmless
such Persons
from and
against all
Damages
incurred or suffered by such Persons with respect to or related to)
all Proceedings asserted against
such Persons, that are:
(i)
caused by, related
to, arising
out of,
or resulting
from Seller’s breach
of Seller’s covenants or agreements contained in this Agreement;
(ii)
caused by, related to, arising out of, or resulting from any breach of
any of the representations and warranties of Seller contained in this Agreement, or
confirmed in
the certificate
delivered by
Seller at
Closing pursuant
to Section
7.2(c)
(without regard to the Seller
Material Adverse Effect or other materiality qualifiers
contained in such certificate) with respect to such representations and warranties;
(iii)
caused by,
related to, arising
out of, or
resulting from the
Retained
Liabilities;
(iv)
caused
by,
related
to,
arising
out
of,
or
resulting
from
any
Seller
Taxes; or
(v)
caused
by,
related
to,
arising
out
of,
or
resulting
from
any
of
the
Previously-Divested Properties.
(c)
Notwithstanding
anything
to
the
contrary
contained
in
this
Agreement,
subject
to
Section
5.1(d),
Section
5.9
(including
Schedule
5.9(a)
and
Schedule
5.9(b)),
Section
5.15, Article
8, Article
10, Section
11.16,
and, from
and after
the Closing,
absent Fraud,
this Article
9
contains
the
Parties’
exclusive
remedies
against
each
other
with
respect
to
the
transactions
contemplated
hereby,
including
any
breaches of
the
representations,
warranties,
covenants,
and
Exhibit 10.1
- 47 -
agreements of the
Parties in
this Agreement. Except
for the remedies
contained in
this Article
9,
Section
5.1(d),
Section
5.9
(including
Schedule
5.9(a)
and
Schedule
5.9(b)),
Article
10,
and
Section
11.16,
if
Closing
occurs
SELLER
(ON
BEHALF
OF
ITSELF
AND
ON
BEHALF
OF
THE SELLER GROUP) AND BUYER (ON BEHALF OF ITSELF AND ON BEHALF
OF THE
BUYER GROUP)
EACH RELEASE,
REMISE, AND
FOREVER DISCHARGE
THE OTHER
AND ITS
AFFILIATES AND ALL SUCH
PARTIES’
OFFICERS, DIRECTORS,
EMPLOYEES,
AGENTS, ADVISORS,
AND OTHER
REPRESENTATIVES
FROM ANY
AND ALL
SUITS,
LEGAL
OR
ADMINISTRATIVE
PROCEEDINGS,
CLAIMS,
DEMANDS,
DAMAGES,
LOSSES, COSTS, LIABILITIES, INTEREST,
OR CAUSES OF ACTION WHATSOEVER,
IN
LAW
OR
IN
EQUITY,
KNOWN
OR
UNKNOWN,
WHICH
SUCH
PARTIES
MIGHT
NOW
OR SUBSEQUENTLY
MAY
HAVE,
BASED ON, RELATING
TO, OR ARISING OUT OF (i)
THIS
AGREEMENT,
(ii)
NON-PERMIAN
NEWCO’S
OWNERSHIP
OF
THE
SUBJECT
INTERESTS
OR
SELLER’S
OWNERSHIP
OF
NON-PERMIAN
NEWCO
OR
SWEPI,
(iii)
SWEPI OR NEWCO’S USE, OWNERSHIP OR
OPERATION
OF THE ASSETS, OR (iv) THE
CONDITION, QUALITY,
STATUS,
OR NATURE
OF THE ASSETS, INCLUDING, IN
EACH
SUCH
CASE,
RIGHTS
TO
CONTRIBUTION
UNDER
CERCLA
OR
ANY
OTHER
ENVIRONMENTAL
LAW,
BREACHES
OF
STATUTORY
OR
IMPLIED
WARRANTIES,
NUISANCE
OR
OTHER
TORT
ACTIONS,
RIGHTS
TO
PUNITIVE
DAMAGES
AND
COMMON
LAW
RIGHTS
OF
CONTRIBUTION,
RIGHTS
UNDER
AGREEMENTS
BETWEEN SELLER, SWEPI, NEWCO, OR NON-PERMIAN NEWCO
AND ANY PERSONS
WHO
ARE
AFFILIATES
OF
SUCH
PERSONS,
AND
RIGHTS
UNDER
INSURANCE
MAINTAINED
BY
SELLER
OR
ANY
PERSON
WHO
IS
AN
AFFILIATE
OF
SELLER
(INCLUDING SWEPI
AND NON-PERMIAN
NEWCO), EVEN
IF CAUSED
IN WHOLE
OR
IN PART
BY THE NEGLIGENCE (WHETHER SOLE, JOINT,
OR CONCURRENT), STRICT
LIABILITY,
OR OTHER LEGAL FAULT
OF ANY RELEASED PERSON.
(d)
The indemnity and defense of
each Party provided in this
Section 9.1 shall
be for the benefit of and extend to each Person included
in the Seller Group and the Buyer Group,
as applicable.
Any claim
for indemnity
or defense
under Section
5.1(d), Schedule
5.9(a) or
this
Section 9.1 to which any member of the Seller Group or
Buyer Group is entitled must be brought
and
administered
by
a
Party
to
this
Agreement.
No
Indemnified
Person
(including
any
Person
within the
Seller Group
or the
Buyer Group)
other than
the Parties
shall have
any rights
against
Seller or
Buyer under
the terms
of Section
5.1(d),
Schedule 5.9(a)
or this
Section 9.1
except as
may be exercised on its behalf
by Buyer or Seller, as applicable, pursuant to this Section
9.1(d). A
Party
may
elect
to
exercise
or
not
exercise
its
indemnification
or
defense
rights
under
Section
5.1(d), Schedule
5.9(a) or
this
Section 9.1
on behalf
of the
other Indemnified
Persons affiliated
with it
in its
sole discretion
and shall
have no
liability to
any such
other Indemnified
Person for
any action or inaction under this Section 9.1(d).
(e)
Notwithstanding
anything
herein
to
the
contrary,
for
purposes
of
Section
9.1(b)(ii),
when
determining
the
amount
of
Damages
resulting
from
a
breach
of
a
Seller
representation and warranty or in
the certificate delivered by Seller pursuant
to Section 7.2(c) (but
not whether
a breach
has occurred)
all materiality
qualifications (including
Seller Material
Adverse
Effect) contained
in the representations
and warranties of
Seller made in
this Agreement or
such
certificate related thereto
shall be disregarded.
For the avoidance
of doubt, this
Section 9.1(e) shall
not
be
deemed
to
disregard
any
dollar
amounts
or
monetary
thresholds
set
forth
in
any
Exhibit 10.1
- 48 -
representation or warranty
in Article 3
(and, for the
avoidance of doubt,
in no event
shall “Material
Contract” be read to mean “Contract”).
Section 9.2
Indemnity Actions. All
claims for indemnification
or defense under
Section
5.1(d), Schedule 5.9(a) and Section 9.1 shall be asserted and resolved as follows:
(a)
For
purposes
hereof,
(i)
the
term
“Indemnifying
Person”
when
used
in
connection with particular Damages or Proceedings, as
applicable, shall mean the Party having an
obligation
to
indemnify
or
defend
another
Person
or
Persons
with
respect
to
such
Damages
or
Proceedings, as applicable,
pursuant to Section
5.1(d), Schedule 5.9(a) or
this Article 9 and
(ii) the
term “Indemnified Person”
when used in
connection with particular
Damages or Proceedings,
as
applicable, shall mean the Person
or Persons having the right
to be indemnified or defended
with
respect to such
Damages or
Proceedings, as applicable,
by a Party
or Parties pursuant
to Section
5.1(d), Schedule 5.9(a) or this Article 9.
(b)
To
make
a
claim
for
indemnification
or
defense
under
Section
5.1(d),
Schedule 5.9(a) or Section 9.1, an Indemnified Person
shall notify the Indemnifying Person of its
claim
under
this
Section
9.2
including
the
specific
details
of
and
specific
basis
under
this
Agreement for
its claim
(the “Claim
Notice”). In
the event
that the
claim for
indemnification or
defense is
based upon
a claim
by a
Third Party
against the
Indemnified Person (a
“Third Person
Claim”),
the
Indemnified Person
shall
provide
its
Claim
Notice
promptly
after the
Indemnified
Person has actual knowledge of
the Third Person Claim
and shall enclose a copy
of all papers (if
any) served with respect to
the Third Person Claim;
provided
, that the failure of
any Indemnified
Person to give notice of a Third Person Claim
as provided in this Section 9.2 shall
not relieve the
Indemnifying Person of its
obligations under Section 5.1(d),
Schedule 5.9(a) or Section
9.1 except
(i) to the extent such failure results
in insufficient time being available to permit the Indemnifying
Person to effectively defend against
the Third Person Claim or
otherwise materially prejudices
the
Indemnifying Person’s ability
to defend
against the
Third Person
Claim, or
(ii) if
such Third
Person
Claim is in respect of
a Retained Liability or
an Assumed Liability, as the case may be,
then to the
extent
any
legal
action
taken
by
the
Indemnified
Person
(prior
to
the
giving
of
such
notice)
in
response to such
Third Person Claim without
the consent of
the Indemnifying Person
increases the
amount of such
Third Person Claim.
In the event
that the claim
for indemnification or
defense is
based
upon
an
inaccuracy
or
breach
of
a
representation,
warranty,
covenant,
or
agreement,
the
Claim
Notice
shall
specify
the
representation,
warranty,
covenant,
or
agreement
that
was
inaccurate or breached.
(c)
In the
case of
a
claim
for
indemnification
or
defense
based upon
a
Third
Person Claim, the Indemnifying Person shall have 30 days from its receipt of the Claim Notice to
notify the Indemnified Person whether it admits or
denies its obligation to defend the Indemnified
Person against such Third Person Claim under Section 5.1(d), Schedule 5.9(a) or this Article 9. If
the
Indemnifying
Person
does
not
notify
the
Indemnified
Person
within
such
30-day
period
whether the Indemnifying
Person admits or
denies its obligation
to defend
the Indemnified Person,
it
shall
be
conclusively
deemed
to
have
denied
such
indemnification
or
defense
obligation
hereunder.
The Indemnified
Person is
authorized, prior
to and
during such
30-day period,
to file
any
motion,
answer,
or
other
pleading
that
it
shall
deem
necessary or
appropriate
to
protect
its
interests or
those of
the Indemnifying
Person and
that is
not prejudicial
to the
Indemnifying Person;
provided
,
that
if
such
Third
Person
Claim
is
in
respect
of
a
Retained
Liability
or
an
Assumed
Exhibit 10.1
- 49 -
Liability,
as the case may be,
then the Indemnified Person shall
not take any other legal
action in
response to such Third Person Claim without the consent of the Indemnifying Person.
(d)
If the Indemnifying Person admits its obligation,
it shall have the right and
obligation to diligently defend,
at its sole cost
and expense, the
Third Person Claim;
provided
, that
Buyer (and not Seller) shall be entitled
to defend any Third Person Claim that
is a Tax Proceeding
to the extent
that such Third
Person Claim could
reasonably be expected
to have an
adverse impact
on Buyer
or any
of its
Affiliates
or the
Assets following
the Closing
or is
not fully
indemnified
under this Agreement, but Seller may, at its own expense, reasonably participate in the defense of
such Third Person Claim to the
extent the resolution of such Third
Person Claim could reasonably
result in
liability
for Seller
under this
Agreement
and in
such
case Buyer
shall not,
without
the
written
consent
of
Seller,
settle
such
Third
Person
Claim
(such
consent
not
to
be
unreasonably
withheld, conditioned or delayed). Except
as otherwise provided in this
Section 9.2(d) or Section
9.2(e),
(i)
the
Indemnifying
Person
shall
have
full
control
of
such
defense
and
proceedings,
including any compromise or settlement
thereof, and (ii) if such
Third Person Claim is
in respect
of a Retained Liability or
an Assumed Liability,
as the case may be, then
the Indemnified Person
shall not
take any other
legal action
in response to
such Third Person
Claim without
the consent
of
the
Indemnifying
Person.
If
requested
by
the
Indemnifying
Person,
the
Indemnified
Person
agrees to cooperate
in contesting
any Third
Person Claim
that the
Indemnifying Person
elects to
contest
(
provided
,
however
,
that
the
Indemnified
Person
shall
not
be
required
to
bring
any
counterclaim
or
cross-complaint
against
any
Person).
The
Indemnified
Person
may
at
its
own
expense participate in, but not control, any defense
or settlement of any Third Person Claim to
the
extent
controlled
by
the
Indemnifying
Person
pursuant
to
this
Section
9.2(d).
An
Indemnifying
Person shall
not, without
the written
consent of
the Indemnified
Person, settle
any Third
Person
Claim or consent to the
entry of any judgment
with respect thereto that
(i) does not result in
a final
resolution of the Indemnified Person’s liability with respect to the Third Person Claim (including,
in the case
of a settlement,
an unconditional written
release of the
Indemnified Person), (ii)
may
materially and adversely
affect the Indemnified
Person (other than
as a result
of money damages
covered by the indemnity), (iii) requires a non-monetary commitment by the Indemnified Person,
including compliance
with an injunction
or other
equitable relief,
(iv) includes
any admission
of
guilt or culpability, or (v) relates to the payment or calculation of Royalties or Taxes.
(e)
If
the
Indemnifying
Person
does
not
admit
its
obligation
or
admits
its
obligation
but
fails
to
diligently
defend
or
settle
the
Third
Person
Claim,
then
the
Indemnified
Person shall have the right to defend against the Third Person Claim (at the sole cost and expense
of
the
Indemnifying Person,
if
the
Indemnified Person
is
entitled
to
defense
or
indemnification
hereunder)
with
counsel
of
the
Indemnified
Person’s
choosing,
subject
to
the
right
of
the
Indemnifying Person to admit its obligation and assume the
defense of the Third Person Claim to
the extent provided in Section
9.2(d) at any time prior to
settlement or final determination thereof.
If
the
Indemnifying
Person
has
not
yet
admitted
its
obligation
to
provide
indemnification
or
defense with respect to a Third Person Claim, the
Indemnified Person shall send written notice to
the Indemnifying Person
of any proposed
settlement and the
Indemnifying Person shall
have the
option for ten days following receipt
of such notice to (i) admit in
writing its obligation to provide
indemnification or
defense with
respect to
the Third
Person Claim
and (ii)
if its
obligation is
so
admitted,
assume
the
defense
of
the
Third
Person
Claim,
including
the
power
to
reject,
in
its
reasonable judgment,
the proposed
settlement;
provided
, that
the Indemnifying
Person shall
not,
without the written
consent of the
Indemnified Person, settle
any Third Person
Claim or consent
Exhibit 10.1
- 50 -
to the
entry of
any judgment
with respect
thereto that
relates to
the payment
or calculation
of Taxes.
If the Indemnified
Person settles any
Third Person Claim
over the objection
of the Indemnifying
Person after
the Indemnifying
Person has
timely admitted
its obligation
in writing
and assumed
the
defense
of
a
Third
Person
Claim
that
the
Indemnifying
Person
is
entitled
to
control,
the
Indemnified Person shall be deemed to have waived any right to indemnity therefor.
(f)
In the case
of a claim for
indemnification or defense
not based upon
a Third
Person Claim, the Indemnifying Person shall have 30 days from its receipt of the Claim Notice to
(i)
cure
the
Damages
complained
of
or
Proceedings
occurring,
as
applicable,
(ii)
admit
its
obligation to provide indemnification or defense with respect to such
Damages or Proceedings, as
applicable,
or
(iii)
dispute
the
claim
for
such
indemnification
or
defense.
If
the
Indemnifying
Person
does
not
notify
the
Indemnified
Person
within
such
30-day
period
that
it
has
cured
the
Damages or
Proceedings, as
applicable, or
that it
disputes the
claim for
such indemnification
or
defense, the Indemnifying
Person shall be
deemed to have
disputed such claim
for indemnification
or defense.
Section 9.3
Limitation on Actions.
(a)
The representations and warranties of
the Parties in Article
3 and Article 4
and the covenants and agreements
of the Parties
in Article 5 and Article 10
(other than the proviso
appearing
in
the
last
sentence
of
Section
5.5,
Section
5.7,
Section
5.16,
Section
5.17,
Section
5.19(d),
Section
5.20,
and
Section
5.22)
and
the
corresponding
representations,
warranties,
covenants and
agreements confirmed
in the
certificates delivered
at Closing
pursuant to
Section
7.2(c)
and
Section
7.3(b),
as
applicable,
shall
terminate
at
Closing,
except
that
(i)
the
Seller
Fundamental
Representations,
the
Buyer
Fundamental
Representations
and
the
corresponding
representations
and
warranties
confirmed
in
the
certificates
delivered
at
Closing
pursuant
to
Section 7.2(c) and Section 7.3(b) shall survive the Closing for seven years
following the Closing,
(ii) the
representations and
warranties of
Seller in
Section 3.8,
the covenants
and agreements
of
Seller in Article 5
that relate to Taxes,
the covenants and agreements
of the Parties
in Article 10,
and
the
corresponding
representations,
warranties,
covenants
and
agreements
confirmed
in
the
certificates
delivered
at
Closing
pursuant
to
Section
7.2(c)
and
Section
7.3(b)
shall
survive
the
Closing until
the earlier
of seven
years following
the Closing
or the
expiration of
the applicable
statute of limitations,
(iii) the other
representations and warranties
of Seller in
Article 3 (other
than
the Seller Fundamental
Representations and the
representations and warranties
of Seller in
Section
3.8,
Section
3.15,
Section
3.20,
Section
3.22,
and
Section
3.27),
the
other
covenants
and
agreements
set
forth
in
Section
5.3,
Section
5.4,
Section
5.9,
and
Section
5.13
and
the
corresponding representations, warranties, covenants
and agreements confirmed in
the certificate
delivered at Closing pursuant to
Section 7.2(c) shall survive the
Closing for a period of one
year,
(iv) the
representations and
warranties set
forth in
Section 3.20
and Section
3.22, the
covenants
and
agreements
set
forth
in
Section
5.6
and
the
corresponding
representations,
warranties,
covenants
and
agreements
confirmed in
the
certificate
delivered
at
Closing
pursuant
to
Section
7.2(c) shall survive
the Closing
for a period
of four
years, (v)
the representations
and warranties
set forth
in Section
3.15
and the
corresponding representations
and warranties
confirmed in
the
certificate delivered at Closing pursuant to Section 7.2(c) shall survive the Closing for a period of
two years,
and (vi)
the representations
and warranties
set forth
in Section
3.27 and
Section 4.13
and
the
corresponding
representations
and
warranties
confirmed
in
the
certificates
delivered
at
Closing pursuant to Section 7.2(c)
and Section 7.3(b) shall survive the
Closing for a period of five
Exhibit 10.1
- 51 -
years.
The
remainder
of
this
Agreement
(including
the
disclaimers
and
acknowledgments
in
Section
3.32
and
Section
4.10)
shall
survive
the
Closing
without
time
limit
except
(A)
as
may
otherwise
be
expressly
provided
herein,
(B)
for
covenants
and
agreements
set
forth
in
this
Agreement that, by their terms, are to be completed prior to Closing, which shall
only survive for
one
year
after
the
Closing
Date,
and
(C)
all
other
covenants
and
agreements
set
forth
in
this
Agreement, which
shall survive until
fully satisfied and/or
performed in accordance
with the terms
hereof
(unless
otherwise
specifically
provided
in
this
Agreement).
Representations,
warranties,
covenants, and agreements shall be of no further force and
effect after the date of their expiration;
provided
,
that
there
shall
be
no
termination
of
any
bona
fide
claim
asserted
pursuant
to
this
Agreement
with
respect
to
such
a
representation,
warranty,
covenant,
or
agreement
prior
to
its
expiration date.
(b)
The
indemnity
and
defense
obligations
in
Section
9.1(a)(i),
Section
9.1(a)(ii),
Section 9.1(b)(i),
and Section 9.1(b)(ii)
shall terminate as
of the termination
date of each
respective representation, warranty, covenant,
or agreement that is subject to indemnification and
defense
thereunder,
except
in
each
case
as
to
matters
for
which
a
specific
written
claim
for
indemnity or defense
has been delivered to
the Indemnifying Person
on or before such
termination
date. The
indemnity and
defense obligation
in Section
9.1(a)(iii) shall
not terminate.
The indemnity
and defense obligation
in Section 9.1(b)(iii)
shall terminate
10 years
after the
Closing Date.
The
indemnity and
defense obligations
in Section
9.1(b)(iv) and
Section 9.1(b)(v)
shall terminate
on
the date
that is
the earlier
of 7
years following
the Closing
or the
expiration of
the applicable
statute
of limitations.
(c)
Seller shall not have any
liability for any indemnification or
defense under
Section 9.1(b)(ii) (other than with respect to Section 3.8, Section 3.20
and the Seller Fundamental
Representations)
or
Section
9.1(b)(v)
for
any
individual
Damage
(whether
the
subject
of
a
Proceeding subject to an obligation
to defend or otherwise) or
Proceeding, unless the amount with
respect
to
such
Damage
or
the
Damages
involved
in
such
Proceeding
exceeds
$400,000
(the
“Individual Indemnity
Threshold”);
provided,
however
, that,
with respect
to a
breach of
Section
3.15, Seller shall not have any liability for
any indemnification or defense under Section
9.1(b)(ii)
for any individual Damage (whether the
subject of a Proceeding subject to an
obligation to defend
or
otherwise)
or
Proceeding
unless
the
amount
with
respect
to
such
Damage
or
the
Damages
involved
in
such
Proceeding
exceeds
$250,000
(the
“Individual
Environmental
Indemnity
Threshold”);
provided, further
, that with respect to a breach of Section 3.20, Seller shall
not have
any
liability
for
any
indemnification
or
defense
under
Section
9.1(b)(ii)
for
(x) any
individual
Damage (whether
the
subject
of
Proceeding subject
to
an
obligation
to
defend or
otherwise)
or
Proceeding
in
respect
of
such
breach
unless
the
amount
with
respect
to
such
Damage
or
the
Damages involved in such
Proceeding exceeds $250,000
or (y) Damages (whether the
subject of
Proceeding
subject
to
an
obligation
to
defend
or
otherwise)
or
Proceedings
in
respect
of
such
breach
to
the
extent
such
Damages
or
the
Damages
involved
in
such
Proceeding
exceed
the
Allocated Value
of the affected Asset.
(d)
Seller shall not have any
liability for any indemnification or
defense under
Section 9.1(b)(ii) (other than with
respect to the Seller Fundamental Representations,
Section 3.8
and Section 3.20) until and
unless the aggregate amount of the
liability for all Damages (whether
the
subject
of
a
Proceeding
subject
to
an
obligation
to
defend
or
otherwise)
that
exceed
the
Individual
Indemnity
Threshold
or
the
Individual
Environmental
Indemnity
Threshold,
as
Exhibit 10.1
- 52 -
applicable, and for which
Claim Notices are delivered
by Buyer exceeds
$200,000,000, and then
only to the extent such Damages exceed $200,000,000.
(e)
Notwithstanding
anything
to
the
contrary
contained
elsewhere
in
this
Agreement, (i) Seller shall not be required to indemnify or defend the
Buyer Group under Section
9.1(b)(ii)
(other
than
with
respect
to
the
Seller
Fundamental
Representations,
Section
3.8
and
Section 3.20) for aggregate
Damages (whether the subject
of a Proceeding subject
to an obligation
to defend or
otherwise) in excess
of ten percent
(10%) of the
Purchase Price, (ii)
Seller shall not
be
required
to
indemnify
or
defend
the
Buyer
Group
under
Section
9.1(b)(iii)
for
aggregate
Damages (whether
the subject
of Proceeding
subject to
an obligation
to defend
or otherwise)
in
excess of $2,000,000,000,
and (iii) Seller
shall not
be required to
indemnify or defend
the Buyer
Group under Section 9.1(b) for aggregate Damages
(whether the subject of Proceeding subject to
an obligation to defend or otherwise) in excess of the Purchase Price.
(f)
The amount of
any Damages
(whether the
subject of
a Proceeding
subject
to an obligation to defend
or otherwise) for which an
Indemnified Person is entitled to
indemnity
under this Article 9 shall be reduced
by the amount of insurance proceeds actually
received by the
Indemnified Person or its
Affiliates with respect to such
Damages (net of any collection
costs, and
excluding the proceeds of any insurance policy issued
or underwritten by the Indemnified Person
or its Affiliates).
(g)
In
no
event
shall
any
Indemnified
Person
be
entitled
to
duplicate
compensation with respect to the
same Damage (whether the subject of
a Proceeding subject to an
obligation to defend
or otherwise), liability,
loss, cost, expense, claim,
award, or judgment
under
more than one provision of this Agreement and the Transaction Documents.
(h)
Notwithstanding anything to the contrary in this Agreement, (i) in no event
shall Seller’s indemnity or
defense obligation under
Section 9.1(b)(iii) nullify
any prior or
existing
indemnity,
assumption of
liability or
right of
contribution from
Buyer or
any of
its Affiliates
in
favor
of
Seller
or
any
of
its
Affiliates,
and
(ii)
Seller
shall
have
no
indemnification
or
defense
obligation
pursuant
to
Section
9.1(b)(iii)
to
the
extent
of
any
such
prior
or
existing
indemnity,
assumption of liability or
right of contribution
from Buyer or any
of its Affiliates in
favor of Seller
or any of its Affiliates.
ARTICLE 10
TAX MATTERS
Section 10.1
Tax Allocations; Tax
Returns.
(a)
Seller shall be
allocated, bear and
be responsible for
all Asset Taxes that are
attributable to
(i) any
Tax
period ending
at or
prior to
the Effective
Time
and (ii)
the portion
of
any
Straddle
Period
ending
at
the
Effective
Time.
Subject
to
Seller’s
indemnity
and
defense
obligations in Section 9.1(b), Buyer shall be
allocated, bear and be responsible for
all Asset Taxes
that are attributable
to (x)
any Tax
period beginning
after the Effective
Time
and (y) the
portion
of any Straddle Period beginning after the Effective Time. For purposes of allocating Asset Taxes
pursuant
to
this
Section
10.1(a),
(A) Asset
Taxes
that
are
attributable
to
the
severance
or
production
of
Hydrocarbons
(other
than
such
Asset
Taxes
described
in
clause (C))
shall
be
Exhibit 10.1
- 53 -
allocated
to
the
period
in
which
the
severance
or
production
giving
rise
to
such
Asset
Taxes
occurred,
(B) Asset
Taxes
that
are
based
upon
or
related
to
sales
or
receipts
or
imposed
on
a
transactional basis (other than such Asset Taxes
described in clause (A) or (C)) shall be
allocated
to the
period in
which the
transaction giving
rise to such
Asset Taxes occurred and
(C) Asset Taxes
that
are
ad
valorem,
property
or
other
Asset
Taxes
imposed
on
a
periodic
basis
pertaining
to
a
Straddle Period shall
be allocated between
the portion of
such Straddle Period
ending immediately
prior to the
Effective Time and the
portion of such
Straddle Period
beginning at the
Effective Time
by prorating each
such Asset
Tax
based on the
number of days
in the applicable
Straddle Period
that
occur
on
or
before
the
date
on
which
the
Effective
Time
occurs,
on
the
one
hand,
and
the
number
of
days
in
such
Straddle
Period
that
occur
after
the
date
on
which
the
Effective
Time
occurs,
on the other hand.
(b)
Seller shall be
allocated, bear
and be responsible
for (i) all
Taxes (other than
Asset Taxes)
of, imposed
on or
attributable to
Newco or
SWEPI that
are attributable
to (A)
any
Tax
period ending
on or
before the
Closing Date
and (B)
the portion
of any
Current Tax
Period
ending on
and including
the Closing
Date and
(ii) all
Taxes
imposed with
respect to
or that
are
attributable
to
any
Combined
Return.
For
purposes
of
allocating
Taxes
pursuant
to
Section
10.1(b)(i) for any Current Tax Period, such Taxes shall be allocated based on a deemed closing of
the
books
of
Newco
or
SWEPI,
as
applicable,
as
of
the
end
of
the
day
on
the
Closing
Date.
Notwithstanding anything herein to the
contrary, any franchise or similar Tax shall be allocated to
the period during which the income, operations, assets or capital comprising the base of such Tax
is measured,
regardless of
whether the
right to
do business
for another
period is
obtained by
the
payment of such Tax.
(c)
To the extent the actual amount of an Asset Tax is not known at
the time an
adjustment is to be made with respect to such Asset Tax pursuant to Section 2.5 or Section 7.4, as
applicable, the Parties shall utilize the most recent information available in estimating the amount
of such
Asset Tax
for purposes
of such
adjustment. To
the extent
the actual
amount of
an Asset
Tax (or the
amount thereof paid or economically borne by a
Party) is ultimately determined to be
different
than
the
amount
(if
any)
that
was
taken
into
account
in
the
Purchase
Price
as
finally
determined pursuant to Section 7.4(b),
timely payments will be made
from one Party to the
other
(without
duplication
of
Section
2.2(d))
to
the
extent
necessary
to
cause
each
Party
to
bear
the
amount of such Asset Tax that is allocable to such Party under Section 10.1(a).
(d)
With respect to Tax Returns required to be filed by or with respect
to Seller
or Newco, Seller shall and shall cause Newco to prepare and timely
file all such Tax
Returns that
are required
to
be
filed
prior
to
the
Closing
Date in
a
manner consistent
with
past
practice and
Seller
shall
and
shall
cause
Newco
to
pay
to
the
applicable
Governmental
Authority
all
Taxes
shown to be due on such Tax
Returns. Seller shall prepare and timely file or cause to
be prepared
and timely filed, in a manner consistent with
past practice, all Tax
Returns that are required to be
filed
by
or
with
respect to
SWEPI and
pay
or
cause
to
be
paid
to
the
applicable Governmental
Authority all Taxes required to be paid with respect to such Tax
Returns. Seller shall also prepare
and timely file or cause to be prepared and timely filed, in a manner consistent with past practice,
all Combined
Returns that
are required
to be
filed and
pay or
cause to
be paid
to the
applicable
Governmental Authority all
Taxes required to be paid
with respect to
such Combined Returns
and,
for the
avoidance of
doubt, neither
Buyer nor
any of
its Affiliates
shall have
any liability, obligation
or responsibility
with respect
to any
Combined Return
or any
Taxes
imposed with
respect to
or
Exhibit 10.1
- 54 -
that are attributable to any Combined Return. Newco shall prepare and timely file
all Tax Returns
that are required to be filed
by or with respect to Newco
on or after the Closing Date
for any Tax
period that
ends before
or includes
the Closing
Date (other
than Combined
Returns) and
Buyer
shall pay or cause Newco to pay to the applicable Governmental Authority
all Taxes shown
to be
due on
such Tax
Returns;
provided
,
however
, that
to the
extent any
such Taxes
constitute Seller
Taxes,
the payment
of such
Seller Taxes
shall be
on behalf
of Seller
and, within
five days
after
such payment, Seller shall
pay to Buyer
such Seller Taxes.
The Parties agree
that (i) this
Section
10.1(d) is intended to solely address the timing and manner
in which certain Tax Returns are filed
and the Taxes
shown thereon are paid to the
applicable Governmental Authority,
and (ii) nothing
in this Section 10.1(d) shall
be interpreted as altering
the manner in which
Taxes
are allocated to
and economically borne by the Parties.
Section 10.2
Tax Refunds.
To
the extent that Newco actually receives a
refund or credit
within
two
years
following
the
Closing
Date
with
respect
to
Taxes
paid
by
Seller
prior
to
the
Effective Time
(excluding any such
refund or credit to
the extent it (a)
was taken into
account in
the Purchase
Price as
finally determined pursuant
to Section
7.4(b) or
(b) is
attributable to any
loss,
credit
or
other
Tax
attribute
arising
in
a
taxable
year
(or
portion
thereof)
beginning
after
the
Effective Time that is carried back to a
taxable year (or a portion thereof)
ending on or prior to
the
Effective Time) (each non-excluded
refund, a “Pre-Effective
Refund”), such Pre-Effective
Refund
shall be for the account of Seller. Buyer shall forward, and shall cause its Affiliates to forward, to
Seller any such Pre-Effective Refund that is for Seller’s account pursuant to this Section 10.2 (net
of (x) any Taxes
payable by Buyer or
any of its Affiliates
(including Newco) attributable to such
Pre-Effective Refund and (y) any expenses incurred
by Buyer or any of its Affiliates
in obtaining
such amounts)
within 30
days after
such Pre-Effective Refund
is received
or realized.
To the extent
that Seller or any
of its Affiliates receives a
refund or credit with
respect to Taxes for which Buyer
is responsible
pursuant to
this Agreement
(including Asset
Taxes
allocable to
Buyer pursuant
to
Section 10.1(a)), excluding any such refund or credit to the extent it was taken into account in the
Purchase Price as finally determined pursuant to
Section 7.4(b), such refund or credit
shall be for
the account of Buyer,
and Seller shall forward,
and shall cause its
Affiliates to forward,
to Buyer
any such refund or
credit (net of (1)
any Taxes payable by Seller or any
of its Affiliates (excluding
Newco)
attributable
to
such
refund
or
credit
and
(2)
any
reasonable
out-of-pocket
expenses
incurred by
Seller
or
any
of its
Affiliates
in obtaining
such amounts)
within
30 days
after such
refund
or
credit
is
received
or
realized.
If
any
amount
actually
paid
to
a
Party
pursuant
to
this
Section 10.2 is subsequently challenged successfully by
any Governmental Authority,
such Party
shall repay
to the
other Party
such amount
(together with
any interest
and penalties
assessed by
such Governmental Authority in respect of such amount).
Section 10.3
Tax Cooperation. Buyer and Seller shall reasonably cooperate as and to the
extent
reasonably
requested
by
the
other
Party,
in
connection
with
obtaining
any
Pre-Effective
Refund,
the
filing
of
Tax
Returns
and
any
audit,
litigation
or
other
proceeding
with
respect
to
Taxes (each a “Tax
Proceeding”) that is related to Taxes imposed on or with
respect to the assets,
operations or activities of SWEPI or Newco.
Section 10.4
Characterization of Certain Payments. The Parties agree that any payments
made pursuant to
Section 7.4, Article
9 or this
Article 10 shall
be treated for
all Tax
purposes as
an adjustment to the Purchase Price unless otherwise required by Law.
Exhibit 10.1
- 55 -
Section 10.5
Transfer
Taxes.
Notwithstanding
anything
to
the
contrary
in
this
Agreement, any sales, use, transfer, real
property transfer, registration, documentary, stamp, value
added or
similar
Taxes
imposed
on
or
payable
in
connection
with
the
purchase
and
sale
of
the
Subject Interests contemplated by
this Agreement (“Transfer Taxes”) shall be borne 50 percent
by
Seller
and
50
percent
by
Buyer.
The
Party
responsible
under applicable
Law for
filing
the
Tax
Returns with
respect to
any such
Transfer Taxes
shall prepare
and timely
file such
Tax
Returns,
promptly provide
a copy
of such
Tax Return to the
other Party, and
pay such Transfer
Taxes shown
to be due on
such Tax Return. Seller and Buyer shall,
and shall cause their
respective Affiliates to,
cooperate in good
faith to minimize,
to the extent
permissible under applicable
Law,
the amount
of any such Transfer Taxes and timely prepare and file any
Tax Returns or other filings relating to
such
Transfer
Taxes,
including
any
claim
for
exemption
or
exclusion
from
the
application
or
imposition of any Transfer Taxes.
One half of the amount of any Transfer Taxes
due with respect
to any Tax Return to be filed under this Section 10.5 shall be paid by the
other Party to the paying
Party at least two Business Days prior to the due date for the filing of such Tax Returns.
Section 10.6
Termination
of
Tax
Agreements.
Any
Tax
sharing,
Tax
indemnity,
Tax
receivable, Tax
allocation or
similar Contract
(other than
any Customary
Agreement) involving
Newco or pursuant to
which Newco could otherwise have
any liability shall be terminated
prior to
the
Closing
Date
and,
after
the
Closing,
none
of
the
Buyer,
Newco,
or
any
of
their
respective
Affiliates shall be bound thereby or have any liability thereunder.
Section 10.7
Purchase Price Allocation. It is
the intent of the Parties
that the acquisition
by Buyer of the Subject
Interests is treated as an
acquisition by Buyer of
the assets of Newco
for
U.S. federal (and applicable state and local) Income Tax purposes and Buyer and Seller shall, and
shall cause their respective Affiliates to, not take any position for Tax
purposes (including on any
Tax
Return,
in
any
Tax
Proceeding
or
otherwise)
that
is
inconsistent
with
such
intended
Tax
treatment unless otherwise
required by applicable
Law.
Buyer and Seller
shall use commercially
reasonable efforts to agree, within 60 days after the Closing Date, to an allocation of
the Purchase
Price
(and any
other
item
included
in
computing consideration
for
applicable
U.S.
federal
(and
applicable state and
local) income tax purposes
to the extent known
at such time)
among the assets
of
Newco
in
accordance
with
Section
1060
of
the
Code,
as
applicable,
and
the
Treasury
Regulations
promulgated
thereunder
(the
“Tax
Allocation”).
If
Seller
and
Buyer
reach
an
agreement
with
respect
to
the
Tax
Allocation,
(i)
Buyer
and
Seller
shall
use
commercially
reasonable
efforts
to
update
the
Tax
Allocation
in
accordance
with
Section
1060
of
the
Code
following
any
adjustment
to
the Purchase
Price
pursuant
to
this
Agreement,
and
(ii)
Buyer
and
Seller
shall,
and
shall
cause
their
Affiliates
to,
report
consistently
with
the
Tax
Allocation,
as
adjusted, on
all Tax
Returns, including
Internal Revenue
Service Form
8594 (Asset
Acquisition
Statement under Section
1060), which Buyer
and Seller shall
timely file with
the Internal Revenue
Service, and neither
Seller nor Buyer
shall take any position
on any Tax Return that is
inconsistent
with
the
Tax
Allocation,
as
adjusted,
unless
otherwise
required
by
applicable
Law;
provided,
however
, that neither
Party shall be
unreasonably impeded
in its ability
and discretion to
negotiate,
compromise and/or settle any Tax Proceeding in connection with such Tax
Allocation.
Section 10.8
Amended Returns. Unless required
by applicable Law or
except as set forth
below, no amended Tax Return with respect to
a Tax period (or portion thereof)
ending on or
prior
to the Effective Time shall
be filed by or on behalf of Newco without the prior written
consent of
Seller (such
consent not
to be
unreasonably withheld,
conditioned, or
delayed) if
such amended
Exhibit 10.1
- 56 -
Tax
Return would increase the
Taxes
for which Seller is
obligated to indemnify or
defend Buyer
under Section 9.1(b)(iv).
ARTICLE 11
MISCELLANEOUS
Section 11.1
Counterparts.
This
Agreement
may
be
executed
in
counterparts,
each
of
which shall
be deemed
an original
instrument, but
all such
counterparts together
shall constitute
but one agreement.
Either Party’s
delivery of an
executed counterpart signature
page by email
is
as effective as
executing and
delivering this
Agreement in
the presence
of the
other Party. No Party
shall be bound until such time as all of the Parties have executed counterparts of this Agreement.
Section 11.2
Notice. All
notices and
other communications
that are
required or
may be
given
pursuant
to
this
Agreement must
be
given
in
writing,
in
English,
and shall
be
deemed to
have been given (a) when delivered personally, by courier, to the addressee, (b) when received by
the
addressee if
sent
by
registered or
certified
mail,
postage
prepaid,
or
(c)
on
the
date
sent
by
email (upon affirmative or automated
reply by email by the
intended recipient that such
email was
received) if sent during normal business hours of the recipient or on the next Business Day if sent
after normal business hours of the recipient. Such notices and other communications must be sent
to the following addresses or email addresses:
If to Buyer:
Danny Yick
Sr. Director,
Acquisitions & Divestitures
925 N. Eldridge Parkway
Houston, Texas 77079
SP1-21-21-N096
Email: Danny.H.Yick@conocophillips.com
With a copy (which shall not constitute notice) to:
Joseph Adams
Lead Counsel, L48 Transactions
925 N. Eldridge Parkway
Houston, Texas 77079
SP1-16-16-N154
E-mail:
joseph.adams@conocophillips.com
If to Seller:
Parag Mathur
Deal Lead, Deepwater and Shales
Shell Enterprises LLC
150 N. Dairy Ashford
Houston, Texas 77079
Exhibit 10.1
- 57 -
E-mail:
parag.mathur@shell.com
Either Party may change its address or email address for notice purposes by written notice
to the other Party in the manner set forth above.
Section 11.3
Newco
Transaction
Expenses.
All
Newco
Transaction
Expenses
shall
be
borne by Seller (and not Newco), regardless of whether
payable prior to or on the Closing Date or
thereafter.
Section 11.4
Governing Law.
(a)
THIS AGREEMENT AND
THE LEGAL RELATIONS
BETWEEN THE
PARTIES
SHALL BE GOVERNED
BY AND CONSTRUED
IN ACCORDANCE WITH
THE
LAWS
OF THE STATE
OF TEXAS WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS
OF
LAW
THAT
WOULD
REQUIRE
THE
APPLICATION
OF
THE
LAWS
OF
ANOTHER
JURISDICTION.
(b)
THE
PARTIES
HEREBY
IRREVOCABLY
SUBMIT
TO
THE
EXCLUSIVE JURISDICTION
OF THE
FEDERAL COURTS
OF THE
UNITED STATES
OF
AMERICA
LOCATED
IN
HARRIS
COUNTY,
TEXAS
(OR,
IF
REQUIREMENTS
FOR
FEDERAL
JURISDICTION
ARE
NOT
MET,
STATE
COURTS
LOCATED
IN
HARRIS
COUNTY,
TEXAS) AND
APPROPRIATE
APPELLATE
COURTS
THEREFROM FOR
THE
RESOLUTION OF ANY DISPUTE, CONTROVERSY,
OR CLAIM ARISING OUT OF OR IN
RELATION
TO
THIS
AGREEMENT,
AND
EACH
PARTY
HEREBY
IRREVOCABLY
AGREES
THAT
ALL
ACTIONS,
SUITS,
AND
PROCEEDINGS
IN
RESPECT
OF
SUCH
DISPUTE, CONTROVERSY,
OR CLAIM MAY
BE HEARD
AND DETERMINED
IN SUCH
COURTS. EACH PARTY
HEREBY IRREVOCABLY WAIVES,
TO THE FULLEST EXTENT
PERMITTED
BY
APPLICABLE
LAWS,
(i)
ANY
OBJECTION
IT
MAY
NOW
OR
HEREAFTER
HAVE
TO
THE
LAYING
OF
VENUE
OF
ANY
SUCH
ACTION,
SUIT,
OR
PROCEEDING IN
ANY OF THE
AFORESAID COURTS, (ii) ANY
CLAIM IT MAY NOW OR
HEREAFTER
HAVE
THAT
ANY
SUCH
ACTION,
SUIT,
OR
PROCEEDING
HAS
BEEN
BROUGHT
IN
AN
INCONVENIENT
FORUM,
AND
(iii)
THE
RIGHT
TO
OBJECT,
IN
CONNECTION
WITH
SUCH
ACTION,
SUIT,
OR
PROCEEDING,
THAT
ANY
SUCH
COURT
DOES
NOT
HAVE
ANY
JURISDICTION
OVER
SUCH
PARTY.
EACH
PARTY
HEREBY IRREVOCABLY CONSENTS TO THE
SERVICE OF ANY PAPERS, NOTICES, OR
PROCESS
AT
THE
OFFICE
(BUT
NOT
ELECTRONIC
MAIL)
ADDRESS
SET
OUT
IN
SECTION 11.2
OF THIS AGREEMENT
FOR SUCH PARTY
IN CONNECTION WITH
ANY
ACTION,
SUIT,
OR
PROCEEDING
AND
AGREES
THAT
NOTHING
HEREIN
WILL
AFFECT THE RIGHT OF
THE OTHER PARTY
TO SERVE ANY SUCH PAPERS, NOTICES,
OR
PROCESS
IN
ANY
OTHER
MANNER
PERMITTED
BY
APPLICABLE
LAW.
EACH
PARTY
AGREES
THAT
A
JUDGMENT
IN
ANY
SUCH
DISPUTE,
CONTROVERSY,
OR
CLAIM MAY
BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT
OR IN ANY OTHER MANNER PROVIDED BY APPLICABLE LAW.
(c)
EACH
PARTY
HERETO
WAIVES,
TO
THE
FULLEST
EXTENT
PERMITTED BY APPLICABLE LAW,
ANY RIGHT IT MAY
HAVE
TO A TRIAL BY JURY
Exhibit 10.1
- 58 -
IN
RESPECT
OF
ANY
ACTION,
SUIT,
OR
PROCEEDING
ARISING
OUT
OF
OR
RELATING
TO
THIS
AGREEMENT
OR
ANY
TRANSACTION
CONTEMPLATED
HEREBY.
Section 11.5
Waivers.
Any failure by either Party
to comply with any of
its obligations,
agreements or conditions herein contained may be waived by the Party to whom such compliance
is owed by an instrument signed by such
Party and expressly identified as a waiver, but not in any
other manner.
No waiver
of, consent to
a change in,
or any delay
in timely
exercising any rights
arising from, any of the provisions of this Agreement shall be deemed or shall constitute a waiver
of, or
consent to
a change
in, other
provisions hereof
(whether or
not similar),
nor shall
such waiver
constitute a continuing waiver unless otherwise expressly provided.
Section 11.6
Assignment. No
Party shall
assign or
otherwise transfer
all or
any part
of
this Agreement,
nor shall any
Party assign or
delegate any
of its rights
or duties hereunder, without
the
prior
written
consent
of
the
other
Party
(which
consent
may
be
withheld
for
any
reason);
provided,
that Buyer may
assign this Agreement
to an Affiliate
without the prior
written consent
of Seller,
but no
such assignment
shall relieve
or discharge
Buyer of
any liability
or obligations
under or in
connection with
this Agreement. Any
assignment, transfer or
delegation made not
in
accordance with this Section 11.6 shall be void. Subject to the foregoing,
this Agreement shall be
binding upon and inure to
the benefit of the Parties
and their respective successors
and permitted
assigns.
Section 11.7
Entire Agreement.
This Agreement
(including, for
purposes of
certainty, the
Appendices, Exhibits and
Schedules attached hereto),
the Transaction
Documents, and any
other
documents to
be executed
hereunder, constitute
the entire
agreement between
the Parties
pertaining
to the subject matter hereof, and supersede all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the Parties pertaining to the subject matter hereof.
Section 11.8
Amendment.
This
Agreement
may
be
amended
or
modified
only
by
an
agreement
in
writing
executed
by
all
Parties
and
expressly
identified
as
an
amendment
or
modification.
Section 11.9
No Third Party Beneficiaries.
Except (solely with respect to Section 11.13)
the Nonparty Affiliates,
nothing in
this Agreement shall
entitle any Person
other than Buyer
and
Seller and their respective successors and
permitted assigns to any claim,
cause of action, remedy,
or right of any kind,
except the rights expressly
provided in Section 5.1(d)
and Section 9.1 to
the
Persons
described
therein,
in
which
case
such
Persons
will
be
regarded
as
intended
third-party
beneficiaries for the sole purpose of those provisions.
Section 11.10
Construction.
The
Parties
acknowledge
that
(a)
the
Parties
have
had
the
opportunity
to
exercise
business
discretion
in
relation
to
the
negotiation
of
the
details
of
the
transaction contemplated hereby, (b) this Agreement
is the result
of arms-length negotiations from
equal
bargaining
positions,
and
(c)
the
Parties
and
their
respective
counsel
participated
in
the
preparation
and
negotiation
of
this
Agreement.
Any
rule
of
construction
that
a
contract
be
construed against
the drafter
shall not apply
to the
interpretation or
construction of this
Agreement.
Exhibit 10.1
- 59 -
Section 11.11
Limitation on Damages.
NOTWITHSTANDING ANYTHING TO
THE
CONTRARY,
EXCEPT
FOR
ANY
DAMAGES
INCURRED BY
THIRD PARTIES
FOR
WHICH
INDEMNIFICATION
IS
SOUGHT
UNDER
THE
TERMS
OF
THIS
AGREEMENT,
NONE
OF
BUYER,
SELLER,
NOR
ANY
MEMBER
OF
THE
BUYER
GROUP
OR
SELLER
GROUP,
RESPECTIVELY,
SHALL
BE
ENTITLED
TO
CONSEQUENTIAL,
SPECIAL,
INDIRECT,
PUNITIVE
OR
EXEMPLARY
DAMAGES
IN
CONNECTION
WITH
THIS
AGREEMENT
AND
THE
TRANSACTIONS
CONTEMPLATED
HEREBY
AND,
EXCEPT
AS
OTHERWISE
PROVIDED
IN
THIS
SENTENCE,
EACH
OF
BUYER
AND
SELLER,
FOR
ITSELF
AND
ON
BEHALF
OF
EACH
MEMBER
OF
THE
BUYER
GROUP
OR
SELLER
GROUP,
AS
APPLICABLE,
HEREBY
EXPRESSLY
WAIVES
ANY
RIGHT
TO
CONSEQUENTIAL,
SPECIAL,
INDIRECT,
PUNITIVE OR
EXEMPLARY
DAMAGES IN
CONNECTION
WITH THIS
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 11.12
Conspicuous.
THE
PARTIES
AGREE
THAT,
TO
THE
EXTENT
REQUIRED
BY
APPLICABLE
LAW
TO
BE
EFFECTIVE
OR
ENFORCEABLE,
THE
PROVISIONS
IN
THIS
AGREEMENT
IN
BOLD-TYPE
OR
ALL-CAPS
FONT
ARE
“
CONSPICUOUS
” FOR THE PURPOSE OF ANY APPLICABLE LAW.
Section 11.13
Affiliate
Liability.
All
obligations
and/or
other
liabilities
(whether
in
contract or in tort, in law or in equity, granted
by statute or otherwise) that may be based upon, in
respect
of,
arise
under,
out
or
by
reason
of,
be
connected
with,
or
relate
in
any
manner
to
this
Agreement,
the
Transaction
Documents,
or
the
negotiation,
execution,
or
performance
of
this
Agreement or
the Transaction
Documents (including
any representation
or warranty
made in,
in
connection with, or
as an inducement
to, this Agreement
or any Transaction
Document), may be
made only against (and are
expressly limited to) the entities that
are expressly identified as Parties
in the preamble
to this Agreement
(or any successor
or permitted assign
of any the
Parties) or, with
respect
to
any
Transaction
Document,
the
entities
and
individuals
(if
applicable)
identified
as
parties to
such Transaction
Document (collectively,
the “Contracting
Parties”). Notwithstanding
anything to
the contrary
in this
Agreement, any
Transaction
Document or
otherwise, no
Person
who is not
a Contracting Party,
including any director,
officer,
employee, incorporator,
member,
partner, manager, direct
or indirect
equity holder, Affiliate,
agent, attorney, or
other Representative
of, and
any financial
advisor or
lender to,
any Contracting
Party, or any director, officer, employee,
incorporator, member, partner, manager, direct or indirect equity holder, Affiliate, agent, attorney,
or
other
Representative
of,
and
any
financial
advisor
or
lender
to,
any
of
the
foregoing
(collectively, the “Nonparty
Affiliates”), shall have any liability (whether in contract or in
tort, in
law or in equity, or granted by statute or otherwise) for any obligations or liabilities
arising under,
out of, in
connection with,
or related in
any manner
to this
Agreement or
any of the
Transaction
Documents or
based on,
in respect
of, or
by reason
of this
Agreement or
any of
the Transaction
Documents
or
the
negotiation,
execution,
performance,
or
breach
of
this
Agreement
or
any
Transaction Document; and, to the
maximum extent permitted
by Law, each Contracting Party, on
behalf of
itself and
all other
Persons, hereby
waives and
releases all
such liabilities
against any
such
Nonparty
Affiliates.
Without
limiting
the
foregoing,
to
the
maximum
extent
permitted
by
Law, each Contracting Party,
on behalf of itself and all other Persons, hereby waives and releases
any and all rights,
claims, demands, or causes
of action that may otherwise
be available (including
at law
or in
equity,
or granted
by statute
or otherwise)
to avoid
or disregard
the entity
form of
a
Contracting Party or otherwise impose
liability of a Contracting Party
on any Nonparty Affiliate,
Exhibit 10.1
- 60 -
whether granted
by statute
or based
on theories
of equity,
agency,
control, instrumentality,
alter
ego,
domination,
sham,
single
business
enterprise,
piercing
the
corporate
or
other
veil,
distributions, unfairness, undercapitalization, or otherwise.
Section 11.14
Time of Essence. This Agreement contains a number of dates and times by
which performance or the exercise
of rights is due, and
the Parties intend that each and
every such
date and
time be
the firm
and final
date and
time, as
agreed. For
this reason,
each Party
hereby
waives
and
relinquishes
any
right
it
might
otherwise
have
to
challenge
its
failure
to
meet
any
performance
or
rights
election
date
applicable
to
it
on
the
basis
that
its
late
action
constitutes
substantial performance, to require
the other Party to
show prejudice, or on
any equitable grounds.
Without
limiting the
foregoing, time
is of
the essence
in this
Agreement. If
the date
specified in
this Agreement for
giving any notice
or taking any
action is not
a Business Day
(or if the
period
during which any notice is required to be given or any action taken expires on a date
which is not
a Business Day),
then the date for
giving such notice or
taking such action (and
the expiration date
of such
period during
which notice
is required
to be
given or
action taken)
shall be
the next
day
that is a Business Day.
Section 11.15
Severability. The invalidity
or unenforceability of any term or provision of
this Agreement in any situation or jurisdiction shall not
affect the validity or enforceability of the
other terms or
provisions hereof or
the validity or
enforceability of the
offending term or provision
in
any
other
situation
or
in
any
other
jurisdiction
and
the
remaining
terms
and
provisions
shall
remain in full force and effect, unless doing so
would result in an interpretation of this Agreement
that is manifestly unjust.
Section 11.16
Specific Performance. Each
Party agrees that
if any of the
provisions of this
Agreement
were
not
performed
by
the
other
Party
in
accordance
with
their
specific
terms,
irreparable damage would occur,
no adequate remedy at
Law would exist and damages
would be
difficult to determine, and the non-breaching Party shall be entitled to specific
performance of the
terms hereof and
immediate injunctive relief,
without the necessity
of proving the
inadequacy of
money damages
as a
remedy,
in addition
to any
other remedy
available at
law or
in equity
that
such
Party
is
entitled
to
seek
pursuant
to
the
terms
of
this
Agreement.
Neither
Party
shall
be
required to
provide any
bond or
other security
in connection
with seeking
any specific
performance
or other
equitable remedy
to enforce
specifically the
terms and
provisions of
this Agreement
in
accordance with this Section 11.16.
[Signature Pages Follow]
Exhibit 10.1
- 1 -
IN WITNESS WHEREOF
, this Agreement has been signed by
each of the Parties on the
Execution Date.
SELLER:
SHELL ENTERPRISES LLC
By:
Scott S. Porter
Attorney-in-Fact
BUYER:
CONOCOPHILLIPS COMPANY
By:
Andrew D. Hastings
Attorney-in-Fact
Exhibit 10.1
- 1 -
APPENDIX A
ATTACHED
TO AND MADE A PART
OF THAT
CERTAIN
PURCHASE AND SALE AGREEMENT
DATED
AS OF THE EXECUTION DATE
BY AND BETWEEN SELLER AND BUYER
DEFINITIONS
“AAPL” means the American Association of Petroleum Landmen.
“Accounting Firm” has the meaning set forth in Section 7.4(b).
“AFEs”
means authorization for expenditures issued pursuant to a Contract.
“Affiliate”
means, with
respect to
(a) any
Person other
than Newco,
any Person
that directly
or
indirectly
Controls,
is
Controlled
by
or
is
under
common
Control
with
such
Person
and
(b)
Seller
or
Newco,
Shell
Oil
Company,
a
Delaware
corporation,
and
its
direct
and
indirect
Subsidiaries. Notwithstanding
anything to
the contrary
herein, (a)
prior to
Closing, Newco
shall
be deemed to be an Affiliate of Seller and not Buyer, and (b) from and after Closing, Newco shall
be deemed to be an Affiliate of Buyer.
“Agreement” has the meaning set forth in the Preamble of this Agreement.
“Allocated
Value”
means,
with
respect
to
any
Lease
or
Well,
the
portion
of
the
Base
Purchase Price that is allocated to such Lease or Well on Exhibit
B.
“Anti-Corruption
Laws”
means
(a)
the
United
States
Foreign
Corrupt
Practices
Act
of
1977;
(b)
the
United
Kingdom
Bribery
Act
2010;
and
(c)
all
applicable
national,
regional,
provincial,
state,
municipal
or
local
Laws
and
regulations
that
prohibit
tax
evasion,
money
laundering
or
otherwise
dealing
in
the
proceeds
of
crime
or
the
bribery
of,
or
the
providing
of
unlawful
gratuities,
facilitation
payments,
or
other
benefits
to,
any
Government
Official
or
any
other Person.
“Asset Taxes”
means any
ad valorem,
property,
excise, severance,
production, sales,
use
and other
similar Taxes
based upon
or measured
by the
operation or
ownership of
the Assets
or
the
production
of
Hydrocarbons
therefrom,
but
excluding,
for
the
avoidance
of
doubt,
Income
Taxes and Transfer
Taxes.
“Assets” means
all of
SWEPI’s
right, title
and interest in
and to
the following
assets and
properties as of the Effective Time (excluding any Retained Assets):
(a)
the Real Property Interests;
(b)
the Wells;
(c)
the Units;
Exhibit 10.1
- 2 -
(d)
all Surface Contracts;
(e)
all Equipment;
(f)
all
Contracts
(including,
(x)
without
limiting
any
disclaimer
by
Seller
hereunder, with respect to
each joint operating agreement where SWEPI
is
named
or
acting
as
the
operator,
all
of
SWEPI’s
rights
and
obligations
(including operatorship)
in and
to such
joint
operating
agreement
and (y)
the Related Party Contracts
set forth on
Schedule 5.7) to the
extent related
to
or
used
or
held
for
use
in
connection
with
(i) the
exploration,
development
or
operation
of
the
Real
Property
Interests
or
the
transportation,
marketing
or
disposition
of
Hydrocarbons,
water
or
other
substances produced
therefrom
or
(ii) the
Previously-Divested
Properties,
but excluding Contracts to the extent related to the IT Systems;
(g)
all Permits with respect to the exploration, development or operation of the
Properties,
the
Surface
Contracts
or
the
Equipment
or
the
transportation,
marketing
or
disposition
of
Hydrocarbons,
water
or
other
substances
produced therefrom, to the extent the foregoing Permits are not included in
the Surface Contracts;
(h)
all Records;
(i)
all
(i)
trade
credits,
accounts
receivable,
notes
receivable,
take-or-pay
amounts
receivable,
and
other
receivables
and
general
intangibles,
attributable
to
the
other
Assets
with
respect to
periods
of
times
from
and
after
the
Effective
Time;
and
(ii)
liens
and
security
interests
in
favor
of
SWEPI
or
its
Affiliates,
whether
choate
or
inchoate,
under
any
Law
or
Contract to the extent arising from, or
relating to, the ownership, operating,
or sale or
other disposition on
or after the
Effective Time of any of
the other
Assets or to the extent arising in favor of SWEPI as to the
operator or non-
operator of any Property;
(j)
all rights
of SWEPI
to audit the
records of
any Person
and to
receive refunds
or
payments
of
any
nature,
and
all
amounts
of
money
relating
thereto,
whether before, on, or after the Effective Time;
(k)
all claims
for
refunds (whether
by
way of
refund,
credit, rebate,
offset
or
otherwise) of,
Tax assets or credits
attributable to
and rights
to receive
funds
from any
Governmental Authority or
any loss carryforwards
with respect or
related to
any Taxes,
whether attributable
to the
period before,
at or
after
the Effective Time; and
(l)
all
(i)
Hydrocarbons
produced
from
and
to
the
extent
attributable
to
the
Properties with respect to all
periods subsequent to the Effective
Time, (ii)
Hydrocarbon
inventories
from
or
attributable
to
the
Properties
that
are
in
storage on the
Effective Time, (iii) to the
extent related
or attributable to
the
Properties,
all
production,
plant,
and
transportation
imbalances
as
of
the
Exhibit 10.1
- 3 -
Effective
Time,
and
all
make-up
rights
with
respect
to
take-or-pay
payments,
(iv)
proceeds
from
or
of
such
Hydrocarbons;
and
(v)
all
proprietary seismic
data, geological
data, engineering
data, and
other data
and interpretations, files and records
(in whatever form), in each
case to the
extent
related
to
the
Assets,
if
any,
provided
that
Buyer
obtains
any
sublicense
or
other
similar
arrangement
required
to
receive
such
data,
interpretations, files, and records;
(m)
the SCADA Systems; and
(n)
all
claims
against
Third
Parties
(including
those
described
on
Schedule
3.7(b))
to
the
extent
relating
to
the
ownership,
use,
construction,
maintenance or operation of the Assets, whether
or not previously asserted
by
SWEPI, but
excluding
any
such
claims
to the
extent
relating
to
Seller
Taxes.
“Assignment
Agreement”
means
the
assignment
of
membership
interest
substantially
in
the form attached hereto as Exhibit A assigning the Subject Interests to Buyer.
“Assumed
Liabilities”
means
all
duties,
obligations,
claims
and
liabilities
of
SWEPI
relating
to,
arising
out
of,
or
resulting
from
the
Assets
or
SWEPI’s
or
Newco’s
ownership
or
operation of the Assets or
of any Previously-Divested Properties,
prior to, on or after
the Effective
Time, but excluding any Seller Taxes.
“Base Purchase Price” has the meaning set forth in Section 2.4.
“Benefit Plan” means any “employee benefit plan,” within the meaning of Section 3(3) of
ERISA, and any bonus, deferred compensation, incentive compensation, employment,
consulting
or other
compensation agreement,
equity, equity purchase
or any
other equity-based
compensation,
change
in
control,
termination
or
severance,
sick
leave,
pay,
salary
continuation
for
disability,
hospitalization, medical insurance,
retiree welfare, life insurance,
scholarship, cafeteria, employee
assistance, education or tuition assistance, or fringe benefit policy, plan, program or arrangement.
“Business
Day”
means
any
day
that
is
not
a
Saturday,
a
Sunday
or
other
day
on
which
banks are required or authorized by Law to be closed in the State of Texas.
“Buyer” has the meaning set forth in the Preamble of this Agreement.
“Buyer Fundamental
Representations” means
Section 4.2,
Section 4.3,
Section 4.4,
Section
4.5, Section 4.6, Section 4.9, and Section 4.12.
“Buyer Group” means Buyer, its Affiliates, and each of their respective officers, directors,
employees, agents, advisors and other Representatives.
“Buyer Material Adverse Effect” means a Material Adverse Effect with respect to Buyer.
“Central Time”
means the central time zone of the United States of America.
Exhibit 10.1
- 4 -
“CERCLA”
means
the
Comprehensive
Environmental
Response,
Compensation
and
Liability Act, 42 U.S.C. § 9601 et seq., as amended.
“Claim Notice” has the meaning set forth in Section 9.2(b).
“Closing” has the meaning set forth in Section 7.1.
“Closing Date” has the meaning set forth in Section 7.1.
“Closing Payment” has the meaning set forth in Section 7.4(a).
“Code” means the United States Internal Revenue Code of 1986, as amended.
“Combined
Return”
means
any
affiliated,
aggregate,
consolidated,
combined
or
unitary
Tax
Return with
respect to
any “affiliated
group” as
defined in
Section 1504(a)
of the
Code (or
any analogous affiliated, aggregate, combined, consolidated or
unitary group under state, local or
foreign Income Tax Law) (a) of which Newco
or any predecessor thereof (including
SWEPI) is or
has
been
a
member,
(b)
of
which
Seller
or
any
of
its
direct
or
indirect
owners,
Affiliates
or
Subsidiaries or
any predecessor
thereof (in
each case,
other than
Newco) is
or was
the common
parent and (c) which includes Newco (or any predecessor thereof, including SWEPI).
“Confidentiality Agreement” means that certain
Confidentiality Agreement dated May 24,
2021 between SWEPI and Buyer.
“Confidentiality Restrictions” has the meaning set forth in Section 5.3(b).
“Consent”
means
any
approval,
consent,
change
of
control
provision,
permission,
ratification, waiver,
notification or
other authorization
that may
be applicable
to the
transactions
contemplated by this Agreement and,
for the avoidance of
doubt, does not include
any change of
control provision if such provision
is subject to a carve-out
for the sale of all
or substantially all of
the
assets
of
a
party,
which
carve-out
alone,
if
satisfied,
is
sufficient
to
entirely
negate
the
application of such change of control provision to any particular transaction.
“Contracting Parties” has the meaning set forth in Section 11.13.
“Contracts”
means
all
contracts,
agreements
(including
any
side
letter
agreements
or
purchase
orders
or
other
similar
agreements
entered
into
under
any
master
agreement
(such
as
master services agreements or fleet agreements)), or other legally binding arrangements presently
existing to which SWEPI is a party or by which SWEPI is bound or to which any of the Assets or
the
Subject
Interests
is
subject,
but
excluding
the
Leases,
the
Surface
Contracts,
and
any
other
instrument
creating
or
memorializing
the
ownership
of
any
Properties
or
Surface
Contracts
included in the Assets.
“Control” means
with respect
to any
Person, the
possession, directly
or indirectly,
of the
power
to
direct
or
cause
the
direction
of
the
management
or
policies
of
such
Person,
whether
through the ownership of voting securities, as
trustee or executor, as
general partner or managing
member,
by
contract
or
otherwise,
including
the
ownership,
directly
or
indirectly,
of
securities
having the power to elect
a majority of the board
of directors or similar body governing
the affairs
Exhibit 10.1
- 5 -
of such Person.
The terms “Controls”
and “Controlled by”
and other derivatives
shall be construed
accordingly.
“Controlled Group Liability” means any and all
liabilities (i) under Title IV of ERISA, (ii)
under Sections
206(g), 302
or 303
of ERISA,
(iii) under
Sections 412,
430, 431,
436 or
4971 of
the
Code,
and
(iv)
as
a
result
of
the
failure
to
comply
with
the
continuation
of
coverage
requirements of Section 601 et seq. of ERISA and Section 4980B of the Code.
“Conversion” has the meaning set forth in Section 5.19(a).
“COPAS
”
has the meaning set forth in Section 2.3(a).
“COVID-19” means SARS-CoV-2 or COVID-19, and any evolutions thereof or related or
associated epidemics, pandemic or disease outbreaks.
“Current Insurance Policies” has the meaning set forth in Section 5.14(a).
“Current Tax
Period” means any Tax
period beginning on or before, and
ending after, the
Closing Date.
“Customary
Agreement”
means
an
agreement,
contract,
arrangement
or
commitment
entered into with customers, vendors, lessors or the like in
the ordinary course of business and the
primary purpose of which does not relate to Taxes.
“Customary
Post-Closing
Consents”
means
consents
and
approvals
from
Governmental
Authorities for the transfer of
the Subject Interests to Buyer
that are customarily obtained
after the
transfer of similar Interests.
“Cut-off Date” has the meaning set forth in Section 2.5.
“Damages”
means,
subject
to
Section
11.11,
any
liability,
loss,
cost,
expense,
award,
obligation, assessment, penalty, fine or judgment
of any kind or character, whether attributable to
personal
injury
or
death,
property
damage,
contract
claims,
torts,
or
otherwise,
and
including
penalties and
interest on
any amount
payable as
a result
of any
of the
foregoing and
reasonable
fees and expenses of attorneys, consultants, accountants
or other agents and experts (which,
in the
case of
indemnification, are reasonably
incident to matters
indemnified against, and
the reasonable
costs of enforcement of the indemnity).
“Deposit” has the meaning set forth in Section 2.7.
“DOJ” means the Department of Justice.
“Dollars” means U.S. Dollars.
“Effective Time”
has the meaning set forth in Section 2.2(a).
“Encumbrance(s)”
means
any
charge,
claim,
license,
limitation,
condition,
equitable
interest, mortgage, lien, pledge, option, warrant, security interest, right of first refusal
and/or right
Exhibit 10.1
- 6 -
of first offer, pre-emptive
right, adverse claim or restriction of any kind,
including any restriction
on or transfer or other assignment, as security or otherwise, of or relating to use, quiet enjoyment,
voting, transfer, receipt of income or exercise of any other attribute of ownership.
“Environmental Condition” means (a) a condition with
respect to the air,
soil, subsurface,
surface waters, ground waters and/or sediments that causes an Asset (or Seller,
SWEPI or Newco
with respect to an
Asset) not to
be in compliance with
any Environmental Law,
(b) the existence
with respect to the Assets or the operation thereof of any environmental pollution, contamination,
degradation, damage or injury caused
by or related to an
Asset for which Remediation
is presently
required
(or
if
known,
would
be
presently
required)
under
Environmental
Laws,
or
(c)
any
condition, act or omission with respect to
an Asset or operation thereof that gives rise
to liabilities
or obligations under Environmental Laws.
“Environmental Laws” means,
as the same have
been amended as of
the Execution Date,
any
Law
(including
common
law)
relating
to
pollution,
the
protection
or
restoration
of
the
environment or, as
such relates to Hazardous
Substances, Hydrocarbons or NORM,
occupational
health
and
safety,
natural
resources
including
flora
and
fauna,
or
natural
resource
damages,
including any such
law relating to
the generation, manufacture,
treatment, storage, disposal,
use,
handling, transportation or Release of any Hazardous Substances, Release of Hydrocarbons, or to
exposure to
Hazardous Substances,
Hydrocarbons or
NORM, including
CERCLA, the
Resource
Conservation and
Recovery Act,
42 U.S.C.
§ 6901
et seq.;
the
Federal Water
Pollution Control
Act, 33
U.S.C. §
1251 et
seq.; the
Clean Air
Act, 42
U.S.C. §
7401 et
seq.; the
Hazardous Materials
Transportation
Act,
49
U.S.C.
§
5101
et
seq.;
the
Toxic
Substances
Control
Act,
15
U.S.C.
§§
2601 through 2629; the Oil Pollution
Act, 33 U.S.C. § 2701 et seq.; the
Emergency Planning and
Community
Right-to-Know
Act,
42
U.S.C.
§
11001
et
seq.;
the
Safe
Drinking
Water
Act,
42
U.S.C.
§§
300f
through
300j;
the
Occupational
Safety
and
Health
Act,
and
their
implementing
regulations, along with and all similar state or local acts and regulations.
“Equipment” means SWEPI’s
right, title
and interest in
and to all
equipment, machinery,
fixtures, and other
tangible personal property
and improvements used
or held for
use in connection
with the operation of
the Properties or the handling,
production, storage, transportation, treatment,
or processing, marketing, or disposition of Hydrocarbons from the Properties (whether located on
or off the Properties),
including all rigs,
platforms, constructions, extraction plants,
facilities, gas
systems (for gathering, treating, injection
and compression), water systems (for treating,
disposal
and
injection),
well
heads,
compressors,
casing,
tubing,
rods,
flow
lines,
transmission
lines,
gathering lines, pipelines, derricks, vessels, tanks, boilers, separators, treating equipment,
pumps,
motors, gauges,
valves, heaters,
treaters, machinery,
tools, automation
systems including
meters
and
related
telemetry
on
Wells,
power
lines,
telephone
and
communication
lines,
and
all
other
movable
property
and
fixtures
located
upon
or
used
or
held
for
use
in
connection
with
the
Properties, together with
all additions, accessories,
parts, attachments, special
tools and accessions
affixed
thereto
or
used
in
connection therewith,
and
including
any
such
equipment,
machinery,
fixtures, and other
tangible personal property
and improvements that
is leased pursuant
to a master
services agreement or fleet agreement, but excluding the IT Systems.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
Exhibit 10.1
- 7 -
“ERISA Affiliate”
means any
person or
entity under
common control
with Seller
within
the meaning
of Section
414(b), (c),
(m), or
(o) of
the Code
and the
rules and
regulations issued
thereunder.
“Execution Date” has the meaning set forth in the Preamble of this Agreement.
“FFCRA” means
the Families
First Coronavirus
Response Act,
Pub. L.
No. 116-127 (116th
Cong.) (Mar. 18, 2020).
“Fraud” means
actual fraud by
a Party, which involves
a knowing
and intentional or
willful
misrepresentation
or
omission
of
a
material
fact
with
respect
to
the
making
of
(a)
any
representation or warranty set forth in Article 3
or confirmed in the certificate delivered by Seller
at Closing
pursuant to Section
7.2(c) or (b)
Article 4
or confirmed in
the certificate delivered
by
Buyer
at
Closing
pursuant
to
Section
7.3(b),
as
applicable,
and
in
each
case,
with
the
intent
of
inducing any other Party hereto to enter into this Agreement and upon which such other Party has
relied
under
applicable
tort
Laws,
and
does
not
include
any
fraud
claim
based
on
negligent
misrepresentation, recklessness or any equitable fraud or promissory fraud.
“FTC” means the Federal Trade Commission.
“GAAP” means
United States
generally accepted
accounting principles
as in
effect from
time to time.
“Government
Official”
means
an
official
or
employee
of
any
Governmental
Authority,
including any person acting
in official capacity for
a Governmental Authority,
regardless of rank
or position; any official or employee
of a company wholly or
partially controlled by a government
(e.g.,
a
state-owned
oil
company),
but
excluding
employees
seconded
to
such
companies;
a
political party or any official of one; any candidate for political office; any officer or employee of
a
public
international
organization,
such
as
the
United
Nations
or
World
Bank;
and
immediate
family
members
(spouse,
dependent
child,
parent
or
household
member)
of
any
of
the
Persons
listed above.
“Governmental Authority”
means any
instrumentality,
subdivision,
court, administrative
agency,
commission, official
or other
authority of
the United
States or
any other
country or
any
state, province, prefect,
municipality, locality or other government
or political subdivision
thereof,
or
any
quasi-governmental
or
private
body
exercising
any
administrative,
executive,
judicial,
legislative,
arbitral,
police,
regulatory,
taxing,
importing
or
other
governmental
or
quasi-
governmental authority.
“Governmental Transition Filing” has the meaning set forth in Section 5.20.
“Hard Required Consent” means a Required Consent that is not a Soft Required Consent.
“Hazardous
Substances”
means
any
pollutants,
contaminants,
toxic
or
hazardous
substances, materials, wastes, constituents, compounds or chemicals that are regulated by, or may
form
the
basis
of
liability
under,
any
Environmental
Laws,
including
asbestos-containing
materials, produced water, poly-chlorinated bi-phenyls, or per- or poly-fluoroalkyl substances.
Exhibit 10.1
- 8 -
“Hedging Transaction” means a transaction that is (a) a swap, basis swap, option, forward
contract,
future
contract,
collar,
three-way
collar,
or
similar
transaction
entered
into
“over-the-
counter”, (b) involving,
or settled by
reference to,
one or more
commodities, and (c)
intended to
hedge the risks associated with the production of Hydrocarbons.
“HSR
Act”
means
the
Hart-Scott-Rodino
Antitrust
Improvements
Act
of
1976,
as
amended.
“Hydrocarbons” means oil, gas, condensate and other gaseous and liquid
hydrocarbons or
any combination thereof,
and all
minerals, products and
substances extracted, separated,
processed
and produced therefrom or therewith.
“Imbalances” means any imbalance at the wellhead between the amount
of Hydrocarbons
produced from
any of
the Wells and allocated
to, the interests
of SWEPI (as
of the
Execution Date)
or Newco (as
of the
consummation of the
Merger) therein
and the shares
of production
from the
relevant
Well
to
which
such
Person
was
entitled,
or
at
the
pipeline
flange
(or
inlet
flange
at
a
processing
plant
or
similar
location)
between
the
amount
of
Hydrocarbons
nominated
by
or
allocated to such Person and the Hydrocarbons actually delivered on behalf of such Person at that
point.
“Income Taxes”
means any income, capital gain, gross receipts, franchise or
other similar
Taxes.
“Indebtedness” of any
Person means, without
duplication:
(a) indebtedness of
such Person
for borrowed
money,
(b)
obligations of
such Person
to pay
the deferred
purchase or
acquisition
price
for
any
property
of
such
Person,
(c)
obligations
of
such
Person
with
respect
to
unpaid
management fees, (d) all deposits and monies received in advance, (e) indebtedness evidenced by
notes, debentures,
bonds, or
other similar
instruments, (f)
obligations
of such
Person to
pay the
deferred purchase
price of
goods and
services, including
any earn
out liabilities
associated with
past acquisitions, (g)
reimbursement obligations
of such
Person in respect
of drawn
letters of
credit
or similar instruments issued or accepted by banks and other
financial institutions for the account
of
such
Person,
(h)
obligations
of
such
Person
under
a
lease
to
the
extent
such
obligations
are
required to
be
classified
and accounted
for
as a
capital
lease on
a balance
sheet of
such
Person
under
GAAP,
and
(i)
indebtedness
of
others
as
described
in
clauses
(a)
through
(h)
above
guaranteed by
such Person
or for
which such
Person is
liable as
obligor,
surety,
by Contract,
or
otherwise; but
Indebtedness does
not include
(x)
accounts payable
to trade
creditors or
accrued
expenses, in each case arising in the ordinary course of business
consistent with past practice and
that
are
not
yet
due
and
payable,
or
are
being
disputed
in
good
faith,
and
the
endorsement
of
negotiable instruments for
collection in the
ordinary course of
business, (y) the
arrangements set
forth on Schedule 3.24, or (z) the Material Contracts.
“Indemnified Person” has the meaning set forth in Section 9.2(a).
“Indemnifying Person” has the meaning set forth in Section 9.2(a).
“Individual
Environmental
Indemnity
Threshold”
has
the
meaning
set
forth
in
Section
9.3(c).
Exhibit 10.1
- 9 -
“Individual Indemnity Threshold” has the meaning set forth in Section 9.3(c).
“Intellectual
Property”
means
all
intellectual
property
pertaining
to
the
other
Assets,
including (a) all registered and
unregistered names, trademarks, service names and
service marks
(and
applications
for
registration
of
the
same)
of
SWEPI
and
(b)
all
trade
secrets,
technical
information,
know-how
and
other
confidential
information
which
are
not
disclosed
in
issued
patents, published patent applications or copyright registrations of SWEPI.
“Intellectual Property Rights” means rights in any of the following to the extent subject to
protection under
applicable Law:
(a) trademarks,
service marks,
logos and
trade names;
(b) patents;
(c) copyrights; (d) internet domain names; (e) trade secrets and other proprietary
and confidential
information; and (f) any registrations or applications for registration for any of the foregoing.
“Interests” means,
with respect
to any
Person, (a)
capital stock,
membership interests,
units,
partnership
interests,
other
equity
interests,
rights
to
profits
or
revenue
and
any
other
similar
interest
of
such
Person
(including
the
right
to
participate
in
the
management
and
business
and
affairs
or
otherwise
Control
such
Person),
(b)
any
security
or
other
interest
convertible
into
or
exchangeable or exercisable
for any of
the foregoing, and
(c) any right
(contingent or otherwise)
to subscribe for, purchase or otherwise acquire any of the foregoing.
“IT
Systems”
means
all
information
technology
equipment
and
services,
networks
and
associated
information
systems,
whether
owned,
used
or
held
for
use
by
Seller
or
any
of
its
Affiliates,
including
SWEPI,
including:
(i)
all
computer
hardware
(including
network
and
telecommunications
devices,
laptops,
mobile
devices,
peripherals,
printers,
scanners,
storage,
racks);
(ii)
all
software
(including
firmware,
associated
user
manuals,
object
code
and
source
code); and (iii) all databases, but excluding the SCADA Systems.
“Known/Knowledge” means,
whenever a
statement regarding
the existence
(or absence)
of any fact, circumstance or condition in this
Agreement is qualified by a phrase such as “to
such
Party's Knowledge”,
“Known to
such Party,”
or “had
actual Knowledge”,
the Parties
intend that
the
only
information
to
be
attributed
to
such
Party
with
respect
to
such
fact,
circumstance
or
condition is information
actually known to
(a) the person
in the case of
an individual or (b)
subject
to
Section
3.1(a)
and
Section
4.1(a),
in
the
case
of
a
corporation
(or
other
business
entity),
the
current officer and manager who devotes substantial attention to matters
of such nature during the
ordinary
course
of
such
person’s
employment.
Unless
otherwise
specifically
provided
in
this
Agreement,
no
Party
is
represented
or
obligated
to
have
undertaken
a
separate
investigation
in
connection
with
the
transaction
contemplated
in
this
Agreement
to
determine
the
existence
(or
absence)
of
any
statement
or
representation
qualified
by
a
phrase
such
as
“to
such
Party's
Knowledge”, “Known to such Party” or “had actual Knowledge”.
“Laws” means all
Permits, statutes,
laws, ordinances,
regulations, rules,
codes, executive
orders, injunctions, judgments, decrees, rulings, or orders of any Governmental Authority.
“Leases”
has
the
meaning
set
forth
in
the
definition
of
“Real
Property
Interests”
in
this
Appendix A.
“Material Adverse
Effect”
means, with
respect to
any Person,
any change,
circumstance,
development, state of facts, effect, or
condition that, individually or in the
aggregate, (a) has been,
Exhibit 10.1
- 10 -
or
would
be
reasonably
likely
to
be,
materially
adverse
to
the
business,
liabilities,
financial
condition, or results
of operations
of such
Person, or (b)
materially and
adversely affects the
ability
of
such
Person
to
consummate
the
transactions
contemplated
hereby
or
would
reasonably
be
expected
to
do
so;
provided
,
however
,
that
in
the
case
of
subsection
(a)
above,
none
of
the
following, either alone or in
combination, shall be deemed
to constitute or contribute to
a Material
Adverse
Effect,
or
otherwise
be
taken
into
account
in
determining
whether
a
Material
Adverse
Effect has
occurred or
is existing:
(i) any change
in applicable
Laws or accounting
standards or
the
interpretation
or
enforcement
thereof
after
the
date
of
this
Agreement;
(ii)
any
change
in
general
economic
or
political
conditions
or
business
conditions
or
financial,
credit,
debt,
or
securities
market
conditions
generally,
including
changes
in
supply,
demand,
interest
rates,
exchange rates, commodity prices (including Hydrocarbons), electricity prices, or fuel costs, sand
or proppants; (iii)
any legal, regulatory, or other
change generally affecting the
industries, industry
sectors, or geographic sectors
of such Person, any
increase in operating costs
or capital expenses
or any reduction in drilling activity or production or the demand for
related gathering, processing,
transportation,
and
storage
services;
(iv)
any
change
resulting
or
arising
from
the
execution
or
delivery
of
this
Agreement
or
the
other
Transaction
Documents,
the
consummation
of
the
transactions contemplated
hereby, or the
announcement or
other publicity
or pendency
with respect
to any
of the
foregoing (including
the impact
thereof on
relationships, contractual
or otherwise,
with
customers,
suppliers,
distributors,
partners,
employees
or
labor
unions);
(v)
any
change
resulting or arising from hostilities, sabotage, terrorism, or
the escalation of any of the foregoing;
(vi)
any
epidemic,
pandemic,
disease outbreak
(including
the
COVID-19
virus)
or
other
public
health crisis or public health
event, or the worsening
of any of the foregoing;
(vii) any disruption
in the
purchase or
transportation of
crude oil
or natural
gas produced
or otherwise
sold by
such
Person or its Subsidiaries as a result of
any shutdown, interruption or declaration of force majeure
by
any
pipeline
operator
or
other
purchaser
of
such
products;
(viii)
natural
declines
in
well
performance or reclassification or recalculation
of reserves in the ordinary
course of business; (ix)
seasonal reductions
in revenues
and/or earnings
of such
Person or
any of
its Subsidiaries
in the
ordinary course
of their
respective businesses;
(x) any
actions taken
or omitted
to be
taken by
a
Party
at
the
written
direction
of
the
other
Party
(for
the
avoidance
of
doubt
any
action
by,
or
omission of, a
Party for which
such Party sought
or requested, and the
other Party
provided
, that
consent shall not be deemed
to be “at the written direction
of” such Party); (xi) any change,
in and
of itself, in the market price or trading
volume of such Person’s securities; (xii) any failure, in and
of
itself,
by
such
Person
to
meet
any
internal
or
published
projections,
forecasts,
estimates
or
predictions in respect of revenues, earnings, production or other financial or operating metrics for
any
period
(it
being
understood
that
the
events,
changes,
circumstances,
occurrences
or
effects
giving rise to or contributing to such failure may be deemed to constitute or be taken into account
in determining whether there has occurred or
would occur a Material Adverse Effect) or (xiii) any
change
resulting
or
arising
from
compliance
with
this
Agreement,
including
the
taking
of
any
action required hereby or the failure to take any action that is not permitted hereby;
provided,
that
the exceptions in clauses
(ii) and (iii) above
shall apply only to the
extent that such changes
do not
have a
disproportionate
impact
on such
Person as
compared to
other
Persons
in the
oil
and gas
industry related
to similarly
situated operations
in the
geographic region
in which
the such
Person’s
assets are located.
“Material Contracts” has the meaning set forth in Section 3.11(a).
“Merger”
has the meaning set forth in Section 5.19(b).
Exhibit 10.1
- 11 -
“Net Mineral
Acres”
means,
as
computed
separately
with
respect to
each
Lease, (a)
the
number of gross acres in the land
covered by such Lease, multiplied by (b)
the lessor’s or owner’s
undivided mineral
interest in
the Hydrocarbons
covered by
such Lease
in such
lands, multiplied
by (c) SWEPI’s Working
Interest in such Lease.
“Net Revenue Interest”
means, (a) with respect
to any Well,
SWEPI’s interest
(expressed
as
a
percentage
or
a
decimal)
in
and
to
the
Hydrocarbons
produced,
saved
and
sold
from
or
allocated to such Well, (b) with respect to any
Lease, SWEPI’s interest (expressed as a percentage
or a decimal on an “8/8ths” basis with respect to SWEPI’s Working Interest in such Lease) in and
to the Hydrocarbons produced, saved and sold from or
allocated to such Lease, or (c) with respect
to any Unit, SWEPI’s
interest (expressed as a percentage or
decimal) in and to the
Hydrocarbons
produced, saved and sold
from or allocated to
such Unit, in the
case of each
of items (a),
(b) and
(c), after giving effect to all Royalties.
“Newco” has the meaning set forth in Section 5.19(b).
“Newco
Transaction
Expenses”
means
the
aggregate
amount
of
any
and
all
fees
and
expenses incurred by or
on behalf of, or
paid or to be
paid directly by,
Newco or any Person
that
Newco pays
or
reimburses
or is
otherwise legally
obligated to
pay
or
reimburse (including
any
such fees
and expenses
incurred by
or on
behalf of
Seller or
SWEPI) in
connection with
the process
of selling
the Subject
Interests or
the negotiation,
preparation or
execution of
this Agreement
or
the Transaction Documents or the
performance or consummation of
the transactions contemplated
hereby or
thereby, including (a) all fees
and expenses of
counsel, advisors, consultants,
investment
bankers,
accountants,
auditors
and
any
other
experts
in
connection
with
the
transactions
contemplated hereby (including
any process run
by or on
behalf of Newco
in connection with
such
transactions);
(b)
all
brokers’,
finders’
or
similar
fees
in
connection
with
the
transactions
contemplated hereby (including
any process run
by or on
behalf of Newco
in connection with
such
transactions); (c) subject
to Section 5.2,
any fees
and expenses
associated with obtaining
necessary
or appropriate waivers, consents, or approvals of any Governmental Authority or Third Parties on
behalf of Newco in connection
with the transactions contemplated hereby
(including any process
run
by
or
on
behalf
of
Newco
in
connection
with
such
transactions);
(d)
any
fees
or
expenses
associated with obtaining the
release and termination of
any Encumbrances in connection
with the
transactions
contemplated
hereby
(including
any
process
run
by
or
on
behalf
of
Newco
in
connection
with
such
transactions);
and
(e)
any
fees
and
expenses
associated
with
any
of
the
matters set forth on Schedule 3.13.
“Non-Permian Newco” has the meaning set forth in Section 5.19(b).
“Nonparty Affiliates”
has the meaning set forth in Section 11.13.
“NORM” means naturally occurring radioactive material.
“Organizational Documents”
means (a) with
respect to a
corporation, the charter,
articles
or
certificate
of
incorporation,
as
applicable,
and
bylaws
thereof,
(b)
with
respect
to
a
limited
liability company,
the certificate of formation or organization,
as applicable, and the operating or
limited
liability
company
agreement
thereof,
(c)
with
respect to
a
partnership,
the
certificate of
Exhibit 10.1
- 12 -
formation
and
the
partnership
agreement
thereof,
and
(d)
with
respect
to
any
other
Person,
the
organizational, constituent or governing documents or instruments of such Person.
“Outside Date”
means the
date that
is 120
days after
the Execution
Date;
provided
,
however
that if
the applicable
waiting
periods (and
any
extensions
thereof) under
the
HSR
Act have
not
expired or otherwise been
terminated on or prior
to such date, but
all other conditions precedent
to
Closing set forth in Section
6.1 and Section 6.2 have
been satisfied or waived (except
for any such
conditions
that by
their nature
may only
be satisfied
at or
in connection
with
the occurrence
of
Closing), then
the Outside
Date will
automatically be
extended to
the date
that is
150 days
after
the Execution Date.
“Party” and “Parties” have the meanings set forth in the Preamble of this Agreement.
“Permits”
means
federal,
state
and
local
government
licenses,
permits,
registrations,
franchises, orders,
consents,
approvals, variances,
waivers, exemptions
and other
authorizations
by, or filings with, any Governmental Authority.
“Permitted Encumbrance(s)” means any or all of the following:
(a)
Royalties to
the extent
that the
net cumulative
effect of
such burdens
on a
property does not, individually or in the aggregate, (i) reduce SWEPI’s Net
Revenue Interest
in such
Property below
that shown
in Schedule
1.1(a) or
Schedule 1.1(b),
as applicable,
(ii) increase
SWEPI’s
Working
Interest in
such Property
above that
shown in
Schedule 1.1(a)
or Schedule
1.1(b), as
applicable, without a proportionate increase
in the Net Revenue
Interest of
SWEPI in
such Property, or (iii)
reduce SWEPI’s Net Mineral
Acres in
such
Property below that shown in Schedule 1.1(a);
(b)
all
unit
agreements,
pooling
agreements,
operating
agreements,
farmout
agreements,
Hydrocarbon
production
sales
contracts,
division
orders
and
other contracts, agreements and instruments applicable to the Properties, in
each case
to the
extent
that
the net
cumulative
effect
of
such
instruments
does not, individually or in
the aggregate, (i) reduce SWEPI’s Net Revenue
Interest
in
a
Property
below
that
shown
therefor
in
Schedule
1.1(a)
or
Schedule 1.1(b), as applicable, (ii) increase SWEPI’s Working
Interest in a
Property
above
that
shown
in
Schedule
1.1(a)
or
Schedule 1.1(b),
as
applicable, without a proportionate increase
in the Net Revenue
Interest of
SWEPI in
such Property, or (iii)
reduce SWEPI’s Net
Mineral Acres
in such
Property below that shown therefor in Schedule 1.1(a);
(c)
the Required Consents, or the
failure to obtain the Required
Consents, that
are triggered by the consummation of the transactions contemplated
by this
Agreement;
(d)
liens for
Taxes
or assessments
not yet
due and
payable or
being contested
in good faith by appropriate proceedings, for which adequate cash reserves
are maintained by SWEPI (as of the Execution Date) and Newco (as of
the
Exhibit 10.1
- 13 -
Closing) for the payment thereof in accordance
with GAAP and that are set
forth on Schedule 3.8(h);
(e)
materialman’s,
mechanic’s,
repairman’s,
employee’s,
contractor’s,
operator’s and
other similar liens
or charges
arising in
the ordinary course
of business for amounts not yet delinquent
or if delinquent, being contested
reasonably and
by appropriate
actions, and
for which
adequate cash
reserves
are
maintained
for
the
payment
thereof
in
accordance
with
GAAP
(including any amounts being withheld as provided by Law);
(f)
all rights to consent, by required notices to, filings with, or
other actions by
Governmental
Authorities
that
do
not
apply
to
the
transactions
contemplated
by
this
Agreement
or,
if
they
do
apply,
are
customarily
obtained
subsequent
to
the
closing
of
transactions
that
are
similar
to
the
transactions
contemplated
by
this
Agreement
if
such
Governmental
Authority
is,
pursuant
to
applicable
Law,
without
discretion
to
refuse
to
grant such
consent
if specifically
enumerated
conditions
set forth
in such
applicable Law are satisfied, including Customary Post-Closing Consents;
(g)
excepting
circumstances
where
such
rights
have
already
been
triggered,
rights of reassignment arising upon
final intention to abandon
or release the
Assets, or any of them, and requiring notice to the holders of such rights;
(h)
easements, rights-of-way, covenants,
servitudes, Permits,
surface leases
and
other rights
in respect
of surface
operations that
do not,
individually or
in
the aggregate, materially interfere with the use, development, or ownership
of the Assets subject thereto or affected thereby;
(i)
gas balancing
and other
production balancing
obligations, and
obligations
to
balance
or
furnish
make-up
Hydrocarbons
under
Hydrocarbon
sales,
gathering, processing or transportation contracts;
(j)
all rights reserved
to or vested
in any Governmental
Authorities to control
or regulate any of the Assets in any manner or
to assess Tax with respect to
the Assets, the
ownership, use or
operation thereof,
or revenue, income
or
capital gains
with respect
thereto, and
all obligations
and duties
under all
applicable
Laws
of
any
such
Governmental
Authority
or
under
any
franchise, grant, license or Permit issued by any Governmental Authority;
(k)
the terms and conditions of the Leases,
to the extent that the net cumulative
effect
of
such
terms
and
conditions
does
not,
individually
or
in
the
aggregate,
(i)
reduce
SWEPI’s
Net
Revenue
Interest
in
a
Property
below
that
shown
therefor
in
Schedule
1.1(a)
or
Schedule
1.1(b),
as
applicable,
(ii) increase
SWEPI’s
Working
Interest
in
a
Property
above
that
shown
therefor
in
Schedule
1.1(a)
or
Schedule
1.1(b),
as
applicable,
without
a
proportionate
increase
in
the
Net
Revenue
Interest
of
SWEPI
in
such
Exhibit 10.1
- 14 -
Property,
or (iii)
reduce
SWEPI’s
Net Mineral
Acres in
a Property
below
that shown therefor in Schedule 1.1(a);
(l)
zoning and planning ordinances and municipal regulations promulgated by
any Governmental Authority;
(m)
any
Encumbrance burdening
a
third
party
lessor’s
or
grantor’s
interest
in
the
Assets
(including
any
Encumbrances
created
under
deeds
of
trust,
mortgages and similar instruments by any such lessor or grantor), which, if
not subordinated to the rights
of SWEPI (or Newco
after the consummation
of the Merger), is
not currently in default or
subject to foreclosure or other
enforcement proceedings by the holder;
(n)
depth severances expressly
identified on Schedule
1.1(a) or Schedule
1.1(b)
to
the
extent
that
they
do
not,
individually
or
in
the
aggregate,
reduce
SWEPI’s
Net
Revenue
Interest
or
Net
Mineral
Acre
ownership
in
any
Property
below
that
shown
on
Schedule
1.1(a)
or
Schedule
1.1(b),
as
applicable, for such Property or increase SWEPI’s
Working
Interest in any
Property
beyond
that
shown
on
Schedule
1.1(b)
without
a
corresponding
and
proportionate
increase
in
SWEPI’s
Net
Revenue
Interest
for
such
Property;
(o)
the terms and conditions of, and any rights
of third parties to back into any
interest in the Properties to the extent such
terms, conditions and rights are
expressly shown as
binding on
the applicable Property
on Schedule
1.1(a)
and/or Schedule 1.1(b);
(p)
normal
and
customary
liens
of
co-owners
under
operating
agreements
relating to the Properties, which obligations are not yet due and
pursuant to
which SWEPI
(or Newco
after the
consummation of
the Merger)
is not
in
default;
(q)
defective
acknowledgements,
name
variations,
lack
of
power of
attorney,
lack
of
trustee
authorization,
lack
of
representative
capacity,
lack
of
evidence of corporate or entity authorization, failure to recite marital status
or omissions
of successions
of heirship
or estate
proceedings, except
in each
case where
evidence is
available that
reasonably supports
a Third
Party’s
claim to superior title;
(r)
lack of a survey of the surface of the Properties, unless a survey is required
by Law;
(s)
any matter that
has been cured,
released or waived by
any Law of
limitation
or prescription, and which can be substantiated by the affirmative
ruling of
a court of competent jurisdiction;
(t)
failure to record Leases issued by any Governmental
Authority (which, for
the avoidance
of doubt,
includes any
state or
county agency
or any
successor
Exhibit 10.1
- 15 -
agency
thereto)
in
the
real
property,
conveyance,
or
other
records
of
the
county
in
which
such
Leases
are
located,
provided
,
that
the
instruments
evidencing
the
conveyance
of
such
title
to
SWEPI
from
its
immediate
predecessor
in
title
are
recorded
with
and,
if
applicable,
approved
by
the
Governmental Authority that issued any such Lease;
(u)
rights of
any (i)
common owner of
any interest
in any
fee mineral
interest
as tenants
in common
or through
common ownership,
(ii) owner
or lessee
of any
oil and
gas interests
in formations,
strata, horizons,
or depths
other
than
the
depths
described
for
the
applicable
Lease
described
on
Schedule 1.1(a)
or
(iii)
common
owner
of
any
interest
in
surface
rights
currently held by
SWEPI and such
common owner as
tenants in common
or
through common ownership,
to the extent that
the net cumulative effect
of
the matter
referenced in
clause (i),
(ii) or
(iii) does
not, individually
or in
the aggregate,
(i) reduce SWEPI’s Net
Revenue Interest in
a Property
below
that
shown
therefor
in
Schedule
1.1(a)
or
Schedule
1.1(b),
as
applicable,
(ii) increase
SWEPI’s
Working
Interest
in
a
Property
above
that
shown
therefor
in
Schedule
1.1(a)
or
Schedule
1.1(b),
as
applicable,
without
a
proportionate
increase
in
the
Net
Revenue
Interest
of
SWEPI
in
such
Property,
or (iii)
reduce
SWEPI’s
Net Mineral
Acres in
a Property
below
that shown therefor in Schedule 1.1(a);
(v)
(i) lack of a
division order or
an operating agreement covering
any Property
(including portions
of a
Property that
were formerly
within a
unit but
that
have been excluded from the unit as a result
of a contraction of the unit) to
the extent
that they
do not,
individually or
in the
aggregate, reduce
SWEPI’s
Net Revenue Interest
or Net Mineral
Acre ownership in any
Property below
that shown in on Schedule
1.1(a) or Schedule 1.1(b), as
applicable, for such
Property or
increase SWEPI’s Working Interest in
any Property
beyond that
shown
on
Schedule
1.1(b)
without
a
corresponding
and
proportionate
increase in SWEPI’s
Net Revenue Interest for such
Property, or
(ii) failure
to
obtain
waivers
of
maintenance
of
uniform
interest,
restriction
on
zone
transfer,
or
similar
provisions
in
operating
agreements
with
respect
to
assignments
in
SWEPI’s
chain
of
title
to
the
Property
unless
(A)
the
underlying provisions of
such operating agreement
provide that
such failure
voids or nullifies (automatically or at the election of the holder thereof) the
assignment
with
respect
to
such
asset
or
(B)
there
is
an
outstanding
and
pending, unresolved
claim from
a third
party with
respect to
the failure
to
obtain such waiver;
(w)
defects
arising
from
prior
expired
Hydrocarbon
leases
that
are
not
surrendered or released of record absent affirmative evidence of an
adverse
claim by another Person that such
lease is in full force and
effect;
provided,
that
SWEPI
has
held
the
affected
Properties
for
at
least
five
consecutive
years on the Execution Date;
Exhibit 10.1
- 16 -
(x)
defects
based
solely
on
SWEPI’s
failure
to
have
a
title
opinion
or
title
insurance policy on any Property;
(y)
the Retained Litigation;
(z)
decreases
in
SWEPI’s
Net
Revenue
Interest
(i)
in
connection
with
those
operations
in
which
SWEPI
may
be
a
non-consenting
co-owner
after
the
Execution Date
in accordance
with the
terms of
Section 5.4,
(ii) resulting
from the reversion of interests
to co-owners with
operations in which such
co-owners elect after the Execution Date not to consent, (iii)
resulting from
the establishment or amendment,
after the Execution Date,
of pools or units
permitted
under
the
terms
of
Section
5.4,
or
(iv)
required
to
allow
other
working
interest
owners
to
make
up
past
underproduction
or
pipelines
to
make up past under-deliveries
to the extent accounted
for and described in
Schedule 3.12;
(aa)
increases
in
SWEPI’s
Working
Interest
in
a
Property
above
that
shown
therefor
in
Schedule
1.1(a)
or
Schedule
1.1(b),
as
applicable
(i)
that
are
accompanied by at least a proportionate increase in
SWEPI’s Net Revenue
Interest in
such Property
above that
shown
therefor
in
Schedule 1.1(a)
or
Schedule
1.1(b),
as
applicable,
or
(ii)
resulting
from
contribution
requirements with respect to defaulting or non-consenting co-owners
under
the applicable operating agreement;
(bb)
decreases in SWEPI’s Net Mineral Acres or Net Revenue Interest listed on
Schedule
1.1(a)
or
Schedule
1.1(b),
as
applicable,
where
there
is
a
proportionate Net
Revenue Interest
or Net
Mineral Acres
increase related
to
a
different
Property
(the
value
of
which
Net
Revenue
Interest
or
Net
Mineral Acres increase, as
applicable, is in
each case on a
basis comparable
to or
more
favorable
than
the corresponding
Net
Revenue Interest
or
Net
Mineral Acres that are the subject of
such decrease), and such decrease and
correlating increase are due to an acreage
swap that has not been accounted
for in SWEPI’s leasing systems;
(cc)
decreases
in
SWEPI’s
Net
Mineral
Acres
(i)
in
connection
with
those
operations
in
which
SWEPI
may
be
a
non-consenting
co-owner
after
the
Execution Date in
accordance with the
terms of Section 5.4,
or (ii) resulting
from the establishment or
amendment, after the Execution
Date, of pools or
units permitted under the terms of Section 5.4;
(dd)
defects which
are based
solely on
(i) a
lack of
information in
SWEPI’s
or
Newco’s files or of record,
(ii) references to
any document if
a copy of
such
document
is
not
in
SWEPI’s
or
Newco’s
files
or
of
record,
or
(iii)
the
inability
to
locate
an
unrecorded
instrument
of
which
Buyer
has
constructive or
inquiry notice
by virtue
of a
reference to
such unrecorded
instrument in a recorded instrument
(or a reference to a
further unrecorded
instrument in such
unrecorded instrument), unless,
in each of
(i), (ii) or
(iii),
Exhibit 10.1
- 17 -
such
lack
of
information,
referenced
document
or
unlocated
unrecorded
instrument is required to establish the existence or validity of a Property;
(ee)
any
defect
as
a
consequence
of
cessation
of
production,
insufficient
production,
or
failure to
conduct
operations
on
any
of
the
Assets
held
by
production, or lands pooled,
communitized, or unitized therewith,
except to
the extent (i) the cessation
of production, insufficient
production or failure
to conduct operations is
affirmatively shown to exist
such that it has given
rise to a
right of the
lessor or other
third party to
terminate all or
any portion
of the underlying Lease
or (ii) of a third party’s
claim of termination of
all
or
any
portion
of
the
underlying
Lease;
provided,
however
,
that
defects
based
upon
a
determination
that
(A)
there
has
been
no
Hydrocarbon
production
from
wells
located
on
the
Property
or
lands
pooled,
communitized
or
unitized
therewith,
and
(B)
there
has
been
no
activity
conducted
on
the
Property
or
lands
pooled,
communitized
or
unitized
therewith
that
would
otherwise maintain
the
Property
in
force and
effect,
may be
considered as
a breach
of Seller’s special
warranty of
title in Section
3.20; and
(ff)
the Material
Contracts and
the matters
set forth
on any
Schedule, in
each
case to the extent
that the net cumulative
effect of such Material
Contracts
and matters
do not,
individually or
in the
aggregate, (i) reduce
SWEPI’s Net
Revenue Interest
in a Property
below that
shown therefor in
Schedule 1.1(a)
or Schedule
1.1(b), as
applicable, (ii)
increase SWEPI’s
Working
Interest
in
a
Property
above
that
shown
in
Schedule
1.1(a)
or
Schedule 1.1(b),
as
applicable, without a proportionate increase
in the Net Revenue
Interest of
SWEPI in
such Property, or (iii)
reduce SWEPI’s Net
Mineral Acres
in such
Property below that shown therefor in Schedule 1.1(a).
“Person” means an individual, corporation, partnership, limited liability company,
limited
liability
partnership,
joint
venture,
syndicate,
person,
trust,
association,
organization
or
other
entity,
including
any
Governmental
Authority,
and
including
any
successor,
by
merger
or
otherwise, of any of the foregoing.
“Phase
I
Environmental
Site
Assessment”
means
an
environmental
site
assessment
performed pursuant
to ASTM
E1527-13 Standard
Practice for
Environmental Site
Assessments:
Phase
I
Environmental
Site
Assessment
Process
or
any
similar
environmental
assessment,
including a limited
assessment of a
facility’s or operation’s compliance with Environmental
Laws;
provided,
that the Phase I Environmental Site Assessment shall not include any sampling, testing,
or invasive activities.
“Pre-Effective Refund” has the meaning set forth in Section 10.2.
“Preferential Rights”
means any
right or
agreement that
may enable
any Person
to purchase
or acquire any Asset or
any interest therein or
portion thereof as a
result of or in
connection with
the execution or
delivery of this Agreement
or the consummation of
the transactions contemplated
hereby, including any preferential purchase rights, rights of first refusal, or other similar rights.
Exhibit 10.1
- 18 -
“Previously-Divested Properties”
means the
leases and
wells that
have been
divested by
SWEPI in the Subject Area and that are set forth on Schedule A-1.
“Proceeding”
means any
proceeding, claim,
charge, complaint,
lawsuit, direct
or indirect
demand, inquiry, hearing, notice of violation, investigation,
action, cause of action,
suit, litigation,
arbitration, citation, summons,
subpoena, audit, controversy, discovery
request, or other
dispute or
legal proceeding,
whether civil,
criminal, administrative
or otherwise,
made pursuant
to federal,
state or other Laws.
“Properties” means, collectively, the Real Property Interests, the Units and the Wells.
“Property Costs” means each of
the following to the extent
incurred in and attributable
to
the ownership
and operation
of the
Assets in
the ordinary
course of
business and,
where applicable,
the
applicable
operating
agreement
and
not
otherwise
prohibited
under
Section
5.4:
(a) all
operating expenses (including costs of
Seller personnel dedicated to
the Assets, insurance, rentals,
shut-in payments,
title examination
and curative
actions taken
in connection
with the
drilling of
Wells,
and gathering,
marketing, processing
and transportation
costs in
respect of
Hydrocarbons
produced from the Properties), (b) capital expenditures (including bonuses, broker fees, and other
Lease acquisition costs, costs of drilling and completing wells, cost
of building site pads, costs of
acquiring Equipment, and
other Lease acquisition,
extension or renewal
costs); and
(c) overhead
costs
charged
to
the
Assets
under
any
applicable
Third
Party
operating
agreement;
provided
,
however
, that “Property Costs”
shall exclude Seller’s
and its Affiliates’ general
and administrative
expenses
and
any
liabilities,
losses
and
expenses
attributable
to
(i)
any
matters
with
respect
to
which
Buyer
Group
or
Seller
Group
is
entitled
to
indemnity
from
the
other
Party
under
this
Agreement or (ii) Taxes.
“Public Announcement Restrictions” has the meaning set forth in Section 5.3(a).
“Purchase Price”
has the meaning set forth in Section 2.4.
“Real Property
Interests” means
SWEPI’s
right, title
and interest
in and
to (a)
all oil
and
gas
leases, oil,
gas,
and
mineral
leases and
subleases,
royalties,
overriding
royalties,
net
profits
interests, payments
out of
production, reversionary
rights, mineral
fee interests,
carried interests
and any
contractual rights to
production relating
thereto, including
as described on
Schedule 1.1(a)
to the
extent and
only to
the extent
the same
are located within
the Subject
Area (the “Leases”),
and (b)
all other
rights in
the lands
covered by
the Units
and the
foregoing Leases,
including all
Royalties,
Working
Interests,
Net
Revenue
Interests,
and
other
interests
and
rights
to
Hydrocarbons, to the extent and only to the extent the same are located within the Subject Area.
“Records” means, to the extent reasonably in Seller or SWEPI’s possession
or control, (a)
any
files,
records,
maps,
information,
and
data,
whether
written
or
electronically
stored,
to
the
extent relating to
the Assets, including:
(i) land and title
records (including abstracts of
title, title
opinions,
and
title
curative
documents);
(ii) contract
files;
(iii) correspondence;
(iv) operations,
environmental,
production,
and
accounting
records
(including
equipment
lists,
repair
notes
and
archives, and technical drawings); (v) production, facility and well records and data;
(vi) supplier
lists and records; (vii) training materials and training records (including certifications) and (b) the
corporate,
financial,
Tax
and
legal
records
of
SWEPI
and
Newco
(including
Tax
Returns);
Exhibit 10.1
- 19 -
provided
,
however
, that
the term
“Records” shall
not include
(i) any
of Seller’s
or its
Affiliates’
business
plans,
strategies,
cost
and
pricing
information,
accounting
records,
supplier
lists
and
records,
proprietary
training
materials
and
equipment,
equipment
lists,
technical
drawings,
and
contracts and financial records
that address or reflect
activities outside of the
business of SWEPI
related to the Assets; (ii) any of Seller’s or its Affiliates’ company minute books and records, Tax
Returns, Tax
records that relate
to Seller’s
or its Affiliates’
business generally or
other materials
that do
not pertain
to the
business of
Newco or
ongoing day-to-day
operation of
the Assets;
(iii)
training,
personnel,
and
medical
records
(including
certifications)
of
employees,
including
Transferred Employees
(as defined
in Schedule
5.9(a)), except
as specified
in Section
1.02(f) of
Schedule 5.9(a); (iv) hiring exams for Transferred Employees (as defined in Schedule 5.9(a)); (v)
any transfer pricing information;
(vi) materials that are subject
to any applicable legal
privileges,
including attorney work product
and attorney-client communications that
extend beyond Newco;
and (vii)
any files,
records, information,
and data
to the extent
related to the
IT Systems (for
the
avoidance of
doubt,
such
files,
records,
information
and
data
shall
not
include
information
that
may be stored on the IT Systems that would otherwise constitute a Record).
“Related Party
Contract” means
any Contract
between (a)
SWEPI, on
the one
hand, and
(b)
Seller,
any
Affiliate
of
Seller
(other
than
SWEPI)
or
any
Person
that
directly
or
indirectly
controls or is under
common control with Shell
Oil Company,
or any of their
respective officers,
directors,
stockholders,
members,
partners,
managers,
investors,
private
equity
sponsors,
or
employees, on the other hand.
“Release”
means
any
releasing,
disposing,
discharging,
injecting,
spilling,
leaking,
pumping, pouring, leaching, migrating, dumping,
emitting, escaping or emptying into
or upon any
soil, air, sediment, subsurface strata, surface water, groundwater,
or drinking water supply.
“Release of Hydrocarbons” means any Release
of Hydrocarbons into or upon any soil,
air,
sediment, subsurface strata, surface
water, groundwater, or drinking water supply that
triggers any
reporting
obligations
to
any
Governmental
Authority,
including
the
Railroad
Commission
of
Texas, under any applicable Law.
“Remediation” including the correlative term “Remediate” means the implementation and
completion
of
any
investigative,
remedial,
removal,
response,
monitoring,
construction,
repair,
closure,
disposal,
restoration
or
other
corrective
actions
(including
any
necessary
filings
or
interactions with
Governmental
Authorities) required
under Environmental
Laws to
respond, to
the extent
required by
applicable Environmental
Laws, to
any Release
or
threatened Release
of
any
Hazardous
Substances
at,
on,
under
or
from
any
Asset,
in
the
most
cost-effective
manner
allowed under
applicable Environmental
Laws, considering
ongoing operation
and maintenance
and any operational or use limitations or controls.
“Reorganization”
has the meaning set forth in Section 5.19.
“Representatives”
means
(a)
partners,
employees,
officers,
directors,
members,
equity
owners and counsel of a Party
or any of its Affiliates or any
prospective purchaser of a Party or
an
interest in a Party;
(b) any investment bank,
consultant or agent retained
by a Party or
the parties
listed
in subsection
(a) above;
and (c)
any bank,
other financial
institution
or entity
funding, or
Exhibit 10.1
- 20 -
proposing to fund, such
Party’s operations in connection with the Assets,
including any consultant
retained by such bank, other financial institution or entity.
“Required Consent” has the meaning set forth in Section 3.13.
“Required Consent Asset” means an Asset subject to a Required Consent.
“Restricted Party” means any
Person (a) targeted by national,
regional or multilateral trade
or economic sanctions under
Trade Control Laws; or (b) directly
or indirectly owned or
controlled
or acting on behalf of such Persons, including their Affiliates and Representatives.
“Retained Assets”
means
(a)
any
and
all
real
property
owned
by
SWEPI
or
any
of
its
wholly-owned
subsidiaries
on
or
prior
to
the
Execution
Date
and
located
outside
of
the
Subject Area (the “Retained Properties”);
(b)
all
contracts,
agreements,
and
instruments
to
the
extent
relating
to
the
Retained
Properties,
including
operating
agreements,
letter
agreements,
unitization
agreements,
declarations
and
orders,
farmin
and
farmout
agreements,
exploration
and
participation
agreements,
joint
development
agreements,
area
of
mutual
interest
agreements,
agreements
pursuant
to
which the
Retained Properties
(or any
portion thereof)
were purchased
or
sold by
SWEPI, and
the transfers,
assignments or
conveyances relating
to
the
Retained
Properties,
and
any
rights
under
any
such
contracts,
agreements, or
instruments, including
any audit
rights or
rights to
receive
refunds
or
reimbursements
in
connection
with
any
such
contracts,
agreements,
or
instruments
and
any
master
services
agreements,
fleet
agreements, or other similar master
agreements, including those that
relate
to
the
Assets
or
that
otherwise would
constitute
an
Asset,
except
in
each
case any
purchase orders or
other similar agreements
entered into under
any
master agreement (such as master services agreements or fleet agreements)
(collectively, the “Retained Contracts”);
(c)
all claims
and
causes of
action arising
under
and
to the
extent
relating to
any Retained Contract (including claims for adjustments or refunds) or any
other Retained Asset;
(d)
the Retained Litigation;
(e)
all
rights
and
interests
of
SWEPI
(i) under
any
policy
or
agreement
of
insurance
or
indemnity,
(ii) under
any
bond
or
(iii) to
any
insurance
or
condemnation proceeds or
awards, in each
case, to the
extent relating to
any
other Retained Asset;
(f)
all
surety
agreements,
bonds,
letters
of
credit,
guarantees
and
any
other
financial
assurances
or
credit
support
to
the
extent
relating
to
any
other
Retained Asset;
Exhibit 10.1
- 21 -
(g)
all personal property used, or held for use, in
connection with the Retained
Properties;
(h)
all easements, permits,
well licenses, servitudes,
rights-of-way,
subsurface
leases, and other subsurface rights appurtenant to, and to the extent used or
held for use in connection with, the Retained Properties;
(i)
all records relating exclusively to any other Retained Asset;
(j)
all Related Party Contracts (other than those set forth on Schedule 5.7);
(k)
all matters set forth on Schedule 3.22 (the “Retained Royalties”);
(l)
any Contract for a Hedging Transaction;
(m)
any Required
Consent Assets
retained by
SWEPI
pursuant and
subject to
the terms of Section 5.16(c);
(n)
all
end
user
computing
devices
used
in
connection
with
the
Assets,
including laptops, iPhones and iPads;
(o)
subject
to
Section
5.22,
all
non-proprietary
seismic,
geological,
engineering,
and
other
data
and
interpretations,
files
and
records
(in
whatever form)
in
each
case to
the
extent related
to the
Assets
(“Seismic
Data”);
(p)
the IT Systems; and
(q)
any
and
all
other
real
property,
personal
property,
Permits,
contracts,
agreements, leases, instruments, claims, rights and other interests owned or
held by SWEPI
or any
of their
wholly-owned subsidiaries, in
each case to
the extent not comprising a part of, or unrelated to, the Assets.
“Retained Contracts”
has the
meaning set
forth in
item (b)
of the
definition of
“Retained
Assets”.
“Retained
Liabilities”
means
any
and
all
duties,
obligations,
claims
and
liabilities
of
SWEPI
other
than
the
Assumed
Liabilities,
and
all
duties,
obligations,
claims
and
liabilities
attributable to the Retained Assets, the Retained Litigation and the Retained Royalties.
“Retained Litigation” has the meaning set forth in Section 5.17.
“Retained Properties” has
the meaning set
forth in item
(a) of the
definition of “Retained
Assets”.
“Retained Royalties”
has the
meaning set
forth in
item (k)
of the
definition of
“Retained
Assets”.
Exhibit 10.1
- 22 -
“Royalties” means
royalties, overriding
royalties, production
payments, carried
interests,
net
profits
interests,
reversionary
interests,
options,
back-in
interests,
contractual
rights
to
production, and other burdens upon, measured by or payable out of production.
“SCADA
Systems”
means
the
field
based
operating
system
software
and
hardware
components of the
Supervisory Control and Data
Acquisition systems exclusively used
by SWEPI
to monitor
and control
the operation
of the
Wells
(including field
based sensors
which interface
with field based Well
Equipment) and to provide
data in relation to
the operation of those
Wells,
excluding
telecommunications
links
between
the
Supervisory
Control
and
Data
Acquisition
systems and
the IT
Systems and
any software
and hardware
components which
are shared
with,
used or held for use by Seller or any of its Affiliates other than SWEPI.
“SEC” shall mean the Securities and Exchange Commission.
“Securities Act” shall
mean the United States
Securities Act of 1933,
as amended, together
with the rules and regulations of the SEC promulgated thereunder.
“Seismic Data”
has the
meaning set
forth in
item (o)
of the
definition of
“Retained Assets”.
“Seller” has the meaning set forth in the Preamble of this Agreement.
“Seller Fundamental Representations”
means the representations
and warranties in Section
3.2, Section
3.3, Section
3.4, Section
3.5, Section
3.6, Section
3.17, Section
3.18, Section
3.24,
Section 3.26 and Section 3.29.
“Seller Group”
means Seller,
its
Affiliates
(other
than SWEPI
and Newco),
and each
of
their respective officers, directors, employees, agents, advisors and other Representatives.
“Seller Material Adverse Effect” means a Material Adverse Effect with respect to Newco,
taken as a whole.
“Seller Parent Guaranty” has the meaning set forth in Section 5.18.
“Seller Taxes”
means
(a)
all Taxes
of,
attributable
to or
imposed on
Seller
or
any of
its
direct
or
indirect
owners
or
Affiliates
(other
than
Newco),
(b)
any
Taxes
allocable
to
Seller
pursuant
to
Section
10.1(a)
(taking
into
account,
and
without
duplication
of,
any
Asset
Taxes
effectively borne
by Seller
as a
result of
the adjustments
to the
Purchase Price
made pursuant
to
Section 2.5 or
Section 7.4,
as applicable,
and any
payments made
from one
Party to
the other
in
respect of
Asset Taxes
pursuant to
Section 2.2(d)
or Section
10.1(c)) or
Section 10.1(b),
(c) any
Taxes attributable
to or imposed on or with
respect to the ownership or operation
of the Retained
Assets
or
the
production
of
Hydrocarbons
or
the
receipt
of
proceeds
therefrom,
(d)
all
Taxes
attributable to or
resulting from the
Reorganization, (e) any
Taxes imposed on Newco or
for which
Newco
becomes
liable
(i)
by
reason
of
having
been
a
member
of
an
affiliated,
aggregate,
combined, consolidated
or unitary
group on
or prior
to the
Closing
Date (including
pursuant to
Treasury
Regulations
Section
1.1502-6
or
any
analogous
or
similar
provision
of
state,
local
or
foreign Law) or (ii) as a transferee or successor or by
contract or other agreement or arrangement
(other than
a
Customary
Agreement), assumption,
operation
of
Law or
otherwise, which
Taxes
relate to an
event or transaction
occurring, or a
contract or other
agreement or arrangement
entered
Exhibit 10.1
- 23 -
into,
on or
prior to
the Closing
Date, (f)
50 percent
of any
Transfer
Taxes,
(g) any
other Taxes
relating
to
the
ownership
or
operation
of
the
Assets
or
the
production
of
Hydrocarbons
or
the
receipt of
proceeds therefrom
that are
attributable to
any Tax
period (or
portion of
any Straddle
Period) ending
at or
prior to
the Effective
Time
and (h)
any Taxes
caused by,
related to,
arising
out of
or resulting
from Seller’s
breach of
any of
Seller’s covenants
or agreements
contained in
this Agreement.
“Soft Required Consent” means
a Required Consent that by
its express terms provides
that
Consent may not be unreasonably
withheld and for which the
failure to obtain would not
(a) cause
the
transfer
or
assignment
(whether
by
operation
of
law
or
otherwise)
of
any
portion
of
the
Required
Consent
Asset
subject
to
such
Consent
to
be
void,
(b) cause
the
termination
of
the
Required Consent
Asset subject
to such
Consent under
the express
terms of
such Required
Consent
Asset, or (c) result in a penalty of any sort, including a requirement to make a payment.
“Straddle
Period”
means
any
Tax
period
beginning
at
or
before,
and
ending
after,
the
Effective Time.
“Subject Area” means Culberson, Loving, Ward, Winkler,
and Reeves Counties, Texas.
“Subject Interests”
has the meaning set forth in the Recitals of this Agreement.
“Subsidiary” means, with respect to any Person, any other Person Controlled by such first
Person, directly or indirectly, through one or more intermediaries.
“Surface
Contracts”
means
SWEPI’s
right,
title
and
interest
in
and
to
all
easements,
Permits, licenses, servitudes, rights-of-way,
surface fee interests, surface use
agreements, surface
leases, right
of use
and easement,
and other
rights to
use the
surface and subsurface
appurtenant
thereto,
to
the
extent
used
or
held
for
use
in
connection
with
the
Properties,
including
those
described on Schedule 1.1(c).
“SWEPI” has the meaning set forth in the Recitals of this Agreement.
“Tax Allocation” has the meaning set forth in Section 10.7.
“Tax Incentive” has the meaning set forth in Section 3.8(m).
“Tax Proceeding” has the meaning set forth in Section 10.3.
“Tax
Return”
means
any
return
(including
any
information
return
and
any
estimated
return), report, statement,
schedule, notice, form,
election, estimated Tax
filing, claim
for refund
or
other
document
(including
any
attachments
thereto
and
amendments
thereof)
filed
with
or
submitted to,
or required
to be filed
with or
submitted to,
any Governmental
Authority with
respect
to any Tax.
“Taxes”
means
(a)
all
federal,
state,
local,
foreign
and
other
net
income,
gross
income,
gross
receipts,
alternative,
estimated,
sales,
use,
ad
valorem,
value
added,
transfer,
franchise,
profits, registration, license, lease, service, service use, withholding, payroll, employment,
excise,
severance,
social
security,
welfare,
workers’
compensation,
unemployment,
disability,
Exhibit 10.1
- 24 -
environmental, stock, stamp, occupation, premium,
real, personal, or intangible
property, windfall
profits,
customs,
duties,
levies,
tariffs,
imposts,
amounts
due
under
any
escheat
or
unclaimed
property
Law
or
other
taxes,
fees,
assessments
or
charges
of
any
kind
whatsoever
(whether
imposed
directly
or
through
withholding,
whether
or
not
disputed,
and
including
any
amounts
resulting
from
the
failure
to
file
any
Tax
Return
and
any
amounts
that
have
been
deferred
(including amounts deferred under the rules of Code Section 965)), together with any interest and
any penalties, additions
to tax or additional
amounts imposed with respect
thereto; (b) any
liability
for payment
of amounts
described in
clause (a)
whether as
a result
of assumption,
transferee or
successor
liability,
of
being
a
member
of
an
affiliated,
aggregate,
consolidated,
combined
or
unitary group for any period, operation of Law or otherwise; and (c) any liability
for the payment
of
amounts
described
in
clauses
(a)
or
(b)
as
a
result
of
any
tax
sharing,
tax
indemnity
or
tax
allocation
agreement
or
any
other
express
or
implied
contract,
agreement
or
arrangement
to
indemnify any other Person.
“TBOC” has the meaning set forth in Section 5.19(a).
“Third Party” means
any Person
other than a
Party to
this Agreement or
an Affiliate
of a
Party to this Agreement.
“Third Person Claim” has the meaning set forth in Section 9.2(b).
“Trade
Control
Laws” means
any applicable
trade
or economic
sanctions or
embargoes,
Restricted Party
lists issued
by the
respective authorities,
controls on
the imports,
export, re-export,
use,
sale,
transfer,
trade,
or
otherwise
disposal
of
goods,
services
or
technology,
anti-boycott
legislation
or
similar
laws
or
regulations,
rules,
restrictions,
licenses,
orders
or
requirements
in
force from time to time,
including those of the European Union,
the United Kingdom, the United
States of America or under applicable Laws.
“Transaction
Documents”
means
this
Agreement
and
any
other
documents
executed
in
connection with this Agreement.
“Transfer Taxes
”
has the meaning set forth in Section 10.5.
“Transition Services Agreement” has the meaning set forth in Section 5.11.
“Treasury
Regulations”
means
the
final,
temporary,
and
proposed
United
States
Department of the Treasury regulations promulgated under the Code.
“Units”
means
SWEPI’s
right,
title
and
interest
in
and
to
all
pooled,
communitized,
or
unitized acreage, which
includes all
or any part
of the
lands located within
the Subject Area
and
covered
by
the
Leases,
and
all
tenements,
hereditaments,
and
appurtenance
belonging
thereto,
including the pools and units described on Schedule 1.1(a).
“U.S.” means the United States of America.
“Wells”
means
SWEPI’s
right,
title
and
interest
in
and
to
all
Hydrocarbons,
water,
monitoring,
disposal
or
injection
wells
in
the
Subject
Area,
including
the
wells
described
on
Exhibit 10.1
- 25 -
Schedule
1.1(b),
whether
producing,
non-producing,
temporarily
plugged
and
abandoned,
and
whether or not fully described on any exhibit or schedule hereto.
“Working
Interest”
means,
with
respect
to
any
(a)
Well,
the
interest
(expressed
as
a
percentage or
a decimal)
in such
Well
that is
burdened with
the obligation
to bear
and pay
costs
and
expenses
of
maintenance,
development
and
operations
on
or
in
connection
with
such
Well
(with respect to
those formations
in which such
Well
is currently producing,
or with respect
to a
Well that is not currently producing,
the last depth or
formation at which
it produced), or (b)
Lease
or Unit, the
interest (expressed as
a percentage or
a decimal) in
such Lease or
Unit that is
burdened
with
the
obligation
to
bear
and
pay
costs
and
expenses
of
maintenance,
development
and
operations on
or in
connection with
such Lease
or Unit,
in the
case of
each of
items (a)
and (b)
without regard to the effect of any Royalties.
d093021dex311
Exhibit 31.1
CERTIFICATION
I, Ryan M. Lance, certify that:
1.
I have reviewed this quarterly report on Form
10-Q of ConocoPhillips;
2.
Based on my knowledge, this report does not contain
any untrue statement of a material fact or omit
to
state a material fact necessary to make the statements
made, in light of the circumstances under
which
such statements were made, not misleading with
respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements,
and other financial information included in this
report,
fairly present in all material respects the financial
condition, results of operations and cash
flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing
and maintaining disclosure
controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and
have:
(a)
Designed such disclosure controls and procedures,
or caused such disclosure controls
and
procedures to be designed under our supervision,
to ensure that material information relating
to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
(b)
Designed such internal control over financial reporting,
or caused such internal control over
financial reporting to be designed under our supervision,
to provide reasonable assurance regarding
the reliability of financial reporting and the preparation
of financial statements for external
purposes in accordance with generally accepted
accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in
this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of
the end of the period covered by this report based
on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control
over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter
in
the case of an annual report) that has materially
affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of
internal control over financial reporting, to the
registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses
in the design or operation of internal
control
over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to
record, process, summarize and report financial
information; and
(b)
Any fraud, whether or not material, that
involves management or other employees who
have a
significant role in the registrant’s internal control over financial reporting.
November 4, 2021
/s/ Ryan M. Lance
Ryan M. Lance
Chairman and
Chief Executive Officer
d093021dex312
Exhibit 31.2
CERTIFICATION
I, William L. Bullock, Jr., certify that:
1.
I have reviewed this quarterly report on Form
10-Q of ConocoPhillips;
2.
Based on my knowledge, this report does not contain
any untrue statement of a material fact or omit
to
state a material fact necessary to make the statements
made, in light of the circumstances under
which
such statements were made, not misleading with
respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements,
and other financial information included in this
report,
fairly present in all material respects the financial
condition, results of operations and cash
flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing
and maintaining disclosure
controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and
have:
(a)
Designed such disclosure controls and procedures,
or caused such disclosure controls
and
procedures to be designed under our supervision,
to ensure that material information relating
to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
(b)
Designed such internal control over financial reporting,
or caused such internal control over
financial reporting to be designed under our supervision,
to provide reasonable assurance regarding
the reliability of financial reporting and the preparation
of financial statements for external
purposes in accordance with generally accepted
accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in
this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of
the end of the period covered by this report based
on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control
over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter
in
the case of an annual report) that has materially
affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of
internal control over financial reporting, to the
registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses
in the design or operation of internal control
over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to
record, process, summarize and report financial
information; and
(b)
Any fraud, whether or not material, that
involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
November 4, 2021
/s/ William L. Bullock, Jr.
William L. Bullock, Jr.
Executive Vice President and
Chief Financial Officer
d093021dex32
Exhibit 32
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of ConocoPhillips
(the Company) on Form 10-Q for the period ended
September 30, 2021, as filed with the U.S.
Securities and Exchange Commission on the
date hereof (the
Report), each of the undersigned hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002,
that to their knowledge:
(1)
The Report fully complies with the requirements
of Sections 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2)
The information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Company.
November 4, 2021
/s/ Ryan M. Lance
Ryan M. Lance
Chairman and
Chief Executive Officer
/s/ William L. Bullock, Jr.
William L. Bullock, Jr.
Executive Vice President and
Chief Financial Officer