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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-13726
CHESAPEAKE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
Oklahoma | 73-1395733 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
6100 North Western Avenue, | Oklahoma City, | Oklahoma | 73118 |
| (Address of principal executive offices) | (Zip Code) |
| | (405) | 848-8000 | |
| (Registrant’s telephone number, including area code) |
| | | | | | | | | | | | | | |
| Securities Registered Pursuant to Section 12(b) of the Act: |
| Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
| Common Stock, $0.01 par value per share | | CHK | | The Nasdaq Stock Market LLC |
| Class A Warrants to purchase Common Stock | | CHKEW | | The Nasdaq Stock Market LLC |
| Class B Warrants to purchase Common Stock | | CHKEZ | | The Nasdaq Stock Market LLC |
| Class C Warrants to purchase Common Stock | | CHKEL | | The Nasdaq Stock Market LLC |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. Yes ☐ No ☒
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 ☒ 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 ☒ 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 ☒ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
The aggregate market value of our common stock held by non-affiliates on June 30, 2021, was approximately $1.6 billion. As of February 21, 2022, there were 118,558,307 shares of our $0.01 par value common stock outstanding.
__________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2022 Annual Meeting of Shareholders are incorporated by reference in Part III.
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| PART I | Page |
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| PART II | |
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| PART III | |
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| PART IV | |
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Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Chesapeake,” the “Company” and “Registrant” refer to Chesapeake Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in millions of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Annual Report on Form 10-K:
“Adjusted Free Cash Flow” (a non-GAAP measure) means net cash provided by operating activities (GAAP) less cash capital expenditures, adjusted to exclude certain items management believes affect the comparability of operating results.
“ASC” means Accounting Standards Codification.
“Backstop Commitment Agreement” means that certain Backstop Commitment Agreement, dated as of June 28, 2020, by and between Chesapeake and the Backstop Parties, as may be further amended, modified, or supplemented from time to time, in accordance with its terms.
“Backstop Parties” means the members of the FLLO Ad Hoc Group that are signatories to the Backstop Commitment Agreement and Franklin Advisers, Inc., as investment manager on behalf of certain funds and accounts.
“Bankruptcy Code” means Title 11 of the United States Code, 11 U.S.C. §§ 101–1532, as amended.
“Bankruptcy Court” means the United States Bankruptcy Court for the Southern District of Texas.
“Bbl” or “Bbls” means barrel or barrels.
“Bcf” means billion cubic feet.
“Boe” means barrel of oil equivalent. Natural gas proved reserves and production are converted to Boe, at the pressure and temperature base standard of each respective state in which the natural gas is produced, at the rate of six Mcf of gas per Bbl of oil, based upon the approximate relative energy content of natural gas and oil. NGL proved reserves and production are converted to Boe on a one-to-one basis with oil.
“Chapter 11 Cases” means, when used with reference to a particular Debtor, the case pending for that Debtor under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court, and when used with reference to all the Debtors, the procedurally consolidated Chapter 11 cases pending for the Debtors in the Bankruptcy Court.
“Chief” means Chief E&D Holdings, LP.
“Chief Acquisition” means Chesapeake’s planned acquisition of Chief E&D Holdings, LP and associated non-operated interests held by affiliates of Tug Hill, Inc., which, subject to the satisfaction or waiver of certain closing conditions, including certain regulatory approvals, is expected to close in the first quarter of 2022.
“Class A Warrants” means warrants to purchase 10 percent of the New Common Stock (after giving effect to the Rights Offering, but subject to dilution by the Management Incentive Plan, the Class B Warrants, and the Class C Warrants), at an initial exercise price per share of $27.63. The Class A Warrants are exercisable from the Effective Date until February 9, 2026.
“Class B Warrants” means warrants to purchase 10 percent of the New Common Stock (after giving effect to the Rights Offering, but subject to dilution by the Management Incentive Plan and the Class C Warrants), at an initial exercise price per share of $32.13. The Class B Warrants are exercisable from the Effective Date until February 9, 2026.
“Class C Warrants” means warrants to purchase 10 percent of the New Common Stock (after giving effect to the Rights Offering, but subject to dilution by the Management Incentive Plan), at an initial exercise price per share of $36.18. The Class C Warrants are exercisable from the Effective Date until February 9, 2026.
“Completion” means the process of treating a drilled well followed by the installation of permanent equipment for the production of oil, natural gas or natural gas liquids, or in the case of a dry well, the reporting to the appropriate authority that the well has been abandoned.
“Confirmation Order” means the order confirming the Fifth Amended Joint Chapter 11 Plan of Reorganization of Chesapeake Energy Corporation and its Debtor Affiliates, Docket No. 2915, entered by the Bankruptcy Court on January 16, 2021.
“Debtors” means the Company, together with all of its direct and indirect subsidiaries that have filed the Chapter 11 Cases.
“Developed Acreage” means acres which are allocated or assignable to producing wells or wells capable of production.
“DIP Facility” means that certain debtor-in-possession financing facility documented pursuant to the DIP Documents and DIP Order.
“Dry Well” means a well found to be incapable of producing either oil or natural gas in sufficient quantities to justify completion as an oil or natural gas well.
“Effective Date” means February 9, 2021.
“Exit Credit Facility” means the reserve-based revolving credit facility available upon emergence from bankruptcy.
“Exploratory Well” means a well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir.
“FLLO Term Loan Facility” means the facility outstanding under the FLLO Term Loan Facility Credit Agreement.
“FLLO Term Loan Facility Credit Agreement” means that certain Term Loan Agreement, dated as of December 19, 2019 ((i) as supplemented by that certain Class A Term Loan Supplement, dated as of December 19, 2019 (as amended, restated or otherwise modified from time to time), by and among Chesapeake, as borrower, the Debtor guarantors party thereto, GLAS USA LLC, as administrative agent, and the lenders party thereto, and (ii) as further amended, restated, or otherwise modified from time to time), by and among Chesapeake, the Debtor guarantors party thereto, GLAS USA LLC, as administrative agent, and the lenders party thereto.
“Formation” means a succession of sedimentary beds that were deposited under the same general geologic conditions.
“Free Cash Flow” (a non-GAAP measure) means net cash provided by operating activities (GAAP) less cash capital expenditures.
“GAAP” means U.S. generally accepted accounting principles.
“General Unsecured Claim” means any Claim against any Debtor that is not otherwise paid in full during the Chapter 11 Cases pursuant to an order of the Bankruptcy Court and is not an Administrative Claim, a Priority Tax Claim, an Other Priority Claim, an Other Secured Claim, a Revolving Credit Facility Claim, a FLLO Term Loan Facility Claim, a Second Lien Notes Claim, an Unsecured Notes Claim, an Intercompany Claim, or a Section 510(b) Claim.
“Gross Acres or Gross Wells” means the total acres or wells, as the case may be, in which a working interest is owned.
“MBbls” means thousand barrels.
“MMBbls” means million barrels.
“MBoe” means thousand Boe.
“MMBoe” means million Boe.
“Mcf” means thousand cubic feet.
“MMcf” means million cubic feet.
“Net Acres or Net Wells” means the sum of the fractional working interests owned in gross acres or gross wells.
“New Common Stock” means the single class of common stock issued by Reorganized Chesapeake on the Effective Date.
“NGL” means natural gas liquids.
“NYMEX” means New York Mercantile Exchange.
“OPEC” means Organization of the Petroleum Exporting Countries.
“Petition Date” means June 28, 2020, the date on which the Debtors commenced the Chapter 11 Cases.
“Plan” means the Fifth Amended Joint Chapter 11 Plan of Reorganization of Chesapeake Energy Corporation and its Debtor Affiliates, attached as Exhibit A to the Confirmation Order.
“Play” means a portion of the exploration and production cycle following the identification by geologists and geophysicists of areas with potential oil, natural gas and NGL reserves.
“Present Value of Estimated Future Net Revenues or PV-10 (non-GAAP)” means the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices calculated as the average oil and natural gas price during the preceding 12-month period prior to the end of the current reporting period, (determined as the unweighted arithmetic average of prices on the first day of each month within the 12-month period) and costs in effect at the determination date (unless such costs are subject to change pursuant to contractual provisions), without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expense or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%.
“Price Differential” means the difference in the price of oil, natural gas or NGL received at the sales point and the NYMEX price.
“Productive Well” means a well that is not a dry well. Productive wells include producing wells and wells that are mechanically capable of production.
“Proved Developed Reserves” means reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well.
“Proved Properties” means properties with proved reserves.
“Proved Reserves” As used in this report, proved reserves has the meaning given to such term in Rule 4-10(a)(22) of Regulation S-X, which states in part proved oil and natural gas reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.
“Proved Undeveloped Reserves (PUDs)” means proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances.
“Put Option Premium” means a nonrefundable aggregate fee of $60 million, which represents 10 percent of the Rights Offering Amount, payable to the Backstop Parties in accordance with, and subject to the terms of the
Backstop Commitment Agreement based on their respective backstop commitment percentages at the time such payment is made.
“Reservoir” means a porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
“Rights Offering” means the New Common Stock rights offering for the Rights Offering Amount consummated by the Debtors on the Effective Date.
“SEC” means United States Securities and Exchange Commission.
“Second Lien Notes” means the 11.50% senior notes due 2025 issued by Chesapeake pursuant to the Second Lien Notes Indenture.
“Second Lien Notes Claim” means any Claim on account of the Second Lien Notes.
“Standardized Measure” means the discounted future net cash flows relating to proved reserves based on the means of the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices calculated as the average oil and natural gas price during the preceding 12-month period prior to the end of the current reporting period (determined as the unweighted arithmetic average of prices on the first day of each month within the 12-month period). The standardized measure differs from the PV-10 measure only because the former includes the effects of estimated future income tax expenses.
“Tranche A Loans” means the fully revolving loans made under and on the terms set forth under the Exit Credit Facility which will be partially funded on the Effective Date, will have a scheduled maturity of 3 years from the Effective Date, and shall at all times be repaid prior to the repayment of the Tranche B Loans.
“Tranche B Loans” means term loans made under and on the terms set forth under the Exit Credit Facility which will be fully funded on the Effective Date, will have a scheduled maturity of 4 years from the Effective Date, will be repaid or prepaid only after there are no Tranche A Loans outstanding, and once so prepaid or repaid, may not be reborrowed.
“Undeveloped Acreage” means acreage on which wells have not been drilled or completed to a point that would permit the production of economic quantities of oil and natural gas regardless of whether the acreage contains proved reserves.
“Unproved Properties” means properties with no proved reserves.
“Vine Acquisition” means Chesapeake’s acquisition of Vine Energy Inc. which closed on November 1, 2021.
“Vine” means Vine Energy Inc.
“Volumetric Production Payment (VPP)” means a limited-term overriding royalty interest in oil and natural gas reserves that: (i) entitles the purchaser to receive scheduled production volumes over a period of time from specific lease interests; (ii) is free and clear of all associated future production costs and capital expenditures; (iii) is nonrecourse to the seller (i.e., the purchaser's only recourse is to the reserves acquired); (iv) transfers title of the reserves to the purchaser; and (v) allows the seller to retain the remaining reserves, if any, after the scheduled production volumes have been delivered.
“Warrants” means collectively, the Class A Warrants, Class B Warrants and Class C Warrants.
“Working Interest” means the operating interest which gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.
“WTI” means West Texas Intermediate.
“/Bbl” means per barrel.
“/Boe” means per Boe.
“/Mcf” means per Mcf.
“2019 Predecessor Period” means the year ended December 31, 2019.
“2020 Predecessor Period” means the year ended December 31, 2020.
“2021 Predecessor Period” means the period of January 1, 2021 through February 9, 2021.
“2021 Successor Period” means the period of February 10, 2021 through December 31, 2021.
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| Forward-Looking Statements |
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 (the “Exchange Act”). Forward-looking statements include our current expectations or forecasts of future events, including matters relating to the continuing effects of the COVID-19 pandemic and the impact thereof on our business, financial condition, results of operations and cash flows, the potential effects of the Plan restructuring on our operations, management, and employees, actions by, or disputes among or between, members of OPEC+ and other foreign oil-exporting countries, market factors, market prices, our ability to meet debt service requirements, our ability to continue to pay cash dividends, the amount and timing of any cash dividends, our ESG initiatives, and the other items discussed in the Introduction to Item 7 of Part II of this report. In this context, forward-looking statements often address our expected future business, financial performance and financial condition, and often contain words such as "expect," “could,” “may,” "anticipate," "intend," "plan," “ability,” "believe," "seek," "see," "will," "would," “estimate,” “forecast,” "target," “guidance,” “outlook,” “opportunity” or “strategy.”
Although we believe the expectations and forecasts reflected in our forward-looking statements are reasonable, they are inherently subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. No assurance can be given that such forward-looking statements will be correct or achieved or that the assumptions are accurate or will not change over time. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:
•the ability to execute on our business strategy following emergence from bankruptcy;
•the impact of the COVID-19 pandemic and its effect on our business, financial condition, employees, contractors, vendors and the global demand for oil and natural gas and U.S. and world financial markets;
•risks related to the Vine Acquisition, including our ability to successfully integrate the business of Vine into the Company and achieve the expected synergies from the Vine Acquisition within the expected timeframe;
•risks related to the Chief Acquisition, including a delay or failure to complete the Chief Acquisition caused by a failure to receive required regulatory approvals or satisfy or waive, as applicable, other closing conditions to the Chief Acquisition, and if the Chief Acquisition is completed, our ability to successfully integrate the business of Chief into the Company and achieve the expected synergies from the Chief Acquisition within the expected timeframe;
•our ability to comply with the covenants under our Exit Credit Facility and other indebtedness;
•our ability to realize our anticipated cash cost reductions;
•the volatility of oil, natural gas and NGL prices, which are affected by general economic and business conditions, as well as increased demand for (and availability of) alternative fuels and electric vehicles;
•uncertainties inherent in estimating quantities of oil, natural gas and NGL reserves and projecting future rates of production and the amount and timing of development expenditures;
•our ability to replace reserves and sustain production;
•drilling and operating risks and resulting liabilities;
•our ability to generate profits or achieve targeted results in drilling and well operations;
•the limitations our level of indebtedness may have on our financial flexibility;
•our inability to access the capital markets on favorable terms;
•the availability of cash flows from operations and other funds to finance reserve replacement costs or satisfy our debt obligations;
•adverse developments or losses from pending or future litigation and regulatory proceedings, including royalty claims;
•legislative, regulatory and environmental, social and governance (“ESG”) initiatives, including as a result of the change in the U.S. presidential administration, addressing environmental concerns, including initiatives addressing the impact of global climate change or further regulating hydraulic fracturing, methane emissions, flaring or water disposal;
•terrorist activities and/or cyber-attacks adversely impacting our operations;
•effects of purchase price adjustments and indemnity obligations; and
•other factors that are described under Risk Factors in Item 1A of Part I of this Annual Report on Form 10-K (this “Form 10-K” or this “report”).
We caution you not to place undue reliance on the forward-looking statements contained in this report, which speak only as of the filing date, and we undertake no obligation to update this information. We urge you to carefully review and consider the disclosures in this report and our other filings with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.
PART I
Unless the context otherwise requires, references to “Chesapeake,” the “Company,” “us,” “we” and “our” in this report are to Chesapeake Energy Corporation together with its subsidiaries. Our principal executive offices are located at 6100 North Western Avenue, Oklahoma City, Oklahoma 73118, and our main telephone number at that location is (405) 848-8000.
We are an independent exploration and production company engaged in the acquisition, exploration and development of properties to produce oil, natural gas and NGL from underground reservoirs. We own a large and geographically diverse portfolio of onshore U.S. unconventional natural gas and liquids assets, including interests in approximately 8,200 gross oil and natural gas wells.
On June 28, 2020, we and certain of our subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Bankruptcy Court confirmed the Plan in a bench ruling on January 13, 2021 and entered the Confirmation Order on January 16, 2021. The Debtors emerged from bankruptcy on February 9, 2021. Upon emergence, all existing equity was canceled and New Common Stock was issued to the previous holders of our FLLO Term Loan Facility, Second Lien Notes, senior unsecured notes and certain general unsecured creditors whose claims were impaired as a result of our bankruptcy, as well as to other parties as set forth in the Plan, including to other parties participating in a $600 million rights offering. Upon emergence from bankruptcy, we adopted fresh start accounting, which resulted in us becoming a new entity for financial reporting purposes. Accordingly, the consolidated financial statements on or after February 9, 2021 are not comparable to the consolidated financial statements prior to that date. To facilitate our discussion in this report, we refer to the post-emergence reorganized company as the “Successor” and the pre-emergence company as the “Predecessor.” See Note 2 and Note 3 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further discussion of our bankruptcy, the resulting reorganization and fresh start accounting. On November 1, 2021, we completed our acquisition of Vine, an energy company focused on the development of natural gas properties in the over-pressured stacked Haynesville and Mid-Bossier shale plays in Northwest Louisiana. The Vine Acquisition strengthens Chesapeake’s competitive position, meaningfully increasing our Free Cash Flow outlook and deepening our inventory of premium natural gas locations, while preserving the strength of our balance sheet.
On January 24, 2022, we entered into a definitive agreement to acquire Chief and associated non-operated interests held by affiliates of Tug Hill, Inc. (“Tug Hill”), for $2.0 billion in cash and approximately 9.44 million common shares. Chief and Tug Hill hold producing assets and an inventory of premium drilling locations in the Marcellus Shale in Northeast Pennsylvania. The cash portion of the Chief Acquisition will be financed with cash on hand and the use of our Exit Credit Facility. The Chief Acquisition, which is subject to customary closing conditions, including certain regulatory approvals, is expected to close by the end of the first quarter of 2022.
On January 24, 2022, we entered into an agreement to sell our Powder River Basin assets in Wyoming to Continental Resources, Inc. for approximately $450 million in cash. The transaction, which is subject to certain customary closing conditions, is expected to close in the first quarter of 2022.
The completion of these transactions will clarify and strengthen our asset portfolio, concentrating on three operating areas and advancing our highest-return assets in the Marcellus and Haynesville gas basins.
We make available, free of charge on our website at chk.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of all recent news releases. Documents and information on our website are not incorporated by reference herein.
The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including Chesapeake, that file electronically with the SEC.
Consistent returns, sustainable future. Our strategy is to create shareholder value by generating sustainable Free Cash Flow from our oil and natural gas development and production activities. We continue to focus on improving margins through operating efficiencies and financial discipline and improving our Environmental, Social, and Governance (“ESG”) performance. To accomplish these goals, we intend to allocate our human resources and capital expenditures to projects we believe offer the highest cash return on capital invested, to deploy leading drilling and completion technology throughout our portfolio and to take advantage of acquisition and divestiture opportunities to strengthen our portfolio. We also intend to continue to dedicate capital to projects that reduce the environmental impact of our oil and natural gas producing activities. We continue to seek opportunities to reduce cash costs (production, gathering, processing and transportation and general and administrative) per barrel of oil equivalent production through operational efficiencies, including but not limited to improving our production volumes from existing wells. We believe that we have emerged from Chapter 11 bankruptcy as a fundamentally stronger company, built to generate sustainable Free Cash Flow with a strengthened balance sheet, geographically diverse asset base and continuously improving ESG performance.
Maintain low leverage and strong liquidity. Subsequent to our emergence from Chapter 11 bankruptcy, we believe that maintaining low net leverage is integral to our business strategy and will allow us to maintain lower fixed costs, improve our margins and maintain the flexibility of our capital program.
Returns-focused capital reinvestment strategy. Our business focus will be on optimizing the development of our large, geographically diverse resource base with a prioritization of generating high cash returns on capital invested. We expect our maintenance capital program to yield in excess of annual production of 700 mboe per day and generate significant Free Cash Flow at today’s prevailing commodity market prices.
Low-cost operator with expected top-quartile cash costs. We expect to continue to focus on our cost optimization initiatives.
Continue efforts to reduce greenhouse gas (GHG) emissions and operate in an environmentally responsible manner with a goal of net zero direct GHG emissions by 2035. We are committed to operating our business responsibly and protecting the environments in which we operate. We eliminated routine flaring on all new wells completed in 2021, and plan to accomplish the same on all wells enterprise-wide by 2025. We reduced our methane loss rate to 0.08% and our GHG intensity to 5.0 as of December 31, 2021.
Manage commodity price exposure and ensure stability through prudent hedging strategy. We employ a prudent hedging strategy, which is aligned with our capital expenditure program and is designed to manage our exposure to commodity price volatility, ensure the stability of our cash flows and mitigate our risks to realizing attractive cash returns on capital invested. As of February 21, 2022, we have 11 mmbbls and 899 bcf of expected 2022 production, representing 58% and 68% of 2022 forecasted oil and natural gas production, hedged at prices of $44.30/bbl and $2.69/mcf, respectively, for swaps and $3.21/mcf to $4.26/mcf, respectively, for collars. Additionally, as of February 21, 2022, we have hedged 6 mmbbl and 467 bcf of expected 2023 oil and natural gas production at prices of $47.17/bbl and $2.69/mcf, respectively, for swaps and $65.00/bbl to $79.09/bbl and $3.03/mcf to $4.02/mcf, respectively, for collars. Metrics include hedges that are contingent upon the closing of the Chief Acquisition.
We focus our acquisition, exploration, development and production efforts in the geographic operating areas described below.
Marcellus - Northern Appalachian Basin in Pennsylvania.
Haynesville - Haynesville/Bossier Shales in Northwestern Louisiana.
Eagle Ford - Eagle Ford Shale in South Texas.
Powder River Basin - Stacked pay in Wyoming (purchase and sale agreement to divest executed on January 24, 2022, and which, subject to the satisfaction or waiver of certain closing conditions, is expected to close in the first quarter of 2022).
As of December 31, 2021, we held an interest in approximately 8,200 gross productive wells, including 6,500 wells in which we held a working interest and 1,700 wells in which we held an overriding or royalty interest. Of the 6,500 (4,100 net) wells in which we held a working interest, 3,000 (1,700 net) wells were classified as productive natural gas wells and 3,500 (2,400 net) wells were classified as productive oil wells. During 2021, excluding sold properties, we operated 5,700 gross wells and held a non-operating working interest in 800 gross wells. We also completed 126 gross (74 net) wells as operator and participated in another 13 gross (1 net) wells completed by other operators. We operate approximately 98% of our current daily production volumes.
The following table sets forth the wells we completed or participated in during the periods indicated. In the table, "gross" refers to the total wells in which we had a working interest and "net" refers to gross wells multiplied by our working interest:
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| | 2021 | | 2020 | | 2019 |
| | Gross | | % | | Net | | % | | Gross | | % | | Net | | % | | Gross | | % | | Net | | % |
| Development: | | | | | | | | | | | | | | | | | | | | | | | | |
| Productive | | 137 | | | 100 | | | 74 | | | 100 | | | 203 | | | 100 | | | 126 | | | 100 | | | 414 | | | 100 | | | 271 | | | 100 | |
| Dry | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 137 | | | 100 | | | 74 | | | 100 | | | 203 | | | 100 | | | 126 | | | 100 | | | 414 | | | 100 | | | 271 | | | 100 | |
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| Exploratory: | | | | | | | | | | | | | | | | | | | | | | | | |
| Productive | | 2 | | | 100 | | | 1 | | | 100 | | | — | | | — | | | — | | | — | | | 1 | | | 20 | | | 1 | | | 20 | |
| Dry | | — | | | — | | | — | | | — | | | 2 | | | 100 | | | 2 | | | 100 | | | 4 | | | 80 | | | 4 | | | 80 | |
| Total | | 2 | | | 100 | | | 1 | | | 100 | | | 2 | | | 100 | | | 2 | | | 100 | | | 5 | | | 100 | | | 5 | | | 100 | |
The following table shows the wells we completed or participated in by operating area:
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| | 2021 | | 2020 | | 2019 |
| | Gross Wells | | Net Wells | | Gross Wells | | Net Wells | | Gross Wells | | Net Wells |
| Marcellus | | 83 | | | 34 | | | 79 | | | 33 | | | 44 | | | 22 | |
| Haynesville | | 40 | | | 31 | | | 21 | | | 19 | | | 22 | | | 16 | |
| Eagle Ford | | 12 | | | 7 | | | 86 | | | 65 | | | 233 | | | 164 | |
| Powder River Basin | | 4 | | | 3 | | | 12 | | | 9 | | | 75 | | | 57 | |
| Mid-Continent | | — | | | — | | | 5 | | | — | | | 40 | | | 12 | |
| Other | | — | | | — | | | 2 | | | 2 | | | 5 | | | 5 | |
| Total | | 139 | | | 75 | | | 205 | | | 128 | | | 419 | | | 276 | |
As of December 31, 2021, we had 55 gross (32 net) wells in the process of being drilled or completed.
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| Production Volumes, Sales Prices, Production Expenses and Gathering, Processing and Transportation Expenses |
The following table sets forth information regarding our net production volumes, average sales price received for our production, average sales price of our production combined with our realized gains or losses on derivatives and production and gathering, processing and transportation expenses per boe for the periods indicated:
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| | Successor | | | Predecessor |
| | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Net Production: | | | | | | | | | |
| Oil (mmbbl) | | 23 | | | | 3 | | 37 | | | 43 | |
| Natural gas (bcf) | | 727 | | | | 80 | | 685 | | | 728 | |
| NGL (mmbbl) | | 7 | | | | 1 | | 11 | | | 12 | |
| Oil equivalent (mmboe) | | 150 | | | | 18 | | 163 | | | 177 | |
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Average Sales Price of Production: | | | | | | | | | |
| Oil ($ per bbl) | | $ | 69.07 | | | | $ | 53.21 | | | $ | 38.16 | | | $ | 59.16 | |
| Natural gas ($ per mcf) | | $ | 3.61 | | | | $ | 2.45 | | | $ | 1.73 | | | $ | 2.45 | |
| NGL ($ per bbl) | | $ | 31.37 | | | | $ | 25.92 | | | $ | 11.55 | | | $ | 15.62 | |
| Oil equivalent ($ per boe) | | $ | 29.19 | | | | $ | 22.63 | | | $ | 16.84 | | | $ | 25.57 | |
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Average Sales Price (including realized gains (losses) on derivatives): | | | | | | | | | |
| Oil ($ per bbl) | | $ | 49.06 | | | | $ | 46.85 | | | $ | 56.74 | | | $ | 60.00 | |
| Natural gas ($ per mcf) | | $ | 2.62 | | | | $ | 2.52 | | | $ | 1.97 | | | $ | 2.60 | |
| NGL ($ per bbl) | | $ | 31.42 | | | | $ | 25.55 | | | $ | 11.55 | | | $ | 15.62 | |
| Oil equivalent ($ per boe) | | $ | 21.46 | | | | $ | 21.72 | | | $ | 22.09 | | | $ | 26.42 | |
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| Expenses ($ per boe): | | | | | | | | | |
| Production | | $ | 1.97 | | | | $ | 1.80 | | | $ | 2.29 | | | $ | 2.94 | |
| Gathering, processing and transportation | | $ | 5.17 | | | | $ | 5.78 | | | $ | 6.64 | | | $ | 6.13 | |
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| Oil, Natural Gas and NGL Reserves |
The tables below set forth information as of December 31, 2021, with respect to our estimated proved reserves, the associated estimated future net revenue, the present value of estimated future net revenue (“PV-10”) and the standardized measure of discounted future net cash flows (“standardized measure”). None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Oil | | Natural Gas | | NGL | | Total |
| | (mmbbl) | | (bcf) | | (mmbbl) | | (mmboe) |
| Proved developed | | 166 | | | 4,246 | | | 62 | | | 935 | |
| Proved undeveloped | | 44 | | | 3,578 | | | 20 | | | 661 | |
Total proved(a) | | 210 | | | 7,824 | | | 82 | | | 1,596 | |
| | | | | | | | | | | | | | | | | | | | |
| | Proved Developed | | Proved Undeveloped | | Total Proved |
Estimated future net revenue(b) | | $ | 14,502 | | | $ | 8,776 | | | $ | 23,278 | |
Present value of estimated future net revenue (PV-10)(b) | | $ | 8,654 | | | $ | 5,057 | | | $ | 13,711 | |
Standardized measure(b) | | $ | 12,287 | |
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(a) Haynesville, Marcellus, and Eagle Ford accounted for approximately 39%, 36%, and 23% respectively, of our estimated proved reserves by volume as of December 31, 2021.
(b) Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using pricing differentials and costs under existing economic conditions as of December 31, 2021, and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2021. The prices used in our PV-10 measure were $66.56 per bbl of oil and $3.60 per mcf of natural gas, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2021. The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense of $1.424 billion as of December 31, 2021.
Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10, a non-GAAP measure, should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP.
A comparison of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves.
As of December 31, 2021, our proved reserve estimates included 661 mmboe of reserves classified as proved undeveloped, compared to 60 mmboe as of December 31, 2020. Presented below is a summary of changes in our proved undeveloped reserves (“PUDs”) for 2021:
| | | | | | | | |
| | Total |
| | (mmboe) |
| Proved undeveloped reserves, beginning of period (Predecessor) | | 60 | |
| Extensions and discoveries | | 321 | |
| Revisions of previous estimates | | 145 | |
| Conversion to proved developed reserves | | (60) | |
| Purchase of reserves-in-place | | 195 | |
| Proved undeveloped reserves, end of period (Successor) | | 661 | |
As of December 31, 2021, all PUDs were planned to be developed within five years of original recording. In 2021, we invested approximately $97 million to convert 60 mmboe of PUDs to proved developed reserves. In 2022, we estimate that we will invest approximately $794 million for PUD conversion. We added 321 mmboe of proved undeveloped reserves through extensions and discoveries following our emergence from bankruptcy on February 9, 2021 and certainty regarding our ability to finance the development of our proved reserves over a five-year period. In addition, during 2021, we recorded an upward revision of 145 mmboe from previous estimates due to lateral length adjustments, performance and updates to our five-year development plan. We also added 195 mmboe of proved undeveloped reserves through purchase of reserves-in-place related to the Vine Acquisition.
The future net revenue attributable to our estimated PUDs was $8.776 billion and the present value was $5.057 billion as of December 31, 2021. These values were calculated assuming that we will expend approximately $2.7 billion to develop these reserves ($794 million in 2022, $814 million in 2023, $539 million in 2024, $378 million in 2025 and $217 million in 2026). The amount and timing of these expenditures will depend on a number of factors, including actual drilling results, service costs, commodity prices and the availability of capital. Our developmental drilling schedules are subject to revision and reprioritization throughout the year resulting from unknowable factors such as unexpected developmental drilling results, title issues and infrastructure availability or constraints.
Of our 1,596 mmboe of proved developed reserves as of December 31, 2021, approximately 20 mmboe, or 1%, were non-producing.
Our ownership interest used for calculating proved reserves and the associated estimated future net revenue assumes maximum participation by other parties to our farm-out and participation agreements.
Our estimated proved reserves and the standardized measure of discounted future net cash flows of the proved reserves as of December 31, 2021, 2020 and 2019, along with the changes in quantities and standardized measure of the reserves for each of the three years then ended, are shown in Supplemental Disclosures About Oil, Natural Gas and NGL Producing Activities included in Item 8 of Part II of this report. No estimates of proved reserves comparable to those included herein have been included in reports to any federal agency other than the SEC.
There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond our control. The reserve data represents only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured exactly, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates made by different engineers often vary. Accordingly, reserve estimates often differ from the actual quantities of oil, natural gas and NGL that are ultimately recovered. Furthermore, the estimated future net revenue from proved reserves and the associated present value are based upon certain assumptions, including prices, future production levels and costs that may not prove correct. Future prices and costs may be materially higher or lower than the prices and costs as of the date of any estimate. See Supplemental Disclosures About Oil, Natural Gas and NGL Producing Activities included in Item 8 of Part II of this report for further discussion of our reserve quantities.
Reserves Estimation
Our Corporate Reserves Department prepared approximately 9% by volume, and approximately 4% by value, of our estimated proved reserves as of December 31, 2021, disclosed in this report. Those estimates were based upon the best available production, engineering and geologic data.
Our Director – Corporate Reserves, is the technical person primarily responsible for overseeing the preparation of our reserve estimates and for coordinating any reserves work conducted by a third-party engineering firm. Her qualifications include the following:
•Over 19 years of practical experience in the oil and gas industry, with over 16 years in reservoir engineering;
•Bachelor of Science degree in Geology and Environmental Sciences;
•Master’s Degree in Petroleum and Natural Gas Engineering;
•Executive MBA; and
•member in good standing of the Society of Petroleum Engineers.
We ensure that the key members of our Corporate Reserves Department have appropriate technical qualifications to oversee the preparation of reserve estimates. Each of our Corporate Reserves Engineers has significant engineering experience in reserve estimation. Our engineering technicians have a minimum of a four-year degree in mathematics, economics, finance or other technical/business/science field. We maintain a continuous education program for our engineers and technicians on new technologies and industry advancements as well as refresher training on basic skills and analytical techniques.
We maintain internal controls such as the following to ensure the reliability of reserves estimations:
•We follow comprehensive SEC-compliant internal policies to estimate and report proved reserves. Reserve estimates are made by experienced reservoir engineers or under their direct supervision. All material changes are reviewed and approved by Corporate Reserves Engineers.
•The Corporate Reserves Department reviews our proved reserves at the close of each quarter.
•Each quarter, Reservoir Managers, the Director – Corporate Reserves, the Vice Presidents of each operating area and the Vice President of Corporate and Strategic Planning review all significant reserves changes and all new proved undeveloped reserves additions.
•The Corporate Reserves Department reports independently of our operations.
•The five-year PUD development plan is reviewed and approved annually by the Director – Corporate Reserves and the Vice President of Corporate and Strategic Planning.
We engaged LaRoche Petroleum Consultants, Ltd., a third-party engineering firm, to prepare approximately 91% by volume, and approximately 96% by value, of our estimated proved reserves as of December 31, 2021. A copy of the report issued by the engineering firm is filed with this report as Exhibit 99.1. The qualifications of the technical person at the firm primarily responsible for overseeing the preparation of our reserve estimates are set forth below.
•Over 40 years of practical experience in the estimation and evaluation of reserves;
•licensed professional engineer in the State of Texas; and
•Bachelor of Science and Master of Science degrees in Petroleum Engineering.
The following table sets forth our gross and net developed and undeveloped oil and natural gas leasehold and fee mineral acreage as of December 31, 2021. Gross acres are the total number of acres in which we own a working interest. Net acres refer to gross acres multiplied by our fractional working interest. Acreage numbers do not include our unexercised options to acquire additional acreage.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Developed Leasehold | | Undeveloped Leasehold | | Total |
| | Gross Acres | | Net Acres | | Gross Acres | | Net Acres | | Gross Acres | | Net Acres |
| | (in thousands) |
| Marcellus | | 556 | | | 339 | | | 216 | | | 172 | | | 772 | | | 511 | |
| Haynesville | | 359 | | | 323 | | | 33 | | | 23 | | | 392 | | | 346 | |
| Eagle Ford | | 678 | | | 478 | | | 235 | | | 133 | | | 913 | | | 611 | |
| Powder River Basin | | 106 | | | 86 | | | 126 | | | 95 | | | 232 | | | 181 | |
Other(a) | | 231 | | | 212 | | | 1,256 | | | 1,195 | | | 1,487 | | | 1,407 | |
| Total | | 1,930 | | | 1,438 | | | 1,866 | | | 1,618 | | | 3,796 | | | 3,056 | |
___________________________________________
(a) Includes 1.2 million net acres retained in the 2016 divestiture of our Devonian Shale assets, in which we retained all rights below the base of the Kope formation.
Most of our leases have a three- to five-year primary term, and we manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our drilling to establish production in paying quantities in order to hold leases by production, timely exercising our contractual rights to pay delay rentals to extend the terms of leases we value, planning non-core divestitures to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The acreage in the table above includes a total of 0.1 million net acres subject to expiration in the next three years.
The principal function of our marketing operations is to provide oil, natural gas and NGL marketing services, including commodity price structuring, securing and negotiating of gathering, hauling, processing and transportation services, contract administration and nomination services for us and other interest owners in Chesapeake-operated wells. The marketing operations also provide other services for our exploration and production activities, including services to enhance the value of oil and natural gas production by aggregating volumes sold to various intermediary markets, end markets and pipelines. This aggregation allows us to attract larger, more creditworthy customers that in turn assist in maximizing the prices received.
Generally, our oil production is sold under market-sensitive short-term or spot price contracts. Natural gas and NGL production are sold to purchasers under percentage-of-proceeds contracts, percentage-of-index contracts or spot price contracts. Under the terms of our percentage-of-proceeds contracts, we receive a percentage of the resale price received from the ultimate purchaser. Under our percentage-of-index contracts, the price we receive is tied to published indices.
We have entered into long-term gathering, processing, and transportation contracts with various parties that require us to deliver fixed, determinable quantities of production over specified periods of time. Certain of our contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. See Note 7 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further discussion of commitments.
For the 2021 Successor Period, sales to Valero Energy Corporation and Energy Transfer Crude Marketing accounted for approximately 14% and 11%, respectively, of total revenues (before the effects of hedging). For the 2021 Predecessor Period, sales to Valero Energy Corporation accounted for approximately 19% of total revenues (before the effects of hedging). For the 2020 and 2019 Predecessor Periods, sales to Valero Corporation constituted 17% and 12% of total revenues (before the effects of hedging). No other purchasers accounted for more than 10% of our total revenues during the 2021 Successor Period or 2021, 2020 or 2019 Predecessor Periods.
We compete with both major integrated and other independent oil and natural gas companies in all aspects of our business to explore, develop and operate our properties and market our production. Some of our competitors may have larger financial and other resources than us. Competitive conditions may be affected by future legislation and regulations as the United States develops new energy and climate-related policies. In addition, some of our competitors may have a competitive advantage when responding to factors that affect demand for oil and natural gas production, such as changing prices, domestic and foreign political conditions, weather conditions, the price and availability of alternative fuels, the proximity and capacity of natural gas pipelines and other transportation facilities and overall economic conditions. We also face indirect competition from alternative energy sources, including wind, solar and electric power. We believe that our technological expertise, combined with our exploration, land, drilling and production capabilities and the experience of our management team, enables us to compete effectively.
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| Public Policy and Government Regulation |
All of our operations are conducted onshore in the United States. Our industry is subject to a wide range of regulations, laws, rules, taxes, fees and other policy implementation actions that have been pervasive and are under constant review for amendment or expansion. Numerous government agencies have issued extensive regulations that are binding on our industry, some of which carry substantial penalties for failure to comply. These laws and regulations increase the cost of doing business and consequently affect profitability. Additionally, currently unforeseen environmental incidents may occur or past non-compliance with environmental laws or regulations may be discovered. We actively monitor regulatory developments applicable to our industry in order to anticipate, design and implement required compliance activities and systems. The following are significant areas of government control and regulation affecting our operations.
Exploration and Production, Environmental, Health and Safety and Occupational Laws and Regulations
Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following:
•reporting of workplace injuries and illnesses;
•industrial hygiene monitoring;
•worker protection and workplace safety;
•approval or permits to drill and to conduct operations;
•provision of financial assurances (such as bonds) covering drilling and well operations;
•calculation and disbursement of royalty payments and production taxes;
•seismic operations/data;
•location, drilling, cementing and casing of wells;
•well design and construction of pad and equipment;
•construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance;
•method of well completion and hydraulic fracturing;
•water withdrawal;
•well production and operations, including processing and gathering systems;
•emergency response, contingency plans and spill prevention plans;
•emissions and discharges permitting;
•climate change;
•use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations;
•surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads;
•plugging and abandoning of wells; and
•transportation of production.
Shortly after taking office in January 2021, President Biden issued a series of executive orders designed to address climate change and requiring agencies to review environmental actions taken by the Trump administration, as well as a memorandum to departments and agencies to refrain from proposing or issuing rules until a departmental or agency head appointed or designated by the Biden administration has reviewed and approved the rule. In November 2021, the Biden Administration released “The Long-Term Strategy of the United States: Pathways to Net-Zero Greenhouse Gas Emissions by 2050,” which establishes a roadmap to net zero emissions in the United States by 2050 through, among other things, improving energy efficiency; decarbonizing energy sources via electricity, hydrogen, and sustainable biofuels; and reducing non-carbon dioxide GHG emissions, such as methane and nitrous oxide. These executive orders and policy priorities may result in the development of additional regulations or changes to existing regulations, certain of which could negatively impact our financial position, results of operations and cash flows. In addition, the United States is one of almost 200 nations that, in December 2015, agreed to the Paris Agreement, an international climate change agreement in Paris, France that calls for countries to set their own GHG emissions targets and be transparent about the measures each country will take to achieve its GHG emissions targets. President Biden has recommitted the United States to the Paris Agreement and, in April 2021, announced a goal of reducing the United States’ emissions by 50-52% below 2005 levels by 2030. In November 2021, the international community gathered again in Glasgow at the 26th Conference to the Parties on the UN Framework Convention on Climate Change (“COP26”), during which multiple announcements were made, including a call for parties to eliminate certain fossil fuel subsidies and pursue further action on non-carbon dioxide GHGs. Relatedly, the United States and European Union jointly announced the launch of the “Global Methane Pledge,” which aims to cut global methane pollution at least 30% by 2030 relative to 2020 levels, including “all feasible reductions” in the energy sector. In addition, several states and geographic regions in the United States have also adopted legislation and regulations regarding climate change-related matters, and additional legislation or regulation by these states and regions, U.S. federal agencies, including the Environmental Protection Agency (the “EPA”), and/or international agreements to which the United States may become a party could result in increased compliance costs for us and our customers. Failure to comply with these laws and regulations can lead to the imposition of remedial liabilities, administrative, civil or criminal fines or penalties or injunctions limiting our operations in affected areas. Moreover, multiple environmental laws provide for citizen suits which allow environmental organizations to act in the place of the government and sue operators for alleged violations of environmental law. We consider the responsibility and costs of environmental protection and safety and health compliance fundamental, manageable parts of our business. To date, we have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on regulatory trends and increasingly stringent laws, as well as the increasing number of climate-related commitments by capital providers, our capital expenditures and operating expenses related to the protection of the environment and safety and health compliance have increased over the years and may continue to increase. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters.
Our operations also are subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the statutory pooling or integration of tracts to facilitate exploration, while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations limit the amounts of oil and gas we
can produce from our wells and the number of wells or the locations at which we can drill. For further discussion, see Item 1A. Risk Factors - We are subject to extensive governmental regulation, which can change and could adversely impact our business.
Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation and regulation. Further restrictions of hydraulic fracturing could make it difficult or impossible to conduct our drilling and completion operations, and thereby reduce the amount of oil, natural gas and NGL that we are ultimately able to produce from our properties.
Certain of our U.S. natural gas and oil leases, primarily in our Powder River Basin operating area, are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. On January 20, 2021, the Acting Secretary for the Department of the Interior signed an order effectively suspending new fossil fuel leasing and permitting on federal lands for 60 days. Then on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. A federal district court judge in Louisiana issued a nationwide preliminary injunction on June 15, 2021, effectively preventing the Biden Administration from implementing the pause of new oil and natural gas leases on federal lands and waters and forcing the lease sale. On November 26, 2021, the U.S. Department of the Interior released its “Report On The Federal Oil And Gas Leasing Program,” which assessed the current state of oil and gas leasing on federal lands and proposed several reforms, including raising royalty rates and implementing stricter standards for entities seeking to purchase oil and gas leases. Recently, on January 27, 2022, a federal district court judge in Washington, DC vacated the results of the federal government’s Lease Sale 257, effectively canceling the sale, on the grounds that the federal government failed to consider foreign consumption of oil and natural gas from its greenhouse gas emissions analysis. These recent developments and the Biden Administration’s and certain federal courts’ focus on the climate change impacts of federal projects could result in significant changes to the federal oil and gas leasing program in the future. Restrictions surrounding onshore drilling, onshore federal lease availability, and restrictions on the ability to obtain required permits could have a material adverse impact on our operations.
Permitting activities on federal lands are also subject to frequent delays. Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties.
For further discussion, see Item 1A. Risk Factors - Oil and natural gas operations are uncertain and involve substantial costs and risks.
Our title to properties is subject to royalty, overriding royalty, carried, net profits, working and other similar interests and contractual arrangements customary in the oil and natural gas industry, to liens for current taxes not yet due and to other encumbrances. As is customary in the industry in the case of undeveloped properties, only cursory investigation of record title is made at the time of acquisition. Drilling title opinions are usually prepared before commencement of drilling operations. We believe we have satisfactory title to substantially all of our active properties in accordance with standards generally accepted in the oil and natural gas industry. Nevertheless, we are involved in title disputes from time to time that may result in litigation.
| | |
| Operating Hazards and Insurance |
The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations.
We maintain a control of well insurance policy with a $50 million single well limit and a $100 million multiple wells limit that insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $250 million comprehensive general liability umbrella insurance policy. In addition, we maintain a $50 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future.
We own an office complex in Oklahoma City and we own or lease various field offices in cities or towns in the areas where we conduct our operations.
Michael A. Wichterich, Executive Chairman and Director
Michael A. (“Mike”) Wichterich, 53, has served as Executive Chair of Chesapeake's Board of Directors since October 2021. He previously served as Chair of the Board of Directors since February 2021, and as the Company's Interim Chief Executive Officer from April 2021 to October 2021. Mr. Wichterich is Founder and Chief Executive Officer of Three Rivers Operating Company LLC, a private exploration and production company with a focus in the Permian Basin. Prior to founding Three Rivers Operating, Mr. Wichterich served as the Chief Financial Officer of Texas American Resources, New Braunfels Utilities and Mariner Energy. Additionally, Mr. Wichterich began his career with PricewaterhouseCoopers in its energy auditing practice. Mr. Wichterich also serves as a board member of Grizzly Energy. He earned a B.B.A. from the University of Texas.
Domenic J. Dell'Osso, Jr., President, Chief Executive Officer and Director
Domenic J. (“Nick”) Dell'Osso, Jr., 45, has served as President and Chief Executive Officer since October 2021. Prior to being named as CEO, Mr. Dell’Osso served as our Executive Vice President and Chief Financial Officer since November 2010. Mr. Dell'Osso served as our Vice President – Finance and Chief Financial Officer of our wholly owned midstream subsidiary, Chesapeake Midstream Development, L.P., from August 2008 to November 2010. Before joining Chesapeake, Mr. Dell’Osso was an energy investment banker with Jefferies & Co. from 2006 to 2008 and Banc of America Securities from 2004 to 2006. Mr. Dell’Osso graduated from Boston College in 1998 and from the University of Texas at Austin in 2003.
Mohit Singh, Executive Vice President and Chief Financial Officer
Mohit Singh, 44, was appointed Executive Vice President and Chief Financial Officer in December 2021. For the last six years, Mr. Singh has served on the executive leadership team at BPX Energy, the United States onshore subsidiary of BP (NYSE: BP). He most recently led the M&A, corporate land and reserves functions, having previously served as Head of Business Development and Exploration and as Senior Vice President – North Business Unit. Prior to joining BPX, Mr. Singh worked as an investment banker focused on oil and gas transactions for RBC Capital Markets and Goldman Sachs. A chemical engineer by training, he began his career at Shell Exploration & Production Company where he held business planning, reservoir engineering and research engineering roles of increasing importance. Mr. Singh earned a PhD in Chemical Engineering from the University of Houston, an MBA from the University of Texas and a BTech in Chemical Engineering from the Indian Institute of Technology.
Josh Viets, Executive Vice President and Chief Operating Officer
Josh Viets, 43, was appointed Executive Vice President and Chief Operating Officer in February 2022. For the last 20 years, Mr. Viets has worked in operational positions of increasing importance at ConocoPhillips Company (NYSE: COP). He most recently served as Vice President, Delaware Basin and previously held leadership positions in operations, engineering, subsurface, and capital project across the ConocoPhillips portfolio. Mr. Viets earned a Bachelor of Science in Petroleum Engineering from Colorado School of Mines in 2001.
Benjamin E. Russ, Executive Vice President - General Counsel and Corporate Secretary
Benjamin E. (“Ben”) Russ, 47, was appointed Executive Vice President – General Counsel and Corporate Secretary in June 2021. Prior to that time, he served as Associate General Counsel – Corporate from May 2014 to June 2021; Division Counsel/Senior Division Counsel managing day-to-day legal matters in the Barnett, East Texas and Louisiana from July 2010 to May 2014; and Attorney/Senior Attorney managing litigation in Louisiana from September 2008 to July 2010. Before joining Chesapeake, Mr. Russ worked at Gulfport Energy Corporation serving as Assistant General Counsel from 2005 to 2006 and General Counsel from 2006 to 2008. Prior to Gulfport, he was an associate at the McKinney & Stringer, P.C. Mr. Russ received a B.S. in Finance from Oklahoma State University in 1996 and a J.D. from Oklahoma City University in 2004.
One Team. One Chesapeake.
Our “One CHK” culture and company core values promote an inclusive, diverse and productive workplace. Working as One CHK defines Chesapeake’s culture and unites our team to achieve shared goals for the benefit of our stakeholders. It is a culture of accountability where innovation and collaboration help us achieve sustainable operational success. We had approximately 1,300 employees as of February 21, 2022.
Our Culture, Our Core Values
At Chesapeake, our employees are driven to create value every day in a safe and responsible manner. Our core values are the foundation of our culture and the driving force behind our goal to achieve ESG excellence. Serving as the lens through which we evaluate every business decision, our commitment to these values, in both words and actions builds a stronger, healthier Chesapeake, benefiting all our stakeholders. Our core values are:
•Integrity and Trust
•Respect
•Transparency and Open Communication
•Commercial Focus
•Change Leadership
Celebrating Inclusion and Diversity
We are committed to inclusion and diversity. We proactively embrace our diversity of people, thoughts and talents, and combine these strengths to pursue results and meaningful change for our company, employees and stakeholders, and we provide education and training for our employees on topics related to inclusion and diversity.
In 2019, Chesapeake joined a coalition of companies pledging to advance diversity and inclusion in the workplace. On February 9, 2021, we formed a board committee dedicated to ESG oversight, including our inclusion and diversity efforts. Two of the seven members of our Board of Directors are considered diverse, including one female and one “underrepresented minority” (as defined in Nasdaq’s newly proposed listing rule). Chesapeake cultivates a workplace in which diverse perspectives are welcomed and respected and where employees feel encouraged to discuss diversity and inclusion.
Stewards of Our Environment
Chesapeake is committed to protecting our country’s natural resources and reducing our environmental footprint. We have strict standards for environmental stewardship and a culture of environmental excellence among our employees and business partners. We recognize that ownership and accountability are key to helping ensure our work sites are safe and protective of the environment.
Our path to leading a responsible energy future begins with our goal to achieve net-zero direct greenhouse gas emissions by 2035. To meet this challenge, we have set meaningful initial steps including:
•Eliminating routine flaring from all new wells completed from 2021 forward, and enterprise-wide by 2025;
•Reducing our methane intensity to 0.09% by 2025 (achieved 0.08% in 2021); and
•Reducing our GHG intensity to 5.5 by 2025 (achieved 5.0 in 2021).
Safety First Every Day
Safety is more than a company metric, it is core to our commitment to leading a responsible energy future. We set and deliver strict safety standards, prioritizing the well-being of our employees and partners. Our safety culture is championed by our Board of Directors and executive leadership team, owned by every employee and contractor and managed by our Health, Safety, Environmental and Regulatory (HSER) team. Maintaining a safe work environment and promoting safe behaviors is a commitment that each of our employees own together. We hold each other accountable to keeping our sites, our co-workers and our contractors safe.
One program that reinforces this philosophy of personal responsibility is Stop Work Authority. Through Stop Work Authority, every employee and contractor has the right, responsibility and authority to stop work if conditions are unsafe or could cause harm to the environment. Creating an incident-free work environment starts with setting clear expectations among employees, contractors and suppliers regarding our safety standards, and working to empower and equip individuals with the skills necessary to promote safety in their areas of work. The foundation of our safety training efforts is our Stay Accident Free Every Day (S.A.F.E.) program, which encourages all workers on our locations to take personal responsibility for their safety and the safety of those around them. This behavior-based program addresses the activities that can often lead to safety incidents and encourages actions that create safe work sites and a safe corporate campus.
Every year our HSER team provides targeted trainings based on safety performance analysis, job functions and location specific factors. Our training program includes a mix of in-person and virtual training, with greater emphasis on in-person instruction and includes all employees. Job-specific learning paths aim to exceed regulatory requirements and ensure employees are holistically prepared to execute their job functions safely and responsibly.
Chesapeake’s training philosophy values contractor training in the same manner as employees. We design contractor training to align as much as possible with employee training, encouraging synchronized knowledge sharing and understanding, critical to decreasing our cumulative incidents.
Ethical Business Conduct
Chesapeake works hard to maintain the confidence of our stakeholders. We earn this trust by acting in an ethical manner to protect our people, the environment and the communities where we operate. This starts by driving accountability through all levels of the company and having systems in place to uphold our high standards for conduct. Strong governance practices begin at the top providing our organization with clear guidelines to define standards for ethical behavior at every level. Each Chesapeake director or employee, regardless of position, must abide by Chesapeake’s Code of Business Conduct (the "Code"), which is structured around our core values. Each year all employees must sign a Code certification confirming they have reviewed the Code and related policies, understand the high standards expected of them and will report actual or potential ethics concerns or Code violations.
Employee Wellness and Benefits
Supporting the individual well-being of our employees is foundational to our safety culture and success as a company. We champion healthy lifestyles and offer health resources. Across the company, employees are offered preventive programs and are encouraged to complete an annual screening for common health-related issues. We support our employees’ and their families’ health by offering full medical, dental, vision, prescription drug insurance for employees and their families, life insurance, short- and long-term disability coverage, and health savings and dependent care flexible spending accounts. We offer parental leave for the birth or adoption of a child, an adoption assistance program, alternate work schedules, a 401(k) savings plan with company match, flexible work hours, tuition reimbursement and access to a child development center and fitness center at market rates. Additionally, Chesapeake provides employees and their families access to a confidential Employee Assistance Program (EAP) which connects employees with trained counselors and other support professionals.
There are numerous factors that affect our business and results of operations, many of which are beyond our control. The following is a description of factors that we consider to be material and that might cause our future results to differ materially from those currently expected. The risks described below are not the only risks facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur, our business, financial position, results of operations, cash flows, reserves and/or our ability to pay our debts and other liabilities could suffer, the trading price and liquidity of our securities could decline and you may lose all or part of your investment in our securities.
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| Risks Related to our Emergence from Bankruptcy |
•We recently emerged from bankruptcy, which may adversely affect our business and relationships.
•Our actual financial results after emergence from bankruptcy may not be comparable to our historical financial information as a result of the implementation of the Plan and the transactions contemplated thereby.
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| Risks Related to Operating our Business |
•Conservation measures and technological advances could reduce demand for natural gas and oil.
•Negative public perception regarding us or our industry could have an adverse effect on our operations.
•The oil and gas exploration and production industry is very competitive; some of our competitors have greater financial and other resources than we do, and there is competition to attract and retain talent, and competition over access to certain industry equipment.
•Oil, natural gas and NGL prices fluctuate widely, and lower prices for an extended period of time are likely to have a material adverse effect on our business.
•The ongoing coronavirus (COVID-19) pandemic and related economic turmoil have affected and could continue to adversely affect our business, financial condition, results of operations and cash flows.
•If commodity prices fall or drilling efforts are unsuccessful, we may be required to record write downs of the carrying value of our oil and natural gas properties.
•Significant capital expenditures are required to replace our reserves and conduct our business.
•If we are not able to replace reserves, we may not be able to sustain production.
•The actual quantities of and future net revenues from our proved reserves may be less than our estimates.
•Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns.
•Certain of our undeveloped properties are subject to leases that will expire over the next several years unless production is established on units containing the acreage or the leases are renewed.
•Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices, may require us to provide collateral for derivative liabilities and involve risk that our counterparties may be unable to satisfy their obligations to us.
•Oil and natural gas operations are uncertain and involve substantial costs and risks.
•Our ability to produce oil, natural gas and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner.
•Risks related to potential acquisitions or dispositions may adversely affect our business.
•Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow.
•Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we or our third-party providers are unable to obtain and maintain adequate protection for our data, our business may be harmed.
•Our operations could be disrupted by natural or human causes beyond our control.
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| Financial Risks Related to our Business |
•We have significant capital needs, and our ability to access the capital and credit markets to raise capital on favorable terms is limited by industry conditions.
•Restrictive covenants in certain of our debt agreements could limit our growth and our ability to finance our operations, fund our capital needs, respond to changing conditions and engage in other business activities that may be in our best interests.
•Changes in the method of determining the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to outstanding debt.
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| Risks Related to Recent and Pending Acquisitions |
•The Chief Acquisition may not be completed. Failure to complete the Chief Acquisition could negatively impact the price of shares of our common stock, as well as our future business and financial results.
•The synergies attributable to the Vine Acquisition, or Chief Acquisition, if consummated, may vary from expectations, and we will be subject to business uncertainties for a period of time after the closing of the Vine Acquisition and Chief Acquisition, if consummated, which could adversely affect the combined company after these acquisitions. These uncertainties could include, but may not be limited to, loss of key personnel, retention of customer or supplier contracts or relationships, and litigation in connection with the Chief Acquisition.
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| Legal and Regulatory Risks |
•We are subject to extensive governmental regulation, which can change and could adversely impact our business.
•Environmental and regulatory matters and related costs can be significant.
•Increasing attention to environmental, social and governance matters may impact our business, financial results or stock price.
•The taxation of independent producers is subject to change, and changes in tax law could increase our cost of doing business.
•Trading in our new common stock, additional issuances of new common stock, and certain other stock transactions could lead to a second, potentially more restrictive annual limitation on the utilization of our tax attributes reducing their ability to offset future taxable income, which may result in an increase to income tax liabilities.
•A deterioration in general economic, political, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition.
•Military and other armed conflicts, including terrorist activities, could materially and adversely affect our business and results of operations.
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| Risks Related to our Emergence from Bankruptcy |
We recently emerged from bankruptcy, which may adversely affect our business and relationships.
It is possible that our having filed for bankruptcy and our recent emergence from bankruptcy may adversely affect our business and relationships with customers, vendors, contractors or employees. Due to uncertainties, many risks exist, including the following:
•key vendors or other contract counterparties may terminate their relationships with us or require additional financial assurances or enhanced performance from us;
•our ability to renew existing contracts and compete for new business may be adversely affected;
•our ability to attract, motivate and/or retain key executives may be adversely affected; and
•competitors may take business away from us, and our ability to attract and retain customers may be negatively impacted.
The occurrence of one or more of these events could have a material and adverse effect on our operations, financial condition and reputation. We cannot assure you that having been subject to bankruptcy protection will not adversely affect our operations in the future.
Our actual financial results after emergence from bankruptcy may not be comparable to our historical financial information as a result of the implementation of the Plan and the transactions contemplated thereby.
In connection with the disclosure statement we filed with the Bankruptcy Court, and the hearing to consider confirmation of the Plan, we prepared projected financial information to demonstrate to the Bankruptcy Court the feasibility of the Plan and our ability to continue operations upon our emergence from bankruptcy. Those projections were prepared solely for the purpose of bankruptcy proceedings and have not been, and will not be, updated on an ongoing basis and should not be relied upon by investors. At the time they were prepared, the projections reflected numerous assumptions concerning our anticipated future performance with respect to prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. Projections are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions underlying the projections and/or valuation estimates may prove to be wrong in material respects. Actual results may vary significantly from those contemplated by the projections. As a result, investors should not rely on these projections.
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| Risks Related to Operating our Business |
Conservation measures and technological advances could reduce demand for natural gas and oil.
Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to natural gas and oil, technological advances in fuel economy and energy generation devices could reduce demand for natural gas and oil. The impact of the changing demand for natural gas and oil could adversely impact our earnings, cash flows and financial position.
Negative public perception regarding us or our industry could have an adverse effect on our operations.
Negative public perception regarding us or our industry resulting from, among other things, concerns raised by advocacy groups about hydraulic fracturing, waste disposal, oil spills, seismic activity, climate change, explosions of natural gas transmission lines and the development and operation of pipelines and other midstream facilities may lead to generally increased political pressure and regulatory scrutiny, which may, in turn, lead to new state and federal safety and environmental laws, regulations, guidelines and enforcement interpretations. Additionally, environmental groups, landowners, local groups and other advocates may oppose our operations through organized protests, attempts to block or sabotage our operations or those of our midstream transportation providers, encourage capital providers to divest of their interests in us or our industry, intervene in regulatory or administrative proceedings involving our assets or those of our midstream transportation providers, or file lawsuits or other actions
designed to prevent, disrupt or delay the development or operation of our assets and business or those of our midstream transportation providers. These actions may cause operational delays or restrictions, increased operating costs, additional regulatory burdens and increased risk of litigation. Moreover, governmental authorities exercise considerable discretion in the timing and scope of permit issuance and the public may engage in the permitting process, including through intervention in the courts. Negative public perception could cause the permits we require to conduct our operations to be withheld, delayed or burdened by requirements that restrict our ability to profitably conduct our business. A change in control of national or local governments, including the U.S. presidential administration, Congress, state or local governments, and governments of other countries may also result in uncertainty regarding the degree to which there will be increased restrictions on oil and gas production activities, which could materially adversely affect our industry and our financial condition and results of operations.
Recently, activists concerned about the potential effects of climate change have directed their attention towards sources of funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in energy-related activities. Ultimately, this could make it more difficult or costly for us to secure funding for exploration and production activities. Members of the investment community have also begun to screen companies such as ours for sustainability performance, including practices related to GHGs and climate change, before investing in our common units. Any efforts to improve our sustainability practices in response to these pressures may increase our costs, and we may be forced to implement technologies that are less economically efficient or are not economically viable in order to improve our sustainability performance and to meet the specific requirements to perform services for certain customers.
The oil and gas exploration and production industry is very competitive; some of our competitors have greater financial and other resources than we do, and there is competition to attract and retain talent and competition over access to certain industry equipment.
We face competition in every aspect of our business, including, but not limited to, buying and selling reserves and leases, obtaining goods and services needed to operate our business and marketing oil, natural gas or NGL. Competitors include multinational oil companies, independent production companies and individual producers and operators. Some of our competitors have greater financial and other resources than we do. As a result, these competitors may be able to address industry challenges more effectively or weather industry downturns more easily than we can. We also face indirect competition from alternative energy sources, including wind, solar and electric power.
Our performance depends largely on the talents and efforts of highly skilled individuals and on our ability to attract new employees and to retain and motivate our existing employees. Competition in our industry for qualified employees is intense. If we are unsuccessful in attracting and retaining skilled employees and managerial talent, our ability to compete effectively may be diminished. We also compete for the equipment required to explore, develop and operate properties. Typically, during times of rising commodity prices, drilling and operating costs will also increase. During these periods, there is often a shortage of drilling rigs and other oilfield equipment and services, which could adversely affect our ability to execute our development plans on a timely basis and within budget.
Oil, natural gas and NGL prices fluctuate widely, and lower prices for an extended period of time are likely to have a material adverse effect on our business.
Our revenues, results of operations, profitability, liquidity, leverage ratio and ability to grow and invest in capital expenditures depend primarily upon the prices we receive for the oil, natural gas and NGL we sell. We incur substantial expenditures to replace reserves, sustain production and fund our business plans. Low oil, natural gas and NGL prices can negatively affect the amount of cash available for capital expenditures, debt service and debt repayment and our ability to borrow money or raise additional capital and, as a result, could have a material adverse effect on our financial condition, results of operations, cash flows and reserves. In addition, periods of low oil and natural gas prices may result in a reduction of the carrying value of our oil and natural gas properties due to recognizing impairments in proved and unproved properties.
Volatility in oil, natural gas and NGL prices may result from factors that are beyond our control, including:
•domestic and worldwide supplies of oil, natural gas and NGL, including U.S. inventories of oil and natural gas reserves;
•weather conditions;
•changes in the level of consumer and industrial demand, including impacts from global or national health epidemics and concerns, such as the COVID-19 pandemic;
•the price and availability of alternative fuels;
•technological advances affecting energy consumption;
•the effectiveness of worldwide conservation measures;
•the availability, proximity and capacity of pipelines, other transportation facilities and processing facilities;
•the level and effect of trading in commodity futures markets, including by commodity price speculators and others;
•U.S. exports of oil, natural gas, liquefied natural gas and NGL;
•the price and level of foreign imports;
•the nature and extent of domestic and foreign governmental regulations and taxes;
•the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) and others to agree to and maintain oil price and production controls;
•increased use of competing energy products, including alternative energy sources;
•political instability or armed conflict in oil and natural gas producing regions;
•acts of terrorism; and
•domestic and global economic and political conditions.
These factors and the volatility of the energy markets make it extremely difficult to predict future oil, natural gas and NGL price movements. In addition, any prolonged period of lower prices could reduce the quantities of reserves that we may economically produce.
The ongoing COVID-19 pandemic and related economic turmoil have affected, and could continue to adversely affect, our business, financial condition, results of operations and cash flows.
The global spread of COVID-19 created significant volatility, uncertainty, and economic disruption during 2020 and 2021, and threatens to do the same in 2022. The ongoing COVID-19 pandemic has reached more than 200 countries and continues to present rapidly evolving economic and public health risks. The pandemic has adversely impacted the entire global economy, and there is considerable uncertainty regarding how long the pandemic and related market conditions will persist and the extent and duration of governmental and other measures implemented to try to slow the spread of the virus, such as quarantines, shelter-in-place orders, business and government shutdowns and restrictions on operations. In certain cases, states that had begun taking steps to reopen their economies experienced a subsequent surge in cases of COVID-19, causing these states to cease or dramatically scale back such reopening measures in some cases and reinstitute restrictions in others. Our precautionary measures and plans may not be effective in preventing future disruptions to our business. Moreover, future operations could be negatively affected if a significant number of our employees are quarantined as a result of exposure to the virus. In addition, actions by our customers and derivative contract counterparties in response to COVID-19 and its economic impacts, including potential non-performance or delays, may also have an adverse impact on our business.
Furthermore, the impact of the pandemic, including the initial resulting reduction in demand for oil and natural gas, coupled with the sharp decline in commodity prices following the announcement of price reductions and production increases in March 2020 by members of OPEC+ has led to significant global economic contraction generally and in our industry in particular. While an agreement to cut production has since been announced by OPEC+ and its allies, the supply and demand imbalance created by such price reductions and production increases, coupled with the impact of COVID-19, has continued to result in a significant downturn in the oil and gas industry. Although OPEC+ agreed in April 2020 to cut oil production and has extended such production cuts through
March 2021, crude oil prices have remained depressed as a result of the oversupply of oil, an increasingly utilized global storage network and the decrease in crude oil demand due to COVID-19. Oil and natural gas prices are expected to continue to be volatile as a result of the ongoing COVID-19 pandemic and as changes in oil and natural gas inventories, industry demand and national and economic performance are reported, and we cannot predict when prices will improve and stabilize. Due to numerous uncertainties, we cannot at this time predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, financial condition and results of operations.
The ultimate impact of COVID-19 will depend on future developments that cannot be anticipated, including, among others, the ultimate severity of the virus and its rapidly evolving and spreading variants, the consequences of governmental and other measures designed to mitigate the spread of the virus, the development and availability of treatments and vaccines and the extent to which these treatments and vaccines may remain effective as new strains of the virus emerge, the duration of the pandemic, any further actions taken by members of OPEC+, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent of any return to normal economic and operating conditions.
If commodity prices fall or drilling efforts are unsuccessful, we may be required to record write downs of the carrying value of our oil and natural gas properties.
We have been required to write down the carrying value of certain of our oil and natural gas properties in the past, and there is a risk that we will be required to take additional writedowns in the future. Writedowns may occur in the future when oil and natural gas prices are low, or if we have downward adjustments to our estimated proved reserves, increases in our estimates of operating or development costs, or due to the anticipated sale of properties.
The successful efforts method of accounting requires that we periodically review the carrying value of our oil and natural gas properties for possible impairment. Impairment is recognized for the excess of book value over fair value when the book value of a proven property is greater than the expected undiscounted future net cash flows from that property and on acreage when conditions indicate the carrying value is not recoverable. We may be required to write down the carrying value of a property based on oil and natural gas prices at the time of the impairment review, or as a result of continuing evaluation of drilling results, production data, economics, divestiture activity, and other factors. A writedown constitutes a non-cash charge to earnings and does not impact cash or cash flows from operating activities; however, it reflects our long-term ability to recover an investment, reduces our reported earnings and increases certain leverage ratios. See Impairment of Oil and Natural Gas Properties included in Item 7 of this report for further information.
Significant capital expenditures are required to replace our reserves and conduct our business.
Our exploration, development and acquisition activities require substantial capital expenditures. We intend to fund our capital expenditures through cash flows from operations, and to the extent that is not sufficient, borrowings under our revolving credit facility. Our ability to generate operating cash flow is subject to a number of risks and variables, such as the level of production from existing wells, prices of oil, natural gas and NGL, our success in developing and producing new reserves and the other risk factors discussed herein. Our forecasted 2022 capital expenditures, inclusive of capitalized interest, are $1.5 - $1.8 billion compared to our 2021 capital spending level of $746 million. Management continues to review operational plans for 2022 and beyond, which could result in changes to projected capital expenditures and projected revenues from sales of oil, natural gas and NGL. If we are unable to fund our capital expenditures as planned, we could experience a curtailment of our exploration and development activity, a loss of properties and a decline in our oil, natural gas and NGL reserves.
If we are not able to replace reserves, we may not be able to sustain production.
Our future success depends largely upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Unless we replace the reserves we produce through successful development, exploration or acquisition activities, our proved reserves and production will decline over time. Thus, our future oil and natural gas reserves and production, and therefore our cash flow and income, are highly dependent on our success in efficiently developing our current reserves and economically finding or acquiring additional recoverable reserves.
The actual quantities of and future net revenues from our proved reserves may be less than our estimates.
The estimates of our proved reserves and the estimated future net revenues from our proved reserves included in this report are based upon various assumptions, including assumptions required by the SEC relating to oil, natural gas and NGL prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating oil, natural gas and NGL reserves is complex and involves significant decisions and assumptions associated with geological, geophysical, engineering and economic data for each well. Therefore, these estimates are subject to future revisions.
Actual future production, oil, natural gas and NGL prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil, natural gas and NGL reserves most likely will vary from these estimates. Such variations may be significant and could materially affect the estimated quantities and present value of our proved reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development drilling, prevailing oil and natural gas prices and other factors, many of which are beyond our control.
As of December 31, 2021, approximately 41% of our estimated proved reserves (by volume) were undeveloped. These reserve estimates reflect our plans for capital expenditures to convert PUDs into proved developed reserves, including approximately $2.7 billion during the next five years. You should be aware that the estimated development costs may not equal our actual costs, development may not occur as scheduled and results may not be as estimated. If we choose not to develop our PUDs, or if we are not otherwise able to successfully develop them, we will be required to remove them from our reported proved reserves. In addition, under the SEC's reserve reporting rules, because PUDs generally may be booked only if they relate to wells scheduled to be drilled within five years of the date of booking, we may be required to remove any PUDs that are not developed within this five-year time frame.
You should not assume that the present values included in this report represent the current market value of our estimated reserves. In accordance with SEC requirements, the estimates of our present values are based on prices and costs as of the date of the estimates. The price on the date of estimate is calculated as the average oil and natural gas price during the 12 months ending in the current reporting period, determined as the unweighted arithmetic average of prices on the first day of each month within the 12-month period. The December 31, 2021 present value is based on a $66.56 per bbl of oil price and a $3.60 per mcf of natural gas price, before considering basis differential adjustments. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of an estimate.
The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect both the timing of future net cash flows from our proved reserves and their present value. Any changes in demand for oil and natural gas, governmental regulations or taxation will also affect the future net cash flows from our production. In addition, the 10% discount factor that is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes is not necessarily the most appropriate discount factor. Interest rates in effect from time to time and the risks associated with our business or the oil and gas industry in general will affect the appropriateness of the 10% discount factor.
Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns.
We have a substantial inventory of undeveloped properties. Development and exploratory drilling and production activities are subject to many risks, including the risk that commercially productive reservoirs will not be discovered. We have acquired undeveloped properties that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our initial investments. Additionally, there can be no assurance that undeveloped properties acquired by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive, or that we will recover all or any portion of our investment in such undeveloped properties or wells.
Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling and completion operations may be curtailed, delayed or canceled as a
result of unexpected drilling conditions, title problems, equipment failures or accidents, shortages of midstream transportation, equipment or personnel, environmental issues, state or local bans or moratoriums on hydraulic fracturing and produced water disposal, federal restrictions on oil and gas leasing and permitting, and a decline in commodity prices, among others. The profitability of wells, particularly in certain of the areas in which we operate, will be reduced or eliminated if commodity prices decline. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and future market prices for oil, natural gas and NGL, costs associated with producing oil, natural gas and NGL and our ability to add reserves at an acceptable cost.
We rely to a significant extent on seismic data and other technologies in evaluating undeveloped properties and in conducting our exploration activities. The seismic data and other technologies we use do not allow us to know conclusively, prior to acquisition of undeveloped properties, or drilling a well, whether oil or natural gas is present or may be produced economically. If we incur significant expense in acquiring or developing properties that do not produce as expected or at profitable levels, it could have a material adverse effect on our results of operations and financial condition.
Certain of our undeveloped properties are subject to leases that will expire over the next several years unless production is established on units containing the acreage or the leases are renewed.
Leases on oil and natural gas properties typically have a term of three to five years, after which they expire unless, prior to expiration, a well is drilled and production of hydrocarbons in paying quantities is established. If our leases on our undeveloped properties expire and we are unable to renew the leases, we will lose our right to develop the related properties. Although we seek to actively manage our undeveloped properties, our drilling plans for these areas are subject to change based upon various factors, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. Low commodity prices may cause us to delay our drilling plans and, as a result, lose our right to develop the related properties.
Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices, may require us to provide collateral for derivative liabilities and involve risk that our counterparties may be unable to satisfy their obligations to us.
To manage our exposure to price volatility, we enter into oil, natural gas and NGL price derivative contracts. Our oil, natural gas and NGL derivative arrangements may limit the benefit we would receive from increases in commodity prices. The fair value of our oil, natural gas and NGL derivative instruments can fluctuate significantly between periods. Our decision to mitigate cash flow volatility through derivative arrangements, if any, is based in part on our view of current and future market conditions and our desire to stabilize cash flows necessary for the development of our proved reserves. We may choose not to enter into derivatives if we believe the pricing environment for certain time periods is unfavorable. Additionally, we may choose to liquidate existing derivative positions prior to the expiration of their contractual maturities to monetize gain positions for the purpose of funding our capital program.
Most of our oil, natural gas and NGL derivative contracts are with counterparties under bilateral hedging arrangements. Under a majority of our arrangements, the collateral provided for our obligations is secured by the same hydrocarbon interests that secure our Exit Credit Facility. Our counterparties’ obligations under the arrangements must be secured by cash or letters of credit to the extent that any mark-to-market amounts owed to us exceed defined thresholds. Collateral requirements are dependent to a large extent on oil and natural gas prices.
Oil, natural gas and NGL derivative transactions expose us to the risk that our counterparties, which are generally financial institutions, may be unable to satisfy their obligations to us. During periods of declining commodity prices, the value of our commodity derivative asset positions increase, which increases our counterparty exposure. Although the counterparties to our hedging arrangements are required to secure their obligations to us under certain scenarios, if any of our counterparties were to default on their obligations to us under the derivative contracts or seek bankruptcy protection, it could have an adverse effect on our ability to fund our planned activities and could result in a larger percentage of our future cash flows being exposed to commodity price changes.
Oil and natural gas operations are uncertain and involve substantial costs and risks.
Our operating activities are subject to numerous costs and risks, including the risk that we will not encounter commercially productive oil or gas reservoirs. Drilling for oil, natural gas and NGL can be unprofitable, not only from
dry holes, but from productive wells that do not return a profit because of insufficient revenue from production or high costs. Substantial costs are required to locate, acquire and develop oil and gas properties, and we are often uncertain as to the amount and timing of those costs. Our cost of drilling, completing, equipping and operating wells is often uncertain before drilling commences. Declines in commodity prices and overruns in budgeted expenditures are common risks that can make a particular project uneconomic or less economic than forecasted. Although both exploratory and developmental drilling activities involve these risks, exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons. In addition, our oil and gas properties can become damaged, our operations may be curtailed, delayed or canceled and the costs of such operations may increase as a result of a variety of factors, including, but not limited to:
•unexpected drilling conditions, pressure conditions or irregularities in reservoir formations;
•equipment failures or accidents;
•fires, explosions, blowouts, cratering or loss of well control;
•the mishandling or underground migration of fluids and chemicals;
•adverse weather conditions and natural disasters, such as tornadoes, earthquakes, hurricanes and extreme temperatures;
•issues with title or in receiving governmental permits or approvals;
•restricted takeaway capacity for our production, including due to inadequate midstream infrastructure or constrained downstream markets;
•environmental hazards or liabilities;
•restrictions in access to, or disposal of, water used or produced in drilling and completion operations;
•shortages or delays in the availability of services or delivery of equipment; and
•unexpected or unforeseen changes in regulatory policy, and political or public opinion.
The occurrence of one or more of these factors could result in a partial or total loss of our investment in a particular property, as well as significant liabilities. Although we may maintain insurance against some, but not all, of the risks described above, our insurance may not be adequate to cover casualty losses or liabilities, and our insurance does not cover penalties or fines that may be assessed by a governmental authority. For certain risks, such as political risk, business interruption, war, terrorism and piracy, we have limited or no insurance coverage. Also, in the future we may not be able to obtain insurance at premium levels that justify its purchase. The occurrence of a significant event against which we are not fully insured may expose us to liabilities.
Moreover, certain of these events could result in environmental pollution and impact to third parties, including persons living in proximity to our operations, our employees and employees of our contractors, leading to possible injuries, death or significant damage to property and natural resources.
Our ability to produce oil, natural gas and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner.
Development activities, particularly hydraulic fracturing, require the use and disposal of significant quantities of water. In certain areas, there may be insufficient local aquifer capacity to provide a source of water for drilling activities. Water must be obtained from other sources and transported to the drilling site. Our inability to secure sufficient amounts of water, or to dispose of or recycle the water used in our operations, could adversely impact our operations in certain areas. The imposition of environmental initiatives and regulations could further restrict our ability to conduct certain operations such as hydraulic fracturing or disposal of waste, including, but not limited to, produced water, drilling fluids and other materials associated with the exploration, development or production of oil and natural gas.
Risks related to potential acquisitions or dispositions may adversely affect our business.
From time to time, we evaluate acquisitions and dispositions of assets, businesses and other investments. These transactions may not result in the anticipated benefits or efficiencies. In addition, acquisitions may be financed by borrowings, requiring us to incur more debt, or by the issuance of our common stock. Any such acquisition or disposition involves risks and we cannot assure you that:
•any acquisition will be successfully integrated into our operations and internal controls;
•the due diligence conducted prior to an acquisition will uncover situations that could result in financial or legal exposure, such as title defects and potential environmental and other liabilities;
•post-closing purchase price adjustments will be realized in our favor;
•our assumptions about, among other things, reserves, estimated production, revenues, capital expenditures, operating, operating expenses and costs will be accurate;
•any investment, acquisition, disposition or integration will not divert management resources from the operation of our business; and
•any investment, acquisition, or disposition or integration will not have a material adverse effect on our financial condition, results of operations, cash flows or reserves.
If any of these risks materialize, the benefits of such acquisition or disposition may not be fully realized, if at all, and our financial condition, results of operations, cash flows and reserves could be negatively impacted.
Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow.
In certain resource plays, the capacity of gathering and transportation systems is insufficient to accommodate potential production from existing and new wells. We rely heavily on third parties to meet our oil, natural gas and NGL gathering needs. Capital constraints could limit the construction of new pipelines and gathering systems and the provision or expansion of trucking services by third parties. Until this new capacity is available, we may experience delays in producing and selling our oil, natural gas and NGL. In such event, we might have to shut in our wells while awaiting a pipeline connection or additional capacity, which would adversely affect our results of operations.
A portion of our oil, natural gas and NGL production in any region may be interrupted, or shut in, from time to time for numerous reasons, including weather conditions, accidents, loss of pipeline or gathering system access, field labor issues or strikes, or we might voluntarily curtail production in response to market conditions. If a substantial amount of our production is interrupted at the same time, it could materially adversely affect our cash flow.
Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we or our third-party providers are unable to obtain and maintain adequate protection for our data, our business may be harmed.
Our business has become increasingly dependent on digital technologies to conduct certain exploration, development and production activities. We depend on digital technology to estimate quantities of oil, natural gas and NGL reserves, process and record financial and operating data, analyze seismic and drilling information, and communicate with our customers, employees and third-party partners. In addition, many third-party providers, such as vendors and others in the supply chain, directly or indirectly provide to us various products and services across an array of internal and external functions that enable us to conduct, monitor and/or protect our business, systems and data assets. In addition, in the ordinary course, we and our service providers collect, process, transmit, and store proprietary and confidential data, including personal information.
We have been the subject of cyber-attacks on our internal systems and through those of third parties in the past. As an energy company, we expect to continue to be a target for such attacks in the future. We are vulnerable to malicious attacks by third parties or insiders, social engineering and human error, as well as to bugs and other vulnerabilities that may exist in our third-party providers systems. Unauthorized access to our seismic data, reserves information, customer or employee data or other proprietary or commercially sensitive information could lead to data corruption, communication interruption, or other disruptions in our exploration or production operations or planned business transactions, any of which could have a material adverse impact on our results of operations. If
our information technology systems cease to function properly or our cybersecurity is breached (for example, due to ransomware), we could suffer disruptions to our normal operations, which may include disruptions to our drilling, completion, production and corporate functions. A cyber-attack involving our information systems and related infrastructure, or that of our business associates or third-party providers, could result in supply chain disruptions that delay or prevent the transportation and marketing of our production, non-compliance leading to regulatory fines or penalties, loss or disclosure of, or damage to, our or any of our customer’s or supplier’s data or confidential information that could harm our business by damaging our reputation, subjecting us to potential financial or legal liability, and requiring us to incur significant costs, including costs to repair or restore our systems and data or to take other remedial steps.
Both the frequency and magnitude of cyberattacks is expected to increase and attackers are becoming more sophisticated. As a result, we may be unable to anticipate, detect or prevent future attacks, particularly as the methodologies utilized by attackers change frequently or are not recognized until launched, and we may be unable to investigate or remediate incidents because attackers are increasingly using techniques and tools designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence. Further, our increased reliance on remote access to our information systems as a result of the COVID-19 pandemic increases our exposure to potential cybersecurity breaches. As cyber-attacks continue to evolve, we may be required to spend significant additional resources to modify or enhance our protective measures or to investigate and remediate any vulnerabilities to cyber-attacks. In addition, new laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate costs as we collect and store personal data related to employees, royalty owners and other parties. Any failure to comply with these laws and regulations could result in significant penalties and legal liability. For example, the California Consumer Privacy Act (“CCPA”) was signed into law on June 28, 2018 and largely took effect on January 1, 2020. The CCPA, among other things, contains new disclosure obligations for businesses that collect personal information about California residents and enhanced consumer protections for those individuals, and provides for statutory fines and penalties for certain data security breaches or other CCPA violations. At least fifteen other states have considered, and some have already enacted privacy laws like the CCPA.
Any losses, costs or liabilities directly or indirectly related to cyberattacks or similar incidents may not be covered by, or may exceed the coverage limits of, any or all of our insurance policies.
Our operations could be disrupted by natural or human causes beyond our control.
Our operations are subject to disruption from natural or human causes beyond our control, including risks from extreme weather events, such as hurricanes, severe storms, floods, heat waves, and ambient temperature increases, as well as wildfires, war, accidents, civil unrest, political events, earthquakes, system failures, cyber threats, terrorist acts and epidemic or pandemic diseases, such as the COVID-19 pandemic, any of which could result in suspension of operations or harm to people, our assets or the natural environment.
It is difficult to predict with certainty the timing, frequency or severity of such events, any of which could have a material adverse effect on our results of operations or financial condition.
In addition, our headquarters are located in Oklahoma City, Oklahoma, an area that experiences severe weather events, including tornadoes and earthquakes. Our information systems and administrative and management processes are primarily provided to our various drilling projects and producing wells throughout the United States from this location, which could be disrupted if a catastrophic event, such as a tornado, power outage or act of terror, destroyed or severely damaged our headquarters. Any such catastrophic event could harm our ability to conduct normal operations and could adversely affect our business.
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| Financial Risks Related to our Business |
We have significant capital needs, and our ability to access the capital and credit markets to raise capital on favorable terms is limited by industry conditions.
Disruptions in the capital and credit markets, in particular with respect to the energy sector, could limit our ability to access these markets or may significantly increase our cost to borrow. In the past, low commodity prices have caused and may continue to cause lenders to increase the interest rates under upstream operators’ credit
facilities, enact tighter lending standards, refuse to refinance existing debt around maturity on favorable terms or at all and may reduce or cease to provide funding to borrowers. Additionally, certain financial institutions have announced their intention to cease investment banking and corporate lending activities in the North American oil and gas sector or have established climate-related funding commitments that could have the effect of limiting their investment in us or our industry. If we are unable to access the capital and credit markets on favorable terms, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and liquidity and our ability to repay or refinance our debt. Additionally, challenges in the economy have led and could further lead to reductions in the demand for oil and gas, or further reductions in the prices of oil and gas, or both, which could have a negative impact on our financial position, results of operations and cash flows.
Restrictive covenants in certain of our debt agreements could limit our growth and our ability to finance our operations, fund our capital needs, respond to changing conditions and engage in other business activities that may be in our best interests.
Our debt agreements impose operating and financial restrictions on us. These restrictions limit our ability and that of our restricted subsidiaries to, among other things:
•incur additional indebtedness;
•make investments or loans;
•create liens;
•consummate mergers and similar fundamental changes;
•make restricted payments;
•make investments in unrestricted subsidiaries;
•enter into transactions with affiliates; and
•use the proceeds of asset sales.
We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under certain of our debt agreements. The restrictions contained in the covenants could:
•limit our ability to plan for, or react to, market conditions, to meet capital needs or otherwise to restrict our activities or business plan; and
•adversely affect our ability to finance our operations, enter into acquisitions or divestitures to engage in other business activities that would be in our interest.
Changes in the method of determining the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to outstanding debt.
Amounts drawn under certain of our debt instruments may bear interest at rates based on LIBOR. On July 27, 2017, the Financial Conduct Authority in the United Kingdom (the “FCA”) announced that it would phase out LIBOR as a benchmark by the end of 2021. The publication of USD LIBOR will cease after June 30, 2023, and the FCA confirmed that use of USD LIBOR will not be permitted in most new contracts after December 31, 2021. The Credit Agreement adopts the hardwire approach for LIBOR replacement which provides that Term SOFR (or Daily Simple SOFR, to the extent Term SOFR is unavailable) will be used in the event of LIBOR cessation or upon an election to early opt-in, once SOFR becomes available. The Credit Agreement also provides that in the event that SOFR is not available at the time of LIBOR cessation, the borrower and agent must agree on a successor rate subject to negative consent rights of the lenders. We are currently evaluating the impact of the potential replacement of the LIBOR interest rate. In addition, the overall financial markets may be disrupted as a result of the phase-out or replacement of LIBOR. Uncertainty as to the nature of such potential phase-out and alternative reference rates or disruption in the financial market could have a material adverse effect on our financial condition, results of operations and cash flows.
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| Risks Related to Recent and Pending Acquisitions |
The Chief Acquisition may not be completed. Failure to complete the Chief Acquisition could negatively impact the price of shares of our common stock, as well as our future business and financial results.
The Chief Acquisition is subject to a number of conditions that must be satisfied or, to the extent permitted by applicable law, waived, prior to the completion of the merger. These conditions to the completion of the Chief Acquisition, some of which are beyond our control, may not be satisfied or waived in a timely manner or at all, and, accordingly, the Chief Acquisition may be delayed or may not be completed.
If the Chief Acquisition is not completed for any reason, our ongoing business, financial condition and financial results may be adversely affected. Without realizing any of the benefits of having completed the transactions, we will be subject to a number of risks, including the following:
•we may be required to pay certain costs relating to the Chief Acquisition, which are substantial, such as legal, accounting, financial advisory and printing fees, whether or not the transactions are completed;
•time and resources committed by our management to matters relating to the Chief Acquisition could otherwise have been devoted to pursuing other beneficial opportunities;
•we may experience negative reactions from financial markets, including negative impacts on the price of our common stock, including to the extent that the current market price reflects a market assumption that the Chief Acquisition will be completed;
•we may experience negative reactions from employees, customers or vendors; and
•we may not have been able to take certain actions during the pendency of the Chief Acquisition that would have benefitted us as an independent company and the opportunity to take such actions may no longer be available.
In addition, any delay in completing the Chief Acquisition may significantly reduce the synergies and other benefits that we expect that the combined company may achieve if the Chief Acquisition is completed within the expected timeframe.
Required regulatory approvals for the Chief Acquisition may not be received, may take longer than expected to be received, or may impose conditions that are not presently anticipated or cannot be met.
Completion of the Chief Acquisition is conditioned upon the expiration or termination of any waiting period applicable to the merger under the HSR Act. Although each party has agreed to use its reasonable best efforts to ensure the prompt expiration or termination of any applicable waiting period under the HSR Act and to respond to and comply with any request for information from any governmental entity charged with enforcing, applying, administering or investigating the HSR Act or any other antitrust laws, there can be no assurance that HSR clearance will be obtained and that the other conditions to completing the Chief Acquisition will be satisfied. In addition, the governmental authorities from which the regulatory approvals are required may impose conditions on the completion of the Chief Acquisition or require changes to the terms of the Chief Acquisition. We cannot provide any assurance that these approvals will be obtained or that there will not be any adverse consequences to our business resulting from the failure to obtain these governmental approvals or from conditions that could be imposed in connection with obtaining these governmental approvals.
Completion of the Chief Acquisition is also conditioned upon the authorization for listing of our common stock to be issued in connection with the Chief Acquisition on the Nasdaq Global Select Market, or such other Nasdaq market on which our shares of common stock are then listed. There can be no assurance that such approval will be obtained or that the other conditions to completing the Chief Acquisition will be satisfied.
Such conditions or changes and the process of obtaining regulatory approvals could have the effect of delaying or impeding consummation of the Chief Acquisition or of imposing additional costs or limitations on us following completion of the Chief Acquisition, any of which might have an adverse effect on us following completion of the Chief Acquisition and may diminish the anticipated benefits of the Chief Acquisition.
The synergies attributable to the Vine Acquisition, or Chief Acquisition, if consummated, may vary from expectations.
We may fail to realize the anticipated benefits and synergies expected from the Vine Acquisition, or Chief Acquisition, if consummated, which could adversely affect our business, financial condition and results of operations. The success of these acquisitions will depend, in significant part, on our ability to successfully integrate the acquired businesses, grow the revenue of the combined company and realize the anticipated strategic benefits and synergies from the combinations, such as operational and financial scale, and increased Free Cash Flow. However, achieving these goals requires, among other things, realization of the targeted cost synergies expected from these acquisitions. The growth and the anticipated benefits of the acquisitions may not be realized fully or at all, or may take longer to realize than expected. Actual operating, technological, strategic and revenue opportunities, if achieved at all, may be less significant than expected or may take longer to achieve than anticipated. If we are not able to achieve these objectives and realize the anticipated benefits and synergies expected from the Vine Acquisition, or Chief Acquisition, if consummated, within the anticipated timing or at all, our business, financial condition and results of operations may be adversely affected.
We will be subject to business uncertainties for a period of time after the closing of the Vine Acquisition and Chief Acquisition, if consummated, which could adversely affect the combined company after these acquisitions.
Uncertainty about the effect of these acquisitions on employees, industry contacts and business partners may have an adverse effect on the combined company. These uncertainties may impair the combined company’s ability to attract, retain and motivate key personnel for a period of time after the closing of these acquisitions and could cause industry contacts, business partners and others that deal with the combined company to seek to change their existing business relationships with the combined company.
Uncertainties associated with the Vine Acquisition and Chief Acquisition, if consummated, may cause a loss of management personnel and other key employees, which could adversely affect the future business and operations of the combined company.
The combined company’s success after the Vine Acquisition and Chief Acquisition, if consummated, will depend in part upon the ability to retain key management personnel and other key employees of the Company, Vine and Chief. Current and prospective employees may experience uncertainty about their roles within the combined company following the Vine Acquisition, and Chief Acquisition, if consummated, which may have an adverse effect on the ability of the combined company to attract or retain key management and other key personnel. Accordingly, no assurance can be given that the combined company will achieve the same success attracting or retaining key management personnel and other key employees as the Company may have independently achieved prior to the Vine Acquisition and Chief Acquisition, if consummated.
We have incurred and will continue to incur significant transaction and acquisition-related costs in connection with the Vine Acquisition and Chief Acquisition, which may be in excess of our expectations.
We have incurred and expect to continue to incur a number of non-recurring costs associated with negotiating and completing the Vine Acquisition and Chief Acquisition and combining the operations of the acquired entities and achieving desired synergies. These fees and costs have been, and will continue to be, substantial. The substantial majority of non-recurring expenses will consist of transaction costs related to the Vine Acquisition and Chief Acquisition and include, among others, employee retention costs, fees paid to financial, legal and accounting advisors, severance and benefit costs and filing fees.
We will also incur transaction fees and costs related to the integration of the companies, which may be substantial. Moreover, we may incur additional unanticipated expenses in connection with the Vine Acquisition and the integration, including costs associated with any stockholder litigation related to the Vine Acquisition. Although we expect that the elimination of duplicative costs as well as the realization of other efficiencies related to the integration of the businesses should offset integration-related costs over time, this net benefit may not be achieved
in the near term, or at all. Similar risks regarding the integration of Chief may arise if the Chief Acquisition is completed.
The costs described above, as well as other unanticipated costs and expenses, could have a material adverse effect on our financial condition and results of operations.
Completion of the Chief Acquisition may trigger change in control or other provisions in certain agreements to which Chief or its subsidiaries is a party.
The completion of the Chief Acquisition may trigger change in control or other provisions in certain agreements to which Chief or its subsidiaries is a party. If we are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under such agreements, potentially terminating the agreement or seeking monetary damages. Additionally, even if we are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to the combined company.
Lawsuits may be filed against the Company Chief and their respective affiliates in connection with the Chief Acquisition. An adverse ruling could result in substantial costs and could result in an injunction preventing the completion of the Chief Acquisition.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into acquisition, merger or other business combination agreements like those related to the Chief Acquisition. Even if any of the lawsuits which have been filed and may be filed are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition.
One of the conditions to the closing of the Chief Acquisition is that no injunction by any governmental entity has been entered and continues to be in effect and no law has been adopted, in either case, that prohibits the closing of the Chief Acquisition. Consequently, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Chief Acquisition, that injunction may delay or prevent the Chief Acquisition from being completed within the expected timeframe, or at all, which may adversely affect our business, financial position and results of operations.
Additionally, there can be no assurance that any of the defendants in any potential future lawsuits will be successful in the outcome of such lawsuits. The defense or settlement of any lawsuit or claim that remains unresolved at the time the merger is completed may adversely affect our business, financial condition, results of operations and cash flows.
Our integration of the acquired businesses into the Company may not be as successful as anticipated, and we may not achieve the intended benefits or do so within the intended timeframes.
The Vine Acquisition and Chief Acquisition, if consummated, involve numerous operational, strategic, financial, accounting, legal, tax and other risks, potential liabilities associated with the acquired businesses, and uncertainties related to design, operation and integration of the acquired businesses’ internal control over financial reporting. Difficulties in integrating the acquired businesses into the Company may result in the acquired businesses performing differently than expected, operational challenges, or the failure to realize anticipated expense-related efficiencies. Potential difficulties that may be encountered in the integration process include, among others:
•the inability to successfully integrate the acquired businesses into the Company in a manner that permits the Company to achieve the full revenue and cost savings anticipated from the Vine Acquisition and Chief Acquisition, if consummated;
•complexities associated with managing the larger, more complex integrated business;
•not realizing anticipated operating synergies;
•integrating personnel from different entities and the loss of key employees;
•potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the Vine Acquisition or Chief Acquisition, if consummated;
•integrating relationships with industry contacts and business partners;
•performance shortfalls as a result of the diversion of management’s attention caused by completing the acquisitions and the integration process; and
•the disruption of, or the loss of momentum in, ongoing business or inconsistencies in standards, controls, procedures and policies.
Additionally, the success of the Vine Acquisition and Chief Acquisition, if consummated, will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the acquired businesses, including operational and other synergies that we believe the combined company will achieve. The anticipated benefits and cost savings of the Vine Acquisition and Chief Acquisition, if consummated, may not be realized fully or at all, may take longer to realize than expected or could have other adverse effects that we do not currently foresee.
Our results may suffer if we do not effectively manage our expanded operations following the Vine Acquisition and Chief Acquisition, if consummated.
The success of the Vine Acquisition and Chief Acquisition, if consummated, will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the acquired businesses, including the need to integrate the operations and businesses of the acquired entities into our existing business in an efficient and timely manner, to combine systems and management controls and to integrate relationships with customers, vendors, industry contacts and business partners.
The anticipated benefits and cost savings of the Vine Acquisition and Chief Acquisition, if consummated, may not be realized fully or at all, may take longer to realize than expected or could have other adverse effects that we do not currently foresee. Some of the assumptions that we have made, such as the achievement of operating synergies, may not be realized. There could also be unknown liabilities and unforeseen expenses associated with the acquisitions that were not discovered in the due diligence review conducted prior to entering into each transaction.
The market price of our common stock may be affected by factors different from those that historically have affected the price of our common stock.
Our business differs from that of Vine in certain respects, and if consummated, the business acquired in the Chief Acquisition will also differ. Accordingly, the financial position or results of operations and/or cash flows of the combined company, as well as the market price of our common stock, may be affected by factors different from those currently affecting our financial position or results of operations and/or cash flows as an independent standalone company.
As a result of the Vine Acquisition, we have incorporated Vine’s hedging activities into our business, and we may be exposed to additional commodity price risks arising from such hedges.
To mitigate its exposure to changes in commodity prices, Vine hedges natural gas prices from time to time, primarily through the use of certain derivative instruments. As a result of the Vine Acquisition, we assumed Vine’s existing derivative instruments. Actual natural gas prices may differ from our expectations and, as a result, such derivative instruments may have a negative impact on our business, financial condition and results of operations.
The combined company may not be able to retain customers or suppliers, and customers or suppliers may seek to modify contractual obligations with the combined company, either of which could have an adverse effect on the combined company’s business and operations. Third parties may terminate or alter existing contracts or relationships as a result of the Vine Acquisition or Chief Acquisition, if consummated.
As a result of the Vine Acquisition, or Chief Acquisition, if consummated, the combined company may experience impacts on relationships with customers and suppliers that may harm the combined company’s business and results of operations. Certain customers or suppliers may seek to terminate or modify contractual obligations following the Vine Acquisition, or Chief Acquisition, if consummated, whether or not contractual rights are triggered as a result of such acquisition. There can be no guarantee that customers and suppliers will remain with or continue to have a relationship with the combined company or do so on the same or similar contractual terms following the acquisitions. If any customers or suppliers seek to terminate or modify contractual obligations or discontinue their relationships with the combined company, then the combined company’s business and results of operations may be harmed. If the combined company’s suppliers were to seek to terminate or modify an arrangement with the combined company, then the combined company may be unable to procure necessary supplies or services from other suppliers in a timely and efficient manner and on acceptable terms, or at all.
The acquired entities also have contracts with vendors, landlords, licensors and other business partners that may require consents from these other parties in connection with the Vine Acquisition or Chief Acquisition, if consummated. If these consents cannot be obtained, the combined company may suffer a loss of potential future revenue, incur costs and/or lose rights that may be material to the business of the combined company. Any such disruptions could limit the combined company’s ability to achieve the anticipated benefits of the Vine Acquisition or Chief Acquisition, if consummated.
We are subject to risks related to health epidemics and pandemics, including the ongoing COVID-19 pandemic, and it is difficult to predict what effect, if any, this might have on the combined company after the Vine Acquisition and Chief Acquisition, if consummated.
We face various risks related to public health issues, including epidemics, pandemics and other outbreaks, including the ongoing COVID-19 pandemic. The actual and potential effects of COVID-19 include, but are not limited to, its impact on general economic conditions, trade and financing markets, changes in customer behavior and continuity in business operations, all of which create significant uncertainty. In addition, the pandemic has resulted in governmental authorities implementing significant and varied measures to contain the spread of COVID-19, including travel bans and restrictions, quarantines, shelter in place and stay at home orders and business shutdowns. Governmental authorities may enact additional restrictions, or tighten existing measures if COVID-19 continues to spread. These measures, as well as the COVID-19 pandemic broadly, may have a negative effect on the combined company after the Vine Acquisition and Chief Acquisition, if consummated, which effect will be difficult to predict.
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| Legal and Regulatory Risks |
We are subject to extensive governmental regulation, which can change and could adversely impact our business.
Our operations are subject to extensive federal, state, local and other laws, rules and regulations, including with respect to environmental matters, worker health and safety, wildlife conservation, the gathering and transportation of oil, gas and NGL, conservation policies, reporting obligations, royalty payments, unclaimed property and the imposition of taxes, and tribal laws for a minor portion of our acreage. Such regulations include requirements for permits to drill and to conduct other operations and for provision of financial assurances (such as bonds) covering drilling, completion and well operations. If permits are not issued, or if unfavorable restrictions or conditions are imposed on our drilling or completion activities, we may not be able to conduct our operations as planned. For example, on January 20, 2021, the Acting Secretary for the Department of the Interior signed an order effectively suspending new fossil fuel leasing and permitting on federal lands for 60 days. Then, on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. On November 26, 2021, the U.S. Department of the Interior released its “Report On The Federal Oil And Gas Leasing Program,” which assessed the current state of oil and gas leasing on federal lands and proposed several reforms, including raising royalty rates and implementing stricter standards for entities seeking to purchase oil and gas leases. With respect to offshore oil and gas leases, challenges to President Biden’s moratorium on leasing initially prevailed on June 15, 2021, when a federal court judge in Louisiana issued a nationwide preliminary injunction effectively preventing the Biden Administration from implementing the pause of
new oil and natural gas leases on federal lands and waters and forcing the lease sale; however, on January 25, 2022, the U.S. District Court for the District of Columbia invalidated the lease sale, reasoning that the Biden Administration did not properly evaluate the climate change impacts of drilling in the Gulf of Mexico. Although we do not expect this ruling to impact the availability of onshore federal oil and gas lease sales, the Biden Administration’s and certain federal courts’ focus on the climate change impacts of federal projects could result in similar restrictions surrounding onshore drilling, onshore federal lease availability, and restrictions on the ability to obtain required permits, which could have a material adverse impact on our operations. In addition, we may be required to make large, sometimes unexpected, expenditures to comply with applicable governmental laws, rules, regulations, permits or orders.
In addition, changes in public policy have affected, and in the future could further affect, our operations. Regulatory developments could, among other things, restrict production levels, impose price controls, change environmental protection requirements with respect to the treatment of hazardous waste, air emissions, or water discharges, and increase taxes, royalties and other amounts payable to the government. Our operating and compliance costs could increase further if existing laws and regulations are revised, reinterpreted, or if new laws and regulations become applicable to our operations. We do not expect that any of these laws and regulations will affect our operations materially differently than they would affect other companies with similar operations, size and financial strength. Although we are unable to predict changes to existing laws and regulations, such changes could significantly impact our profitability, financial condition and liquidity. This is particularly true of changes related to pipeline safety, hydraulic fracturing and climate change, as discussed below.
Pipeline Safety. The pipeline assets in which we own interests are subject to stringent and complex regulations related to pipeline safety and integrity management. The Pipeline and Hazardous Materials Safety Administration (PHMSA) has established a series of rules that require pipeline operators to develop and implement integrity management programs for gas, NGL and condensate transmission pipelines as well as for certain low stress pipelines and gathering lines transporting hazardous liquids, such as oil, that, in the event of a failure, could affect “high consequence areas.” Recent PHMSA rules have also extended certain requirements for integrity assessments and leak detections beyond high consequence areas and impose a number of reporting and inspection requirements on regulated pipelines. Further, legislation funding PHMSA through 2023 requires the agency to engage in additional rulemaking to amend the integrity management program, emergency response plan, operation and maintenance manual, and pressure control recordkeeping requirements for gas distribution operators; to create new leak detection and repair program obligations; and to set new minimum federal safety standards for onshore gas gathering lines. At this time, we cannot predict the cost of these requirements or other potential new or amended regulations, but they could be significant. Moreover, violations of pipeline safety regulations can result in the imposition of significant penalties.
Hydraulic Fracturing. Several states have adopted or are considering adopting regulations that could impose more stringent permitting, public disclosure and/or well construction requirements on hydraulic fracturing operations. We cannot predict whether additional federal, state or local laws or regulations applicable to hydraulic fracturing will be enacted in the future and, if so, what actions any such laws or regulations would require or prohibit. If additional levels of regulation or permitting requirements were imposed on hydraulic fracturing operations, our business and operations could be subject to delays, increased operating and compliance costs and potential bans. Additional regulation could also lead to greater opposition to hydraulic fracturing, including litigation.
Climate Change. Continuing political and social attention to the issue of climate change has resulted in legislative, regulatory and other initiatives to reduce greenhouse gas emissions, such as carbon dioxide and methane. Policy makers at both the U.S. federal and state levels have introduced legislation and proposed new regulations designed to quantify and limit the emission of greenhouse gases through inventories, limitations and/or taxes on greenhouse gas emissions. The EPA and the BLM have issued regulations for the control of methane emissions, which also include leak detection and repair requirements, for the oil and gas industry and are likely to create additional regulations regarding such matters. For example, on November 15, 2021, the EPA proposed new regulations to establish comprehensive standards of performance and emission guidelines for methane and volatile organic compound (VOC) emissions from new and existing operations in the oil and gas sector, including the exploration and production, transmission, processing, and storage segments. The comment period for the proposed rule ended on January 31, 2022, and the EPA hopes to finalize it by the end of 2022. Once finalized, the regulations are likely to be subject to legal challenge, and will also need to be incorporated into the states’ implementation plans, which will need to be approved by the EPA in individual rulemakings that could also be subject to legal challenge. As a result, we cannot predict the scope of any final methane regulatory requirements or the cost to
comply with such requirements. However, given the long-term trend toward increasing regulation, future federal GHG regulations of the oil and gas industry remain a significant possibility. In addition, several states in which we operate have imposed limitations designed to reduce methane emissions from oil and gas exploration and production activities. Legislative and state initiatives to date have generally focused on the development of renewable energy standards and/or cap-and-trade and/or carbon tax programs. Renewable energy standards (also referred to as renewable portfolio standards) require electric utilities to provide a specified minimum percentage of electricity from eligible renewable resources, with potential increases to the required percentage over time. The development of a federal renewable energy standard, or the development of additional or more stringent renewable energy standards at the state level could reduce the demand for oil and gas, thereby adversely impacting our earnings, cash flows and financial position. A cap-and-trade program generally would cap overall greenhouse gas emissions on an economy-wide basis and require major sources of greenhouse gas emissions or major fuel producers to acquire and surrender emission allowances. A federal cap and trade program or expanded use of cap and trade programs at the state level could impose direct costs on us through the purchase of allowances and could impose indirect costs by incentivizing consumers to shift away from fossil fuels. In addition, federal or state carbon taxes could directly increase our costs of operation and similarly incentivize consumers to shift away from fossil fuels.
In addition, activists concerned about the potential effects of climate change have directed their attention at sources of funding for fossil-fuel energy companies, which has resulted in an increasing number of financial institutions, funds and other sources of capital restricting or eliminating their investment in oil and natural gas activities. Ultimately, this would make it more difficult and expensive to secure funding for exploration and production activities. Members of the investment community have also begun to screen companies such as ours for sustainability performance, including practices related to greenhouse gases and climate change, before investing in our common stock. Any efforts to improve our sustainability practices in response to these pressures may increase our costs, and we may be forced to implement technologies that are not economically viable in order to improve our sustainability performance and to meet the specific requirements to perform services for certain customers.
These various legislative, regulatory and other activities addressing greenhouse gas emissions could adversely affect our business, including by imposing reporting obligations on, or limiting emissions of greenhouse gases from, our equipment and operations, which could require us to incur costs to reduce emissions of greenhouse gases associated with our operations. Limitations on greenhouse gas emissions could also adversely affect demand for oil and gas, which could lower the value of our reserves and have a material adverse effect on our profitability, financial condition and liquidity.
Environmental matters and related costs can be significant.
As an owner, lessee or operator of oil and gas properties, we are subject to various federal, state, tribal and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on us for the cost of remediating pollution that results from our operations. Environmental laws may impose strict, joint and several liability, and failure to comply with environmental laws and regulations can result in the imposition of administrative, civil or criminal fines and penalties, as well as injunctions limiting operations in affected areas. Any future costs associated with these matters are uncertain and will be governed by several factors, including future changes to regulatory requirements. Changes in or additions to public policy regarding the protection of the environment could have a significant impact on our operations and profitability.
Increasing attention to environmental, social and governance matters (“ESG”) may impact our business, financial results or stock price.
In recent years, increasing attention has been given to corporate activities related to ESG matters in public discourse and the investment community. A number of advocacy groups, both domestically and internationally, have campaigned for governmental and private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment advisers, public pension funds, activist investors, universities and other members of the investing community. These activities include increasing attention and demands for action related to climate change, advocating for changes to companies’ boards of directors, and promoting the use of energy saving building materials. These activities may result in demand shifts for oil, natural gas and NGL. In addition, a failure to comply with investor or customer expectations and standards, which are evolving, or if we are perceived to not have responded appropriately to the growing concern for ESG issues,
regardless of whether there is a legal requirement to do so, could cause reputational harm to our business, increase our risk of litigation, and could have a material adverse effect on our results of operations.
In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings systems for evaluating companies on their approach to ESG matters. These ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings may lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital.
The taxation of independent producers is subject to change, and changes in tax law could increase our cost of doing business.
We are subject to taxation by various governmental authorities at the federal, state and local levels in the jurisdictions in which we do business. New legislation could be enacted by any of these governmental authorities making it more costly for us to produce oil and natural gas by increasing our tax burden. The Biden administration has called for changes to fiscal and tax policies which could lead to comprehensive tax reform. For example, federal legislation has been proposed that, if enacted, would impact federal income tax law applicable to the deduction of intangible drilling and development costs, percentage depletion and, the expensing of geological, geophysical, exploration and development costs. Other proposals changing federal income tax law could include a new corporate minimum tax based on book income, an increase to the corporate tax rate and the elimination of certain tax credits. If enacted, certain of these proposals could have a correlative impact on state income taxes. In addition, state and local authorities could enact new legislation that would increase various taxes such as sales, severance and ad valorem taxes as well as accelerate the collection of such taxes.
Trading in our new common stock, additional issuances of new common stock, and certain other stock transactions could lead to a second, potentially more restrictive annual limitation on the utilization of our tax attributes reducing their ability to offset future taxable income, which may result in an increase to income tax liabilities.
Upon emergence from bankruptcy on February 9, 2021, the Company experienced an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as all of the common stock and preferred stock of the Predecessor, or the old loss corporation, was canceled and replaced with new common stock of the Successor, or the new loss corporation (the “First Ownership Change”). As such, an annual limitation was computed based on the fair market value of the new equity immediately after emergence multiplied by the long-term tax-exempt rate in effect for the month of February 2021. This annual limitation will restrict the future utilization of our net operating loss (NOL) carryforwards, disallowed business interest carryforwards and tax credits that existed at the time of emergence.
Trading in our stock, additional issuances, and other stock transactions occurring subsequent to the emergence from Bankruptcy could lead to a second ownership change. In the event of a second ownership change, a second annual limitation would be determined at such time which could be more restrictive than the limitation of the First Ownership Change. Depending on the market conditions and the Company’s tax basis, a second ownership change may result in a net unrealized built-in loss. The annual limitation in such a case would additionally be applied to certain of the Company’s tax items other than just NOL carryforwards, disallowed business interest carryforwards and tax credits. For example, a portion of tax depreciation, depletion and amortization would also be subject to the annual limitation for a five-year period following the ownership change but only to the extent of the net unrealized built-in loss existing at the time of the second ownership change. Whether the new annual limitation would be more restrictive would depend on the value of our stock and the long-term tax-exempt rate in effect at the time of a second ownership change. If the new annual limitation is more restrictive it would apply to certain of the tax attributes existing at the time of the second ownership change including those remaining from the time of the First Ownership Change.
Further, should the Company be in a net unrealized built-in gain position at the time of a second ownership change, the proposed regulations issued on September 10, 2019, and on January 14, 2020, under Section 382(h) of the Code (the “Proposed Regulations”) would, if finalized in their present form, change the currently existing rules and limit the potential increases to the annual limitation amount for certain built-in gains existing at the time of an ownership change, (unless the transition relief provisions of the Proposed Regulations are applicable), thereby possibly reducing the ability to utilize tax attributes significantly.
Some states impose similar limitations on tax attribute utilization upon experiencing an ownership change.
A deterioration in general economic, political, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition.
Historically, concerns about global economic growth and international political stability have had a significant impact on global financial markets and commodity prices. If the economic or political climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and materially adversely impact our results of operations, liquidity and financial condition.
Military and other armed conflicts, including terrorist activities, could materially and adversely affect our business and results of operations.
Military and other armed conflicts, terrorist attacks and the threat of both, whether domestic or foreign, could cause instability in the global financial and energy markets. Continued instability in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy in unpredictable ways, including the disruption of energy supplies and markets, increased volatility in commodity prices, or the possibility that the infrastructure on which we rely could be a direct target or an indirect casualty of an act of terrorism, and, in turn, could materially and adversely affect our business and results of operations.
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| Item 1B. | Unresolved Staff Comments |
Not applicable.
Information regarding our properties is included in Item 1. Business and in the Supplementary Information included in Item 8 of Part II of this report.
Chapter 11 Proceedings
Commencement of the Chapter 11 Cases automatically stayed the proceedings and actions against us that are referenced below, in addition to actions seeking to collect pre-petition indebtedness or to exercise control over the property of the Company’s bankruptcy estates. The Plan in the Chapter 11 Cases, which became effective on February 9, 2021, provided for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that had not been satisfied or addressed during the Chapter 11 Cases. See Note 2 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for additional information. Litigation and Regulatory Proceedings
We were involved in a number of litigation and regulatory proceedings as of the Petition Date. Many of these proceedings were in early stages, and many of them sought damages and penalties, the amount of which is currently indeterminate. See Note 7 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for information regarding our estimation and provision for potential losses related to litigation and regulatory proceedings. Business Operations. We are involved in various lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. The majority of these prepetition legal proceedings were settled during the Chapter 11 Cases or will be resolved in connection with the claims reconciliation process before the Bankruptcy Court. Any allowed claim related to such prepetition litigation will be treated in accordance with the Plan.
Environmental Contingencies
The nature of the oil and gas business carries with it certain environmental risks for us and our subsidiaries. We have implemented various policies, programs, procedures, training and audits to reduce and mitigate such environmental risks. We conduct periodic reviews, on a company-wide basis, to assess changes in our environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. We manage our exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, we may, among other things, exclude a property from the transaction, require the seller to remediate the property to our satisfaction in an acquisition or agree to assume liability for the remediation of the property.
We were recently dismissed from numerous lawsuits in Oklahoma alleging that we and other companies engaged in activities that have caused earthquakes. The lawsuits sought compensation for injury to real and personal property, diminution of property value, economic losses due to business interruption, interference with the use and enjoyment of property, annoyance and inconvenience, personal injury and emotional distress. In addition, they sought the reimbursement of insurance premiums and the award of punitive damages, attorneys’ fees, costs, expenses and interest.
Other Matters
Based on management’s current assessment, we are of the opinion that no pending or threatened lawsuit or dispute relating to our business operations is likely to have a material adverse effect on our future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates.
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| Item 4. | Mine Safety Disclosures |
The information concerning mine safety violations and other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17CFR 229.104) is included in Exhibit 95.1 to this Form 10-K.
PART II
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Upon our emergence from Chapter 11 bankruptcy on February 9, 2021, our then-authorized common stock and preferred stock were canceled and released under the Plan without receiving any recovery on account thereof. In accordance with the Plan confirmed by the Bankruptcy Court on February 9, 2021, we issued 97,097,081 shares of New Common Stock of the Successor, which are listed on the Nasdaq Stock Market LLC under the symbol CHK. In addition, on February 9, 2021, we issued 11,111,111 Class A Warrants, 12,345,679 Class B Warrants and 9,768,527 Class C Warrants, each of which are exercisable for one share of common stock per warrant at the initial exercise prices of $27.63, $32.13 and $36.18 per share, respectively. The warrants are immediately exercisable and will expire on February 9, 2026. For more information regarding our emergence from Chapter 11 bankruptcy and our Plan of Reorganization, see Note 2 of the notes to our consolidated financial statements included in Item 8 of Part II of this report. We declared the first quarterly dividend on our New Common Stock in the second quarter of 2021 of $0.34375 per share (an initial annual rate of $1.375 per share). In the third quarter of 2021, we announced an increase in the base quarterly dividend to $0.4375 per share (an annual rate of $1.75 per share) and announced our intent to adopt a variable return program that will result in the payment of an additional variable dividend, payable beginning in March 2022, equal to the sum of Adjusted Free Cash Flow from the prior quarter less the base quarterly dividend, multiplied by 50%. In January 2022, we announced our intent to increase the base dividend to $0.50 per share (an annual rate of $2.00 per share) beginning in the second quarter of 2022.
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| Repurchases of Equity Securities; Unregistered Sales of Equity Securities and Use of Proceeds |
There were no repurchases or unregistered sales of our common stock during the quarter ended December 31, 2021.
On December 2, 2021, we announced that our Board of Directors authorized the repurchase of up to $1.0 billion in aggregate value of our common stock and/or warrants from time to time. The repurchase authorization permits repurchases on a discretionary basis as determined by management, subject to market conditions, applicable legal requirements, available liquidity, compliance with the Company’s debt agreements and other appropriate factors. As of February 21, 2022, no repurchases had occurred.
As of February 21, 2022, there were approximately 146 holders of record of our common stock.
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| Item 6. | Selected Financial Data |
We have adopted the SEC’s Disclosure Modernization Final Rule, effective February 10, 2021, for Item 301 of Regulation S-K. As such, Item 6 Selected Financial Data has not been provided.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis presents management’s perspective of our business, financial condition and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future and should be read in conjunction with Item 8 of Part II of this report.
We are an independent exploration and production company engaged in the acquisition, exploration and development of properties to produce oil, natural gas and NGL from underground reservoirs. We own a large and geographically diverse portfolio of onshore U.S. unconventional natural gas and liquids assets, including interests in approximately 8,200 oil and natural gas wells. Upon closing of the Chief Acquisition and divestiture of our assets in the Powder River Basin in Wyoming, our portfolio will be focused on three operating areas including the natural gas resource plays in the Marcellus Shale in the northern Appalachian Basin in Pennsylvania (“Marcellus”) and the Haynesville/Bossier Shales in northwestern Louisiana (“Haynesville”) and the liquids-rich resource play in the Eagle Ford Shale in South Texas (“Eagle Ford”).
Our strategy is to create shareholder value by generating sustainable Free Cash Flow from our oil and natural gas development and production activities. We continue to focus on improving margins through operating efficiencies and financial discipline and improving our Environmental, Social, and Governance (“ESG”) performance. To accomplish these goals, we intend to allocate our human resources and capital expenditures to projects we believe offer the highest cash return on capital invested, to deploy leading drilling and completion technology throughout our portfolio, and to take advantage of acquisition and divestiture opportunities to strengthen our portfolio. We also intend to continue to dedicate capital to projects that reduce the environmental impact of our oil and natural gas producing activities. We continue to seek opportunities to reduce cash costs (production, gathering, processing and transportation and general and administrative) per barrel of oil equivalent production through operational efficiencies by, among other things, improving our production volumes from existing wells.
Leading a responsible energy future is foundational to Chesapeake's success. Our core values and culture demand we continuously evaluate the environmental impact of our operations and work diligently to improve our ESG performance across all facets of our Company. Our path to leading a responsible energy future begins with our initiative to achieve net-zero direct greenhouse gas emissions by 2035, which we announced in February 2021. To meet this challenge, we have set meaningful initial goals including:
•Eliminate routine flaring from all new wells completed from 2021 forward, and enterprise-wide by 2025;
•Reduce our methane intensity to 0.09% by 2025 (achieved 0.08% in 2021); and
•Reduce our GHG intensity to 5.5 by 2025 (achieved 5.0 in 2021).
In July 2021, we announced our plan to receive independent certification of our natural gas production under the MiQ methane standard and EO100 Standard for Responsible Energy Development. Certified natural gas was available in our Haynesville assets as of the end of 2021, and we expect it to be available in our legacy Marcellus assets by the end of the second quarter of 2022. The MiQ certification will provide a verified approach to tracking our commitment to reduce our methane intensity to 0.09% by 2025, as well as support our overall objective of achieving net-zero direct greenhouse gas emissions by 2035.
Our results of operations as reported in our consolidated financial statements for the 2021 Successor Period, 2021 Predecessor Period, 2020 Predecessor Period and 2019 Predecessor Period are in accordance with GAAP. Although GAAP requires that we report on our results for the periods January 1, 2021 through February 9, 2021 and February 10, 2021 through December 31, 2021 separately, management views our operating results for the year ended December 31, 2021 by combining the results of the 2021 Predecessor Period and the 2021 Successor Period because management believes such presentation provides the most meaningful comparison of our results to prior periods. We are not able to compare the 40 days from January 1, 2021 through February 9, 2021 operating results to any of the previous periods reported in the consolidated financial statements and do not believe reviewing this period in isolation would be useful in identifying any trends in, or reaching any conclusions regarding, our overall operating performance. We believe the key performance indicators such as operating revenues and expenses for the 2021 Successor Period combined with the 2021 Predecessor Period provide more meaningful comparisons to other periods and are useful in understanding operational trends. Additionally, there were no changes in policies between the periods, and any material impacts as a result of fresh start accounting were included within the discussion of these changes. These combined results do not comply with GAAP and have not been prepared as pro forma results under applicable regulations, but are presented because we believe they provide the most meaningful comparison of our results to prior periods.
Vine Acquisition
On November 1, 2021, we completed our acquisition of Vine pursuant to a definitive agreement with Vine dated August 10, 2021. The transaction strengthens Chesapeake’s competitive position, meaningfully increasing our Free Cash Flow outlook and deepening our inventory of premium natural gas locations, while preserving the strength of our balance sheet.
Chief Acquisition and Powder River Basin Divestiture
On January 25, 2022, we announced our planned Chief Acquisition and the planned divestiture of our Powder River Basin assets. These transactions, which are subject to certain customary closing conditions, including certain regulatory approvals, are expected to close in the first quarter of 2022. In conjunction with the Vine Acquisition, these transactions simplify and refocus our asset portfolio, concentrating on three operating areas and advancing our highest-return assets in the Marcellus and Haynesville gas basins.
Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer
On April 27, 2021, we announced the departure of Doug Lawler from his positions as Chief Executive Officer and Director of Chesapeake, effective April 30, 2021. Michael A. Wichterich, the Chairman of our Board of Directors, served as Interim Chief Executive Officer while the Board of Directors conducted a search for a new Chief Executive Officer.
On October 11, 2021, we announced that the Board of Directors appointed Domenic “Nick” Dell’Osso Jr. as President and Chief Executive Officer and as member of the Board of Directors, effective October 11, 2021. Additionally, on October 11, 2021, the Board of Directors appointed Michael A. Wichterich, who resigned as Interim Chief Executive Officer upon the appointment of Mr. Dell’Osso, as Executive Chairman of the Company.
On November 30, 2021, we announced that the Board of Directors appointed Mohit Singh as Executive Vice President and Chief Financial Officer, effective December 6, 2021.
On January 25, 2022, we announced that the Board of Directors appointed Josh Viets as Executive Vice President and Chief Operating Officer, effective February 1, 2022.
Emergence from Bankruptcy
On the Petition Date, the Debtors filed the Chapter 11 Cases under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. On June 29, 2020, the Bankruptcy Court entered an order authorizing the joint administration of the Chapter 11 Cases under the caption In re Chesapeake Energy Corporation, Case No. 20-33233. Subsidiaries with noncontrolling interests, consolidated variable interest entities and certain de minimis subsidiaries (collectively, the “Non-Filing Entities”) were not part of the bankruptcy filing. The Non-Filing Entities continued to operate in the ordinary course of business.
The Bankruptcy Court confirmed the Plan and the Debtors entered the Confirmation Order on January 16, 2021. The Debtors emerged from bankruptcy on the Effective Date. In connection with our exit from bankruptcy, we filed a registration statement with the SEC to facilitate future sales of our equity by certain holders of our New Common Stock and warrants. See Item 1 Business, Item 3 Legal Proceedings, Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities and Note 2 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for a complete discussion of our Chapter 11 proceedings. COVID-19 Pandemic and Impact on Global Demand for Oil and Natural Gas
The global spread of COVID-19, created, and continues to create, significant volatility, uncertainty, and economic disruption during 2020 through 2021. The pandemic has reached more than 200 countries and territories and has resulted in widespread adverse impacts on the global economy and on our customers and other parties with whom we have business relations. To date, we have experienced limited operational impacts as a result of COVID-19 or related governmental restrictions. While we cannot predict the full impact that COVID-19 or the related significant disruption and volatility in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations, we believe demand is recovering and prices will continue to be positively impacted in the near term. For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A Risk Factors in this report.
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| Liquidity and Capital Resources |
Liquidity Overview
For the 2021 Successor Period, our primary sources of capital resources and liquidity have consisted of internally generated cash flows from operations, and our primary uses of cash have been for the development of our oil and natural gas properties, acquisitions of additional oil and natural gas properties and return of value to shareholders through dividends. Historically, our primary sources of capital resources and liquidity have consisted of internally generated cash flows from operations, borrowings under certain credit agreements and dispositions of non-core assets. Our ability to issue additional indebtedness, dispose of assets or access the capital markets was substantially limited during the Chapter 11 Cases and required court approval in most instances. Accordingly, our liquidity in the 2021 and 2020 Predecessor Periods depended mainly on cash generated from operations and available funds under certain credit agreements including the DIP Facility in the 2021 Predecessor Period and revolving credit facility in the 2020 Predecessor Period.
We believe we have emerged from the Chapter 11 Cases as a fundamentally stronger company, built to generate sustainable Free Cash Flow with a strengthened balance sheet, geographically diverse asset base and continuously improving ESG performance. As a result of the Chapter 11 Cases, we reduced our total indebtedness by $9.4 billion by issuing equity in a reorganized entity to the holders of our FLLO Term Loan, Second Lien Notes, unsecured notes and allowed general unsecured claimants.
We believe our cash flow from operations, cash on hand and borrowing capacity under the Exit Credit Facility, as discussed below, will provide sufficient liquidity during the next 12 months and the foreseeable future. As of December 31, 2021, we had $2.625 billion of liquidity available, including $905 million of cash on hand and $1.720 billion of aggregate unused borrowing capacity available under the Exit Credit Facility. As of December 31, 2021, we had no outstanding borrowings under our Exit Credit Facility – Tranche A Loans, and $221 million in borrowings under our Exit Credit Facility – Tranche B Loans. See Note 6 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further discussion of our debt obligations, including principal and carrying amounts of our senior notes.
Dividend
With our strong liquidity position, we initiated a new dividend strategy in 2021. We paid dividends of $119 million on our New Common Stock in the 2021 Successor Period. See Note 12 for further discussion. On August 10, 2021, we announced a variable return program that will result in the payment of an additional dividend, payable beginning in March 2022, equal to the sum of Adjusted Free Cash Flow from the prior quarter less the base dividend, multiplied by 50%. On February 23, 2022, we declared a quarterly dividend payable of $1.7675 per share, which will be paid on March 22, 2022 to stockholders of record at the close of business on March 7, 2022. The dividend consists of a base quarterly dividend in the amount of $0.4375 per share and a variable quarterly dividend in the amount of $1.33 per share. In January 2022, we announced our intent to increase the base quarterly dividend to $0.50 per share beginning in the second quarter of 2022.
The declaration and payment of any future dividend, whether fixed or variable, will remain at the full discretion of the Board and will depend on the Company’s financial results, cash requirements, future prospects and other relevant factors. The Company’s ability to pay dividends to its stockholders is restricted by (i) Oklahoma corporate law, (ii) its Certificate of Incorporation, (iii) the terms and provisions of its Credit Agreement and (iv) the terms and provisions of the indentures governing its 5.50% Senior Notes due 2026, 5.875% Senior Notes due 2029 and 6.75% senior notes due 2029.
Derivative and Hedging Activities
Our results of operations and cash flows are impacted by changes in market prices for oil, natural gas and NGL. We enter into various derivative instruments to mitigate a portion of our exposure to commodity price declines, but these transactions may also limit our cash flows in periods of rising commodity prices. Our oil, natural gas and NGL derivative activities, when combined with our sales of oil, natural gas and NGL, allow us to better predict the total revenue we expect to receive. See Item 7A Quantitative and Qualitative Disclosures About Market Risk included in Part II of this report for further discussion on the impact of commodity price risk on our financial position. Contractual Obligations and Off-Balance Sheet Arrangements
As of December 31, 2021, our material contractual obligations include repayment of senior notes, outstanding borrowings and interest payment obligations under the Exit Credit Facility, derivative obligations, asset retirement obligations, lease obligations, undrawn letters of credit and various other commitments we enter into in the ordinary course of business that could result in future cash obligations. In addition, we have contractual commitments with midstream companies and pipeline carriers for future gathering, processing and transportation of oil, natural gas and NGL to move certain of our production to market. The estimated gross undiscounted future commitments under these agreements were approximately $3.83 billion as of December 31, 2021. As discussed above, we believe our existing sources of liquidity will be sufficient to fund our near and long-term contractual obligations. See Notes 6, 7, 9, 15 and 23 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further discussion. Post-Emergence Debt
On the Effective Date, pursuant to the terms of the Plan, the Company, as borrower, entered into a reserve-based credit agreement (the “Credit Agreement”) providing for the Exit Credit Facility which features an initial borrowing base of $2.5 billion. The borrowing base will be redetermined semiannually on or around May 1 and November 1 of each year. Our borrowing base was reaffirmed in October 2021, and the next scheduled redetermination will be on or about May 1, 2022. The aggregate initial elected commitments of the lenders under the Exit Credit Facility were $1.75 billion of revolving Tranche A Loans and $221 million of fully funded Tranche B Loans.
The Exit Credit Facility provides for a $200 million sublimit of the aggregate commitments that are available for the issuance of letters of credit. The Exit Credit Facility bears interest at the ABR (alternate base rate) or LIBOR, at our election, plus an applicable margin (ranging from 2.25–3.25% per annum for ABR loans and 3.25–4.25% per annum for LIBOR loans, subject to a 1.00% LIBOR floor), depending on the percentage of the borrowing base then being utilized. The Tranche A Loans mature 3 years after the Effective Date and the Tranche B Loans mature 4 years after the Effective Date. The Tranche B Loans can be repaid if no Tranche A Loans are outstanding.
On February 2, 2021, the Company issued $500 million aggregate principal amount of its 5.50% Senior Notes due 2026 (the “2026 Notes”) and $500 million aggregate principal amount of its 5.875% Senior Notes due 2029 (the “2029 Notes and, together with the 2026 Notes, the “Notes”). The offering of the Notes was part of a series of exit financing transactions undertaken in connection with the Debtors’ Chapter 11 Cases and meant to provide the exit financing originally intended to be provided by the Exit Term Loan Facility pursuant to the Commitment Letter.
Assumption and Repayment of Vine Debt
In conjunction with the Vine Acquisition, Vine’s Second Lien Term Loan was repaid and terminated for $163 million inclusive of a $13 million make whole premium with cash on hand, due to the agreement containing a change in control provision making the term loan callable upon closing. Vine’s reserve based loan facility, which had no borrowings as of November 1, 2021, was terminated at the time of the completion of the Vine Acquisition. Additionally, Vine’s 6.75% Senior Notes with a principal amount of $950 million, were assumed by the Company at the time of the completion of the Vine Acquisition.
Pending Acquisition and Divestiture
On January 24, 2022, we entered into a definitive agreement to acquire Chief and associated non-operated interests held by affiliates of Tug Hill, for $2.0 billion in cash and approximately 9.44 million common shares. On January 24, 2022, we also entered into an agreement to sell our Powder River Basin assets to Continental Resources, Inc. for approximately $450 million in cash. We currently expect to fund the Chief Acquisition with cash on hand, borrowings under our Exit Credit Facility and the proceeds from the planned Powder River Basin divestiture.
Capital Expenditures
For the year ending December 31, 2022, we currently expect to bring or have online approximately 190 to 220 gross wells across 11 to 14 rigs and plan to invest between approximately $1.5 – $1.8 billion in capital expenditures, approximately $150 – $200 million of which is contingent upon the closing of the proposed Chief Acquisition. We expect that approximately 75% of our 2022 capital expenditures will be directed toward our natural gas assets. We currently plan to fund our 2022 capital program through cash on hand, expected cash flow from our operations and borrowings under our Exit Credit Facility. We may alter or change our plans with respect to our capital program and expected capital expenditures based on developments in our business, our financial position, our industry or any of the markets in which we operate.
Sources of Funds
The following table presents the sources of our cash and cash equivalents for the Successor and Predecessor Periods:
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| | Successor | | | Predecessor |
| | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Net cash provided by (used in) operating activities | | $ | 1,809 | | | | $ | (21) | | | $ | 1,164 | | | $ | 1,623 | |
| Proceeds from issuances of debt, net | | — | | | | 1,000 | | | — | | | 1,563 | |
| Proceeds from issuance of common stock | | — | | | | 600 | | | — | | | — | |
| Proceeds from warrant exercise | | 2 | | | | — | | | — | | | — | |
| Proceeds from divestitures of property and equipment | | 13 | | | | — | | | 150 | | | 136 | |
| Proceeds from pre-petition revolving credit facility borrowings, net | | — | | | | — | | | 339 | | | 496 | |
Total sources of cash and cash equivalents | | $ | 1,824 | | | | $ | 1,579 | | | $ | 1,653 | | | $ | 3,818 | |
Cash Flow from Operating Activities
Cash provided by operating activities was $1.809 billion, $1.164 billion and $1.623 billion in the 2021 Successor Period, 2020 Predecessor Period and 2019 Predecessor Period, respectively. Cash used in operating activities was $21 million for the 2021 Predecessor Period. The increase in the 2021 Successor Period is primarily the result of higher prices for the oil, natural gas and NGL we sold coupled with a decrease in cash interest and GP&T costs following our emergence from bankruptcy. The cash used in the 2021 Predecessor Period was primarily in connection with the payment of professional fees related to the Chapter 11 Cases. The decrease in the 2020 Predecessor Period is primarily the result of lower prices for the oil, natural gas and NGL we sold. Changes in cash flow from operations are largely due to the same factors that affect our net income, excluding various non-cash items, such as depreciation, depletion and amortization, certain impairments, gains or losses on sales of fixed assets, deferred income taxes and mark-to-market changes in our derivative instruments. See further discussion below under Results of Operations.
Proceeds from Issuance of Common Stock and Senior Notes
In the 2021 Predecessor Period, we issued $500 million aggregate principal amount of 5.50% 2026 Notes and $500 million aggregate principal amount of 5.875% 2029 Notes for total proceeds of $1.0 billion. Additionally, upon emergence from Chapter 11, we issued 62,927,320 shares of New Common Stock in exchange for $600 million of cash, as agreed upon in the Plan. In the 2019 Predecessor Period we obtained a $1.5 billion term loan and issued $120 million of senior secured second lien notes for net proceeds of $1.563 billion See Note 6 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further discussion. Divestitures of Property and Equipment
In the 2021 Successor Period we divested certain non-core assets for approximately $13 million. In the 2020 Predecessor Period, we divested our Mid-Continent asset for $130 million and certain non-core assets for approximately $6 million. In the 2019 Predecessor Period, we divested certain non-core assets for approximately $130 million. See Note 4 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further discussion.
Uses of Funds
The following table presents the uses of our cash and cash equivalents for the Successor and Predecessor Periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Oil and Natural Gas Expenditures: | | | | | | | | | |
| Capital expenditures | | $ | 669 | | | | $ | 66 | | | $ | 1,142 | | | $ | 2,263 | |
| Other Uses of Cash and Cash Equivalents: | | | | | | | | | |
| Business combination, net | | 194 | | | | — | | | — | | | 353 | |
| Payments on Exit Credit Facility - Tranche A Loans, net | | 50 | | | | 479 | | | — | | | — | |
| Payments on DIP Facility borrowings, net | | — | | | | 1,179 | | | — | | | — | |
| Debt issuance and other financing costs | | 3 | | | | 8 | | | 109 | | | — | |
| Cash paid to purchase debt | | — | | | | — | | | 94 | | | 1,073 | |
| | | | | | | | | |
| Cash paid for common stock dividends | | 119 | | | | — | | | — | | | — | |
| Cash paid for preferred stock dividends | | — | | | | — | | | 22 | | | 91 | |
| Other | | 1 | | | | — | | | 13 | | | 36 | |
Total other uses of cash and cash equivalents | | 367 | | | | 1,666 | | | 238 | | | 1,553 | |
Total uses of cash and cash equivalents | | $ | 1,036 | | | | $ | 1,732 | | | $ | 1,380 | | | $ | 3,816 | |
Capital Expenditures
Our drilling and completion costs decreased in the combined 2021 Successor and Predecessor Periods compared to the 2020 Predecessor Period primarily as a result of decreased drilling and completion activity mainly in our liquids-rich plays. Our drilling and completion costs decreased in the 2020 Predecessor Period compared to the 2019 Predecessor Period primarily as a result of decreased drilling and completion activity mainly in our liquids-rich plays. In the combined 2021 Successor and Predecessor Periods, our average operated rig count was 7 rigs and 121 spud wells, compared to an average operated rig count of 8 rigs and 167 spud wells in the 2020 Predecessor Period and 18 rigs and 333 spud wells in the 2019 Predecessor Period. We completed 127 operated wells in the combined 2021 Successor and Predecessor Periods compared to 188 in the 2020 Predecessor Period and 370 in the 2019 Predecessor Period.
Business Combination
In the 2021 Successor Period, we acquired Vine for approximately 18.7 million shares of our New Common Stock and $253 million cash, less $59 million of cash held by Vine as of the acquisition date. In the 2019 Predecessor Period, we acquired WildHorse for approximately 3.6 million reverse stock split adjusted shares of our Predecessor common stock and $381 million cash, less $28 million of cash held by WildHorse as of the acquisition date. See Note 4 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further discussion of these acquisitions. Payments on DIP Facility Borrowings
On the Effective Date, the DIP Facility was terminated, and the holders of obligations under the DIP Facility received payment in full in cash; provided that to the extend such lender under the DIP Facility was also a lender under the Exit Credit Facility, such lender’s allowed DIP claims were first reduced dollar-for-dollar and satisfied by the amount of its Exit RBL Loans provided as of the Effective Date.
Debt Issuance and Other Financing Costs
In the 2020 Predecessor Period, we paid $109 million of one-time fees to lenders to establish our DIP Credit Facility and Exit Credit Facility.
Cash Paid to Purchase Debt
In the 2020 Predecessor Period, we repurchased approximately $160 million aggregate principal amount of our senior notes for $94 million. In the 2019 Predecessor Period, we repurchased $698 million aggregate principal amount of our BVL Senior Notes for $693 million and retired our BVL revolving credit facility for $1.028 billion. We also repaid upon maturity $380 million principal amount of our Floating Rate Senior Notes due April 2019.
Cash Paid for Common Stock Dividends
As part of our dividend program, we paid dividends of $119 million on our New Common Stock in the 2021 Successor Period. See Note 12 for further discussion. Cash Paid for Preferred Stock Dividends
We paid dividends of $22 million and $91 million on our Predecessor preferred stock during the 2020 and 2019 Predecessor Periods, respectively. On April 17, 2020, we announced that we were suspending payment of dividends on each series of our outstanding convertible preferred stock. On the Effective Date of the Chapter 11 Cases, each holder of an equity interest in Chesapeake had such interest canceled, released, and extinguished without any distribution. See Note 2 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for additional information about the Chapter 11 Cases.
Year ended December 31, 2021 compared to the year ended December 31, 2020
Below is a discussion of changes in our results of operations for the combined 2021 Successor and Predecessor Periods compared to the 2020 Predecessor Period. A discussion of changes in our results of operations for the 2020 Predecessor Period compared to the 2019 Predecessor Period has been omitted from this Form 10-K, but may be found in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 1, 2021.
Oil, Natural Gas and NGL Production and Average Sales Prices | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Period from February 10, 2021 through December 31, 2021 |
| | | Oil | | Natural Gas | | NGL | | Total |
| | | mbbl per day | | $/bbl | | mmcf
per day | | $/mcf | | mbbl per day | | $/bbl | | mboe per day | | $/boe |
| Marcellus | | — | | | — | | | 1,296 | | | 3.25 | | | — | | | — | | | 216 | | | 19.52 | |
| Haynesville | | — | | | — | | | 750 | | | 4.10 | | | — | | | — | | | 125 | | | 24.57 | |
| Eagle Ford | | 60 | | | 69.25 | | | 137 | | | 4.02 | | | 19 | | | 29.76 | | | 101 | | | 51.91 | |
Powder River Basin | | 9 | | | 67.90 | | | 53 | | | 4.33 | | | 3 | | | 40.00 | | | 21 | | | 46.09 | |
| Total | | 69 | | | 69.07 | | | 2,236 | | | 3.61 | | | 22 | | | 31.37 | | | 463 | | | 29.19 | |
| | | | | | | | | | | | | | | | |
| | Predecessor |
| | Period from January 1, 2021 through February 9, 2021 |
| | Oil | | Natural Gas | | NGL | | Total |
| | mbbl per day | | $/bbl | | mmcf
per day | | $/mcf | | mbbl per day | | $/bbl | | mboe per day | | $/boe |
| Marcellus | | — | | | — | | | 1,233 | | | 2.42 | | | — | | | — | | | 206 | | | 14.49 | |
| Haynesville | | — | | | — | | | 543 | | | 2.44 | | | — | | | — | | | 90 | | | 14.62 | |
| Eagle Ford | | 74 | | | 53.37 | | | 165 | | | 2.57 | | | 18 | | | 23.94 | | | 120 | | | 40.27 | |
Powder River Basin | | 10 | | | 51.96 | | | 61 | | | 2.92 | | | 4 | | | 34.31 | | | 24 | | | 34.25 | |
| Total | | 84 | | | 53.21 | | | 2,002 | | | 2.45 | | | 22 | | | 25.92 | | | 440 | | | 22.63 | |
| | | | | | | | | | | | | | | | |
| | Predecessor |
| | Year Ended December 31, 2020 |
| | | Oil | | Natural Gas | | NGL | | Total |
| | | mbbl per day | | $/bbl | | mmcf
per day | | $/mcf | | mbbl per day | | $/bbl | | mboe per day | | $/boe |
| Marcellus | | — | | | — | | | 1,052 | | | 1.64 | | | — | | | — | | | 175 | | | 9.82 | |
| Haynesville | | — | | | — | | | 543 | | | 1.83 | | | — | | | — | | | 90 | | | 10.99 | |
| Eagle Ford | | 86 | | | 38.38 | | | 185 | | | 1.90 | | | 24 | | | 10.93 | | | 141 | | | 27.72 | |
| Powder River Basin | | 13 | | | 36.64 | | | 58 | | | 1.92 | | | 4 | | | 14.94 | | | 26 | | | 24.22 | |
| Mid-Continent | | 4 | | | 38.17 | | | 34 | | | 1.98 | | | 3 | | | 12.36 | | | 13 | | | 20.18 | |
| Total | | 103 | | | 38.16 | | | 1,872 | | | 1.73 | | | 31 | | | 11.55 | | | 445 | | | 16.84 | |
Oil, Natural Gas and NGL Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Period from February 10, 2021 through December 31, 2021 |
| | Oil | | Natural Gas | | NGL | | Total |
| Marcellus | | $ | — | | | $ | 1,370 | | | $ | — | | | $ | 1,370 | |
| Haynesville | | — | | | 998 | | | — | | | 998 | |
| Eagle Ford | | 1,354 | | | 179 | | | 179 | | | 1,712 | |
Powder River Basin | | 202 | | | 75 | | | 44 | | | 321 | |
| Total oil, natural gas and NGL sales | | $ | 1,556 | | | $ | 2,622 | | | $ | 223 | | | $ | 4,401 | |
| | | | | | | | |
| | Predecessor |
| | Period from January 1, 2021 through February 9, 2021 |
| | Oil | | Natural Gas | | NGL | | Total |
| Marcellus | | $ | — | | | $ | 119 | | | $ | — | | | $ | 119 | |
| Haynesville | | — | | | 53 | | | — | | | 53 | |
| Eagle Ford | | 159 | | | 17 | | | 17 | | | 193 | |
| Powder River Basin | | 20 | | | 7 | | | 6 | | | 33 | |
| Total oil, natural gas and NGL sales | | $ | 179 | | | $ | 196 | | | $ | 23 | | | $ | 398 | |
| | | | | | | | |
| | Non-GAAP Combined |
| | Year Ended December 31, 2021 |
| | Oil | | Natural Gas | | NGL | | Total |
| Marcellus | | $ | — | | | $ | 1,489 | | | $ | — | | | $ | 1,489 | |
| Haynesville | | — | | | 1,051 | | | — | | | 1,051 | |
| Eagle Ford | | 1,513 | | | 196 | | | 196 | | | 1,905 | |
| Powder River Basin | | 222 | | | 82 | | | 50 | | | 354 | |
| Total oil, natural gas and NGL sales | | $ | 1,735 | | | $ | 2,818 | | | $ | 246 | | | $ | 4,799 | |
| | | | | | | | |
| | Predecessor |
| | Year Ended December 31, 2020 |
| | | Oil | | Natural Gas | | NGL | | Total |
| Marcellus | | $ | — | | | $ | 631 | | | $ | — | | | $ | 631 | |
| Haynesville | | — | | | 362 | | | — | | | 362 | |
| Eagle Ford | | 1,202 | | | 129 | | | 97 | | | 1,428 | |
Powder River Basin | | 170 | | | 41 | | | 20 | | | 231 | |
| Mid-Continent | | 55 | | | 25 | | | 13 | | | 93 | |
| Total oil, natural gas and NGL sales | | $ | 1,427 | | | $ | 1,188 | | | $ | 130 | | | $ | 2,745 | |
Oil, natural gas and NGL sales in the combined 2021 Successor and Predecessor Periods increased $2.054 billion compared to the 2020 Predecessor Period. The increase was primarily attributable to a $1.901 billion increase in revenues from higher average prices received. Additionally, increased volumes in Marcellus and Haynesville, partially offset by decreased volumes in Eagle Ford, Powder River Basin and Mid-Continent, following the divestiture of our Mid-Continent assets in 2020, resulted in a $153 million increase in revenues. See Note 10 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for a complete discussion of oil, natural gas and NGL sales.
Production Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Non-GAAP Combined | | Predecessor |
| | Period from February 10, 2021 through
December 31, 2021 | | | Period from
January 1, 2021 through
February 9, 2021 | | Year Ended
December 31, 2021 | | Year Ended
December 31, 2020 |
| | | | $/Boe | | | | | $/Boe | | | | $/Boe | | | | $/Boe |
| Marcellus | | $ | 34 | | | 0.49 | | | | $ | 4 | | | 0.50 | | | $ | 38 | | | 0.49 | | | $ | 32 | | | 0.50 | |
| Haynesville | | 59 | | | 1.44 | | | | 4 | | | 1.12 | | | 63 | | | 1.42 | | | 41 | | | 1.28 | |
| Eagle Ford | | 173 | | | 5.25 | | | | 21 | | | 4.24 | | | 194 | | | 5.13 | | | 201 | | | 3.89 | |
| Powder River Basin | | 31 | | | 4.45 | | | | 3 | | | 3.37 | | | 34 | | | 4.32 | | | 42 | | | 4.41 | |
| Mid-Continent | | — | | | — | | | | — | | | — | | | — | | | — | | | 57 | | | 12.56 | |
| Total production expenses | | $ | 297 | | | 1.97 | | | | $ | 32 | | | 1.80 | | | $ | 329 | | | 1.95 | | | $ | 373 | | | 2.29 | |
Production expenses in the combined 2021 Successor and Predecessor Periods decreased $44 million as compared to the 2020 Predecessor Period. The decrease was primarily due to a $57 million reduction from the sale of Mid-Continent properties in the 2020 Predecessor Period, in combination with the effects of workforce reductions in late 2020 and early 2021. The decrease was partially offset by a $12 million increase related to the Vine Acquisition in the Haynesville operating area.
Gathering, Processing and Transportation Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Non-GAAP Combined | | Predecessor |
| | Period from February 10, 2021 through
December 31, 2021 | | | Period from
January 1, 2021 through
February 9, 2021 | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | | | $/Boe | | | | | $/Boe | | | | $/Boe | | | | $/Boe |
| Marcellus | | $ | 287 | | | 4.09 | | | | $ | 34 | | | 4.17 | | | $ | 321 | | | 4.10 | | | $ | 292 | | | 4.55 | |
| Haynesville | | 118 | | | 2.91 | | | | 11 | | | 2.93 | | | 129 | | | 2.91 | | | 188 | | | 5.69 | |
| Eagle Ford | | 290 | | | 8.79 | | | | 45 | | | 9.32 | | | 335 | | | 8.85 | | | 475 | | | 9.23 | |
| Powder River Basin | | 85 | | | 12.20 | | | | 12 | | | 12.53 | | | 97 | | | 12.24 | | | 100 | | | 10.52 | |
| Mid-Continent | | — | | | — | | | | — | | | — | | | — | | | — | | | 27 | | | 5.76 | |
| Total gathering, processing and transportation expenses | | $ | 780 | | | 5.17 | | | | $ | 102 | | | 5.78 | | | $ | 882 | | | 5.24 | | | $ | 1,082 | | | 6.64 | |
Gathering, processing and transportation expenses in the combined 2021 Successor and Predecessor Periods decreased $200 million as compared to the 2020 Predecessor Period. Haynesville decreased $84 million as a result of contract negotiations in the Chapter 11 Cases, partially offset by a $25 million increase associated with Vine acquired wells. Eagle Ford decreased $140 million primarily as a result of reduced production as well as contract negotiations in the Chapter 11 Cases. Additionally, the sale of Mid-Continent properties in 2020 resulted in a $27 million reduction. These decreases were partially offset by a $29 million increase in Marcellus primarily due to increased production.
Severance and Ad Valorem Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Non-GAAP Combined | | Predecessor |
| | Period from February 10, 2021 through
December 31, 2021 | | | Period from
January 1, 2021 through
February 9, 2021 | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | | | $/Boe | | | | | $/Boe | | | | $/Boe | | | | $/Boe |
| Marcellus | | $ | 9 | | | 0.12 | | | | $ | 1 | | | 0.07 | | | $ | 10 | | | 0.12 | | | $ | 6 | | | 0.09 | |
| Haynesville | | 22 | | | 0.55 | | | | 2 | | | 0.54 | | | 24 | | | 0.55 | | | 23 | | | 0.69 | |
| Eagle Ford | | 96 | | | 2.91 | | | | 13 | | | 2.69 | | | 109 | | | 2.88 | | | 92 | | | 1.79 | |
| Powder River Basin | | 31 | | | 4.48 | | | | 2 | | | 2.88 | | | 33 | | | 4.29 | | | 23 | | | 2.41 | |
| Mid-Continent | | — | | | — | | | | — | | | — | | | — | | | — | | | 5 | | | 1.16 | |
| Total severance and ad valorem taxes | | $ | 158 | | | 1.05 | | | | $ | 18 | | | 1.03 | | | $ | 176 | | | 1.05 | | | $ | 149 | | | 0.91 | |
Severance and ad valorem taxes in the combined 2021 Successor and Predecessor Periods increased $27 million as compared to the 2020 Predecessor Period. The severance tax increase of $23 million was primarily driven by increased revenue as a result of improved pricing.
Gross Margin by Operating Area
The table below presents the gross margin for each of our operating areas. Gross margin by operating area is defined as oil, natural gas and NGL sales less production expenses, gathering, processing and transportation expenses, and severance and ad valorem taxes.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Non-GAAP Combined | | Predecessor |
| | Period from February 10, 2021 through
December 31, 2021 | | | Period from
January 1, 2021 through
February 9, 2021 | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | | | $/Boe | | | | | $/Boe | | | | $/Boe | | | | $/Boe |
| Marcellus | | $ | 1,040 | | | 14.82 | | | | $ | 80 | | | 9.75 | | | $ | 1,120 | | | 14.28 | | | $ | 301 | | | 4.68 | |
| Haynesville | | 799 | | | 19.67 | | | | 36 | | | 10.03 | | | 835 | | | 18.88 | | | 110 | | | 3.33 | |
| Eagle Ford | | 1,153 | | | 34.96 | | | | 114 | | | 24.02 | | | 1,267 | | | 33.56 | | | 660 | | | 12.81 | |
| Powder River Basin | | 174 | | | 24.96 | | | | 16 | | | 15.47 | | | 190 | | | 23.81 | | | 66 | | | 6.88 | |
| Mid-Continent | | — | | | — | | | | — | | | — | | | — | | | — | | | 4 | | | 0.70 | |
| Gross margin by operating area | | $ | 3,166 | | | 21.00 | | | | $ | 246 | | | 14.02 | | | $ | 3,412 | | | 20.27 | | | $ | 1,141 | | | 7.00 | |
Oil and Natural Gas Derivatives | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Oil derivatives – realized gains (losses) | | $ | (453) | | | | $ | (19) | | | $ | 694 | |
| Oil derivatives – unrealized losses | | (29) | | | | (190) | | | (140) | |
| Total gains (losses) on oil derivatives | | (482) | | | | (209) | | | 554 | |
| | | | | | | |
| Natural gas derivatives – realized gains (losses) | | (715) | | | | 6 | | | 161 | |
| Natural gas derivatives – unrealized gains (losses) | | 70 | | | | (179) | | | (119) | |
| Total gains (losses) on natural gas derivatives | | (645) | | | | (173) | | | 42 | |
| Total gains (losses) on oil and natural gas derivatives | | $ | (1,127) | | | | $ | (382) | | | $ | 596 | |
See Note 15 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for a complete discussion of our derivative activity. Marketing Revenues and Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Marketing revenues | | $ | 2,263 | | | | $ | 239 | | | $ | 1,869 | |
| Marketing expenses | | 2,257 | | | | 237 | | | 1,889 | |
| Marketing margin | | $ | 6 | | | | $ | 2 | | | $ | (20) | |
Marketing revenues and expenses increased in the 2021 Successor Period as a result of increased oil, natural gas and NGL prices received in our marketing operations.
Exploration Expense
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 |
| Impairments of unproved properties | | $ | 1 | | | | $ | 2 | | | $ | 411 | |
| Dry hole expense | | 1 | | | | — | | | 7 | |
Geological and geophysical expense and other | | 5 | | | | — | | | 9 | |
| Total exploration expense | | $ | 7 | | | | $ | 2 | | | $ | 427 | |
The 2020 Predecessor Period exploration expense is the result of non-cash impairment charges in unproved properties, primarily in our Eagle Ford, Haynesville, Powder River Basin and Mid-Continent operating areas. See Note 20 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further discussion.
General and Administrative Expenses | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Gross compensation and benefits | | $ | 231 | | | | $ | 32 | | | $ | 383 | |
| Non-labor | | 86 | | | | 12 | | | 195 | |
| Allocations and reimbursements | | (220) | | | | (23) | | | (311) | |
| Total general and administrative expenses, net | | $ | 97 | | | | $ | 21 | | | $ | 267 | |
| | | | | | | |
| General and administrative expenses, net per Boe | | $ | 0.64 | | | | $ | 1.19 | | | $ | 1.63 | |
Compensation and benefits before reimbursements and allocations during the combined 2021 Successor and Predecessor Periods decreased $120 million compared to the 2020 Predecessor Period due to reductions in workforce in the 2020 and 2021 Predecessor Periods. Non-labor before reimbursements and allocations during the combined 2021 Successor and Predecessor Periods decreased $97 million compared to the 2020 Predecessor Period due to cost reduction initiatives for professional services as well as $43 million in fees for legal, financial and restructuring advisors incurred in preparation for the Chapter 11 Cases in the 2020 Predecessor Period. The decrease in allocations and reimbursements during the combined 2021 Successor and Predecessor Periods compared to the 2020 Predecessor Period was the result of reduced drilling, staffing reductions and the sale of Mid-Continent properties in 2020.
Separation and Other Termination Costs
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Separation and other termination costs | | $ | 11 | | | | $ | 22 | | | $ | 44 | |
Separation and other termination costs relate to one-time termination benefits for certain employees.
Depreciation, Depletion and Amortization | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Depreciation, depletion and amortization | | $ | 919 | | | | $ | 72 | | | $ | 1,097 | |
| Depreciation, depletion and amortization per Boe | | $ | 6.10 | | | | $ | 4.11 | | | $ | 6.72 | |
The absolute and per unit decrease in depreciation, depletion and amortization for the 2021 Successor Period compared to the 2020 Predecessor Period was primarily the result of the revaluation of the depletable asset base occurring in connection with our emergence from bankruptcy. Fresh start accounting requires that new fair values be established for our assets as of the Effective Date. See Note 3 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further discussion.
Impairments | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Impairments of proved oil and natural gas properties | | $ | — | | | | $ | — | | | $ | 8,446 | |
| Impairments of other fixed assets and other | | 1 | | | | — | | | 89 | |
| Total impairments | | $ | 1 | | | | $ | — | | | $ | 8,535 | |
In the 2020 Predecessor Period, we recorded impairments of proved oil and natural gas properties related to Eagle Ford, Powder River Basin, Mid-Continent and other non-core assets, all of which were due to lower forecasted commodity prices. Additionally, in the 2020 Predecessor Period, we recorded a $76 million impairment of our sand mine assets that support our Eagle Ford operating area for the difference between fair value and the carrying value of the assets as well as a $13 million impairment of compressor inventory due to a lack of a current market for compressors. See Note 19 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further discussion. Other Operating Expense (Income), Net | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Other operating expense (income), net | | $ | 84 | | | | $ | (12) | | | $ | 80 | |
In the 2021 Successor Period we recognized approximately $59 million of costs related to our acquisition of Vine, which included consulting fees, financial advisory fees and legal fees. Additionally, we recognized approximately $36 million of severance expense as a result of the Vine Acquisition, which included $15 million of cash severance and $21 million of non-cash severance, primarily related to the issuance of New Common Stock for the acceleration of certain Vine restricted stock unit awards. A majority of Vine executives and employees were terminated on the date the Vine Acquisition was completed. These executives and employees were entitled to severance benefits in accordance with existing employment agreements. In the 2020 Predecessor Period, we terminated certain gathering, processing and transportation contracts and recognized a non-recurring $80 million expense related to the contract terminations, $9 million expense related to the impairment of sand mine inventory and $42 million of other operating expense primarily related to royalty settlements and other legal matters, partially offset by $51 million of income from the amortization of VPP deferred revenue. In the 2020 Predecessor Period, we sold the assets related to our remaining volumetric production payment and extinguished the liability related to the production volume delivery obligation.
Interest Expense
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| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Interest expense on debt | | $ | 79 | | | | $ | 11 | | | $ | 402 | |
| Amortization of premium, discount, issuance costs and other | | 5 | | | | — | | | (56) | |
| Capitalized interest | | (11) | | | | — | | | (15) | |
| Total interest expense | | $ | 73 | | | | $ | 11 | | | $ | 331 | |
The decrease in total interest expense in the 2021 Successor Period compared to the 2020 Predecessor Period resulted from the decrease in outstanding debt obligations between periods. Upon emergence from the Chapter 11 Cases, all outstanding obligations under our Predecessor senior notes and term loan were canceled in exchange for shares of New Common Stock and Warrants. See Note 6 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further discussion. Other Income (Expense)
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| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Other income (expense) | | $ | 31 | | | | $ | 2 | | | $ | (4) | |
In the 2021 Successor Period, we recorded a gain of $22 million for a refund from a midstream provider.
Reorganization Items, Net
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| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Gains on the settlement of liabilities subject to compromise | | $ | — | | | | $ | 6,443 | | | $ | 12 | |
| Accrual for allowed claims | | — | | | | (1,002) | | | (879) | |
| Write off of unamortized debt premiums (discounts) on Predecessor debt | | — | | | | — | | | 518 | |
| Write off of unamortized debt issuance costs on Predecessor debt | | — | | | | — | | | (61) | |
| Gain on fresh start adjustments | | — | | | | 201 | | | — | |
| Gain from release of commitment liabilities | | — | | | | 55 | | | — | |
| Debt and equity financing fees | | — | | | | — | | | (145) | |
| Loss on divested assets | | — | | | | — | | | (128) | |
| Professional service provider fees and other | | — | | | | (60) | | | (113) | |
| Success fees for professional service providers | | — | | | | (38) | | | — | |
| Surrender of other receivable | | — | | | | (18) | | | — | |
| FLLO alternative transaction fee | | — | | | | (12) | | | — | |
| Total reorganization items, net | | $ | — | | | | $ | 5,569 | | | $ | (796) | |
In the 2021 and 2020 Predecessor Periods, we recorded a net gain of $5.569 billion and a net loss of $796 million, respectively, in reorganization items, net, related to the Chapter 11 Cases. See Note 2 and Note 3 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for a discussion of the Chapter 11 Cases and for discussion of adoption of fresh start accounting. Income Tax Expense (Benefit). We recorded an income tax benefit of $49 million in the 2021 Successor Period. In the 2021 and 2020 Predecessor Periods, we recorded an income tax benefit of $57 million and $19 million, respectively. The income tax benefit recorded in the 2021 Successor Period is related to a $49 million partial release of the valuation allowance maintained against our net deferred tax asset position. The partial release was a consequence of recording a net deferred tax liability of $49 million resulting from the business combination accounting for Vine. The $57 million income tax benefit for the 2021 Predecessor Period consists of the removal of the income tax effects in other comprehensive income related to hedging settlements due to the fair value adjustments made upon emergence from bankruptcy. The income tax benefit for the 2020 Predecessor Period consists of a reversal of the income tax expense recorded in 2019 of $10 million relating to Texas no longer being in a net deferred tax asset position for the period ended December 31, 2019. Texas reverted back to being in a net deferred tax asset position which was offset by a valuation allowance for the period ended December 31, 2020, which resulted in the reversal. The $19 million also includes a current state income tax benefit of $6 million and a $3 million benefit for amounts which were previously sequestered or anticipated to be sequestered by the Internal Revenue Service (IRS) against certain refunds of alternative minimum tax (AMT) credits. The IRS announced on January 16, 2020, that refunds of AMT credits should not have been subject to sequestration. All previously sequestered funds have been received. See Note 11 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for a discussion of income tax expense (benefit).
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| Critical Accounting Estimates |
The preparation of financial statements in accordance with accounting principles generally accepted in the United States require us to make estimates and assumptions. The accounting estimates and assumptions that involve a significant level of estimation uncertainty and have or are reasonably likely to have a material impact on our financial condition or results of operations are discussed below. Our management has discussed each critical accounting estimate with the Audit Committee of our Board of Directors.
Reorganization and Fresh Start Accounting. Effective June 28, 2020, as a result of the filing of the Chapter 11 Cases we began accounting and reporting according to FASB ASC Topic 852 – Reorganizations (“ASC 852”), which specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements include distinguishing and presenting transactions associated with the reorganization and implementation of the plan of reorganization separately from activities related to ongoing operations of the business. Additionally, upon emergence from the Chapter 11 Cases, ASC 852 required us to allocate our reorganization value to our individual assets based on their estimated fair values, resulting in a new entity for financial reporting purposes. After the Effective Date, the accounting and reporting requirements of ASC 852 are no longer applicable and have no impact on the Successor periods.
Oil and Natural Gas Reserves. Estimates of oil and natural gas reserves and their values, future production rates, future development costs and commodity pricing differentials are the most significant of our estimates. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, recent commodity prices, operating costs and other factors. These revisions could materially affect our financial statements. The volatility of commodity prices results in increased uncertainty inherent in these estimates and assumptions. Changes in oil, natural gas or NGL prices could result in actual results differing significantly from our estimates. See Supplemental Disclosures About Oil, Natural Gas, and NGL Producing Activities included in Item 8 of Part II of this report for further information.
Accounting for Business Combinations. We account for business combinations using the acquisition method, which is the only method permitted under FASB ASC Topic 805 – Business Combinations, and involves the use of significant judgment. Under the acquisition method of accounting, a business combination is accounted for at a purchase price based on the fair value of the consideration given. The assets and liabilities acquired are measured at their fair values, and the purchase price is allocated to the assets and liabilities based upon these fair values. The excess, if any, of the consideration given to acquire an entity over the net amounts assigned to its assets acquired and liabilities assumed is recognized as goodwill. The excess, if any, of the fair value of assets acquired and liabilities assumed over the cost of an acquired entity is recognized immediately to earnings as a gain from bargain purchase.
The Company’s principal assets are its oil and natural gas properties, which are accounted for under the successful efforts accounting method. The Company determines the fair value of acquired oil and natural gas properties based on the discounted future net cash flows expected to be generated from these assets. Discounted cash flow models by operating area are prepared using the estimated future revenues and operating costs for all proved developed properties and undeveloped properties comprising the proved and unproved reserves. Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and (v) a market-based weighted average cost of capital by operating area. The Company utilizes NYMEX strip pricing, adjusted for differentials, to value the reserves. The NYMEX strip pricing inputs used are classified as Level 1 fair value assumptions and all other inputs are classified as Level 3 fair value assumptions. The discount rates utilized are derived using a weighted average cost of capital computation, which includes an estimated cost of debt and equity for market participants with similar geographies and asset development type by operating area.
Impairments. Long-lived assets used in operations, including proved oil and gas properties, are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in future cash flows expected to be generated by an asset group. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. If there is an indication the carrying amount of an asset may not be
recovered, the asset is assessed by management through an established process in which changes to significant assumptions such as prices, volumes, and future development plans are reviewed. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value by discounting using a weighted average cost of capital. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is assessed by management using the income approach. Level 3 inputs associated with the calculation of discounted cash flows used in the impairment analysis include our estimate of future crude oil and natural gas prices, production costs, development expenditures, anticipated production of proved reserves and other relevant data. Additionally, we utilize NYMEX strip pricing, adjusted for differentials, to value the reserves.
Income Taxes. Income taxes are accounted for using the asset and liability method as required by GAAP. Deferred tax assets and liabilities arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets for tax attributes such as NOL carryforwards and disallowed business interest carryforwards are also recognized. Deferred tax assets represent potential future tax benefits, and are reduced by a valuation allowance if it is more likely than not that such benefits will not be realized.
In assessing the need for a valuation allowance or adjustments to existing valuation allowances, we consider the weight of all available evidence, both positive and negative, concerning the realization of the deferred tax asset. Among the more significant types of evidence that we consider are:
•taxable income projections in future years;
•reversal of existing deferred tax liabilities against deferred tax assets and whether the carryforward period is so brief that it would limit realization of the tax benefit;
•future sales and operating cost projections that will produce more than enough taxable income to realize the deferred tax asset based on existing sales prices and cost structures; and
•our earnings history exclusive of any loss that creates a future deductible amount coupled with evidence indicating that the loss is an aberration rather than a continuing condition.
Our judgement regarding the realizability of deferred tax assets is thus significantly informed by our assessment of forecasted financial information.
In interim quarters our tax provision is based upon an estimated annual effective tax rate, which is determined through the usage of full year estimates. Thus, our quarterly income tax expense or benefit can fluctuate throughout the year as a result of changing financial forecasts.
We also routinely assess potential uncertain tax positions and, if required, establish accruals for such positions. Accounting guidance for recognizing and measuring uncertain tax positions requires that a more likely than not threshold condition be met on a tax position, based solely on its technical merits of being sustained, before any benefit of the uncertain tax position can be recognized in the financial statements. If it is more likely than not a tax position will be sustained, we measure and recognize the position following a cumulative probability estimate.
Contingencies. We are subject to various legal proceedings, claims, and liabilities that arise in the ordinary course of business. Except for contingencies acquired in a business combination, which are recorded at fair value at the time of acquisition, we accrue losses when such losses are probable and reasonably estimable. If we determine that a loss is probable and cannot estimate a specific amount for that loss, but can estimate a range of loss, the best estimate within the range is accrued. If no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. Our in-house legal personnel regularly assess contingent liabilities and, in certain circumstances, consult with third-party legal counsel or consultants to assist in the evaluation of our liability for these contingencies.
We make judgments and estimates when we establish liabilities for litigation and other contingent matters. Estimates of litigation-related liabilities are based on the facts and circumstances of the individual case and on information currently available to us. The extent of information available varies based on the status of the litigation and our evaluation of the claim and legal arguments. In future periods, a number of factors could significantly change our estimate of litigation-related liabilities, including discovery activities; briefings filed with the relevant court; rulings from the court made pre-trial, during trial, or at the conclusion of any trial; and similar cases involving other plaintiffs and defendants that may set or change legal precedent. As events unfold throughout the litigation
process, we evaluate the available information and may consult with third-party legal counsel to determine whether liability accruals should be established or adjusted.
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| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our exposure to market risk. The term market risk relates to our risk of loss arising from adverse changes in oil, natural gas, and NGL prices and interest rates. These disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. The forward-looking information provides indicators of how we view and manage our ongoing market risk exposures.
Commodity Price Risk
Our results of operations and cash flows are impacted by changes in market prices for oil, natural gas and NGL, which have historically been volatile. To mitigate a portion of our exposure to adverse price changes, we enter into various derivative instruments. Our oil, natural gas and NGL derivative activities, when combined with our sales of oil, natural gas and NGL, allow us to predict with greater certainty the revenue we will receive. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives.
We determine the fair value of our derivative instruments utilizing established index prices, volatility curves and discount factors. These estimates are compared to counterparty valuations for reasonableness. Derivative transactions are also subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. Future risk related to counterparties not being able to meet their obligations has been partially mitigated under our commodity hedging arrangements that require counterparties to post collateral if their obligations to us are in excess of defined thresholds. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. See Note 15 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further discussion of the fair value measurements associated with our derivatives. For the combined 2021 Successor and Predecessor Periods, oil, natural gas, and NGL revenues, excluding any effect of our derivative instruments, were $1.735 billion, $2.818 billion, and $246 million, respectively. Based on production, oil, natural gas, and NGL revenue for the combined 2021 Successor and Predecessor Periods would have increased or decreased by approximately $173 million, $282 million, and $25 million, respectively, for each 10% increase or decrease in prices. As of December 31, 2021, the fair values of our oil and natural gas derivatives were net liabilities of $358 million and net liabilities of $785 million, respectively. A 10% increase in forward oil prices would decrease the valuation of oil derivatives by $95 million while a 10% decrease would increase the valuation by $95 million. A 10% increase in forward natural gas prices would decrease the valuation of natural gas derivatives by approximately $270 million while a 10% decrease would increase the valuation by $269 million. This fair value change assumes volatility based on prevailing market parameters at December 31, 2021. See Note 15 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for further information on our open derivative positions. Interest Rate Risk
Our exposure to interest rate changes relates primarily to borrowings under our Exit Credit Facility for the 2021 Successor Period and pre-petition revolving credit facility and DIP Facility for the 2021, 2020 and 2019 Predecessor Periods. Interest is payable on borrowings under the Exit Credit Facility, pre-petition revolving credit facility and DIP Credit Facility based on a floating rate. See Note 6 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for additional information. As of December 31, 2021, we had no outstanding borrowings under our Exit Credit Facility - Tranche A Loans, and $221 million under our Exit Credit Facility - Tranche B Loans. A 1.0% increase in interest rates based on the variable borrowings as of December 31, 2021 would result in an increase in our interest expense of approximately $2 million per year. Changes in interest rates do affect the fair value of our fixed-rate debt.
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| Item 8. | Financial Statements and Supplementary Data |
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| INDEX TO FINANCIAL STATEMENTS
CHESAPEAKE ENERGY CORPORATION | |
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| Consolidated Financial Statements: | |
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| for the Period from February 10, 2021 through December 31, 2021, the Period from January 1, 2021 through February 9, 2021, and the Years Ended December 31, 2020 and 2019 | |
| for the Period from February 10, 2021 through December 31, 2021, the Period from January 1, 2021 through February 9, 2021, and the Years Ended December 31, 2020 and 2019 | |
| for the Period from February 10, 2021 through December 31, 2021, the Period from January 1, 2021 through February 9, 2021, and the Years Ended December 31, 2020 and 2019 | |
| for the Period from February 10, 2021 through December 31, 2021, the Period from January 1, 2021 through February 9, 2021, and the Years Ended December 31, 2020 and 2019 | |
| Notes to the Consolidated Financial Statements: | |
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| Supplementary Information: | |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Chesapeake Energy Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of Chesapeake Energy Corporation and its subsidiaries (Successor) (the “Company”) as of December 31, 2021, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and of cash flows for the period from February 10, 2021 through December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the period from February 10, 2021 through December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis of Accounting
As discussed in Note 2 to the consolidated financial statements, Chesapeake Energy Corporation and certain of its subsidiaries (collectively the “Debtors”) filed voluntary petitions on June 28, 2020 with the United States Bankruptcy Court for the Southern District of Texas for relief under the provisions of Chapter 11 of the Bankruptcy Code. The Bankruptcy Court confirmed the Debtors’ joint plan of reorganization on January 16, 2021 and the Debtors emerged from bankruptcy on February 9, 2021. In connection with its emergence from bankruptcy, the Company adopted fresh start accounting as of February 9, 2021.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Vine Energy Inc. from its assessment of internal control over financial reporting as of December 31, 2021, because it was acquired by the Company in a purchase business combination during 2021. We have also excluded Vine Energy Inc. from our audit of internal control over financial reporting. Vine Energy Inc. is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 20% and 7%, respectively, of the related consolidated financial statement amounts as of December 31, 2021 and for the period from February 10, 2021 through December 31, 2021.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
The Impact of Proved Oil and Natural Gas Reserves on Proved Oil and Natural Gas Properties, Net
As described in Note 1 to the consolidated financial statements, the Company’s property and equipment, net balance was approximately $8.8 billion as of December 31, 2021, and depreciation, depletion, and amortization (DD&A) expense for the period from February 10, 2021 through December 31, 2021 was approximately $919 million, both of which substantially related to proved oil and natural gas properties. The Company follows the successful efforts method of accounting for its oil and natural gas properties. Under this method, all capitalized well costs and leasehold costs of proved oil and natural gas properties are depreciated by the units-of-production (UOP) method based on total estimated proved developed reserves and proved reserves, respectively. As disclosed by management, estimates of oil and natural gas reserves and their values, future production rates, future development costs and commodity pricing differentials are the most significant of management’s estimates. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves volumes may be revised based on actual production, results of subsequent exploration and development activities, recent commodity prices, operating costs and other factors. The estimates of proved oil and natural gas reserves have been developed by specialists, specifically petroleum engineers.
The principal considerations for our determination that performing procedures relating to the impact of proved oil and natural gas reserves on proved oil and natural gas properties, net is a critical audit matter are (i) the significant judgment by management, including the use of specialists, when developing the estimates of proved oil and natural
gas reserves, which in turn led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the data, methods, and assumptions used by management and its specialists in developing the estimates of proved oil and natural gas reserves volumes and the assumptions applied to the data related to the commodity pricing differentials and future development costs.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s estimates of proved oil and natural gas reserves. The work of management’s specialists was used in performing the procedures to evaluate the reasonableness of the proved oil and natural gas reserves volumes. As a basis for using this work, the specialists’ qualifications were understood and the Company’s relationship with the specialists was assessed. The procedures performed also included evaluation of the methods and assumptions used by the specialists, tests of the data used by the specialists, and an evaluation of the specialists’ findings. These procedures also included, among others, testing the completeness and accuracy of the data related to commodity pricing differentials and future development costs. Additionally, these procedures included evaluating whether the assumptions applied to the aforementioned data were reasonable considering the past performance of the Company.
Acquisition of Vine Energy, Inc. - Valuation of Proved and Unproved Oil and Natural Gas Properties
As described in Note 4 to the consolidated financial statements, on November 1, 2021, the Company acquired Vine Energy, Inc. (Vine), an energy company focused on the development of natural gas properties in the over-pressured stacked Haynesville and Mid-Bossier shale plays in Northwest Louisiana. Accordingly, the Company recorded the estimated fair values of the acquired proved and unproved oil and natural gas properties of approximately $2.2 billion and approximately $1.1 billion for proved oil and gas properties and unproved properties, respectively. As disclosed by management, management determines the fair value of acquired oil and natural gas properties based on the discounted future net cash flows expected to be generated from these assets. Discounted cash flow models by operating area are prepared using the estimated future revenues and operating costs for all proved developed properties and undeveloped properties comprising the proved and unproved reserves. Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and (v) a market-based weighted average cost of capital by operating area. The estimates of proved oil and natural gas reserves have been developed by specialists, specifically petroleum engineers.
The principal considerations for our determination that performing procedures relating to the valuation of the acquired Vine proved and unproved oil and natural gas properties is a critical audit matter are (i) the significant judgment by management, including the use of specialists, when developing the fair value of proved and unproved oil and natural gas properties; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the data, methods, and assumptions used by management and its specialists related to recoverable reserves; production rates; future operating and development costs; future commodity prices escalated by an inflationary rate after five years, adjusted for differentials; and a market-based weighted average cost of capital by operating area; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, testing the effectiveness of controls relating to management’s estimates of the fair value of proved and unproved oil and natural gas properties. These procedures also included, among others, (i) testing management’s process for developing the fair value of proved and unproved oil and natural gas properties; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the data, methods, and significant assumptions used by management related to recoverable reserves, production rates, future operating and development costs, future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and a market-based weighted average cost of capital by operating area. Evaluating the reasonableness of management’s assumptions related to future commodity prices adjusted for differentials involved comparing the prices against observable market data and evaluating differentials through inspection of the underlying contracts. Evaluating future operating and development costs involved evaluating the reasonableness of the costs as compared to the past performance of the acquired business,
comparing to the current performance of the Company, consistency with external market and industry data, and whether the assumptions were consistent with evidence obtained in other areas of the audit. The work of management’s specialists was used in performing the procedures to evaluate the reasonableness of the recoverable reserves and production rates. As a basis for using this work, the specialists’ qualifications were understood and the Company’s relationship with the specialists was assessed. The procedures performed also included evaluation of the data, methods, and assumptions used by the specialists, tests of the data used by the specialists, and an evaluation of the specialists’ findings. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow models and market-based weighted average cost of capital by operating area.
/s/ PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
February 24, 2022
We have served as the Company’s auditor since 1992.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Chesapeake Energy Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Chesapeake Energy Corporation and its subsidiaries (Predecessor) (the “Company”) as of December 31, 2020, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and of cash flows for the period from January 1, 2021 through February 9, 2021 and for the years ended December 31, 2020 and 2019, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the period from January 1, 2021 through February 9, 2021 and for the years ended December 31, 2020 and 2019 in conformity with accounting principles generally accepted in the United States of America.
Basis of Accounting
As discussed in Note 2 to the consolidated financial statements, Chesapeake Energy Corporation and certain of its subsidiaries (collectively the “Debtors”) filed voluntary petitions on June 28, 2020 with the United States Bankruptcy Court for the Southern District of Texas for relief under the provisions of Chapter 11 of the Bankruptcy Code. The Bankruptcy Court confirmed the Debtors’ joint plan of reorganization on January 16, 2021 and the Debtors emerged from bankruptcy on February 9, 2021. In connection with its emergence from bankruptcy, the Company adopted fresh start accounting. This matter is also described in the “Critical Audit Matters” section of our report.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Proved and Unproved Oil and Natural Gas Properties in Connection with the Application of Fresh Start Accounting
As described in Note 3 to the consolidated financial statements, in connection with the Company’s emergence from bankruptcy, management applied fresh start accounting on February 9, 2021 and recorded the estimated fair values of its proved and unproved oil and natural gas properties of approximately $4.7 billion and approximately $483 million, respectively. Management determined the fair value of its oil and natural gas properties based on the discounted future net cash flows expected to be generated from these assets. Discounted cash flow models by operating area were prepared using the estimated future revenues and operating costs for all developed properties and undeveloped properties comprising the proved and unproved reserves. Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and (v) a market-based weighted average cost of capital by operating area.
The principal considerations for our determination that performing procedures relating to the valuation of proved and unproved oil and natural gas properties in connection with the application of fresh start accounting is a critical audit matter are (i) the significant judgment by management, including the use of specialists, when developing the fair value of proved and unproved oil and natural gas properties; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the data, methods, and assumptions used by management and its specialists related to recoverable reserves, production rates, future operating and development costs, future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and a market-based weighted average cost of capital by operating area; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) testing management’s process for developing the fair value of proved and unproved oil and natural gas properties; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the data, methods, and significant assumptions used by management related to recoverable reserves, production rates, future operating and development costs, future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and a market-based weighted average cost of capital by operating area. Evaluating the reasonableness of management’s assumptions related to future commodity prices adjusted for differentials involved comparing the prices against observable market data and evaluating differentials through inspection of the underlying contracts. Evaluating future operating costs involved evaluating the reasonableness of the costs as compared to the past performance of the Company. Evaluating future development costs involved evaluating whether the costs were reasonable considering the current performance of the Company, the consistency with external market and industry data, and whether the assumption was consistent with evidence obtained in other areas of the audit. The work of management’s specialists was used in performing the procedures to evaluate the reasonableness of the recoverable reserves and production rates. As a basis for using this work, the specialists’ qualifications were understood and the Company’s relationship with the specialists was assessed. The procedures performed also included evaluation of the data, methods, and assumptions used by the specialists, tests of the data used by the specialists, and an evaluation of the specialists’ findings. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow models and market-based weighted average cost of capital by operating area.
/s/ PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
February 24, 2022
We have served as the Company’s auditor since 1992.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | December 31,
2021 | | | December 31,
2020 |
| Assets | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | | $ | 905 | | | | $ | 279 | |
| Restricted cash | | 9 | | | | — | |
| Accounts receivable, net | | 1,115 | | | | 746 | |
| Short-term derivative assets | | 5 | | | | 19 | |
| Other current assets | | 69 | | | | 64 | |
| Total current assets | | 2,103 | | | | 1,108 | |
| Property and equipment: | | | | | |
| Oil and natural gas properties, successful efforts method | | | | | |
| Proved oil and natural gas properties | | 7,682 | | | | 25,734 | |
| Unproved properties | | 1,530 | | | | 1,550 | |
| Other property and equipment | | 495 | | | | 1,754 | |
| Total property and equipment | | 9,707 | | | | 29,038 | |
| Less: accumulated depreciation, depletion and amortization | | (908) | | | | (23,806) | |
| Property and equipment held for sale, net | | 3 | | | | 10 | |
| Total property and equipment, net | | 8,802 | | | | 5,242 | |
Other long-term assets | | 104 | | | | 234 | |
| Total assets | | $ | 11,009 | | | | $ | 6,584 | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
79
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS – (Continued)
| | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | December 31,
2021 | | | December 31,
2020 |
| Liabilities and stockholders’ equity (deficit) | | | | | |
| Current liabilities: | | | | | |
Accounts payable | | $ | 308 | | | | $ | 346 | |
Current maturities of long-term debt, net | | — | | | | 1,929 | |
Accrued interest | | 38 | | | | 3 | |
Short-term derivative liabilities | | 899 | | | | 93 | |
| Other current liabilities | | 1,202 | | | | 723 | |
| Total current liabilities | | 2,447 | | | | 3,094 | |
Long-term debt, net | | 2,278 | | | | — | |
Long-term derivative liabilities | | 249 | | | | 44 | |
Asset retirement obligations, net of current portion | | 349 | | | | 139 | |
Other long-term liabilities | | 15 | | | | 5 | |
| Liabilities subject to compromise | | — | | | | 8,643 | |
| Total liabilities | | 5,338 | | | | 11,925 | |
Contingencies and commitments (Note 7) | | | | | |
| Stockholders’ equity (deficit): | | | | | |
Predecessor preferred stock, $0.01 par value, 20,000,000 shares authorized: 0 and 5,563,458 shares outstanding | | — | | | | 1,631 | |
Predecessor common stock, $0.01 par value, 22,500,000 shares authorized: 0 and 9,780,547 shares issued | | — | | | | — | |
| Predecessor additional paid-in capital | | — | | | | 16,937 | |
| Predecessor accumulated other comprehensive income | | — | | | | 45 | |
Successor common stock, $0.01 par value, 450,000,000 shares authorized: 117,917,349 and 0 shares issued | | 1 | | | | — | |
| Successor additional paid-in capital | | 4,845 | | | | — | |
| Retained earnings (accumulated deficit) | | 825 | | | | (23,954) | |
| Total stockholders’ equity (deficit) | | 5,671 | | | | (5,341) | |
| Total liabilities and stockholders’ equity (deficit) | | $ | 11,009 | | | | $ | 6,584 | |
The accompanying notes are an integral part of these consolidated financial statements.
80
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Revenues and other: | | | | | | | | | |
| Oil, natural gas and NGL | | $ | 4,401 | | | | $ | 398 | | | $ | 2,745 | | | $ | 4,517 | |
| Marketing | | 2,263 | | | | 239 | | | 1,869 | | | 3,967 | |
| Oil and natural gas derivatives | | (1,127) | | | | (382) | | | 596 | | | 5 | |
| Gains on sales of assets | | 12 | | | | 5 | | | 30 | | | 43 | |
| Total revenues and other | | 5,549 | | | | 260 | | | 5,240 | | | 8,532 | |
| Operating expenses: | | | | | | | | | |
| Production | | 297 | | | | 32 | | | 373 | | | 520 | |
| Gathering, processing and transportation | | 780 | | | | 102 | | | 1,082 | | | 1,082 | |
| Severance and ad valorem taxes | | 158 | | | | 18 | | | 149 | | | 224 | |
| Exploration | | 7 | | | | 2 | | | 427 | | | 84 | |
| Marketing | | 2,257 | | | | 237 | | | 1,889 | | | 4,003 | |
| General and administrative | | 97 | | | | 21 | | | 267 | | | 315 | |
| Separation and other termination costs | | 11 | | | | 22 | | | 44 | | | 12 | |
| Depreciation, depletion and amortization | | 919 | | | | 72 | | | 1,097 | | | 2,264 | |
| Impairments | | 1 | | | | — | | | 8,535 | | | 11 | |
| Other operating expense (income), net | | 84 | | | | (12) | | | 80 | | | 48 | |
| Total operating expenses | | 4,611 | | | | 494 | | | 13,943 | | | 8,563 | |
| Income (loss) from operations | | 938 | | | | (234) | | | (8,703) | | | (31) | |
| Other income (expense): | | | | | | | | | |
| Interest expense | | (73) | | | | (11) | | | (331) | | | (651) | |
| Gains on purchases or exchanges of debt | | — | | | | — | | | 65 | | | 75 | |
| Other income (expense) | | 31 | | | | 2 | | | (4) | | | (32) | |
| Reorganization items, net | | — | | | | 5,569 | | | (796) | | | — | |
| Total other income (expense) | | (42) | | | | 5,560 | | | (1,066) | | | (608) | |
| Income (loss) before income taxes | | 896 | | | | 5,326 | | | (9,769) | | | (639) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Income tax benefit | | (49) | | | | (57) | | | (19) | | | (331) | |
| Net income (loss) | | 945 | | | | 5,383 | | | (9,750) | | | (308) | |
| Net loss attributable to noncontrolling interests | | — | | | | — | | | 16 | | | — | |
| Net income (loss) attributable to Chesapeake | | 945 | | | | 5,383 | | | (9,734) | | | (308) | |
| Preferred stock dividends | | — | | | | — | | | (22) | | | (91) | |
| Loss on exchange of preferred stock | | — | | | | — | | | — | | | (17) | |
| Net income (loss) available to common stockholders | | $ | 945 | | | | $ | 5,383 | | | $ | (9,756) | | | $ | (416) | |
| Earnings (loss) per common share: | | | | | | | | | |
Basic | | $ | 9.29 | | | | $ | 550.35 | | | $ | (998.26) | | | $ | (49.97) | |
Diluted | | $ | 8.12 | | | | $ | 534.51 | | | $ | (998.26) | | | $ | (49.97) | |
| Weighted average common shares outstanding (in thousands): | | | | | | | |
Basic | | 101,754 | | | | 9,781 | | | 9,773 | | | 8,325 | |
Diluted | | 116,341 | | | | 10,071 | | | 9,773 | | | 8,325 | |
The accompanying notes are an integral part of these consolidated financial statements.
81
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Net income (loss) | | $ | 945 | | | | $ | 5,383 | | | $ | (9,750) | | | $ | (308) | |
| Other comprehensive income, net of income tax: | | | | | | | | | |
Reclassification of losses on settled derivative instruments(a) | | — | | | | 3 | | | 33 | | | 35 | |
| Other comprehensive income | | — | | | | 3 | | | 33 | | | 35 | |
| Comprehensive income (loss) | | 945 | | | | 5,386 | | | (9,717) | | | (273) | |
| Comprehensive loss attributable to noncontrolling interests | | — | | | | — | | | 16 | | | — | |
| Comprehensive income (loss) attributable to Chesapeake | | $ | 945 | | | | $ | 5,386 | | | $ | (9,701) | | | $ | (273) | |
___________________________________________
(a)Deferred tax activity incurred in other comprehensive income was offset by a valuation allowance.
The accompanying notes are an integral part of these consolidated financial statements.
82
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor |
| | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Cash flows from operating activities: | | | | | | | | | |
| Net income (loss) | | $ | 945 | | | | $ | 5,383 | | | $ | (9,750) | | | $ | (308) | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | |
| Depreciation, depletion and amortization | | 919 | | | | 72 | | | 1,097 | | | 2,264 | |
| Deferred income tax benefit | | (49) | | | | (57) | | | (10) | | | (305) | |
| Derivative (gains) losses, net | | 1,127 | | | | 382 | | | (596) | | | (3) | |
| Cash receipts (payments) on derivative settlements, net | | (1,142) | | | | (17) | | | 884 | | | 202 | |
| Share-based compensation | | 9 | | | | 3 | | | 21 | | | 30 | |
| Gains on sales of assets | | (12) | | | | (5) | | | (30) | | | (43) | |
| Impairments | | 1 | | | | — | | | 8,535 | | | 11 | |
| Non-cash reorganization items, net | | — | | | | (6,680) | | | (213) | | | — | |
| Exploration | | 2 | | | | 2 | | | 417 | | | 49 | |
| Gains on purchases or exchanges of debt | | — | | | | — | | | (65) | | | (79) | |
| Other | | 46 | | | | 45 | | | (41) | | | 59 | |
| Changes in assets and liabilities | | (37) | | | | 851 | | | 915 | | | (254) | |
| Net cash provided by (used in) operating activities | | 1,809 | | | | (21) | | | 1,164 | | | 1,623 | |
| Cash flows from investing activities: | | | | | | | | | |
| Capital expenditures | | (669) | | | | (66) | | | (1,142) | | | (2,263) | |
| Business combination, net | | (194) | | | | — | | | — | | | (353) | |
| Proceeds from divestitures of property and equipment | | 13 | | | | — | | | 150 | | | 136 | |
| Net cash used in investing activities | | (850) | | | | (66) | | | (992) | | | (2,480) | |
| Cash flows from financing activities: | | | | | | | | | |
| Proceeds from Exit Credit Facility - Tranche A Loans | | 30 | | | | — | | | — | | | — | |
| Payments on Exit Credit Facility - Tranche A Loans | | (80) | | | | (479) | | | — | | | — | |
| Proceeds from pre-petition revolving credit facility borrowings | | — | | | | — | | | 3,656 | | | 10,676 | |
| Payments on pre-petition revolving credit facility borrowings | | — | | | | — | | | (3,317) | | | (10,180) | |
| Proceeds from DIP Facility borrowings | | — | | | | — | | | 60 | | | — | |
| Payments on DIP Facility borrowings | | — | | | | (1,179) | | | (60) | | | — | |
| Proceeds from issuance of senior notes, net | | — | | | | 1,000 | | | — | | | 108 | |
| Proceeds from issuance of term loan, net | | — | | | | — | | | — | | | 1,455 | |
| Proceeds from issuance of common stock | | — | | | | 600 | | | — | | | — | |
| Proceeds from warrant exercise | | 2 | | | | — | | | — | | | — | |
| Debt issuance and other financing costs | | (3) | | | | (8) | | | (109) | | | — | |
| Cash paid to purchase debt | | — | | | | — | | | (94) | | | (1,073) | |
| Cash paid for common stock dividends | | (119) | | | | — | | | — | | | — | |
| Cash paid for preferred stock dividends | | — | | | | — | | | (22) | | | (91) | |
| Other | | (1) | | | | — | | | (13) | | | (36) | |
| Net cash provided by (used in) financing activities | | (171) | | | | (66) | | | 101 | | | 859 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | 788 | | | | (153) | | | 273 | | | 2 | |
| Cash, cash equivalents and restricted cash, beginning of period | | 126 | | | | 279 | | | 6 | | | 4 | |
| Cash, cash equivalents and restricted cash, end of period | | $ | 914 | | | | $ | 126 | | | $ | 279 | | | $ | 6 | |
| | | | | | | | | |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
83
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor |
| | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Cash and cash equivalents | | $ | 905 | | | | $ | 40 | | | $ | 279 | | | $ | 6 | |
| Restricted cash | | 9 | | | | 86 | | | — | | | — | |
| Total cash, cash equivalents and restricted cash | | $ | 914 | | | | $ | 126 | | | $ | 279 | | | $ | 6 | |
| | | | | | | | | |
Supplemental disclosures to the consolidated statements of cash flows are presented below: | | |
| | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Supplemental cash flow information: | | | | | | | | | |
| Cash paid for reorganization items, net | | $ | 65 | | | | $ | 66 | | | $ | 140 | | | $ | — | |
| | | | | | | | | |
| Interest paid, net of capitalized interest | | $ | 34 | | | | $ | 13 | | | $ | 224 | | | $ | 691 | |
| Income taxes paid, net of refunds received | | $ | (9) | | | | $ | — | | | $ | — | | | $ | (6) | |
| | | | | | | | | |
| Supplemental disclosure of significant non-cash investing and financing activities: | | | | | | | | | |
| Change in accrued drilling and completion costs | | $ | 30 | | | | $ | (5) | | | $ | (216) | | | $ | (19) | |
| Put option premium on equity backstop agreement | | $ | — | | | | $ | 60 | | | $ | 60 | | | $ | — | |
| Operating lease obligations recognized | | $ | — | | | | $ | — | | | $ | 32 | | | $ | — | |
| Common stock issued for business combination | | $ | 1,232 | | | | $ | — | | | $ | — | | | $ | 2,037 | |
| Debt exchanged for common stock | | $ | — | | | | $ | — | | | $ | — | | | $ | 693 | |
| Preferred stock exchanged for common stock | | $ | — | | | | $ | — | | | $ | — | | | $ | 40 | |
| Change in senior notes exchanged | | $ | — | | | | $ | — | | | $ | — | | | $ | 971 | |
The accompanying notes are an integral part of these consolidated financial statements.
84
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Attributable to Chesapeake | | | | |
| | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income | | Treasury Stock | | Non-controlling Interest | | Total Stockholders’ Equity (Deficit) |
| | Shares | | Amount | Shares | | Amount |
| Balance as of December 31, 2020 (Predecessor) | | 5,563,358 | | | $ | 1,631 | | | 9,780,547 | | | $ | — | | | $ | 16,937 | | | $ | (23,954) | | | $ | 45 | | | $ | — | | | $ | — | | | $ | (5,341) | |
| Share-based compensation | | — | | | — | | | 67 | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | |
| Hedging activity | | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | — | | | 3 | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 5,383 | | | — | | | — | | | — | | | 5,383 | |
| Cancellation of Predecessor equity | | (5,563,358) | | | (1,631) | | | (9,780,614) | | | — | | | (16,940) | | | 18,571 | | | (48) | | | — | | | — | | | (48) | |
| Issuance of Successor common stock | | — | | | — | | | 97,907,081 | | | 1 | | | 3,330 | | | — | | | — | | | — | | | — | | | 3,331 | |
| Issuance of Successor Class A warrants | | — | | | — | | | — | | | — | | | 93 | | | — | | | — | | | — | | | — | | | 93 | |
| Issuance of Successor Class B warrants | | — | | | — | | | — | | | — | | | 94 | | | — | | | — | | | — | | | — | | | 94 | |
| Issuance of Successor Class C warrants | | — | | | — | | | — | | | — | | | 68 | | | — | | | — | | | — | | | — | | | 68 | |
| Balance as of February 9, 2021 (Predecessor) | | — | | | $ | — | | | 97,907,081 | | | $ | 1 | | | $ | 3,585 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,586 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Balance as of February 10, 2021 (Successor) | | — | | | $ | — | | | 97,907,081 | | | $ | 1 | | | $ | 3,585 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,586 | |
| Share-based compensation | | — | | | — | | | 248,487 | | | — | | | 21 | | | — | | | — | | | — | | | — | | | 21 | |
| Issuance of common stock for Vine acquisition | | — | | | — | | | 18,709,399 | | | — | | | 1,237 | | | — | | | — | | | — | | | — | | | 1,237 | |
| Issuance of common stock for warrant exercise | | — | | | — | | | 188,292 | | | — | | | 2 | | | — | | | — | | | — | | | — | | | 2 | |
| Issuance of reserved common stock and warrants | | — | | | — | | | 864,090 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 945 | | | — | | | — | | | — | | | 945 | |
| Dividends on common stock | | — | | | — | | | — | | | — | | | — | | | (120) | | | — | | | — | | | — | | | (120) | |
| Balance as of December 31, 2021 (Successor) | | — | | | $ | — | | | 117,917,349 | | | $ | 1 | | | $ | 4,845 | | | $ | 825 | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,671 | |
The accompanying notes are an integral part of these consolidated financial statements.
85
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Attributable to Chesapeake | | | | |
| | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Treasury Stock | | Non-controlling Interest | | Total Stockholders’ Equity (Deficit) |
| | Shares | | Amount | Shares | | Amount |
| Balance as of December 31, 2019 (Predecessor) | | 5,563,458 | | | $ | 1,631 | | | 9,772,793 | | | $ | — | | | $ | 16,973 | | | $ | (14,220) | | | $ | 12 | | | $ | (32) | | | $ | 37 | | | $ | 4,401 | |
| Share-based compensation | | — | | | — | | | 7,753 | | | — | | | (14) | | | — | | | — | | | — | | | — | | | (14) | |
| Dividends on preferred stock | | — | | | — | | | — | | | — | | | (22) | | | — | | | — | | | — | | | — | | | (22) | |
| Hedging activity | | — | | | — | | | — | | | — | | | — | | | — | | | 33 | | | — | | | — | | | 33 | |
| Net loss attributable to Chesapeake | | — | | | — | | | — | | | — | | | — | | | (9,734) | | | — | | | — | | | — | | | (9,734) | |
| Exchange of preferred stock into common stock | | (100) | | | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Purchase of shares for company benefit plans | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
| Release of shares for company benefit plans | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 34 | | | — | | | 34 | |
| Net loss attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (16) | | | (16) | |
| Divestiture of underlying assets | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (21) | | | (21) | |
| Balance as of December 31, 2020 (Predecessor) | | 5,563,358 | | | $ | 1,631 | | | 9,780,547 | | | $ | — | | | $ | 16,937 | | | $ | (23,954) | | | $ | 45 | | | $ | — | | | $ | — | | | $ | (5,341) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Attributable to Chesapeake | | | | |
| | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Treasury Stock | | Non-controlling Interest | | Total Stockholders’ Equity |
| | Shares | | Amount | Shares | | Amount |
| Balance as of December 31, 2018 (Predecessor) | | 5,603,458 | | | $ | 1,671 | | | 4,568,581 | | | $ | — | | | $ | 14,387 | | | $ | (13,912) | | | $ | (23) | | | $ | (31) | | | $ | 41 | | | $ | 2,133 | |
| Common shares issued for WildHorse Merger | | — | | | — | | | 3,586,880 | | | — | | | 2,037 | | | — | | | — | | | — | | | — | | | 2,037 | |
| Share-based compensation | | — | | | — | | | 20,731 | | | — | | | 27 | | | — | | | — | | | — | | | — | | | 27 | |
| Dividends on preferred stock | | — | | | — | | | — | | | — | | | (91) | | | — | | | — | | | — | | | — | | | (91) | |
| Hedging activity | | — | | | — | | | — | | | — | | | — | | | — | | | 35 | | | — | | | — | | | 35 | |
| Net loss attributable to Chesapeake | | — | | | — | | | — | | | — | | | — | | | (308) | | | — | | | — | | | — | | | (308) | |
| Exchange of contingent convertible notes into common stock | | — | | | — | | | 366,945 | | | — | | | 135 | | | — | | | — | | | — | | | — | | | 135 | |
| Exchange of senior notes into common stock | | — | | | — | | | 1,177,817 | | | — | | | 440 | | | — | | | — | | | — | | | — | | | 440 | |
| Exchange of preferred stock into common stock | | (40,000) | | | (40) | | | 51,839 | | | — | | | 40 | | | — | | | — | | | — | | | — | | | — | |
| Equity component of contingent convertible notes repurchased | | — | | | — | | | — | | | — | | | (2) | | | — | | | — | | | — | | | — | | | (2) | |
| Purchase of shares for company benefit plans | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7) | | | — | | | (7) | |
| Release of shares for company benefit plans | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | — | | | 6 | |
| Distributions to noncontrolling interest owners | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| Balance as of December 31, 2019 (Predecessor) | | 5,563,458 | | | $ | 1,631 | | | 9,772,793 | | | $ | — | | | $ | 16,973 | | | $ | (14,220) | | | $ | 12 | | | $ | (32) | | | $ | 37 | | | $ | 4,401 | |
The accompanying notes are an integral part of these consolidated financial statements.
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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - (Continued)
| | | | | |
| 1. | Basis of Presentation and Summary of Significant Accounting Policies |
Description of Company
Chesapeake Energy Corporation ("Chesapeake," “we,” “our,” “us” or the "Company") is an oil and natural gas exploration and production company engaged in the acquisition, exploration and development of properties for the production of oil, natural gas and NGL from underground reservoirs. Our operations are located onshore in the United States. As discussed in Note 2 below, we filed the Chapter 11 Cases on the Petition Date and subsequently operated as a debtor-in-possession, in accordance with applicable provisions of the Bankruptcy Code, until emergence on February 9, 2021. To facilitate our financial statement presentations, we refer to the post-emergence reorganized Company in these consolidated financial statements and footnotes as the “Successor” for periods subsequent to February 9, 2021, and to the pre-emergence Company as “Predecessor” for periods on or prior to February 9, 2021. Basis of Presentation
The accompanying consolidated financial statements of Chesapeake were prepared in accordance with GAAP and include the accounts of our direct and indirect wholly owned subsidiaries and entities in which Chesapeake has a controlling financial interest. Intercompany accounts and balances have been eliminated. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.
This Annual Report on Form 10-K (this “Form 10-K”) relates to the financial position of the Successor as of December 31, 2021 and Predecessor as of December 31, 2020, and the periods of February 10, 2021 through December 31, 2021 (“2021 Successor Period”), January 1, 2021 through February 9, 2021 (“2021 Predecessor Period”), and the years ended December 31, 2020 (“2020 Predecessor Period”) and December 31, 2019 (“2019 Predecessor Period”).
Accounting During Bankruptcy
We have applied Accounting Standards Codification (ASC) 852, Reorganizations, in preparing the consolidated financial statements. ASC 852 requires that the financial statements, for periods subsequent to the filing of a petition of Chapter 11 Cases, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that were realized or incurred during the bankruptcy proceedings, including losses related to executory contracts that were approved for rejection by the Bankruptcy Court, and unamortized debt issuance costs, premiums and discounts associated with debt classified as liabilities subject to compromise, are recorded as reorganization items, net on our accompanying consolidated statements of operations. In addition, pre-petition obligations that could have been impacted by the Chapter 11 process have been classified on the consolidated balance sheet as of December 31, 2020, as liabilities subject to compromise. See Note 2 for more information regarding reorganization items. Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosures in the financial statements. Management evaluates its estimates and related assumptions regularly, including those related to the impairment of oil and natural gas properties, oil and natural gas reserves, derivatives, income taxes, unevaluated properties not subject to evaluation, impairment of other property and equipment, environmental remediation costs, asset retirement obligations, litigation and regulatory proceedings and fair values. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ significantly from these estimates.
The accompanying notes are an integral part of these consolidated financial statements.
87
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidation
We consolidate entities in which we have a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the voting rights and variable interest entities (“VIEs”) in which we are the primary beneficiary. We consolidate a VIE when we are the primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. In order to determine whether we own a variable interest in a VIE, we perform a qualitative analysis of the entity’s design, organizational structure, primary decision makers and relevant agreements. See Note 12 for further discussion of our previous VIE. We use the equity method of accounting to record our net interests where we have the ability to exercise significant influence through our investment but lack a controlling financial interest. Under the equity method, our share of net income (loss) is included in our consolidated statements of operations according to our equity ownership or according to the terms of the applicable governing instrument. Undivided interests in oil and natural gas properties are consolidated on a proportionate basis. Segments
Operating segments are defined as components of an enterprise that engage in activities from which it may earn revenues and incur expenses for which separate operational financial information is available and is regularly evaluated by the chief operating decision maker for the purpose of allocating an enterprise’s resources and assessing its operating performance. We have concluded that we have only one reportable operating segment, due to the similar nature of the exploration and production business across Chesapeake and its consolidated subsidiaries and the fact that our marketing activities are ancillary to our operations.
Noncontrolling Interests
Noncontrolling interests represent third-party equity ownership in certain of our consolidated subsidiaries and are presented as a component of equity. See Note 12 for further discussion of noncontrolling interests. Cash and Cash Equivalents
For purposes of the consolidated financial statements, we consider investments in all highly liquid instruments with original maturities of three months or less at the date of purchase to be cash equivalents.
Restricted Cash
As of December 31, 2021, we had restricted cash of $9 million. The restricted funds are maintained primarily to pay certain convenience class unsecured claims following our emergence from bankruptcy.
Accounts Receivable
Our accounts receivable are primarily from purchasers of oil, natural gas and NGL and from exploration and production companies that own interests in properties we operate. This industry concentration could affect our overall exposure to credit risk, either positively or negatively, because our purchasers and joint working interest owners may be similarly affected by changes in economic, industry or other conditions. We monitor the creditworthiness of all our counterparties and we generally require letters of credit or parent guarantees for receivables from parties deemed to have sub-standard credit, unless the credit risk can otherwise be mitigated. We utilize an allowance method in accounting for bad debt based on historical trends in addition to specifically identifying receivables that we believe may be uncollectible. See Note 10 for further discussion of our accounts receivable. Oil and Natural Gas Properties
We follow the successful efforts method of accounting for our oil and natural gas properties. Under this method, exploration costs such as exploratory geological and geophysical costs, expiration of unproved leasehold, delay rentals and exploration overhead are expensed as incurred. All costs related to production, general corporate overhead and similar activities are also expensed as incurred. All property acquisition costs and development costs are capitalized when incurred.
Exploratory drilling costs are initially capitalized, or suspended, pending the determination of proved reserves. If proved reserves are found, drilling costs remain capitalized and are classified as proved properties. Costs of
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
unsuccessful wells are charged to exploration expense. For exploratory wells that find reserves that cannot be classified as proved when drilling is completed, costs continue to be capitalized as suspended exploratory drilling costs if there have been sufficient reserves found to justify completion as a producing well and sufficient progress is being made in assessing the reserves and the economic and operational viability of the project. If we determine that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed. In some instances, this determination may take longer than one year. We review the status of all suspended exploratory drilling costs quarterly. Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of oil and natural gas are capitalized.
Costs of drilling and equipping successful wells, costs to construct or acquire facilities, and associated asset retirement costs are depreciated using the unit-of-production (“UOP”) method based on total estimated proved developed oil and gas reserves. Costs of acquiring proved properties, including leasehold acquisition costs transferred from unproved properties, are depleted using the UOP method based on total estimated proved developed and undeveloped reserves.
Proceeds from the sales of individual oil and natural gas properties and the capitalized costs of individual properties sold or abandoned are credited and charged, respectively, to accumulated depreciation, depletion and amortization, if doing so does not materially impact the depletion rate of an amortization base. Generally, no gain or loss is recognized until an entire amortization base is sold. However, a gain or loss is recognized from the sale of less than an entire amortization base if the disposition is significant enough to materially impact the depletion rate of the remaining properties in the amortization base.
When circumstances indicate that the carrying value of proved oil and natural gas properties may not be recoverable, we compare unamortized capitalized costs to the expected undiscounted pre-tax future cash flows for the associated assets grouped at the lowest level for which identifiable cash flows are independent of cash flows of other assets. If the expected undiscounted pre-tax future cash flows, based on our estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized costs, the capitalized costs are reduced to fair value. Fair value is generally estimated using the income approach described in the ASC 820, Fair Value Measurements. If applicable, we utilize prices and other relevant information generated by market transactions involving assets and liabilities that are identical or comparable to the item being measured as the basis for determining fair value. The expected future cash flows used for impairment reviews and related fair value measurements are typically based on judgmental assessments of commodity prices, pricing adjustments for differentials, operating costs, capital investment plans, future production volumes, and estimated proved reserves, considering all available information at the date of review. These assumptions are applied to develop future cash flow projections that are then discounted to estimated fair value, using a market-based weighted average cost of capital. We have classified these fair value measurements as Level 3 in the fair value hierarchy.
Other Property and Equipment
Other property and equipment consists primarily of buildings and improvements, land, vehicles, computers and office equipment. Major renewals and betterments are capitalized while the costs of repairs and maintenance are charged to expense as incurred. Other property and equipment costs, excluding land, are depreciated on a straight-line basis and recorded within depreciation, depletion and amortization in the consolidated statement of operations.
Realization of the carrying value of other property and equipment is reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets are determined to be impaired if a forecast of undiscounted estimated future net operating cash flows directly related to the asset, including any disposal value, is less than the carrying amount of the asset. If any asset is determined to be impaired, the loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. An estimate of fair value is based on the best information available, including prices for similar assets and discounted cash flow. See Note 17 for further discussion of other property and equipment. Capitalized Interest
Interest from external borrowings is capitalized on significant investments in major development projects until the asset is ready for service using the weighted average borrowing rate of outstanding borrowings. Capitalized interest is determined by multiplying our weighted average borrowing cost on debt by the average amount of
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
qualifying costs incurred. Capitalized interest is depreciated over the useful lives of the assets in the same manner as the depreciation of the underlying asset.
Accounts Payable
Included in accounts payable as of December 31, 2021 are liabilities of approximately $23 million representing the amount by which checks issued, but not yet presented to our banks for collection, exceeded balances in applicable bank accounts. There were no corresponding liabilities as of December 31, 2020.
Debt Issuance Costs
Costs associated with the arrangement of our Exit Credit Facility are included in other long-term assets and are amortized over the life of the facility using the straight-line method. The Exit Credit Facility unamortized issuance costs as of December 31, 2021 were $23 million. Costs associated with the issuance of the Successor senior notes are included in long-term debt and the remaining unamortized issuance costs are amortized over the life of the senior notes using the effective interest method. Unamortized issuance costs associated with the Successor senior notes as of December 31, 2021 totaled $9 million.
Costs associated with the issuance and amendments of our pre-petition revolving credit facility were included in other long-term assets and the remaining unamortized issuance costs were being amortized over the life of the facility using the straight-line method. Costs associated with the issuance of our Predecessor senior notes were included in long-term debt and the remaining unamortized issuance costs were being amortized over the life of the Predecessor senior notes using the effective interest method. In 2020, our Chapter 11 Cases constituted an event of default under our pre-petition revolving credit facility and our senior notes, and non-cash adjustments were made to write off all related unamortized debt issuance costs which are included in reorganization items, net in the accompanying consolidated statements of operations for the year ended December 31, 2020. See Note 2 and Note 6 herein for further discussion of our Chapter 11 Cases and debt issuance costs, respectively. Litigation Contingencies
We are subject to litigation and regulatory proceedings, claims and liabilities that arise in the ordinary course of business. We accrue losses associated with litigation and regulatory claims when such losses are probable and reasonably estimable. If we determine that a loss is probable and cannot estimate a specific amount for that loss but can estimate a range of loss, our best estimate within the range is accrued. Estimates are adjusted as additional information becomes available or circumstances change. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or third-party recoveries. Legal defense costs associated with loss contingencies are expensed in the period incurred. See Note 7 for further discussion of litigation contingencies. Environmental Remediation Costs
We record environmental reserves for estimated remediation costs related to existing conditions from past operations when the responsibility to remediate is probable and the costs can be reasonably estimated. Expenditures that create future benefits or contribute to future revenue generation are capitalized. See Note 7 for discussion of environmental contingencies. Asset Retirement Obligations
We recognize liabilities for obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction and development of the assets. We recognize the fair value of a liability for a retirement obligation in the period in which the liability is incurred. For oil and natural gas properties, this is the period in which an oil or natural gas well is acquired or drilled. The liability is then accreted each period until the liability is settled or the well is sold, at which time the liability is removed. The related asset retirement cost is capitalized as part of the carrying amount of our oil and natural gas properties. See Note 23 for further discussion of asset retirement obligations.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Revenue Recognition
Revenue from the sale of oil, natural gas and NGL is recognized upon the transfer of control of the products, which is typically when the products are delivered to customers. Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration we expect to receive in exchange for those products.
Revenue from contracts with customers includes the sale of our oil, natural gas and NGL production (recorded as oil, natural gas and NGL revenues in the consolidated statements of operations) as well as the sale of certain of our joint interest holders’ production which we purchase under joint operating arrangements (recorded in marketing revenues in the consolidated statements of operations). In connection with the marketing of these products, we obtain control of the oil, natural gas and NGL we purchase from other interest owners at defined delivery points and deliver the product to third parties, at which time revenues are recorded.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. There are no significant judgments that significantly affect the amount or timing of revenue from contracts with customers.
We also generate revenue from other sources, including from a variety of derivative and hedging activities to reduce our exposure to fluctuations in future commodity prices and to protect our expected operating cash flow against significant market movements or volatility, as well as a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including credit risk mitigation and satisfaction of our pipeline delivery commitments (recorded within marketing revenues in the consolidated statements of operations).
In circumstances where we act as an agent rather than a principal, our results of operations related to oil, natural gas and NGL marketing activities are presented on a net basis. See Note 10 for further discussion of revenue recognition. Fair Value Measurements
Certain financial instruments are reported on a recurring basis at fair value on our consolidated balance sheets. We also use fair value measurements on a nonrecurring basis when a qualitative assessment of our assets indicates a potential impairment. Under fair value measurement accounting guidance, fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants (i.e., an exit price). To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels. Level 1 inputs are unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability and have the lowest priority.
The valuation techniques that may be used to measure fair value include a market approach, an income approach and a cost approach. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. An income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectations, including present value techniques, option-pricing models and the excess earnings method. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
The carrying values of financial instruments comprising cash and cash equivalents, accounts payable and accounts receivable approximate fair values due to the short-term maturities of these instruments. See Notes 6 and 15 for further discussion of fair value measurements. Derivatives
Derivative instruments are recorded at fair value, and changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are followed. As of December 31, 2021, none of our open derivative instruments were designated as cash flow hedges.
Derivative instruments reflected as current in the consolidated balance sheets represent the estimated fair value of derivatives scheduled to settle over the next twelve months based on market prices/rates as of the respective balance sheet dates. Cash settlements of our derivative instruments are generally classified as operating
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
cash flows unless the derivatives are deemed to contain, for accounting purposes, a significant financing element at contract inception, in which case these cash settlements are classified as financing cash flows in the accompanying consolidated statement of cash flows. All of our derivative instruments are subject to master netting arrangements by contract type which provide for the offsetting of asset and liability positions within each contract type, as well as related cash collateral if applicable, by counterparty. Therefore, we net the value of our derivative instruments by contract type with the same counterparty in the accompanying consolidated balance sheets.
We have established the fair value of our derivative instruments using established index prices, volatility curves and discount factors. These estimates are compared to our counterparty values for reasonableness. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. Derivative transactions are subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. See Note 15 for further discussion of our derivative instruments. Share-Based Compensation
Our share-based compensation program consists of restricted stock, performance share units and cash restricted stock units granted to employees and restricted stock granted to non-employee directors under our Long Term Incentive Plan. We recognize the cost of services received in exchange for restricted stock based on the fair value of the equity instruments as of the grant date. This value is amortized over the vesting period, which is generally three years from the grant date. Because performance share units are settled in shares, they are classified as equity and are measured at fair value as of the grant date.
To the extent compensation expense relates to employees directly involved in the acquisition of oil and natural gas leasehold and development activities, these amounts are capitalized to oil and natural gas properties. Amounts not capitalized to oil and natural gas properties are recognized as general and administrative expense, production expense, exploration expense, or marketing expense, based on the employees involved in those activities. See Note 13 for further discussion of share-based compensation. Liability Management
Liability management expense includes third party legal and professional service fees incurred for our activities to restructure our debt and in preparation for our bankruptcy petition. As a result of our Chapter 11 Cases, such expenses, to the extent that they were incremental and directly related to our bankruptcy reorganization, are reflected in reorganization items, net in our consolidated statements of operations.
On June 28, 2020 (the “Petition Date”), the Debtors filed voluntary petitions for relief under the Bankruptcy Code in the Bankruptcy Court. On June 29, 2020, the Bankruptcy Court entered an order authorizing the joint administration of the Chapter 11 Cases under the caption In re Chesapeake Energy Corporation, Case No. 20-33233. The Non-Filing Entities were not part of the Chapter 11 Cases. The Debtors and the Non-Filing Entities continued to operate in the ordinary course of business during the Chapter 11 Cases.
The Bankruptcy Court confirmed the Plan in a bench ruling on January 13, 2021 and entered the Confirmation Order on January 16, 2021. The Debtors emerged from bankruptcy on February 9, 2021 (the “Effective Date”). The Company’s bankruptcy proceedings and related matters have been summarized below.
Debtor-In-Possession
During the pendency of the Chapter 11 Cases, we operated our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court granted the first day relief we requested that was designed primarily to mitigate the impact of the Chapter 11 Cases on our operations, vendors, suppliers, customers and employees. As a result, we were able to conduct normal business activities and pay all associated obligations for the period following the Petition Date and were also authorized to pay mineral interest owner royalties, employee wages and benefits, and certain vendors and suppliers in the ordinary course for goods and services provided prior to the Petition Date. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of business required the prior approval of the Bankruptcy Court.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed all judicial or administrative actions against us and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities were subject to compromise and discharge under the Bankruptcy Code. The automatic stay was lifted on the Effective Date.
Plan of Reorganization
In accordance with the Plan confirmed by the Bankruptcy Court, the following significant transactions occurred upon the Company’s emergence from bankruptcy on February 9, 2021:
•On the Effective Date, we issued 97,907,081 shares of the reorganized company (“New Common Stock”), reserved 2,092,918 shares of New Common Stock for future issuance to eligible holders of Allowed Unsecured Notes Claims and Allowed General Unsecured Claims and reserved 37,174,210 shares of New Common Stock for issuance upon exercise of the Warrants, which were the result of the transactions described below. We also entered into a registration rights agreement, a warrants agreement and amended our articles of incorporation and bylaws for the authorization of the New Common Stock and to provide registration rights thereunder, among other corporate governance actions. See Note 12 for further discussion of our post-emergence equity. •Each holder of a Predecessor equity interest in Chesapeake, including our common and preferred stock, had such interest canceled, released, and extinguished without any distribution.
•Each holder of obligations under the pre-petition revolving credit facility received, at such holder's prior determined allocation, its pro rata share of either Tranche A Loans or Tranche B Loans, on a dollar for dollar basis.
•Each holder of obligations under the FLLO Term Loan Facility received its pro rata share of 23,022,420 shares of New Common Stock.
•Each holder of an Allowed Second Lien Notes Claim received its pro rata share of 3,635,118 shares of New Common Stock, 11,111,111 Class A Warrants to purchase 11,111,111 shares of New Common Stock, 12,345,679 Class B Warrants to purchase 12,345,679 shares of New Common Stock, and 6,858,710 Class C Warrants to purchase 6,858,710 shares of New Common Stock.
•Each holder of an Allowed Unsecured Notes Claim received its pro rata share of 1,311,089 shares of New Common Stock and 2,473,757 Class C Warrants to purchase 2,473,757 shares of New Common Stock.
•Each holder of an Allowed General Unsecured Claim received its pro rata share of 231,112 shares of New Common Stock and 436,060 Class C Warrants to purchase 436,060 shares of New Common Stock; provided that to the extent such Allowed General Unsecured Claim is a Convenience Claim, such holder instead received its pro rata share of $10 million, which pro rata share shall not exceed five percent of such Convenience Claim.
•Participants in the Rights Offering extending to the applicable classes under the Plan received 62,927,320 shares of New Common Stock.
•In connection with the rights offering described above, the Backstop Parties under the Backstop Commitment Agreement received 6,337,031 shares of New Common Stock in respect to the Put Option Premium, and 442,991 shares of New Common Stock were issued in connection with the backstop obligation thereunder to purchase unsubscribed shares of the New Common Stock.
•2,092,918 shares of New Common Stock and 3,948,893 Class C Warrants were reserved for future issuance to eligible holders of Allowed Unsecured Notes Claims and Allowed General Unsecured Claims. The reserved New Common Stock and Class C Warrants will be issued on a pro rata basis upon the
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
determination of the allowed portion of all disputed General Unsecured Claims and Unsecured Notes Claims.
•The 2021 Long Term Incentive Plan (the “LTIP”) was approved with a share reserve equal to 6,800,000 shares of New Common Stock.
•Each holder of an Allowed Other Secured Claim will receive, at the Company's option and in consultation with the Required Consenting Stakeholders (as defined in the Plan): (a) payment in full in cash; (b) the collateral securing its secured claim; (c) reinstatement of its secured claim; or (d) such other treatment that renders its secured claim unimpaired in accordance with Section 1124 of the Bankruptcy Code.
•Each holder of an Allowed Other Priority Claim (as defined in the Plan) will receive cash up to the allowed amount of its claim.
Additionally, pursuant to the Plan confirmed by the Bankruptcy Court, the Company’s post-emergence Board of Directors is comprised of seven directors, including the Company’s Chief Executive Officer, Domenic J. Dell’Osso Jr., the Company’s Executive Chairman, Michael Wichterich, and five non-employee directors, Timothy S. Duncan, Benjamin C. Duster, IV, Sarah Emerson, Matthew M. Gallagher and Brian Steck.
DIP and Exit Credit Facilities
On June 28, 2020, prior to the commencement of the Chapter 11 Cases, the Company entered into a commitment letter (the “Commitment Letter”) with certain of the lenders under the pre-petition revolving credit facility and/or their affiliates (collectively, the “Commitment Parties”), pursuant to which, and subject to the satisfaction of certain customary conditions, including the approval of the Bankruptcy Court, the Commitment Parties agreed to provide the Debtors with a post-petition senior secured super-priority debtor-in-possession revolving credit facility in an aggregate principal amount of up to approximately $2.104 billion (the “DIP Credit Facility”), consisting of a revolving loan facility of new money in an aggregate principal amount of up to $925 million, which includes a sub-facility of up to $200 million for the issuance of letters of credit, and an up to approximately $1.179 billion term loan that reflects the roll-up of a portion of outstanding borrowings under the pre-petition revolving credit facility. Pursuant to the Commitment Letter, the Commitment parties have also committed to provide, subject to certain conditions, an up to $2.5 billion exit credit facility, consisting of an up to $1.75 billion revolving credit facility (the “Exit Revolving Facility”) and an up to $750 million senior secured term loan facility (the “Exit Term Loan Facility” and, together with the Exit Revolving Facility, the “Exit Credit Facilities”). The terms and conditions of the DIP Credit Facility are set forth in the Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”) attached to the Commitment Letter. The proceeds of the DIP Credit Facility may be used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases, payment of court approved adequate protection obligations, and other such purposes consistent with the DIP Credit Facility. On the Effective Date, the DIP Credit Facility was terminated and the holders of obligations under the DIP Credit Facility received payment in full in cash; provided that to the extent such lender under the DIP Credit Facility is also a lender under the Exit Revolver, such lender’s allowed DIP claims were first reduced dollar-for-dollar and satisfied by the amount of its Exit RBL Loans provided as of the Effective Date.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Fresh Start Accounting
In connection with our emergence from bankruptcy and in accordance with ASC 852, we qualified for and applied fresh start accounting on the Effective Date. We were required to apply fresh start accounting because (i) the holders of existing voting shares of the Company prior to its emergence received less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan of approximately $6.8 billion was less than the post-petition liabilities and allowed claims of $13.2 billion.
In accordance with ASC 852, with the application of fresh start accounting, the Company allocated its reorganization value to its individual assets based on their estimated fair value in conformity with FASB ASC Topic 820 - Fair Value Measurements and FASB ASC Topic 805 - Business Combinations. Accordingly, the consolidated financial statements after February 9, 2021 are not comparable with the consolidated financial statements as of or prior to that date. The Effective Date fair values of the Successor’s assets and liabilities differ materially from their recorded values as reflected on the historical balance sheet of the Predecessor.
Reorganization Value
Reorganization value is derived from an estimate of enterprise value, or fair value of the Company’s interest-bearing debt and stockholders’ equity. Under ASC 852, reorganization value generally approximates fair value of the entity before considering liabilities and is intended to approximate the amount a willing buyer would pay for the assets immediately after the effects of a restructuring. As set forth in the disclosure statement, amended for updated pricing, and approved by the Bankruptcy Court, the enterprise value of the Successor was estimated to be between $3.5 billion and $4.9 billion. With the assistance of third-party valuation advisors, we determined the enterprise value and corresponding implied equity value of the Successor using various valuation approaches and methods, including: (i) income approach using a calculation of present value of future cash flows based on our financial projections, (ii) the market approach using selling prices of similar assets and (iii) the cost approach. For GAAP purposes, the Company valued the Successor’s individual assets, liabilities and equity instruments and determined an estimate of the enterprise value within the estimated range. Management concluded that the best estimate of enterprise value was $4.85 billion. Specific valuation approaches and key assumptions used to arrive at reorganization value, and the value of discrete assets and liabilities resulting from the application of fresh start accounting, are described below in greater detail within the valuation process.
The enterprise value and corresponding implied equity value are dependent upon achieving the future financial results set forth in our valuation using an asset-based methodology of estimated proved reserves, undeveloped properties, and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the fresh start reporting date of February 9, 2021. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the financial projections, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, there is no assurance that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially.
The following table reconciles the enterprise value to the implied fair value of the Successor’s equity as of the Effective Date:
| | | | | | | | |
| | February 9, 2021 |
| Enterprise value | | $ | 4,851 | |
Plus: Cash and cash equivalents(a) | | 48 | |
| Less: Fair value of debt | | (1,313) | |
| Successor equity value | | $ | 3,586 | |
____________________________________________
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(a)Cash and cash equivalents includes $8 million that was initially classified as restricted cash as of the Effective Date but subsequently released from escrow and returned to the Successor. Restricted cash exclusive of the $8 million is not included in the table above.
The following table reconciles the enterprise value to the reorganization value as of the Effective Date:
| | | | | | | | |
| | February 9, 2021 |
| Enterprise value | | $ | 4,851 | |
Plus: Cash and cash equivalents(a) | | 48 | |
| Plus: Current liabilities | | 1,582 | |
| Plus: Asset retirement obligations (non-current portion) | | 236 | |
| Plus: Other non-current liabilities | | 97 | |
| Reorganization value of Successor assets | | $ | 6,814 | |
____________________________________________
(a)Cash and cash equivalents includes $8 million that was initially classified as restricted cash as of the Effective Date but subsequently released from escrow and returned to the Successor. Restricted cash exclusive of the $8 million is not included in the table above.
Valuation Process
The fair values of our oil and natural gas properties, other property and equipment, other long-term assets, long-term debt, asset retirement obligations and warrants were estimated as of the Effective Date.
Oil and natural gas properties. The Company’s principal assets are its oil and natural gas properties, which are accounted for under the successful efforts accounting method. The Company determined the fair value of its oil and natural gas properties based on the discounted future net cash flows expected to be generated from these assets. Discounted cash flow models by operating area were prepared using the estimated future revenues and operating costs for all proved developed properties and undeveloped properties comprising the proved and unproved reserves. Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and (v) a market-based weighted average cost of capital by operating area. The Company utilized NYMEX strip pricing, adjusted for differentials, to value the reserves. The NYMEX strip pricing inputs used are classified as Level 1 fair value assumptions and all other inputs are classified as Level 3 fair value assumptions. The discount rates utilized were derived using a weighted average cost of capital computation, which included an estimated cost of debt and equity for market participants with similar geographies and asset development type by operating area.
Other property and equipment. The fair value of other property and equipment such as buildings, land, computer equipment, and other equipment was determined using replacement cost method under the cost approach which considers historical acquisition costs for the assets adjusted for inflation, as well as factors in any potential obsolescence based on the current condition of the assets and the ability of those assets to generate cash flow.
Long-term debt. A market approach, based upon quotes from major financial institutions, was used to measure the fair value of the $500 million aggregate principal amount of 5.50% Senior Notes due 2026 (the “2026 Notes”) and $500 million aggregate principal amount of 5.875% Senior Notes due 2029 (the “2029 Notes” and, together with the 2026 Notes, the “Notes”). The carrying value of borrowings under our Exit Credit Facility approximated fair value as the terms and interest rates are based on prevailing market rates.
Asset retirement obligations. The fair value of the Company’s asset retirement obligations was revalued based upon estimated current reclamation costs for our assets with reclamation obligations, an appropriate long-term inflation adjustment, and our revised credit adjusted risk-free rate. The credit adjusted risk-free rate was based on an evaluation of an interest rate that equates to a risk-free interest rate adjusted for the effect of our credit standing.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Warrants. The fair values of the Warrants issued upon the Effective Date were estimated using a Black-Scholes model, a commonly used option-pricing model. The Black-Scholes model was used to estimate the fair value of the warrants with an implied stock price of $20.52; initial exercise price per share of $27.63, $32.13 and $36.18 for Class A, Class B and Class C Warrants, respectively; expected volatility of 58% estimated using volatilities of similar entities; risk-free rate using a 5-year Treasury bond rate; and an expected annual dividend yield which was estimated to be zero.
Condensed Consolidated Balance Sheet
The following consolidated balance sheet is as of February 9, 2021. This consolidated balance sheet includes adjustments that reflect the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”) as of the Effective Date. The explanatory notes following the table below provide further details on the adjustments, including the assumptions and methods used to determine fair value for its assets, liabilities and warrants.
| | | | | | | | | | | | | | | | | | | | | | | |
| Predecessor | | Reorganization Adjustments | | Fresh Start Adjustments | | Successor |
| | | | | | | |
| Assets | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | $ | 243 | | | $ | (203) | | (a) | $ | — | | | $ | 40 | |
| Restricted cash | — | | | 86 | | (b) | — | | | 86 | |
| Accounts receivable, net | 861 | | | (18) | | (c) | — | | | 843 | |
| Short-term derivative assets | — | | | — | | | — | | | — | |
| Other current assets | 66 | | | (5) | | (d) | — | | | 61 | |
| Total current assets | 1,170 | | | (140) | | | — | | | 1,030 | |
| Property and equipment: | | | | | | | |
| Oil and natural gas properties, successful efforts method | | | | | | | |
| Proved oil and natural gas properties | 25,794 | | | — | | | (21,108) | | (o) | 4,686 | |
| Unproved properties | 1,546 | | | — | | | (1,063) | | (o) | 483 | |
| Other property and equipment | 1,755 | | | — | | | (1,256) | | (o) | 499 | |
| Total property and equipment | 29,095 | | | — | | | (23,427) | | (o) | 5,668 | |
| Less: Accumulated depreciation, depletion and amortization | (23,877) | | | — | | | 23,877 | | (o) | — | |
| Property and equipment held for sale, net | 9 | | | — | | | (7) | | (o) | 2 | |
| Total property and equipment, net | 5,227 | | | — | | | 443 | | (o) | 5,670 | |
Other long-term assets | 198 | | | — | | | (84) | | (p) | 114 | |
| Total assets | $ | 6,595 | | | $ | (140) | | | $ | 359 | | | $ | 6,814 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Predecessor | | Reorganization Adjustments | | Fresh Start Adjustments | | Successor |
| | | | | | | |
| | | | | | | |
| Liabilities and stockholders’ equity (deficit) | |
| Current liabilities: | | | | | | | |
Accounts payable | $ | 391 | | | $ | 24 | | (e) | $ | — | | | $ | 415 | |
Current maturities of long-term debt, net | 1,929 | | | (1,929) | | (f) | — | | | — | |
Accrued interest | 4 | | | (4) | | (g) | — | | | — | |
Short-term derivative liabilities | 398 | | | — | | | — | | | 398 | |
| Other current liabilities | 645 | | | 124 | | (h) | — | | | 769 | |
| Total current liabilities | 3,367 | | | (1,785) | | | — | | | 1,582 | |
Long-term debt, net | — | | | 1,261 | | (i) | 52 | | (q) | 1,313 | |
Long-term derivative liabilities | 90 | | | — | | | — | | | 90 | |
Asset retirement obligations, net of current portion | 139 | | | — | | | 97 | | (r) | 236 | |
Other long-term liabilities | 5 | | | 2 | | (j) | — | | | 7 | |
Liabilities subject to compromise | 9,574 | | | (9,574) | | (k) | — | | | — | |
| Total liabilities | 13,175 | | | (10,096) | | | 149 | | | 3,228 | |
Contingencies and commitments (Note 7) | | | | | | | |
| Stockholders’ equity (deficit): | | | | | | | |
| Predecessor preferred stock | 1,631 | | | (1,631) | | (l) | — | | | — | |
| Predecessor common stock | — | | | — | | | — | | | — | |
| Predecessor additional paid-in capital | 16,940 | | | (16,940) | | (l) | — | | | — | |
| Successor common stock | — | | | 1 | | (m) | — | | | 1 | |
| Successor additional paid-in-capital | — | | | 3,585 | | (m) | — | | | 3,585 | |
| Accumulated other comprehensive income | 48 | | | — | | | (48) | | (s) | — | |
| Accumulated deficit | (25,199) | | | 24,941 | | (n) | 258 | | (t) | — | |
| Total stockholders’ equity (deficit) | (6,580) | | | 9,956 | | | 210 | | | 3,586 | |
| Total liabilities and stockholders’ equity (deficit) | $ | 6,595 | | | $ | (140) | | | $ | 359 | | | $ | 6,814 | |
Reorganization Adjustments(a)The table below reflects the sources and uses of cash on the Effective Date from implementation of the Plan:
| | | | | |
| Sources: | |
| Proceeds from issuance of the Notes | $ | 1,000 | |
| Proceeds from Rights Offering | 600 | |
| Proceeds from refunds of interest deposit for the Notes | 5 | |
| Total sources of cash | $ | 1,605 | |
| Uses: | |
| Payment of roll-up of DIP Facility balance | $ | (1,179) | |
| Payment of Exit Credit Facility - Tranche A Loan | (479) | |
| Transfers to restricted cash for professional fee reserve | (76) | |
| Transfers to restricted cash for convenience claim distribution reserve | (10) | |
| Payment of professional fees | (31) | |
| Payment of DIP Facility interest and fees | (12) | |
| Payment of FLLO alternative transaction fee | (12) | |
| Payment of the Notes fees funded out of escrow | (8) | |
| Payment of RBL interest and fees | (1) | |
| Total uses of cash | $ | (1,808) | |
| Net cash used | $ | (203) | |
(b)Represents the transfer of funds to a restricted cash account for purposes of funding the professional fee reserve and the convenience claim distribution reserve.
(c)Reflects the removal of an insurance receivable associated with a discharged legal liability.
(d)Reflects the collection of an interest deposit for the senior unsecured notes.
(e)Changes in accounts payable include the following:
| | | | | |
| Accrual of professional service provider success fees | $ | 38 | |
| Accrual of convenience claim distribution reserve | 10 | |
| Accrual of professional service provider fees | 5 | |
| Reinstatement of accounts payable from liabilities subject to compromise | 2 | |
| Payment of professional fees | (31) | |
| Net impact to accounts payable | $ | 24 | |
(f)Reflects payment of the pre-petition credit facility for $1.179 billion and transfer of the Tranche A and Tranche B Loans to long-term debt for $750 million.
(g)Reflect payments of accrued interest and fees on the DIP Facility.
(h)Changes in other current liabilities include the following:
| | | | | |
| Reinstatement of other current liabilities from liabilities subject to compromise | $ | 191 | |
| Accrual of the Notes fees | 2 | |
| Settlement of Put Option Premium through issuance of Successor Common Stock | (60) | |
| Payment of DIP Facility fees | (9) | |
| Net impact to other current liabilities | $ | 124 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(i)Changes in long-term debt include the following:
| | | | | |
| Issuance of the Notes | $ | 1,000 | |
| Issuance of Tranche A and Tranche B Loans | 750 | |
| Payments on Tranche A Loans | (479) | |
| Debt issuance costs for the Notes | (10) | |
| Net impact to long-term debt, net | $ | 1,261 | |
(j) Reflects reinstatement of a long-term lease liability.
(k) On the Effective Date, liabilities subject to compromise were settled in accordance with the Plan as follows:
| | | | | |
| Liabilities subject to compromise pre-emergence | $ | 9,574 | |
| To be reinstated on the Effective Date: | |
| Accounts payable | $ | (2) | |
| Other current liabilities | (191) | |
| Other long-term liabilities | (2) | |
| Total liabilities reinstated | $ | (195) | |
| Consideration provided to settle amounts per the Plan or Reorganization: | |
| Issuance of Successor common stock associated with the Rights Offering and Backstop Commitment and settlement of the Put Option Premium | $ | (2,311) | |
| Proceeds from issuance of Successor common stock associated with the Rights Offering and Backstop Commitment | 600 | |
| Issuance of Successor common stock to FLLO Term Loan holders, incremental to the Rights Offering and Backstop Commitment | (783) | |
| Issuance of Successor common stock to second lien note holders, incremental to the Rights Offering and Backstop Commitment | (124) | |
| Issuance of Successor common stock to unsecured note holders | (45) | |
| Issuance of Successor common stock to general unsecured claims | (8) | |
| Fair value of Class A Warrants | (93) | |
| Fair value of Class B Warrants | (94) | |
| Fair value of Class C Warrants | (68) | |
| Proceeds to holders of general unsecured claims | (10) | |
| Total consideration provided to settle amounts per the Plan | $ | (2,936) | |
| Gain on settlement of liabilities subject to compromise | $ | 6,443 | |
(l)Pursuant to the Plan, as of the Effective Date, all equity interests in Predecessor, including Predecessor’s common and preferred stock, were canceled without any distribution.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(m)Reflects the Successor equity including the issuance of 97,907,081 shares of New Common Stock, 11,111,111 shares of Class A Warrants, 12,345,679 shares of Class B Warrants and 9,768,527 shares of Class C Warrants pursuant to the Plan.
| | | | | |
| Issuance of Successor equity associated with the Rights Offering and Backstop Commitment | $ | 2,371 | |
| Issuance of Successor equity to holders of the FLLO Term Loan, incremental to the Rights Offering and Backstop Commitment | 783 | |
| Issuance of Successor equity to holders of the Second Lien Notes, incremental to the Rights Offering and Backstop Commitment | 124 | |
| Issuance of Successor equity to holders of the unsecured senior notes | 45 | |
| Issuance of Successor equity to holders of allowed general unsecured claims | 8 | |
| Fair value of Class A warrants | 93 | |
| Fair value of Class B warrants | 94 | |
| Fair value of Class C warrants | 68 | |
| Total change in Successor common stock and additional paid-in capital | 3,586 | |
| Less: Par value of Successor common stock | (1) | |
| Change in Successor additional paid-in capital | $ | 3,585 | |
(n) Reflects the cumulative net impact of the effects on accumulated deficit as follows:
| | | | | |
| Gain on settlement of liabilities subject to compromise | $ | 6,443 | |
| Accrual of professional service provider success fees | (38) | |
| Accrual of professional service provider fees | (5) | |
| Surrender of other receivable | (18) | |
| Payment of FLLO alternative transaction fee | (12) | |
| Total reorganization items, net | 6,370 | |
| Cancellation of predecessor equity | 18,571 | |
| Net impact on accumulated deficit | $ | 24,941 | |
Fresh Start Adjustments
(o)Reflects fair value adjustments to our (i) proved oil and natural gas properties, (ii) unproved properties, (iii) other property and equipment and (iv) property and equipment held for sale, and the elimination of accumulated depletion, depreciation and amortization.
(p)Reflects the fair value adjustment to record historical contracts at their fair values.
(q)Reflects the fair value adjustments to the 2026 Notes and 2029 Notes for $22 million and $30 million, respectively.
(r)Reflects the adjustment to our asset retirement obligations using assumptions as of the Effective Date, including an inflation factor of 2% and an average credit-adjusted risk-free rate of 5.18%.
(s)Reflects the fair value adjustment to eliminate the accumulated other comprehensive income of $9 million related to hedging settlements offset by the elimination of $57 million of income tax effects which has resulted in the recording of an income tax benefit of $57 million. See Note 11 for a discussion of income taxes.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(t)Reflects the net cumulative impact of the fresh start adjustments on accumulated deficit as follows:
| | | | | |
| Fresh start adjustments to property and equipment | $ | 443 | |
| Fresh start adjustments to other long-term assets | (84) | |
| Fresh start adjustments to long-term debt | (52) | |
| Fresh start adjustments to long-term asset retirement obligations | (97) | |
| Fresh start adjustments to accumulated other comprehensive income | (9) | |
| Total fresh start adjustments impacting reorganizations items, net | 201 | |
| Income tax effects on accumulated other comprehensive income | 57 | |
| Net impact to accumulated deficit | $ | 258 | |
Reorganization Items, Net
We have incurred significant expenses, gains and losses associated with the reorganization, primarily the gain on settlement of liabilities subject to compromise, write-off of unamortized debt issuance costs and related unamortized premiums and discounts, debt and equity financing fees, provision for allowed claims and legal and professional fees incurred subsequent to the Chapter 11 filings for the restructuring process. The accrual for allowed claims primarily represents damages from contract rejections and settlements attributable to the midstream savings requirement as stipulated in the Plan. While the claims reconciliation process is ongoing, we do not believe any existing unresolved claims will result in a material adjustment to the financial statements. The amount of these items, which were incurred in reorganization items, net within our accompanying consolidated statements of operations, have significantly affected our statements of operations.
The following table summarizes the components in reorganization items, net included in our consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Gains on the settlement of liabilities subject to compromise | | $ | — | | | | $ | 6,443 | | | $ | 12 | | | $ | — | |
| Accrual for allowed claims | | — | | | | (1,002) | | | (879) | | | — | |
| Write off of unamortized debt premiums (discounts) on Predecessor debt | | — | | | | — | | | 518 | | | — | |
| Write off of unamortized debt issuance costs on Predecessor debt | | — | | | | — | | | (61) | | | — | |
| Gain on fresh start adjustments | | — | | | | 201 | | | — | | | — | |
| Gain from release of commitment liabilities | | — | | | | 55 | | | — | | | — | |
| Debt and equity financing fees | | — | | | | — | | | (145) | | | — | |
| Loss on divested assets | | — | | | | — | | | (128) | | | — | |
| Professional service provider fees and other | | — | | | | (60) | | | (113) | | | — | |
| Success fees for professional service providers | | — | | | | (38) | | | — | | | — | |
| Surrender of other receivable | | — | | | | (18) | | | — | | | — | |
| FLLO alternative transaction fee | | — | | | | (12) | | | — | | | — | |
| Total reorganization items, net | | $ | — | | | | $ | 5,569 | | | $ | (796) | | | $ | — | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | |
| 4. | Oil and Natural Gas Property Transactions |
Vine Acquisition
On November 1, 2021, we acquired Vine Energy, Inc. (“Vine”), an energy company focused on the development of natural gas properties in the over-pressured stacked Haynesville and Mid-Bossier shale plays in Northwest Louisiana pursuant to a definitive agreement with Vine dated August 10, 2021, for total consideration of approximately $1.5 billion, consisting of approximately 18.7 million shares of our common stock and $90 million in cash. In conjunction with the Vine Acquisition, Vine’s Second Lien Term Loan was repaid and terminated for $163 million inclusive of a $13 million make whole premium with cash on hand due to the agreement containing a change in control provision making the term loan callable upon closing. Vine’s reserve based loan facility, which had no borrowings as of November 1, 2021, was terminated at the time of the acquisition. Additionally, Vine’s 6.75% Senior Notes with a principal amount of $950 million were assumed by the Company. See Note 6 for additional discussion of the assumed debt. We funded the cash portion of the consideration with cash on hand. Preliminary Vine Purchase Price Allocation
We have accounted for the acquisition of Vine as a business combination, using the acquisition method. The following table represents the preliminary allocation of the total purchase price of Vine to the identifiable assets acquired and the liabilities assumed based on the fair values as of the acquisition date. Certain data necessary to complete the purchase price allocation is not yet available, and includes, but is not limited to, valuation of pre-acquisition contingencies, final tax returns that provide the underlying tax basis of Vine’s assets and liabilities and final appraisals of assets acquired and liabilities assumed. We expect to complete the purchase price allocation during the 12-month period following the acquisition date, during which time the value of the assets and liabilities may be revised as appropriate.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | |
| Preliminary
Purchase Price Allocation |
| Consideration: | |
Cash | $ | 253 | |
| Fair value of Chesapeake’s common stock issued in the merger | 1,231 | |
| Restricted stock unit replacement awards | 6 | |
Total consideration | $ | 1,490 | |
| |
| Fair Value of Liabilities Assumed: | |
Current liabilities | $ | 765 | |
Long-term debt | 1,021 | |
Deferred tax liabilities | 49 | |
Other long-term liabilities | 272 | |
Amounts attributable to liabilities assumed | $ | 2,107 | |
| |
| Fair Value of Assets Acquired: | |
Cash and cash equivalents | $ | 59 | |
Other current assets | 206 | |
Proved oil and natural gas properties | 2,181 | |
Unproved properties | 1,118 | |
Other property and equipment | 1 | |
Other long-term assets | 32 | |
Amounts attributable to assets acquired | $ | 3,597 | |
| |
Total identifiable net assets | $ | 1,490 | |
Oil and Natural Gas Properties
For the Vine Acquisition, we applied applicable guidance, under which an acquirer should recognize the identifiable assets acquired and the liabilities assumed on the acquisition date at fair value. The fair value estimate of proved and unproved oil and natural gas properties as of the acquisition date was based on estimated oil and natural gas reserves and related future net cash flows discounted using a weighted average cost of capital, including estimates of future production rates and future development costs. We utilized NYMEX strip pricing adjusted for inflation to value the reserves. We then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired. Additionally, the fair value estimate of proved and unproved oil and natural gas properties was corroborated by utilizing the market approach, which considers recent comparable transactions for similar assets.
The inputs used to value oil and natural gas properties require significant judgment and estimates made by management and represent Level 3 inputs.
Financial Instruments and Other
The fair value measurements of long-term debt were estimated based on a market approach using estimates provided by an independent investment data services firm and represent Level 2 inputs.
Restricted Stock Unit Replacement Awards
Included in consideration for the Vine Acquisition is approximately $6 million related to pre-combination service recognized on Vine’s restricted stock unit awards. For restricted stock units that were accelerated or transitioned at
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
the time of the merger, we recognized expense for the portion of the award that was accelerated and included in consideration the portion of the award related to pre-combination service.
Vine Revenues and Expenses Subsequent to Acquisition
We included in our consolidated statements of operations oil, natural gas and NGL revenues of $290 million, net gains on oil and natural gas derivatives of $144 million, direct operating expenses of $177 million, including depreciation, depletion and amortization, and other expense of $12 million related to the Vine business for the period from November 1, 2021 to December 31, 2021.
Vine Pro Forma Financial Information
The following unaudited pro forma financial information for the 2021 Successor Period is based on our historical consolidated financial statements adjusted to reflect as if the Vine Acquisition had occurred on February 10, 2021. The information below reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including adjustments to conform the classification of expenses in Vine’s statements of operations to our classification for similar expenses and the estimated tax impact of pro forma adjustments.
| | | | | | | | |
| | Successor |
| | Period from February 10, 2021 through December 31, 2021 |
| | |
Revenues | | $ | 5,448 | |
| Net income available to common stockholders | | $ | 128 | |
| Earnings per common share: | | |
Basic | | $ | 1.09 | |
Diluted | | $ | 0.97 | |
Mid-Continent Divestiture
On October 13, 2020, we filed a notice with the Bankruptcy Court that we reached an agreement with Tapstone Energy in a Section 363 transaction under the Bankruptcy Code. An auction supervised by the Bankruptcy Court was held on November 10, 2020 in which other pre-qualified buyers submitted bids for the asset. We presented the results of the auction process to the Bankruptcy Court and the sale was approved on November 13, 2020. On December 11, 2020, we closed the transaction with Tapstone Energy for $130 million, subject to post-closing adjustments which resulted in the recognition of a gain of approximately $27 million.
Haynesville Exchange
On November 22, 2020, we filed notice with the Bankruptcy Court that we had reached an agreement with Williams Companies to transfer certain Haynesville assets, including interests in 144 producing wells and approximately 50,000 net acres, in exchange for improved midstream contract terms with respect to assets we retained. On December 15, 2020, the Court approved the transaction with Williams Companies and the exchange resulted in the recognition of loss of approximately $128 million based on the difference between the carrying value of the assets and the fair value of the assets surrendered. The exchange was executed to obtain sufficient savings on midstream obligations as required by the Plan. Therefore, the loss was recorded to reorganization items, net in our consolidated statements of operations.
WildHorse Acquisition
On February 1, 2019, we acquired WildHorse Resource Development Corporation (“WildHorse”), an oil and gas company with operations in the Eagle Ford Shale and Austin Chalk formations in southeast Texas, for approximately 3.6 million shares of our reverse stock split adjusted Predecessor common stock and $381 million in cash. We funded the cash portion of the consideration through borrowings under the pre-petition revolving credit facility. In connection with the closing, we acquired all of WildHorse’s debt.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
WildHorse Purchase Price Allocation
We have accounted for the acquisition of WildHorse and its corresponding merger with and into our wholly owned subsidiary, Brazos Valley Longhorn, L.L.C. (“Brazos Valley Longhorn” or “BVL”), as a business combination, using the acquisition method. The following table represents the final allocation of the total purchase price of WildHorse to the identifiable assets acquired and the liabilities assumed based on the fair values as of the acquisition date.
| | | | | |
| Purchase Price Allocation |
| Consideration: | |
Cash | $ | 381 | |
| Fair value of Chesapeake’s common stock issued in the merger | 2,037 | |
Total consideration | $ | 2,418 | |
| |
| Fair Value of Liabilities Assumed: | |
Current liabilities | $ | 166 | |
Long-term debt | 1,379 | |
Deferred tax liabilities | 314 | |
Other long-term liabilities | 36 | |
Amounts attributable to liabilities assumed | $ | 1,895 | |
| |
| Fair Value of Assets Acquired: | |
Cash and cash equivalents | $ | 28 | |
Other current assets | 128 | |
Proved oil and natural gas properties | 3,264 | |
Unproved properties | 756 | |
Other property and equipment | 77 | |
Other long-term assets | 60 | |
Amounts attributable to assets acquired | $ | 4,313 | |
| |
Total identifiable net assets | $ | 2,418 | |
Oil and Natural Gas Properties
For the acquisition of WildHorse, we applied applicable guidance, under which an acquirer should recognize the identifiable assets acquired and the liabilities assumed on the acquisition date at fair value. The fair value estimate of proved and unproved oil and natural gas properties as of the acquisition date was based on estimated oil and natural gas reserves and related future net cash flows discounted using a weighted average cost of capital, including estimates of future production rates and future development costs. Management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired. Additionally, the fair value estimate of proved and unproved oil and natural gas properties was corroborated by utilizing the market approach which considers recent comparable transactions for similar assets.
The inputs used to value oil and natural gas properties require significant judgment and estimates made by management and represent Level 3 inputs.
Financial Instruments and Other
The fair value measurements of long-term debt were estimated based on a market approach using estimates provided by an independent investment data services firm and represent Level 2 inputs.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
WildHorse Revenues and Expenses Subsequent to Acquisition
We included in our consolidated statements of operations revenues of $752 million, direct operating expenses of $810 million, including depreciation, depletion and amortization, and other expense of $83 million related to the WildHorse business for the period from February 1, 2019 to December 31, 2019.
WildHorse Pro Forma Financial Information
The following unaudited pro forma financial information for the years ended December 31, 2019 and 2018, respectively, is based on our historical consolidated financial statements adjusted to reflect as if the WildHorse acquisition had occurred on January 1, 2018. The information below reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including adjustments to conform the classification of expenses in WildHorse’s statements of operations to our classification for similar expenses and the estimated tax impact of pro forma adjustments.
| | | | | | | | | | | | | | |
| | Predecessor |
| | Years Ended December 31, |
| | 2019 | | 2018 |
Revenues | | $ | 8,587 | | | $ | 11,211 | |
Net income (loss) available to common stockholders | | $ | (431) | | | $ | 195 | |
| Earnings (loss) per common share: | | | | |
Basic | | $ | (51.77) | | | $ | 42.89 | |
Diluted | | $ | (51.77) | | | $ | 42.89 | |
This unaudited pro forma information has been derived from historical information. The unaudited pro forma financial information is not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the periods presented, nor is it necessarily indicative of future results.
2019 Transactions
In 2019, we received proceeds of approximately $130 million, net of post-closing adjustments, and recognized a gain of approximately $46 million, primarily for the sale of non-core oil and natural gas properties.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Basic earnings (loss) per common share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share is calculated in the same manner, but includes the impact of potentially dilutive securities. Potentially dilutive securities during the Successor Period consist of issuable shares related to warrants, unvested restricted stock units, and unvested performance share units and during the Predecessor Period have historically consisted of unvested restricted stock, contingently issuable shares related to preferred stock and convertible senior notes unless their effect was antidilutive.
The reconciliations between basic and diluted earnings (loss) per share are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 | | Year Ended
December 31, 2019 |
| Numerator | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Net income (loss), basic and diluted | $ | 945 | | | | $ | 5,383 | | | $ | (9,756) | | | $ | (416) | |
| | | | | | | | |
| Denominator (in thousands) | | | | | | | | |
| Weighted average common shares outstanding, basic | 101,754 | | | | 9,781 | | | 9,773 | | | 8,325 | |
| Effect of potentially dilutive securities | | | | | | | | |
| Preferred stock | — | | | | 290 | | | — | | | — | |
| Warrants | 14,376 | | | | — | | | — | | | — | |
| Restricted stock | 200 | | | | — | | | — | | | — | |
| Performance share units | 11 | | | | — | | | — | | | — | |
| Weighted average common shares outstanding, diluted | 116,341 | | | | 10,071 | | | 9,773 | | | 8,325 | |
| | | | | | | | |
| Earnings (loss) per common share | | | | | | | | |
| Earnings (loss) per common share, basic | $ | 9.29 | | | | $ | 550.35 | | | $ | (998.26) | | | $ | (49.97) | |
| Earnings (loss) per common share, diluted | $ | 8.12 | | | | $ | 534.51 | | | $ | (998.26) | | | $ | (49.97) | |
Successor
During the 2021 Successor Period, the diluted earnings (loss) per share calculation excludes the effect of 1,228,828 reserved shares of common stock and 2,318,446 reserved Class C Warrants related to the settlement of General Unsecured Claims associated with the Chapter 11 Cases as all necessary conditions had not been met to be considered dilutive shares for the 2021 Successor Period.
Predecessor
The diluted earnings (loss) per share calculation for the 2020 Predecessor Period excludes the antidilutive effect of 290,716 shares of common stock equivalent of our preferred stock.
The diluted earnings (loss) per share calculation for the 2019 Predecessor Period excludes the antidilutive effect of 295,731 shares of common stock equivalent of our preferred stock and 2,210 shares of restricted stock.
We had the option to settle conversions of the 5.50% convertible senior notes due 2026 with cash, shares or common stock or any combination thereof. As the price of our common stock was below the conversion threshold level for any time during the conversion period, there was no impact to diluted earnings (loss) per share.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Our long-term debt consisted of the following as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 31, 2021 | | | December 31, 2020 |
| Carrying Amount | | Fair Value(a) | | | Carrying Amount | | Fair Value(a) |
| Exit Credit Facility - Tranche A Loans | $ | — | | | $ | — | | | | $ | — | | | $ | — | |
| Exit Credit Facility - Tranche B Loans | 221 | | | 221 | | | | — | | | — | |
5.50% senior notes due 2026 | 500 | | | 526 | | | | — | | | — | |
5.875% senior notes due 2029 | 500 | | | 535 | | | | — | | | — | |
6.75% senior notes due 2029(b) | 950 | | | 1,031 | | | | — | | | — | |
| DIP Facility | — | | | — | | | | — | | | — | |
| Pre-petition revolving credit facility | — | | | — | | | | 1,929 | | | 1,929 | |
| Term loan due 2024 | — | | | — | | | | 1,500 | | | 1,220 | |
11.50% senior secured second lien notes due 2025 | — | | | — | | | | 2,330 | | | 373 | |
6.625% senior notes due 2020 | — | | | — | | | | 176 | | | 8 | |
6.875% senior notes due 2020 | — | | | — | | | | 73 | | | 3 | |
6.125% senior notes due 2021 | — | | | — | | | | 167 | | | 7 | |
5.375% senior notes due 2021 | — | | | — | | | | 127 | | | 5 | |
4.875% senior notes due 2022 | — | | | — | | | | 272 | | | 12 | |
5.75% senior notes due 2023 | — | | | — | | | | 167 | | | 8 | |
7.00% senior notes due 2024 | — | | | — | | | | 624 | | | 29 | |
6.875% senior notes due 2025 | — | | | — | | | | 2 | | | 2 | |
8.00% senior notes due 2025 | — | | | — | | | | 246 | | | 10 | |
5.50% convertible senior notes due 2026 | — | | | — | | | | 1,064 | | | 42 | |
7.50% senior notes due 2026 | — | | | — | | | | 119 | | | 5 | |
8.00% senior notes due 2026 | — | | | — | | | | 46 | | | 2 | |
8.00% senior notes due 2027 | — | | | — | | | | 253 | | | 11 | |
| Premiums on senior notes | 116 | | | — | | | | — | | | — | |
| Debt issuance costs | (9) | | | — | | | | — | | | — | |
| Total debt, net | 2,278 | | | 2,313 | | | | 9,095 | | | 3,666 | |
| Less current maturities of long-term debt, net | — | | | — | | | | (1,929) | | | (1,929) | |
| Less amounts reclassified to liabilities subject to compromise | — | | | — | | | | (7,166) | | | (1,737) | |
| Total long-term debt, net | $ | 2,278 | | | $ | 2,313 | | | | $ | — | | | $ | — | |
____________________________________________
(a)The carrying value of borrowings under our Exit Credit Facility approximate fair value as the interest rates are based on prevailing market rates; therefore, they are a Level 1 fair value measurement. For all other debt, a market approach, based upon quotes from major financial institutions, which are Level 2 inputs, is used to measure the fair value.
(b)On November 1, 2021, we acquired the debt of Vine, which consisted of 6.75% senior notes due 2029. See further discussion below.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Successor Debt
Our post-emergence exit financing consists of the Exit Credit Facility, which includes a reserve-based revolving credit facility and a non-revolving loan facility, and the Notes.
Exit Credit Facility. On the Effective Date, pursuant to the terms of the Plan, the Company, as borrower, entered into a reserve-based credit agreement (the “Credit Agreement”) providing for a reserve-based credit facility with an initial borrowing base of $2.5 billion. The borrowing base will be redetermined semiannually on or around May 1 and November 1 of each year. Our borrowing base was reaffirmed in October 2021, and the next scheduled redetermination will be on or about May 1, 2022. The aggregate initial elected commitments of the lenders under the Exit Credit Facility were $1.75 billion of Tranche A Loans and $221 million of fully funded Tranche B Loans.
The Exit Credit Facility provides for a $200 million sublimit of the aggregate commitments that are available for the issuance of letters of credit. The Exit Credit Facility bears interest at the ABR (alternate base rate) or LIBOR, at our election, plus an applicable margin (ranging from 2.25–3.25% per annum for ABR loans and 3.25–4.25% per annum for LIBOR loans, subject to a 1.00% LIBOR floor), depending on the percentage of the borrowing base then being utilized. The Tranche A Loans mature three years after the Effective Date and the Tranche B Loans mature four years after the Effective Date. The Tranche B Loans can be repaid if no Tranche A Loans are outstanding.
The Credit Agreement contains financial covenants that require the Company and its guarantors, on a consolidated basis, to maintain (i) a first lien leverage ratio of not more than 2.75 to 1:00, (ii) a total leverage ratio of not more than 3.50 to 1:00, (iii) a current ratio of not less than 1.00 to 1:00 and (iv) at any time additional secured debt is outstanding, an asset coverage ratio of not less than 1.50 to 1:00, defined as PV10 of PDP reserves to total secured debt. The Company has no additional secured debt outstanding as of December 31, 2021.
The Credit Agreement also contains customary affirmative and negative covenants, including, among other things, as to compliance with laws (including environmental laws and anti-corruption laws), delivery of quarterly and annual financial statements, conduct of business, maintenance of property, maintenance of insurance, restrictions on the incurrence of liens, indebtedness, asset dispositions, fundamental changes, restricted payments, and other customary covenants.
The Company is required to pay a commitment fee of 0.50% per annum on the average daily unused portion of the current aggregate commitments under the Tranche A Loans. The Company is also required to pay customary letter of credit and fronting fees.
Outstanding Senior Notes. On February 2, 2021, Chesapeake Escrow Issuer LLC, then an indirect wholly owned subsidiary of the Company, issued $500 million aggregate principal amount of its 2026 Notes and $500 million aggregate principal amount of its 2029 Notes. The Notes included a $52 million premium to reflect fair value adjustments at the date of emergence.
The Notes are guaranteed on a senior unsecured basis by each of the Company’s subsidiaries that guarantee the Exit Credit Facility.
The Notes were issued pursuant to an indenture, dated as of February 5, 2021, among the Issuer, the Guarantors and Deutsche Bank Trust Company Americas, as trustee.
Interest on the Notes is payable semi-annually, on February 1 and August 1 of each year, commencing on August 1, 2021, to holders of record on the immediately preceding January 15 and July 15.
The Notes are the Company’s senior unsecured obligations. Accordingly, they rank (i) equal in right of payment to all existing and future senior indebtedness, including borrowings under the Exit Credit Facility, (ii) effectively subordinate in right of payment to all of existing and future secured indebtedness, including indebtedness under the Exit Credit Facility, to the extent of the value of the collateral securing such indebtedness, (iii) structurally subordinate in right of payment to all existing and future indebtedness and other liabilities of any future subsidiaries that do not guarantee the Notes and any entity that is not a subsidiary that does not guarantee the Notes and (iv) senior in right of payment to all future subordinated indebtedness. Each guarantee of the Notes by a guarantor is a general, unsecured, senior obligation of such guarantor. Accordingly, the guarantees (i) rank equally in right of payment with all existing and future senior indebtedness of such guarantor (including such guarantor’s guarantee of indebtedness under the Exit Credit Facility), (ii) are subordinated to all existing and future secured indebtedness of
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
such guarantor, including such guarantor’s guarantee of indebtedness under our Exit Credit Facility, to the extent of the value of the collateral of such guarantor securing such secured indebtedness, (iii) are structurally subordinated to all indebtedness and other liabilities of any future subsidiaries of such guarantor that do not guarantee the notes and (iv) rank senior in right of payment to all future subordinated indebtedness of such guarantor.
Vine Senior Notes
As a result of the completion of the Vine Acquisition, the Company and certain of its subsidiaries entered into a supplemental indenture pursuant to which the Company assumed the obligations under Vine’s $950 million aggregate principal amount of 6.75% senior notes due 2029 (the “Vine Notes”) issued under the indenture dated April 7, 2021 with Wilmington Trust, National Association, as Trustee (the “Vine Indenture”). The Vine Notes included a $71 million premium to reflect fair value adjustments at the date of acquisition.
The Company and certain of its subsidiaries have agreed to guarantee such obligations under the Vine Indenture. Additionally, certain subsidiaries of Vine entered into a supplemental indenture to the Company’s existing indenture, dated February 5, 2021 with Deutsche Bank Trust Company Americas as trustee (the “CHK Indenture”), pursuant to which such subsidiaries of Vine have agreed to guarantee obligations under the CHK Indenture.
Interest on the Vine Notes is payable semi-annually, on April 15 and October 15 of each year to holders of record on the immediately preceding April 1 and October 1. Our first interest payment will be on April 15, 2022.
Phase-Out of LIBOR
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The purpose of ASU 2020-04 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates such as LIBOR, which is no longer being used on new loans as of December 31, 2021, to alternative reference rates. ASU 2020-04 applies only to contracts, hedging relationships, debt arrangements and other transactions that reference a benchmark reference rate expected to be discontinued because of reference rate reform. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of this guidance will not have a material impact on our consolidated financial statements and related disclosures.
Chapter 11 Proceedings - Predecessor Debt
Filing of the Chapter 11 Cases constituted an event of default with respect to certain of our previous secured and unsecured debt obligations. As a result of the Chapter 11 Cases, the principal and interest due under these debt instruments became immediately due and payable. However, Section 362 of the Bankruptcy Code stayed the creditors from taking any action as a result of the default.
The principal amounts outstanding under the FLLO Term Loan, Second Lien Notes and all of our other unsecured senior and convertible senior notes were reclassified as liabilities subject to compromise on the accompanying consolidated balance sheet as of December 31, 2020.
The agreements for our FLLO Term Loan, Second Lien Notes, and unsecured senior and convertible senior notes contained provisions regarding the calculation of interest upon default. Upon default, the interest rate on the FLLO Term Loan increased from LIBOR plus 8.00% to alternative base rate (ABR) (3.25% during the fourth quarter of the 2020 Predecessor Period) plus Applicable Margin (7.00% during the fourth quarter of the 2020 Predecessor Period) plus 2.00%. For the Second Lien Notes and all of our other unsecured senior and convertible senior notes, the interest rate remained the same upon default. However, interest accrued on the amount of unpaid interest in addition to the principal balance. We did not pay or recognize interest on the FLLO Term Loan, Second Lien Notes, or unsecured senior and convertible senior notes during the Chapter 11 process.
Debtor-in-Possession Credit Agreement
On June 28, 2020, prior to the commencement of Chapter 11 Cases, the Company entered into a commitment letter with certain of the lenders (“New Money Lenders”) under the pre-petition revolving credit facility and/or their affiliates to provide the Debtors with a debtor-in-possession credit agreement in an aggregate principal amount of up to approximately $2.104 billion in commitments and loans from the New Money Lenders. The DIP Facility consisted of a revolving loan facility of new money in an aggregate principal amount of up to $925 million, which included a sub-facility of up to $200 million for the issuance of letters of credit, and a $1.179 billion term loan that
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
reflected the roll-up of a portion of outstanding borrowings under the pre-petition revolving credit facility: (i) a $925 million term loan reflected the roll-up of a portion of outstanding existing borrowings made by the New Money Lenders under the existing revolving credit agreement and (ii) an up to approximately $254 million term loan reflected the roll-up or a portion of outstanding existing borrowings made by certain other lenders under the pre-petition revolving credit facility agreement. The $750 million of outstanding borrowings under the pre-petition revolving credit facility that were not rolled up remained outstanding throughout the Chapter 11 Cases but accrued interest at a lower rate than the rolled-up loans. The proceeds of the DIP Facility were used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases, payment of court approved adequate protection obligations and other such purposes consistent with the DIP Facility. On the Effective Date, the DIP Facility was terminated and the holders of obligations under the DIP Facility received payment in full in cash; provided that to the extent such lender under the DIP Facility was also a lender under the Exit Credit Facility, such lender’s allowed DIP claims were first reduced dollar-for-dollar and satisfied by the amount of its Exit RBL Loans provided as of the Effective Date.
Predecessor Debt Issuances and Retirements 2020
In the 2020 Predecessor Period, we repurchased approximately $160 million aggregate principal amount of the following senior notes for $95 million and recorded an aggregate gain of approximately $65 million.
| | | | | | | | |
| | Notes Repurchased |
6.625% senior notes due 2020 | | $ | 32 | |
6.875% senior notes due 2020 | | 20 | |
4.875% senior notes due 2022 | | 66 | |
5.75% senior notes due 2023 | | 42 | |
| Total | | $ | 160 | |
Predecessor Debt 2019
In December 2019, we entered into a secured 4.5-year term loan facility in an aggregate principal amount of $1.5 billion for net proceeds of approximately $1.455 billion. We used the net proceeds to finance tender offers for our unsecured BVL senior notes and to repay amounts outstanding under our BVL revolving credit facility. We recorded an aggregate net gain of approximately $4 million associated with the retirement of our BVL senior notes and the BVL revolving credit facility.
We privately negotiated exchanges of approximately $507 million principal amount of our outstanding senior notes for 235,563,519 shares of common stock and $186 million principal amount of our outstanding convertible senior notes for 73,389,094 shares of common stock. We recorded an aggregate net gain of approximately $64 million associated with the exchanges.
Pre-Petition Revolving Credit Facility
Our pre-petition revolving credit facility was scheduled to mature in September 2023 and the aggregate commitment of the lenders and borrowing base under the facility was $3.0 billion. The pre-petition revolving credit facility provided for an accordion feature, pursuant to which the aggregate commitments thereunder may be increased to up to $4.0 billion from time to time, subject to agreement of the participating lenders and certain other customary conditions. As of December 31, 2020, we had outstanding borrowings of $1.929 billion under our pre-petition revolving credit facility and had used $54 million for various letters of credit.
Borrowings under our pre-petition revolving credit facility bore interest at an alternative base rate (ABR) or LIBOR, at our election, plus an applicable margin ranging from 1.50%-2.50% per annum for ABR loans and 2.50%-3.50% per annum for LIBOR loans, depending on the percentage of the borrowing base then being utilized.
Our pre-petition revolving credit facility was subject to various financial and other covenants. The terms of the pre-petition revolving credit facility included covenants limiting, among other things, our ability to incur additional
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
indebtedness, make investments or loans, incur liens, consummate mergers and similar fundamental changes, make restricted payments, make investments in unrestricted subsidiaries and enter into transactions with affiliates.
| | | | | |
| 7. | Contingencies and Commitments |
Contingencies
Chapter 11 Proceedings
Commencement of the Chapter 11 Cases automatically stayed the proceedings and actions against us that are described below, in addition to actions seeking to collect pre-petition indebtedness or to exercise control over the property of the Company’s bankruptcy estates. The Plan in the Chapter 11 Cases, which became effective on February 9, 2021, provided for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that had not been satisfied or addressed during the Chapter 11 Cases. See Note 2 for additional information. Litigation and Regulatory Proceedings
We were involved in a number of litigation and regulatory proceedings as of the Petition Date. Many of these proceedings were in early stages, and many of them sought damages and penalties, the amount of which is indeterminate. Our total accrued liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different.
We are involved in, and expect to continue to be involved in, various lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. The majority of the prepetition legal proceedings have been settled during the Chapter 11 Cases or will be resolved in connection with the claims reconciliation process before the Bankruptcy Court. Any allowed claim related to such prepetition litigation will be treated in accordance with the Plan.
Environmental Contingencies
The nature of the oil and gas business carries with it certain environmental risks for us and our subsidiaries. We have implemented various policies, programs, procedures, training and audits to reduce and mitigate such environmental risks. We conduct periodic reviews, on a company-wide basis, to assess changes in our environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. We manage our exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, we may, among other things, exclude a property from the transaction, require the seller to remediate the property to our satisfaction in an acquisition or agree to assume liability for the remediation of the property.
We were recently dismissed as a defendant from numerous lawsuits in Oklahoma alleging that we and other companies engaged in activities that have caused earthquakes. The lawsuits sought compensation for injury to real and personal property, diminution of property value, economic losses due to business interruption, interference with the use and enjoyment of property, annoyance and inconvenience, personal injury and emotional distress. In addition, they sought the reimbursement of insurance premiums and the award of punitive damages, attorneys’ fees, costs, expenses and interest. Any allowed claim related to such prepetition litigation will be treated in accordance with the Plan.
Other Matters
Based on management’s current assessment, we are of the opinion that no pending or threatened lawsuit or dispute relating to our business operations is likely to have a material adverse effect on our future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Commitments
Gathering, Processing and Transportation Agreements
We have contractual commitments with midstream service companies and pipeline carriers for future gathering, processing and transportation of oil, natural gas and NGL to move certain of our production to market. Working interest owners and royalty interest owners, where appropriate, will be responsible for their proportionate share of these costs. Commitments related to gathering, processing and transportation agreements are not recorded as obligations in the accompanying consolidated balance sheets; however, they are reflected in our estimates of proved reserves.
The aggregate undiscounted commitments under our gathering, processing and transportation agreements, excluding any reimbursement from working interest and royalty interest owners, credits for third-party volumes or future costs under cost-of-service agreements, are presented below:
| | | | | | | | |
| | Successor |
| | | December 31,
2021 |
| 2022 | | $ | 564 | |
| 2023 | | 500 | |
| 2024 | | 459 | |
| 2025 | | 356 | |
| 2026 | | 318 | |
| 2027 – 2036 | | 1,631 | |
| Total | | $ | 3,828 | |
In addition, we have long-term agreements for certain natural gas gathering and related services within specified acreage dedication areas in exchange for cost-of-service based fees redetermined annually, or tiered fees based on volumes delivered relative to scheduled volumes. Future gathering fees may vary with the applicable agreement.
Other Commitments
As part of our normal course of business, we enter into various agreements providing, or otherwise arranging for, financial or performance assurances to third parties on behalf of our wholly owned guarantor subsidiaries. These agreements may include future payment obligations or commitments regarding operational performance that effectively guarantee our subsidiaries’ future performance.
In connection with acquisitions and divestitures, our purchase and sale agreements generally provide indemnification to the counterparty for liabilities incurred as a result of a breach of a representation or warranty by the indemnifying party and/or other specified matters. These indemnifications generally have a discrete term and are intended to protect the parties against risks that are difficult to predict or cannot be quantified at the time of entering into or consummating a particular transaction. For divestitures of oil and natural gas properties, our purchase and sale agreements may require the return of a portion of the proceeds we receive as a result of uncured title or environmental defects.
While executing our strategic priorities, we have incurred certain cash charges, including contract termination charges, financing extinguishment costs and charges for unused natural gas transportation and gathering capacity.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other current liabilities as of December 31, 2021 and 2020 are detailed below:
| | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | December 31, 2021 | | | December 31, 2020 |
| Revenues and royalties due others | | $ | 617 | | | | $ | 236 | |
| Accrued drilling and production costs | | 142 | | | | 104 | |
| Accrued hedging costs | | 113 | | | | 7 | |
| Accrued compensation and benefits | | 91 | | | | 59 | |
| Other accrued taxes | | 86 | | | | 82 | |
| Operating leases | | 29 | | | | 24 | |
| Joint interest prepayments received | | 14 | | | | 8 | |
| Debt and equity financing fees | | — | | | | 69 | |
| Other | | 110 | | | | 134 | |
| Total other current liabilities | | $ | 1,202 | | | | $ | 723 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We are a lessee under various agreements for drilling rigs, compressors, vehicles, office space and gas treating plants. As of December 31, 2021, these leases have remaining terms ranging from one month to three years. Certain of our lease agreements include options to renew the lease, terminate the lease early or purchase the underlying asset at the end of the lease. We determine the lease term at the lease commencement date as the non-cancelable period of the lease, including options to extend or terminate the lease when we are reasonably certain to exercise the option. The company’s vehicles are the only leases with renewal options that we are reasonably certain to exercise. The renewals are reflected in the ROU asset and lease liability balances.
Our operating ROU assets are included in other long-term assets while operating lease liabilities are included in other current and other long-term liabilities on the consolidated balance sheet. Finance ROU assets are reflected in total property and equipment, net, while finance lease liabilities are included in other current and other long-term liabilities on the consolidated balance sheet.
On November 1, 2021, we acquired Vine and, as part of the purchase price allocation, we recognized additional operating lease liabilities of $32 million and a related ROU asset of $32 million related to drilling rig leases, an office space lease and gas treating plant leases.
On February 1, 2019, we acquired WildHorse and, as part of the purchase price allocation, we recognized additional operating lease liabilities of $40 million, a related ROU asset of $38 million, and lease incentives of $2 million related to two office space leases, a long-term hydraulic fracturing agreement and other equipment leases. Regarding our long-term hydraulic fracturing agreements, we made a policy election to treat both lease and non-lease components as a single lease component. All of these acquired leases were approved for rejection during our bankruptcy process and subsequently removed from our balance sheet.
In 2018, we sold our wholly owned subsidiary, Midcon Compression, L.L.C., to a third party and subsequently leased back certain natural gas compressors for 38 months. The lease was accounted for as a finance lease liability until the contract was renegotiated as part of our bankruptcy process and the changes to the contract resulted in the reclassification of the finance lease as an operating lease in March 2021.
The following table presents our ROU assets and lease liabilities as of December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | December 31, 2021 | | | December 31, 2020 |
| | | Finance | | Operating | | | Finance | | Operating |
| ROU assets | | $ | — | | | $ | 38 | | | | $ | 9 | | | $ | 29 | |
| | | | | | | | | |
| Lease liabilities: | | | | | | | | | |
Current lease liabilities | | $ | — | | | $ | 29 | | | | $ | 9 | | | $ | 27 | |
Long-term lease liabilities | | — | | | 9 | | | | — | | | 2 | |
Total lease liabilities | | — | | | 38 | | | | 9 | | | 29 | |
| Less amounts reclassified to liabilities subject to compromise | | — | | | — | | | | (9) | | | (5) | |
| Total lease liabilities, net | | $ | — | | | $ | 38 | | | | $ | — | | | $ | 24 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Additional information for the Company’s operating and finance leases is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Lease cost: | | | | | | | | | |
| Amortization of ROU assets | | $ | — | | | | $ | 1 | | | $ | 9 | | | $ | 8 | |
| Interest on lease liability | | — | | | | — | | | 1 | | | 2 | |
Finance lease cost | | — | | | | 1 | | | 10 | | | 10 | |
| Operating lease cost | | 33 | | | | 3 | | | 17 | | | 26 | |
| Short-term lease cost | | 13 | | | | — | | | 32 | | | 112 | |
Total lease cost | | $ | 46 | | | | $ | 4 | | | $ | 59 | | | $ | 148 | |
| | | | | | | | | |
| Other information: | | | | | | | | | |
| Operating cash outflows from finance lease | | $ | — | | | | $ | — | | | $ | 1 | | | $ | 2 | |
| Operating cash outflows from operating leases | | $ | 7 | | | | $ | — | | | $ | 9 | | | $ | 11 | |
| Investing cash outflows from operating leases | | $ | 39 | | | | $ | 3 | | | $ | 40 | | | $ | 127 | |
| Financing cash outflows from finance lease | | $ | — | | | | $ | 1 | | | $ | 9 | | | $ | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | December 31, 2021 | | | December 31, 2020 |
| Weighted average remaining lease term - finance lease | | N/A | | | 1.00 year |
| Weighted average remaining lease term - operating leases | | 1.44 years | | | 1.12 years |
| Weighted average discount rate - finance lease | | N/A | | | 7.50 | % |
| Weighted average discount rate - operating leases | | 3.80 | % | | | 6.46 | % |
Maturity analysis of operating lease liabilities are presented below:
| | | | | | | | |
| | Successor |
| | December 31, 2021 |
| 2022 | | $ | 29 | |
| 2023 | | 8 | |
| 2024 | | 1 | |
Total lease payments | | 38 | |
| Less imputed interest | | — | |
Present value of lease liabilities | | 38 | |
| Less current maturities | | (29) | |
Present value of lease liabilities, less current maturities | | $ | 9 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table shows revenue disaggregated by operating area and product type, for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Period from February 10, 2021 through December 31, 2021 |
| | Oil | | Natural Gas | | NGL | | Total |
| Marcellus | | $ | — | | | $ | 1,370 | | | $ | — | | | $ | 1,370 | |
| Haynesville | | — | | | 998 | | | — | | | 998 | |
| Eagle Ford | | 1,354 | | | 179 | | | 179 | | | 1,712 | |
| Powder River Basin | | 202 | | | 75 | | | 44 | | | 321 | |
| Oil, natural gas and NGL revenue | | $ | 1,556 | | | $ | 2,622 | | | $ | 223 | | | $ | 4,401 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Marketing revenue | | $ | 1,158 | | | $ | 908 | | | $ | 197 | | | $ | 2,263 | |
| | | | | | | | |
| | Predecessor |
| | Period from January 1, 2021 through February 9, 2021 |
| | Oil | | Natural Gas | | NGL | | Total |
| Marcellus | | $ | — | | | $ | 119 | | | $ | — | | | $ | 119 | |
| Haynesville | | — | | | 53 | | | — | | | 53 | |
| Eagle Ford | | 159 | | | 17 | | | 17 | | | 193 | |
| Powder River Basin | | 20 | | | 7 | | | 6 | | | 33 | |
| Oil, natural gas and NGL revenue | | $ | 179 | | | $ | 196 | | | $ | 23 | | | $ | 398 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Marketing revenue | | $ | 141 | | | $ | 78 | | | $ | 20 | | | $ | 239 | |
| | | | | | | | |
| | Year Ended December 31, 2020 |
| | | Oil | | Natural Gas | | NGL | | Total |
| Marcellus | | $ | — | | | $ | 631 | | | $ | — | | | $ | 631 | |
| Haynesville | | — | | | 362 | | | — | | | 362 | |
| Eagle Ford | | 1,202 | | | 129 | | | 97 | | | 1,428 | |
| Powder River Basin | | 170 | | | 41 | | | 20 | | | 231 | |
| Mid-Continent | | 55 | | | 25 | | | 13 | | | 93 | |
| Oil, natural gas and NGL revenue | | $ | 1,427 | | | $ | 1,188 | | | $ | 130 | | | $ | 2,745 | |
| | | | | | | | |
| Marketing revenue from contracts with customers | | $ | 1,195 | | | $ | 494 | | | $ | 110 | | | $ | 1,799 | |
| Other marketing revenue | | 67 | | | 3 | | | — | | | 70 | |
Marketing revenue | | $ | 1,262 | | | $ | 497 | | | $ | 110 | | | $ | 1,869 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| | | Oil | | Natural Gas | | NGL | | Total |
| Marcellus | | $ | — | | | $ | 856 | | | $ | — | | | $ | 856 | |
| Haynesville | | — | | | 620 | | | — | | | 620 | |
| Eagle Ford | | 2,010 | | | 185 | | | 135 | | | 2,330 | |
| Powder River Basin | | 369 | | | 77 | | | 32 | | | 478 | |
| Mid-Continent | | 164 | | | 44 | | | 25 | | | 233 | |
| Oil, natural gas and NGL revenue | | $ | 2,543 | | | $ | 1,782 | | | $ | 192 | | | $ | 4,517 | |
| | | | | | | | |
| Marketing revenue from contracts with customers | | $ | 2,473 | | | $ | 900 | | | $ | 246 | | | $ | 3,619 | |
| Other marketing revenue | | 311 | | | 41 | | | — | | | 352 | |
| Losses on marketing derivatives | | — | | | (4) | | | — | | | (4) | |
Marketing revenue | | $ | 2,784 | | | $ | 937 | | | $ | 246 | | | $ | 3,967 | |
Accounts Receivable
Accounts receivable as of December 31, 2021 and 2020 are detailed below:
| | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | December 31, 2021 | | | December 31, 2020 |
Oil, natural gas and NGL sales | | $ | 922 | | | | $ | 589 | |
Joint interest billings | | 158 | | | | 119 | |
Other | | 38 | | | | 68 | |
Allowance for doubtful accounts | | (3) | | | | (30) | |
Total accounts receivable, net | | $ | 1,115 | | | | $ | 746 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The components of the income tax expense (benefit) for each of the periods presented below are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Current | | | | | | | | | |
| Federal | | $ | — | | | | $ | — | | | $ | (3) | | | $ | — | |
| State | | — | | | | — | | | (6) | | | (26) | |
| Current Income Taxes | | — | | | | — | | | (9) | | | (26) | |
| Deferred | | | | | | | | | |
| Federal | | (45) | | | | (54) | | | — | | | (297) | |
| State | | (4) | | | | (3) | | | (10) | | | (8) | |
| Deferred Income Taxes | | (49) | | | | (57) | | | (10) | | | (305) | |
| Total | | $ | (49) | | | | $ | (57) | | | $ | (19) | | | $ | (331) | |
The income tax expense (benefit) reported in our consolidated statement of operations is different from the federal income tax expense (benefit) computed using the federal statutory rate for the following reasons:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Income tax expense (benefit) at the federal statutory rate of 21% | | $ | 188 | | | | $ | 1,119 | | | $ | (2,051) | | | $ | (134) | |
| State income taxes (net of federal income tax benefit) | | (86) | | | | 238 | | | (41) | | | (21) | |
| Partial release of valuation allowance due to Acquisitions | | (49) | | | | — | | | — | | | (314) | |
| Change in valuation allowance excluding impact of Acquisitions | | (179) | | | | (1,191) | | | 2,010 | | | 114 | |
| Reorganization items | | 60 | | | | (173) | | | 41 | | | — | |
| Transaction costs | | 11 | | | | — | | | — | | | — | |
| Removal of stranded tax effects in accumulated other comprehensive income | | — | | | | (57) | | | — | | | — | |
| Equity-based compensation (non-officer) | | — | | | | 7 | | | 10 | | | 4 | |
| Officer compensation limited under Section 162(m) | | 2 | | | | — | | | 9 | | | 3 | |
| Other | | 4 | | | | — | | | 3 | | | 17 | |
| Total | | $ | (49) | | | | $ | (57) | | | $ | (19) | | | $ | (331) | |
After taking into account the effect of the Vine Acquisition, we have increased our estimate of state apportionment to Louisiana. This results in a shift of our state profile towards a higher overall state tax rate, and as such our deferred tax assets associated with that state have increased resulting in a deferred tax benefit in our state tax provision. Such increase was offset in full by an increase to our valuation allowance. We recognize certain permanent book-to-tax differences relating to reorganization items such as differences in the treatment of the extinguishment of liabilities, differences due to the non-deductibility of certain expenses associated with administering the plan of reorganization, and the adjustment to deferred tax assets which are subject to expiration before they are utilizable. In the Successor Period, we recognized a difference due to the non-deductibility of certain transaction costs and other post-combination expenses.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We reassessed the realizability of our deferred tax assets and continue to maintain a full valuation allowance against our net deferred tax asset positions for federal and state purposes. Of the net decrease in our valuation allowance, $1.191 billion is reflected as a component of income tax benefit in our consolidated statement of operations for the 2021 Predecessor Period, and $228 million is reflected as a component of income tax benefit in our consolidated statement of operations for the 2021 Successor Period.
Deferred income taxes are provided to reflect temporary differences in the tax basis of assets and liabilities and their reported amounts in the financial statements. The tax-effected temporary differences, net operating loss (“NOL”) carryforwards and excess business interest expense carryforwards that comprise our deferred income taxes are as follows:
| | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | December 31,
2021 | | | December 31,
2020 |
| Deferred tax liabilities: | | | | | |
| Other | | $ | (3) | | | | $ | (3) | |
| Deferred tax liabilities | | (3) | | | | (3) | |
| | | | | |
Deferred tax assets: | | | | | |
| Property, plant and equipment | | 340 | | | | 907 | |
| Net operating loss carryforwards | | 784 | | | | 2,066 | |
| Carrying value of debt | | 31 | | | | 48 | |
| Excess business interest expense carryforward | | 684 | | | | 293 | |
| Asset retirement obligations | | 86 | | | | 34 | |
| Investments | | 66 | | | | 71 | |
| Accrued liabilities | | 38 | | | | 288 | |
| Derivative instruments | | 289 | | | | 53 | |
| Other | | 68 | | | | 51 | |
| Deferred tax assets | | 2,386 | | | | 3,811 | |
Valuation allowance | | (2,383) | | | | (3,808) | |
| Deferred tax assets after valuation allowance | | 3 | | | | 3 | |
| Net deferred tax liability | | $ | — | | | | $ | — | |
As of December 31, 2021, and 2020, we had deferred tax assets of $2.386 billion and $3.811 billion upon which we had a valuation allowance of $2.383 billion and $3.808 billion, respectively. Of the net change in the valuation allowance of $1.425 billion for both federal and state deferred tax assets, $1.419 billion is reflected as a component of income tax benefit in the consolidated statement of operations and the difference is reflected in components of stockholders’ equity.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A valuation allowance against deferred tax assets, including NOL carryforwards and disallowed business interest carryforwards, is recognized when it is more likely than not that all or some portion of the benefit from the deferred tax assets will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of existing taxable temporary differences, tax planning strategies, as well as the current and forecasted business economics of our industry. Management assesses all available evidence, both positive and negative, to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. Based on all available positive and negative evidence, including projections of future taxable income, we believe it is more likely than not that our deferred tax assets will not be realized. As such, a full valuation allowance was recorded against our net deferred tax asset position for federal and state purposes. A significant piece of objectively verifiable negative evidence consists of the losses incurred in prior quarters. The current quarter’s pre-tax book income is a source of positive evidence, however given the absence of a trend of multiple successive quarters with book income, such evidence does not outweigh the negative evidence. Should future results of operations demonstrate a trend of profitability, additional weight may be placed upon other evidence, such as future forecasts of taxable income. Additionally, future events and new evidence, such as the integration of and realization of profit from the recently acquired assets could lead to increased weight being placed upon future forecasts and the conclusion that some or all of the deferred tax assets are more likely than not to be realizable. Therefore, we believe that there is a possibility that some or all of the valuation allowance could be released in the foreseeable future.
Our ability to utilize NOL carryforwards, disallowed business interest carryforwards, tax credits and possibly other tax attributes to reduce future taxable income and federal income tax is subject to various limitations under Section 382 of the Code. The utilization of such attributes may be subject to an annual limitation under Section 382 of the Code should transactions involving our equity result in a cumulative shift of more than 50% in the beneficial ownership of our stock during any three-year testing period (an “Ownership Change”).
As a result of emergence from bankruptcy on February 9, 2021, the Company did experience an Ownership Change. We did not qualify for the exception under Section 382(l)(5) of the Code, and therefore an annual limitation was determined under Section 382(l)(6) of the Code, which is based on the post-emergence value of our equity multiplied by the adjusted federal long-term rate in effect for the month in which the ownership change occurred. The amount of the annual limitation has been computed to be $54 million and was prorated for the 2021 tax year based on the number of days attributable to the post-Effective Date portion of the year. The limitation applies to our NOL carryforwards, disallowed business interest carryforwards and general business credits until such attributes expire or are fully utilized. As we believe we were in an overall net unrealized built-in loss position at the Effective Date, the limitation also applies to any recognized built-in losses incurred for a period of five years but only to the extent of the overall net unrealized built-in loss. Recognized built-in losses incurred during 2021 include a portion of our tax depreciation, depletion, and amortization deductions along with a portion of our realized hedging losses. We have incurred enough of those items for the 2021 tax year and have thus disallowed deductions up to the net unrealized built-in loss. Accordingly, we estimate no further restriction on the company’s deduction for such items. Some states impose similar limitations on tax attribute utilization upon experiencing an Ownership Change.
In Chapter 11 bankruptcy cases, the cancellation of debt income (“CODI”) realized upon emergence from bankruptcy is excludible from taxable income but results in a reduction of tax attributes in accordance with the attribute reduction and ordering rules of Section 108 of the Code. The amount of our CODI is estimated to be $5 billion, all of which will reduce our NOL carryforwards. This attribute reduction occurs after the close of the tax year, however we have included the estimated effect of such reduction in our ending deferred tax assets as of December 31, 2021. As a result of the Section 382 limitation, $593 million of federal NOLs remaining after the CODI reduction are estimated to expire before they would become utilizable and as such have been removed from our deferred tax assets. The states we operate in generally have similar rules for attribute reduction and Section 382 limitation which results in the reduction of certain of our state NOL carryforwards.
On November 1, 2021, we completed the acquisition of Vine. For federal income tax purposes, the transaction qualified as a tax-free merger under Section 368 of the Code and, as a result, we acquired carryover tax basis in Vine’s assets and liabilities. A net deferred tax liability of $49 million determined through business combination accounting includes deferred tax liabilities on plant, property and equipment totaling $298 million, partially offset by deferred tax assets totaling $249 million relating to federal NOL carryforwards, disallowed business interest carryforwards and certain other deferred tax assets. These carryforwards are subject to a base annual Section 382 limitation of approximately $2 million. The base annual limitation is estimated to be increased over the first five years for recognized
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
built-in gains of approximately $14 million per year. We determined that no separate valuation allowances were required to be established against any of the individual deferred tax assets acquired. We determined that the acquired deferred tax liability was a source of evidence to release valuation allowance, and as such $49 million was recorded as a tax benefit in the successor period.
As of December 31, 2021, and after taking into account each of the foregoing matters, the federal NOLs and excess business interest attributes are as follows:
| | | | | | | | | | | | | | | | | | | | |
| Attributes subject to Section 382 base annual limitation | | | Attributes not subject to Section 382 limitation |
| $54 million | | $2 million | | |
| Net operating losses, by year of expiration: | | | | | | |
| 2037 | $ | 858 | | | $ | 10 | | | | $ | — | |
| Indefinitely lived | 1,919 | | | 112 | | | | — | |
| Total federal net operating losses | $ | 2,777 | | | $ | 122 | | | | $ | — | |
| | | | | | |
| Excess business interest expense (indefinitely lived) | $ | 1,455 | | | $ | 58 | | | | $ | 1,459 | |
We had state NOL carryforwards of approximately $3.541 billion. Several states adopt the federal NOL carryforward period such that our more recent state NOLs do not expire. The state NOL carryforwards are subject to apportioned amounts of the federal Section 382 limitations.
Accounting guidance for recognizing and measuring uncertain tax positions requires a more likely than not threshold condition be met on a tax position, based solely on the technical merits of being sustained, before any benefit of the tax position can be recognized in the financial statements. Guidance is also provided regarding recognition, classification and disclosure of uncertain tax positions. As of both December 31, 2021, and 2020, the amount of unrecognized tax benefits related to NOL carryforwards and tax liabilities associated with uncertain tax positions was $74 million, of which, as of both December 31, 2021 and December 31, 2020, $29 million is related to state tax receivables not expected to be recovered and the remainder is related to NOL carryforwards. If recognized, $29 million of the uncertain tax positions identified would have an effect on the effective tax rate. As of December 31, 2021, and 2020, we had no amounts accrued for interest related to these uncertain tax positions. We recognize interest related to uncertain tax positions as a component of interest expense. Penalties, if any, related to uncertain tax positions would be recorded in other expenses. $24 million of the state tax receivable relates to claims for refund of Pennsylvania income taxes. During the fourth quarter of 2021, a court case with similar claims as ours was decided in favor of the taxpayer. We have considered this new information and determined that we have no change to our assessment of the recognition and measurement of our position. Should the state exhaust its appeals so that the taxpayer ultimately prevails we may be successful in applying that precedent to our claims. As such, it is possible that we may reassess that refund claim in the next twelve months and ascertain it to be more likely than not to be sustained. Should this occur, we will record a current tax benefit and income tax receivable for the amount we determine we are likely to sustain.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Unrecognized tax benefits at beginning of period | | $ | 74 | | | | $ | 74 | | | $ | 74 | | | $ | 79 | |
| Additions based on tax positions related to the current year | | — | | | | — | | | — | | | — | |
| Additions to tax positions of prior years | | — | | | | — | | | — | | | 27 | |
| Settlements | | — | | | | — | | | — | | | (32) | |
| Expiration of the applicable statute of limitations | | — | | | | — | | | — | | | — | |
| Reductions to tax positions of prior years | | — | | | | — | | | — | | | — | |
| Unrecognized tax benefits at end of period | | $ | 74 | | | | $ | 74 | | | $ | 74 | | | $ | 74 | |
Our federal and state income tax returns are subject to examination by federal and state tax authorities. Notification was received from the IRS during February 2021 that the examination of the WildHorse 2017 federal income tax return has been closed as a no-change audit. Our tax years 2018 through 2021 remain open for all purposes of examination by the IRS as do the WildHorse 2018 federal income tax return and the WildHorse short period return for January 1, 2019, through February 1, 2019. However, certain earlier tax years remain open for adjustment to the extent of their NOL carryforwards available for future utilization.
In addition, tax years 2018 through 2021 as well as certain earlier years remain open for examination by state tax authorities. Currently, several state examinations are in progress of various years. We do not anticipate that the outcome of any federal or state audit will have a significant impact on our financial position or results of operations.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
New Common Stock.
As discussed in Note 2, on the Effective Date, we issued an aggregate of 97,907,081 shares of New Common Stock, par value $0.01 per share, to the holders of allowed claims, and approximately 2,092,918 shares of New Common Stock were reserved for future distributions under the Plan. During the 2021 Successor Period, 864,090 reserved shares were issued to resolve allowed unsecured claims. As discussed in Note 4, on November 1, 2021, we acquired Vine and issued 18,709,399 shares of New Common Stock. Dividends
In the 2021 Successor Period, we initiated a new annual dividend on our common shares, expected to be paid quarterly. The following table summarizes our dividend payments in the 2021 Successor Period:
| | | | | | | | | | | | | | | | | | | | |
| Payment Date | | Stockholders of Record Date | | Dividend Payment | | Rate Per Share |
| June 10, 2021 | | May 24, 2021 | | $ | 34 | | | $ | 0.34375 | |
| September 9, 2021 | | August 24, 2021 | | 33 | | | $ | 0.34375 | |
| December 9, 2021 | | November 24, 2021 | | 52 | | | $ | 0.43750 | |
| Total dividends paid | | | | $ | 119 | | | |
Warrants | | | | | | | | | | | | | | | | | |
| Class A Warrants | | Class B Warrants | | Class C Warrants(a) |
| Issued as of February 10, 2021 | 11,111,111 | | | 12,345,679 | | | 9,768,527 | |
Converted into New Common Stock(b) | (254,259) | | | (32,406) | | | (10,603) | |
| Issued for General Unsecured Claims | — | | | — | | | 1,630,447 | |
| Outstanding as of December 31, 2021 | 10,856,852 | | | 12,313,273 | | | 11,388,371 | |
_________________________________________ (a)As of December 31, 2021, we had 2,318,446 of reserved Class C Warrants.
(b)As of December 31, 2021, we issued 188,292 common shares as a result of Warrant exercises.
As discussed in Note 2, on the Effective Date, we issued Class A, Class B and Class C Warrants that are initially exercisable for one share of New Common Stock per Warrant at initial exercise prices of $27.63, $32.13 and $36.18 per share, respectively, subject to adjustments pursuant to the terms of the Warrants. The Warrants are exercisable from the Effective Date until February 9, 2026. The Warrants contain customary anti-dilution adjustments in the event of any stock split, reverse stock split, reclassification, stock dividend or other distributions. The exercise prices of the Warrants were adjusted to prevent the dilution of rights for the effects of the quarterly dividend distribution on December 9, 2021, and the adjusted exercise prices are $27.08, $31.49, and $35.46 per share for the Class A, Class B and Class C Warrants, respectively. Chapter 11 Proceedings
Upon our emergence from Chapter 11 on February 9, 2021, as discussed in Note 2, Predecessor common stock and preferred stock were canceled and released under the Plan without receiving any recovery on account thereof. Noncontrolling Interests
In the 2019 Predecessor Period and part of the 2020 Predecessor Period, we owned 23,750,000 common units in the Chesapeake Granite Wash Trust (the “Trust”) representing a 51% beneficial interest. We determined that the Trust was a VIE and that we were the primary beneficiary. As a result, the Trust was included in our consolidated financial statements. In the 2020 Predecessor Period, we sold our interests in the Mid-Continent operating area and the units we owned in the Trust. See Note 4 for additional discussion.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | |
| 13. | Share-Based Compensation |
As discussed in Note 2, on the Effective Date, our Predecessor common stock was canceled and New Common Stock was issued. Accordingly, our then existing share-based compensation awards were also canceled, which resulted in the recognition of any previously unamortized expense related to the canceled awards on the date of cancellation. Share-based compensation for the Predecessor and Successor Periods is not comparable. Successor Share-Based Compensation
As of the Effective Date, the Board adopted the 2021 Long Term Incentive Plan (the “LTIP”) with a share reserve equal to 6,800,000 shares of New Common Stock. The LTIP provides for the grant of restricted stock units, restricted stock awards, stock options, stock appreciation rights, performance awards and other stock awards to the Company’s employees and non-employee directors.
Restricted Stock Units. In the 2021 Successor Period, we granted restricted stock units to employees and non-employee directors under the LTIP, which will vest over a three-year and one-year period, respectively. The fair value of restricted stock units is based on the closing sales price of our common stock on the date of grant, and compensation expense is recognized ratably over the requisite service period. A summary of the changes in unvested restricted stock units is presented below:
| | | | | | | | | | | | | | |
| |
Unvested
Restricted Stock Units | | Weighted Average
Grant Date
Fair Value Per Share |
| | (in thousands) | | |
| Unvested as of February 10, 2021 | | — | | | $ | — | |
Granted (a) | | 1,202 | | | $ | 52.60 | |
Vested (a) | | (377) | | | $ | 65.66 | |
| Forfeited | | (50) | | | $ | 44.37 | |
| Unvested as of December 31, 2021 | | 775 | | | $ | 46.77 | |
_________________________________________ (a)Due to the Vine Acquisition, each Vine restricted stock unit was converted into a Company restricted stock unit. As a result, approximately 430 thousand Vine restricted stock units were converted to Company restricted stock units, of which approximately 375 thousand restricted stock units were accelerated. We recognized accelerated share-based compensation expense in other operating expense on our consolidated statement of operations.
The aggregate intrinsic value of restricted stock units that vested during the 2021 Successor Period was approximately $25 million based on the stock price at the time of vesting.
As of December 31, 2021, there was approximately $27 million of total unrecognized compensation expense related to unvested restricted stock units. The expense is expected to be recognized over a weighted average period of approximately 2.28 years.
Performance Share Units. In the 2021 Successor Period, we granted performance share units (“PSUs”) to senior management under the LTIP, which will generally vest over a three-year period and will be settled in shares. The performance criteria include share price hurdles, total shareholder return (“TSR”), and relative TSR (“rTSR”). The share price hurdle award could result in a payout between 0% - 100% of the target units, and the TSR and rTSR awards could result in a total payout between 0% - 200% of the target units. The fair value of the PSUs was measured on the grant date using a Monte Carlo simulation, and compensation expense is recognized ratably over the requisite service period because these awards depend on a combination of service and market criteria.
The following table presents the assumptions used in the valuation of the PSUs granted in 2021:
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | |
| Assumption | Share Price Hurdle | | TSR, rTSR |
| Risk-free interest rate | 0.30 | % | | 0.23 | % |
| Volatility | 68.4 | % | | 71.4 | % |
A summary of the changes in unvested PSUs is presented below:
| | | | | | | | | | | | | | |
| | Unvested Performance Share Units | | Weighted Average
Grant Date
Fair Value Per Share |
| | (in thousands) | | |
| Unvested as of February 10, 2021 | | — | | | $ | — | |
| Granted | | 201 | | | $ | 64.41 | |
| Vested | | (9) | | | $ | 38.95 | |
| Forfeited | | (9) | | | $ | 55.42 | |
| Unvested as of December 31, 2021 | | 183 | | | $ | 66.12 | |
The aggregate intrinsic value of PSUs that vested during the 2021 Successor Period was approximately $0.6 million based on the stock price at the time of vesting.
As of December 31, 2021, there was approximately $10 million of total unrecognized compensation expense related to unvested PSUs. The expense is expected to be recognized over a weighted average period of approximately 2.44 years.
Predecessor Share-Based Compensation
Our Predecessor share-based compensation program consisted of restricted stock, stock options, PSUs and cash restricted stock units (“CRSUs”) granted to employees and restricted stock granted to non-employee directors under our long-term incentive plans. The restricted stock and stock options were equity-classified awards and the PSUs and CRSUs were liability-classified awards.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restricted Stock Units. We granted restricted stock units to employees and non-employee directors. The following table provides information related to restricted stock units activity for the Predecessor periods presented:
| | | | | | | | | | | | | | |
| | Unvested
Restricted Stock Units | | Weighted Average
Grant Date
Fair Value Per Share |
| | (in thousands) | | |
| Unvested as of January 1, 2021 | | 1 | | | $ | 616.57 | |
| Granted | | — | | | $ | — | |
| Vested | | — | | | $ | — | |
| Forfeited/canceled | | (1) | | | $ | 611.47 | |
| Unvested as of February 9, 2021 | | — | | | $ | — | |
| | | | |
| Unvested as of January 1, 2020 | | 52 | | | $ | 709.85 | |
| Granted | | 68 | | | $ | 60.00 | |
| Vested | | (21) | | | $ | 791.69 | |
| Forfeited | | (98) | | | $ | 243.13 | |
| Unvested as of December 31, 2020 | | 1 | | | $ | 616.57 | |
| | | | |
| Unvested as of January 1, 2019 | | 59 | | | $ | 886.20 | |
| Granted | | 30 | | | $ | 530.44 | |
| Vested | | (30) | | | $ | 876.18 | |
| Forfeited | | (7) | | | $ | 744.74 | |
| Unvested as of December 31, 2019 | | 52 | | | $ | 709.85 | |
Stock Options. In the 2020 Predecessor Period, we granted members of management stock options that vested ratably over a three-year period. Each stock option award had an exercise price equal to the closing price of our common stock on the grant date. Outstanding options expired seven years to ten years from the date of grant.
We utilized the Black-Scholes option-pricing model to measure the fair value of stock options. The expected life of an option was determined using the simplified method. Volatility assumptions were estimated based on the average historical volatility of Chesapeake stock over the expected life of an option. The risk-free interest rate was based on the U.S. Treasury rate in effect at the time of the grant over the expected life of the option. The dividend yield was based on an annual dividend yield, taking into account our dividend policy, over the expected life of the option.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table provides information related to stock option activity for the Predecessor periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares Underlying Options | | Weighted Average Exercise Price Per Share | | Weighted Average Contract Life in Years | | Aggregate Intrinsic Value(a) |
| | (in thousands) | | | | | | ($ in millions) |
| Outstanding as of January 1, 2021 | | 20 | | | $ | 1,429.11 | | | 4.27 | | $ | — | |
| Granted | | — | | | $ | — | | | | | |
Exercised | | — | | | $ | — | | | | | $ | — | |
Expired | | (1) | | | $ | 741.86 | | | | | |
| Forfeited/canceled | | (19) | | | $ | 1,452.40 | | | | | |
| Outstanding as of February 9, 2021 | | — | | | $ | — | | | — | | | $ | — | |
| Exercisable as of February 9, 2021 | | — | | | $ | — | | | — | | | $ | — | |
| | | | | | | | |
| Outstanding as of January 1, 2020 | | 90 | | | $ | 1,420.90 | | | 5.70 | | $ | — | |
| Granted | | — | | | $ | — | | | | | |
Exercised | | — | | | $ | — | | | | | $ | — | |
Expired | | (23) | | | $ | 914.50 | | | | | |
Forfeited | | (47) | | | $ | 1,666.21 | | | | | |
| Outstanding as of December 31, 2020 | | 20 | | | $ | 1,429.11 | | | 4.27 | | $ | — | |
| Exercisable as of December 31, 2020 | | 19 | | | $ | 1,439.55 | | | 4.35 | | $ | — | |
| | | | | | | | |
| Outstanding as of January 1, 2019 | | 90 | | | $ | 1,440.18 | | | 7.15 | | $ | — | |
| Granted | | 5 | | | $ | 594.00 | | | | | |
Exercised | | — | | | $ | — | | | | | $ | — | |
Expired | | (2) | | | $ | 1,272.94 | | | | | |
Forfeited | | (3) | | | $ | 793.40 | | | | | |
| Outstanding as of December 31, 2019 | | 90 | | | $ | 1,420.90 | | | 5.70 | | $ | — | |
| Exercisable as of December 31, 2019 | | 65 | | | $ | 1,656.14 | | | 4.86 | | $ | — | |
___________________________________________
(a)The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.
Restricted Stock, Stock Option, and PSU Compensation. We recognized the following compensation costs, net of actual forfeitures, related to restricted stock, stock options, and PSUs for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| General and administrative expense | | $ | 7 | | | | $ | 3 | | | $ | 20 | | | $ | 26 | |
| Oil and natural gas properties | | 2 | | | | — | | | 1 | | | 2 | |
| Oil, natural gas and NGL production expense | | 2 | | | | — | | | 1 | | | 3 | |
| Exploration expense | | — | | | | — | | | — | | | 1 | |
| Total restricted stock, stock option, and PSU compensation | | $ | 11 | | | | $ | 3 | | | $ | 22 | | | $ | 32 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | |
| 14. | Employee Benefit Plans |
Our qualified 401(k) profit sharing plan (“401(k) Plan”) is the Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan, which is open to employees of Chesapeake and all our subsidiaries. Eligible employees may elect to defer compensation through voluntary contributions to their 401(k) Plan accounts, subject to plan limits and those set by the IRS. We match employee contributions dollar for dollar (subject to a maximum contribution of 6% of an employee's base salary and performance bonus) in cash. In April 2021, the 401(k) match was changed from 15% to 6%. We contributed $8 million, $2 million, $24 million and $29 million to the 401(k) Plan in 2021 Successor Period, 2021 Predecessor Period, 2020 Predecessor Period and 2019 Predecessor Period, respectively.
| | | | | |
| 15. | Derivative and Hedging Activities |
We use derivative instruments to reduce our exposure to fluctuations in future commodity prices and to protect our expected operating cash flow against significant market movements or volatility. All of our oil and natural gas derivative instruments are net settled based on the difference between the fixed-price payment and the floating-price payment, resulting in a net amount due to or from the counterparty. None of our open oil and natural gas derivative instruments were designated for hedge accounting as of December 31, 2021 and 2020.
Oil and Natural Gas Derivatives
As of December 31, 2021 and 2020, our oil and natural gas derivative instruments consisted of the following types of instruments:
•Swaps: We receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we may sell call options and swap options.
•Options: We sell, and occasionally buy, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, we pay the counterparty the excess on sold call options and we receive the excess on bought call options. If the market price settles below the fixed price of the call option, no payment is due from either party.
•Collars: These instruments contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the put and the call strike prices, no payments are due from either party. Three-way collars include the sale by us of an additional put option in exchange for a more favorable strike price on the call option. This eliminates the counterparty’s downside exposure below the second put option strike price.
•Basis Protection Swaps: These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. We receive the fixed price differential and pay the floating market price differential to the counterparty for the hedged commodity.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The estimated fair values of our oil and natural gas derivative instrument assets (liabilities) as of December 31, 2021 and 2020 are provided below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | Predecessor |
| | | December 31, 2021 | | December 31, 2020 |
| | Notional Volume | | Fair Value | | Notional Volume | | Fair Value |
| Oil (mmbbl): | | | | | | | | |
| Fixed-price swaps | | 13 | | | $ | (356) | | | 27 | | | $ | (136) | |
| | | | | | | | |
| Basis protection swaps | | 9 | | | (2) | | | 7 | | | (1) | |
| Total oil | | 22 | | | (358) | | | 34 | | | (137) | |
| Natural gas (bcf): | | | | | | | | |
| Fixed-price swaps | | 637 | | | (675) | | | 728 | | | 10 | |
| Collars | | 205 | | | (82) | | | 53 | | | 8 | |
| Call options | | 18 | | | (17) | | | — | | | — | |
| Basis protection swaps | | 252 | | | (11) | | | 66 | | | 1 | |
| Total natural gas | | 1,112 | | | (785) | | | 847 | | | 19 | |
| Total estimated fair value | | | | $ | (1,143) | | | | | $ | (118) | |
We have terminated certain commodity derivative contracts that were previously designated as cash flow hedges for which the original contract months are yet to occur. See further discussion below under Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss).
Effect of Derivative Instruments – Consolidated Balance Sheets
The following table presents the fair value and location of each classification of derivative instrument included in the consolidated balance sheets as of December 31, 2021 and 2020 on a gross basis and after same-counterparty netting:
| | | | | | | | | | | | | | | | | | | | |
| | Gross Fair Value | | Amounts Netted in the Consolidated Balance Sheets | | Net Fair Value Presented in the Consolidated Balance Sheets |
| Successor | | | | | | |
| As of December 31, 2021 | | | | | | |
| Commodity Contracts: | | | | | | |
| Short-term derivative asset | | $ | 56 | | | $ | (51) | | | $ | 5 | |
| | | | | | |
| Short-term derivative liability | | (950) | | | 51 | | | (899) | |
| Long-term derivative liability | | (249) | | | — | | | (249) | |
| Total derivatives | | $ | (1,143) | | | $ | — | | | $ | (1,143) | |
| | | | | | |
| Predecessor | | | | | | |
| As of December 31, 2020 | | | | | | |
| Commodity Contracts: | | | | | | |
| Short-term derivative asset | | $ | 84 | | | $ | (65) | | | $ | 19 | |
| Long-term derivative asset | | 5 | | | (5) | | | — | |
| Short-term derivative liability | | (158) | | | 65 | | | (93) | |
| Long-term derivative liability | | (49) | | | 5 | | | (44) | |
| Total derivatives | | $ | (118) | | | $ | — | | | $ | (118) | |
As of December 31, 2021 and 2020, we did not have any cash collateral balances for these derivatives.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Effect of Derivative Instruments – Consolidated Statements of Operations
The components of oil and natural gas derivatives are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor |
| | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Gains (losses) on undesignated oil and natural gas derivatives | | $ | (1,127) | | | | $ | (379) | | | $ | 629 | | | $ | 40 | |
| Losses on terminated cash flow hedges | | — | | | | (3) | | | (33) | | | (35) | |
| Total oil and natural gas derivatives | | $ | (1,127) | | | | $ | (382) | | | $ | 596 | | | $ | 5 | |
Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss)
A reconciliation of the changes in accumulated other comprehensive income (loss) in our consolidated statements of stockholders’ equity related to our cash flow hedges is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from
January 1, 2021 through
February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| | Before
Tax | | After
Tax | | | Before
Tax | | After
Tax | | Before
Tax | | After
Tax | | Before
Tax | | After
Tax |
| Balance, beginning of period | | $ | — | | | $ | — | | | | $ | (12) | | | $ | 45 | | | $ | (45) | | | $ | 12 | | | $ | (80) | | | $ | (23) | |
| Losses reclassified to income | | — | | | — | | | | 3 | | | 3 | | | 33 | | | 33 | | | 35 | | | 35 | |
| Fresh start adjustments | | — | | | — | | | | 9 | | | 9 | | | — | | | — | | | — | | | — | |
| Elimination of tax effects | | — | | | — | | | | — | | | (57) | | | — | | | — | | | — | | | — | |
| Balance, end of period | | $ | — | | | $ | — | | | | $ | — | | | $ | — | | | $ | (12) | | | $ | 45 | | | $ | (45) | | | $ | 12 | |
Our accumulated other comprehensive loss represented the net deferred loss associated with commodity derivative contracts that were previously designated as cash flow hedges for which the original contract months are yet to occur. The remaining deferred gain or loss amounts were to be recognized in earnings in the month for which the original contract months were to occur. In connection with our adoption of fresh start accounting, we recorded a fair value adjustment to eliminate the accumulated other comprehensive income related to hedging settlements including the elimination of tax effects. See Note 3 for a discussion of fresh start accounting adjustments. Credit Risk Considerations
Our derivative instruments expose us to our counterparties’ credit risk. To mitigate this risk, we enter into derivative contracts only with counterparties that are highly rated or deemed by us to have acceptable credit strength and deemed by management to be competent and competitive market-makers, and we attempt to limit our exposure to non-performance by any single counterparty. As of December 31, 2021, our oil and natural gas derivative instruments were spread among ten counterparties.
Hedging Arrangements
Certain of our hedging arrangements are with counterparties that were also lenders (or affiliates of lenders) under our DIP Credit Facility. The contracts entered into with these counterparties are secured by the same collateral that secures the pre-petition revolving credit facility. The counterparties’ obligations must be secured by
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
cash or letters of credit to the extent that any mark-to-market amounts owed to us exceed defined thresholds. As of December 31, 2021, we did not have any cash or letters of credit posted as collateral for our commodity derivatives.
Fair Value
The fair value of our derivatives is based on third-party pricing models which utilize inputs that are either readily available in the public market, such as oil, natural gas and NGL forward curves and discount rates, or can be corroborated from active markets or broker quotes. These values are compared to the values given by our counterparties for reasonableness. As our oil, natural gas and NGL derivatives do not include optionality and therefore generally have no unobservable inputs, they are classified as Level 2. Derivatives are also subject to the risk that either party to a contract will be unable to meet its obligations. We factor non-performance risk into the valuation of our derivatives using current published credit default swap rates. To date, this has not had a material impact on the values of our derivatives.
The following table provides information for financial assets (liabilities) measured at fair value on a recurring basis as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| Significant Other Observable Inputs (Level 2) | | December 31,
2021 | | | December 31,
2020 |
| Derivative Assets (Liabilities): | | | | | |
| Commodity assets | | $ | 56 | | | | $ | 88 | |
| Commodity liabilities | | (1,199) | | | | (206) | |
| Total derivatives | | $ | (1,143) | | | | $ | (118) | |
| | | | | |
| 16. | Capitalized Exploratory Well Costs |
A summary of the changes in our capitalized exploratory well costs for the periods presented is detailed below. Additions pending the determination of proved reserves excludes amounts capitalized and subsequently charged to expense within the same year.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Balance, beginning of period | | $ | — | | | | $ | — | | | $ | 7 | | | $ | 36 | |
| Additions pending the determination of proved reserves | | 24 | | | | — | | | — | | | 7 | |
| Divestitures and other | | — | | | | — | | | — | | | (3) | |
| Reclassifications to proved properties | | (10) | | | | — | | | — | | | (17) | |
| Charges to exploration expense | | — | | | | — | | | (7) | | | (16) | |
| Balance, end of period | | $ | 14 | | | | $ | — | | | $ | — | | | $ | 7 | |
We had no projects with suspended exploratory well costs capitalized for a period greater than one year as of December 31, 2021, 2020 and 2019, respectively.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | |
| 17. | Other Property and Equipment |
Other Property and Equipment
A summary of other property and equipment held for use and the estimated useful lives thereof is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Estimated Useful Life |
| | December 31,
2021 | | | December 31,
2020 | |
| | | | | | | (in years) |
| Buildings and improvements | | $ | 330 | | | | $ | 1,038 | | | 10 – 39 |
| Computer equipment | | 87 | | | | 356 | | | 5 |
| Land | | 37 | | | | 113 | | | |
| Sand mine | | 2 | | | | 81 | | | 10 – 30 |
Natural gas compressors(a) | | — | | | | 36 | | | 3 – 20 |
| Other | | 39 | | | | 130 | | | 5 – 20 |
Total other property and equipment, at cost | | 495 | | | | 1,754 | | | |
Less: accumulated depreciation | | (26) | | | | (799) | | | |
Total other property and equipment, net | | $ | 469 | | | | $ | 955 | | | |
___________________________________________
(a) Includes assets under finance lease of $27 million, less accumulated depreciation of $18 million as of December 31, 2020. The related amortization expense for assets under finance lease is included in depreciation, depletion and amortization expense on our consolidated statement of operations. The lease contract was renegotiated as part of our bankruptcy process and the changes to the contract resulted in the reclassification of the finance lease as an operating lease in March 2021.
FTS International, Inc. (NYSE: FTSI). In the 2019 Predecessor Period, the hydraulic fracturing industry experienced challenging operating conditions resulting in the fair value of our investment in FTSI falling below book value of $65 million and remaining below that amount as of the end of the year. Based on FTSI’s 2019 operating results and FTSI’s share price of $1.04 per share as of December 31, 2019, we determined that the reduction in fair value was other-than-temporary, and recognized an impairment of our investment in FTSI of approximately $43 million.
In the 2020 Predecessor Period, FTSI filed for Chapter 11 bankruptcy and we recognized an impairment of our entire investment of $23 million. FTSI emerged from bankruptcy on November 19, 2020, and this restructuring resulted in a reduction of the common stock we owned in FTSI from 20% to less than 2%. The decreased ownership percentage and the loss of significant influence required us to measure the investment at fair value as of December 31, 2020.
In the 2021 Successor Period, FTSI announced it would be acquired in an all cash deal that is expected to close in 2022. As of December 31, 2021, the investment continues to be measured at fair value.
JWH Midstream LLC. In the 2019 Predecessor Period, in connection with the acquisition of WildHorse, we obtained a 50% membership interest in JWH Midstream LLC (“JWH”). The carrying value of our investment in JWH, which was being accounted for as an equity method investment, was approximately $17 million. In the 2019 Predecessor Period, we paid approximately $7 million to terminate our involvement in the partnership. This removed us from any future obligations related to this joint venture and, therefore, we impaired the full value of the investment and recognized approximately $24 million of impairment expense in the 2019 Predecessor Period.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impairments of Oil and Natural Gas Properties
A summary of our impairments of oil and natural gas properties for the periods presented is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| | | | | | | | | |
| | | | | | | | | |
| Total impairments of oil and natural gas properties | | $ | — | | | | $ | — | | | $ | 8,446 | | | $ | 8 | |
During the 2020 Predecessor Period, the decrease in demand for crude oil primarily due to the combined impacts of COVID-19 and the OPEC+ production increases resulted in decreases in then current and then expected long-term crude oil and NGL sale prices. These conditions resulted in reductions to the market capitalization of peer companies in the energy industry. We determined these adverse market conditions represented a triggering event to perform an impairment assessment of our long-lived assets used in, and in support of, our operations, including proved oil and gas properties, and our sand mine assets.
Proved Oil and Gas Properties
Our impairment test involved a Step 1 assessment to determine if the net book value of our proved oil and natural gas properties is expected to be recovered from the estimated undiscounted future cash flows.
•We calculated the expected undiscounted future net cash flows of our long-lived assets using management’s assumptions and expectations of (i) commodity prices, which are based on the NYMEX strip pricing escalated by an inflationary rate (ii) pricing adjustments for differentials, (iii) operating costs, (iv) capital investment plans, (v) future production volumes, and (vi) estimated proved reserves.
•Unprecedented volatility in the price of oil due to the decrease in demand led us to rely on NYMEX strip pricing, which represents a Level 1 input.
Certain oil and gas properties in our Eagle Ford, Powder River Basin, and Mid-Continent and other non-core operating areas failed the Step 1 assessment. For these assets, we used a discounted cash flow analysis to estimate fair value. The expected future net cash flows were discounted using a rate of 11%, which we believe represents the estimated weighted average cost of capital of a theoretical market participant. Based on Step 2 of our long-lived assets impairment test, we recognized an $8.446 billion impairment because the carrying value exceeded estimated fair market value as of March 31, 2020.
•Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate, adjusted for differentials, and (v) a market-based weighted average cost of capital. We utilized NYMEX strip pricing, adjusted for differentials, to value the reserves. The NYMEX strip pricing inputs used are classified as Level 1 fair value assumptions and all other inputs are classified as Level 3 fair value assumptions.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impairments of Fixed Assets
A summary of our impairments of fixed assets by asset class and other charges for the Successor and Predecessor Periods is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Sand mine | | $ | — | | | | $ | — | | | $ | 76 | | | $ | — | |
| Natural gas compressors | | — | | | | — | | | 13 | | | — | |
| Buildings and land | | — | | | | — | | | — | | | 1 | |
| Other | | 1 | | | | — | | | — | | | 2 | |
| Total impairments of fixed assets and other | | $ | 1 | | | | $ | — | | | $ | 89 | | | $ | 3 | |
In the 2020 Predecessor Period, we recorded a $76 million impairment of our sand mine assets that support our Eagle Ford operating area for the difference between the fair value and carrying value of the assets as well as a $13 million impairment of compressor inventory due to a lack of a current market for compressors.
A summary of our exploration expense for the Successor and Predecessor Periods is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Impairments of unproved properties | | $ | 1 | | | | $ | 2 | | | $ | 411 | | | $ | 32 | |
| Dry hole expense | | 1 | | | | — | | | 7 | | | 25 | |
| Geological and geophysical expense and other | | 5 | | | | — | | | 9 | | | 27 | |
Exploration expense | | $ | 7 | | | | $ | 2 | | | $ | 427 | | | $ | 84 | |
Unproved oil and natural gas properties are periodically assessed for impairment by considering future drilling and exploration plans, results of exploration activities, commodity price outlooks, planned future sales and expiration of all or a portion of the projects. The exploration expense charges during the 2020 Predecessor Period are primarily the result of non-cash impairment charges in unproved properties, primarily in our Eagle Ford, Haynesville, Powder River Basin and Mid-Continent operating areas. The decrease in geological and geophysical expense in the 2021 Successor Period, 2021 Predecessor Period and 2020 Predecessor Period was due to fewer exploratory geological and geophysical projects.
| | | | | |
| 21. | Other Operating Expense (Income), Net |
In the 2021 Successor Period, we recognized approximately $59 million of costs related to our acquisition of Vine, which included consulting fees, financial advisory fees, and legal fees. Additionally, we recognized approximately $36 million of severance expense as a result of the Vine Acquisition, which included $15 million of cash severance and $21 million of non-cash severance, primarily related to the issuance of New Common Stock for the acceleration of certain Vine restricted stock unit awards. A majority of Vine executives and employees were terminated on the date of the acquisition. These executives and employees were entitled to severance benefits in accordance with existing employment agreements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In the 2020 Predecessor Period, we terminated certain gathering, processing and transportation contracts and recognized a non-recurring $80 million expense related to the contract terminations. The contract terminations removed approximately $169 million of future commitments related to gathering, processing and transportation agreements. Additionally, we recognized $9 million of expense related to the impairment of sand mine inventory and $42 million of other operating expense primarily related to royalty settlements and other legal matters offset by $51 million of income from the amortization of VPP deferred revenue. In the 2020 Predecessor Period, we sold the assets related to our remaining volumetric production payment and extinguished the liability related to the production volume delivery obligation.
In the 2019 Predecessor Period, we recorded approximately $37 million of costs related to our acquisition of WildHorse which consisted of consulting fees, financial advisory fees, legal fees and travel and lodging expenses. In addition, we recorded approximately $38 million of severance expense as a result of the acquisition of WildHorse. A majority of the WildHorse executives and employees were terminated on the date of acquisition. These executives and employees were entitled to severance benefits in accordance with existing employment agreements.
| | | | | |
| 22. | Separation and Other Termination Costs |
In the 2021 Successor Period and 2021 Predecessor Period, we incurred charges in of approximately $11 million and $22 million, respectively, related to one-time termination benefits for certain employees. In the 2020 Predecessor Period and 2019 Predecessor Period, we incurred charges of approximately $44 million and $12 million, respectively, related to one-time termination benefits for certain employees.
| | | | | |
| 23. | Asset Retirement Obligations |
The components of the change in our asset retirement obligations are shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31,
2020 |
| Asset retirement obligations, beginning of period | | $ | 241 | | | | $ | 144 | | | $ | 211 | |
Additions(a) | | 48 | | | | — | | | 1 | |
Revisions (b) | | 63 | | | | — | | | (14) | |
Settlements and disposals(c) | | (3) | | | | (1) | | | (66) | |
| Accretion expense | | 11 | | | | 1 | | | 12 | |
| Impact of fresh start accounting | | — | | | | 97 | | | — | |
| Asset retirement obligations, end of period | | 360 | | | | 241 | | | 144 | |
| Less current portion | | 11 | | | | 5 | | | 5 | |
| Asset retirement obligations, long-term | | $ | 349 | | | | $ | 236 | | | $ | 139 | |
___________________________________________
(a) During the 2021 Successor Period, approximately $44 million of additions relate to the acquisition of Vine. See Note 4 for further discussion of these transactions. (b) Revisions primarily represent changes in the present value of liabilities resulting from changes in estimated costs and economic lives of producing properties.
(c) During the 2020 Predecessor Period, approximately $49 million and $14 million of disposals related to our Mid-Continent and Haynesville assets, respectively. See Note 4 for further discussion of these transactions.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For the 2021 Successor Period, sales to Valero Energy Corporation and Energy Transfer Crude Marketing accounted for approximately 14% and 11%, respectively, of total revenues (before the effects of hedging). For the 2021 Predecessor Period, sales to Valero Energy Corporation accounted for approximately 19% of total revenues (before the effects of hedging). For the 2020 and 2019 Predecessor Periods, sales to Valero Corporation constituted 17% and 12% of total revenues (before the effects of hedging). No other purchasers accounted for more than 10% of our total revenues during the 2021 Successor Period or 2021, 2020 or 2019 Predecessor Periods.
On January 24, 2022, Chesapeake entered into definitive agreements to acquire Chief and associated non-operated interests held by affiliates of Tug Hill, Inc. ("Tug Hill"), for $2.0 billion in cash and approximately 9.44 million common shares. Chief and Tug Hill hold producing assets and an inventory of premium drilling locations in the Marcellus Shale in Northeast Pennsylvania. The cash portion of the transaction will be financed with cash on hand and the use of our Exit Credit Facility. The transaction, which is subject to customary closing conditions, including certain regulatory approvals, is expected to close by the end of the first quarter of 2022. In January 2022, we announced our intent to increase the base quarterly dividend to $0.50 per share beginning in the second quarter of 2022, reflecting the cash flow accretion of the transaction.
Additionally, on January 24, 2022, Chesapeake signed an agreement to sell its Powder River Basin assets in Wyoming to Continental Resources, Inc. (NYSE: CLR) for approximately $450 million in cash. The transaction, which is subject to certain customary closing conditions, is expected to close in the first quarter of 2022. At closing, net proceeds from the sale will go toward the purchase price of the Chief Acquisition. The Powder River Basin assets were not classified as held for sale as of December 31, 2021, as the agreement had not been finalized and formal authorization from Chesapeake’s Board of Directors had not yet been obtained.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | |
| Supplemental Disclosures About Oil, Natural Gas and NGL Producing Activities (unaudited) |
Net Capitalized Costs
Capitalized costs related to our oil, natural gas and NGL producing activities are summarized as follows:
| | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | December 31,
2021 | | | December 31,
2020 |
| Oil and oil and natural gas properties: | | | | | |
| Proved | | $ | 7,682 | | | | $ | 25,734 | |
| Unproved | | 1,530 | | | | 1,550 | |
| Total | | 9,212 | | | | 27,284 | |
| Less accumulated depreciation, depletion and amortization | | (882) | | | | (23,007) | |
| Net capitalized costs | | $ | 8,330 | | | | $ | 4,277 | |
Unproved properties as of December 31, 2021 and 2020, consisted mainly of leasehold acquired through direct purchases of significant oil and natural gas property interests. We will continue to evaluate our unproved properties, and although the timing of the ultimate evaluation or disposition of the properties cannot be determined, we can expect the majority of our unproved properties not held by production to be transferred into the amortization base over the next five years.
Costs Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development
Costs incurred in oil and natural gas property acquisition, exploration and development, including capitalized interest and asset retirement costs, are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
Acquisition of Properties(a): | | | | | | | | | |
| Proved properties | | $ | 2,183 | | | | $ | — | | | $ | 3 | | | $ | 3,264 | |
| Unproved properties | | 1,121 | | | | — | | | 6 | | | 792 | |
| Exploratory costs | | 31 | | | | — | | | 8 | | | 42 | |
| Development costs | | 717 | | | | 58 | | | 887 | | | 2,177 | |
| Costs incurred | | $ | 4,052 | | | | $ | 58 | | | $ | 904 | | | $ | 6,275 | |
___________________________________________
(a) Includes $2.181 billion and $1.118 billion of proved and unproved property acquisitions, respectively, related to our acquisition of Vine in 2021.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Results of Operations from Oil, Natural Gas and NGL Producing Activities
The following table includes revenues and expenses associated directly with our oil, natural gas and NGL producing activities for the periods presented. It does not include any interest costs or indirect general and administrative costs and, therefore, is not necessarily indicative of the contribution to consolidated net operating results of our oil, natural gas and NGL operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Oil, natural gas and NGL sales | | $ | 4,401 | | | | $ | 398 | | | $ | 2,745 | | | $ | 4,517 | |
| Oil and natural gas derivatives and VPP revenue | | (1,127) | | | | (382) | | | 652 | | | 68 | |
| Production expenses | | (297) | | | | (32) | | | (373) | | | (520) | |
| Gathering, processing and transportation expenses | | (780) | | | | (102) | | | (1,082) | | | (1,082) | |
| Severance and ad valorem taxes | | (158) | | | | (18) | | | (149) | | | (224) | |
| Exploration | | (7) | | | | (2) | | | (427) | | | (84) | |
| Depletion and depreciation | | (882) | | | | (64) | | | (1,014) | | | (2,177) | |
| Accretion of asset retirement obligations | | (11) | | | | (1) | | | (12) | | | (11) | |
| Impairment of oil and natural gas properties | | — | | | | — | | | (8,446) | | | (8) | |
Imputed income tax provision(a) | | (269) | | | | 48 | | | 1,840 | | | (125) | |
| Results of operations from oil, natural gas and NGL producing activities | | $ | 870 | | | | $ | (155) | | | $ | (6,266) | | | $ | 354 | |
___________________________________________
(a) The imputed income tax provision is hypothetical (at the statutory tax rate) and determined without regard to our deduction for general and administrative expenses, interest costs and other income tax credits and deductions, nor whether the hypothetical tax provision (benefit) will be payable (receivable).
Oil, Natural Gas and NGL Reserve Quantities
Our petroleum engineers and independent petroleum engineering firms estimated all of our proved reserves as of December 31, 2021, 2020 and 2019. Independent petroleum engineering firm LaRoche Petroleum Consultants, Ltd. estimated an aggregate of 91% of our estimated proved reserves (by volume) as of December 31, 2021.
Proved oil, natural gas and NGL reserves are those quantities of oil, natural gas and NGL which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. Based on reserve reporting rules, the price is calculated using the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within the period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. A project to extract hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. The area of the reservoir considered as proved includes: (i) the area identified by drilling and limited by fluid contacts, if any, and (ii) adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or natural gas on the basis of available geoscience and engineering data. In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons as seen in a well penetration unless geoscience, engineering or performance data and reliable technology establish a lower contact with reasonable certainty. Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
SUPPLEMENTARY INFORMATION - (Continued)
associated natural gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering or performance data and reliable technology establish the higher contact with reasonable certainty. Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (i) successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (ii) the project has been approved for development by all necessary parties and entities, including governmental entities.
Developed oil, natural gas and NGL reserves are reserves of any category that can be expected to be recovered through existing wells with existing equipment and operating methods where production can be initiated or restored with relatively low expenditure compared to the cost of drilling a new well.
The information provided below on our oil, natural gas and NGL reserves is presented in accordance with regulations prescribed by the SEC. Our reserve estimates are generally based upon extrapolation of historical production trends, analogy to similar properties and volumetric calculations. Accordingly, these estimates will change as future information becomes available and as commodity prices change. These changes could be material and could occur in the near term.
Presented below is a summary of changes in estimated reserves for the periods presented: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Oil | | Natural Gas | | NGL | | Total |
| | (mmbbl) | | (bcf) | | (mmbbl) | | (mmboe) |
| December 31, 2021 | | | | | | | | |
| Proved reserves, beginning of period (Predecessor) | | 161.3 | | | 3,530 | | | 52.0 | | | 802 | |
| Extensions, discoveries and other additions | | 41.0 | | | 1,744 | | | 16.9 | | | 348 | |
| Revisions of previous estimates | | 33.3 | | | 1,522 | | | 21.1 | | | 308 | |
| Production | | (25.9) | | | (807) | | | (8.0) | | | (168) | |
| Sale of reserves-in-place | | — | | | — | | | — | | | — | |
| Purchase of reserves-in-place | | — | | | 1,835 | | | — | | | 306 | |
| Proved reserves, end of period (Successor) | | 209.7 | | | 7,824 | | | 82.0 | | | 1,596 | |
| Proved developed reserves: | | | | | | | | |
| Beginning of period (Predecessor) | | 158.1 | | | 3,196 | | | 51.4 | | | 742 | |
| End of period (Successor) | | 165.7 | | | 4,246 | | | 61.7 | | | 935 | |
| Proved undeveloped reserves: | | | | | | | | |
| Beginning of period (Predecessor) | | 3.2 | | | 334 | | | 0.6 | | | 60 | |
End of period(a) (Successor) | | 44.0 | | | 3,578 | | | 20.3 | | | 661 | |
| | | | | | | | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
SUPPLEMENTARY INFORMATION - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Oil | | Natural Gas | | NGL | | Total |
| | (mmbbl) | | (bcf) | | (mmbbl) | | (mmboe) |
| December 31, 2020 | | | | | | | | |
| Proved reserves, beginning of period (Predecessor) | | 358.0 | | | 6,566 | | | 120.0 | | | 1,572 | |
| Extensions, discoveries and other additions | | 1.1 | | | 100 | | | 0.4 | | | 18 | |
| Revisions of previous estimates | | (148.2) | | | (2,326) | | | (50.6) | | | (586) | |
| Production | | (37.3) | | | (684) | | | (11.3) | | | (163) | |
| Sale of reserves-in-place | | (12.3) | | | (126) | | | (6.5) | | | (39) | |
| Purchase of reserves-in-place | | — | | | — | | | — | | | — | |
| Proved reserves, end of period (Predecessor) | | 161.3 | | | 3,530 | | | 52.0 | | | 802 | |
| Proved developed reserves: | | | | | | | | |
| Beginning of period (Predecessor) | | 201.4 | | | 3,377 | | | 82.1 | | | 846 | |
| End of period (Predecessor) | | 158.1 | | | 3,196 | | | 51.4 | | | 742 | |
| Proved undeveloped reserves: | | | | | | | | |
| Beginning of period (Predecessor) | | 156.6 | | | 3,189 | | | 37.9 | | | 726 | |
End of period(a) (Predecessor) | | 3.2 | | | 334 | | | 0.6 | | | 60 | |
| | | | | | | | |
| December 31, 2019 | | | | | | | | |
| Proved reserves, beginning of period (Predecessor) | | 215.5 | | | 6,777 | | | 103.3 | | | 1,448 | |
| Extensions, discoveries and other additions | | 52.2 | | | 897 | | | 13.9 | | | 216 | |
| Revisions of previous estimates | | (40.9) | | | (516) | | | (15.8) | | | (143) | |
| Production | | (43.0) | | | (728) | | | (12.3) | | | (177) | |
| Sale of reserves-in-place | | (1.8) | | | (23) | | | (1.4) | | | (7) | |
| Purchase of reserves-in-place | | 176.0 | | | 159 | | | 32.3 | | | 235 | |
| Proved reserves, end of period (Predecessor) | | 358.0 | | | 6,566 | | | 120.0 | | | 1,572 | |
| Proved developed reserves: | | | | | | | | |
| Beginning of period (Predecessor) | | 127.6 | | | 3,314 | | | 67.9 | | | 748 | |
| End of period (Predecessor) | | 201.4 | | | 3,377 | | | 82.1 | | | 846 | |
| Proved undeveloped reserves: | | | | | | | | |
| Beginning of period (Predecessor) | | 87.9 | | | 3,463 | | | 35.4 | | | 700 | |
End of period(a) (Predecessor) | | 156.6 | | | 3,189 | | | 37.9 | | | 726 | |
___________________________________________(a) As of December 31, 2021, 2020 and 2019, there were no PUDs that had remained undeveloped for five years or more.
During 2021, we acquired 306 mmboe primarily related to the acquisition of Vine. We recorded extensions and discoveries of 348 mmboe following our emergence from bankruptcy on February 9, 2021 and certainty regarding our ability to finance the development of our proved reserves over a five-year period. We recorded 308 mmboe of upward revisions of previous estimates, which consisted of 214 mmboe due to lateral length adjustments, performance and updates to our five-year development plan and 94 mmboe due to higher oil, natural gas and NGL prices in 2021. The oil and natural gas prices used in computing our reserves as of December 31, 2021, were $66.56 per bbl and $3.60 per mcf, respectively, before basis differential adjustments.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
SUPPLEMENTARY INFORMATION - (Continued)
During 2020, we recorded extensions and discoveries of 18 mmboe primarily in the Marcellus and Haynesville primarily related to successfully drilled new well additions. We sold 39 mmboe of proved reserves for approximately $136 million primarily in the Mid-Continent. We recorded 586 mmboe of downward revisions of previous estimates consisting of 423 mmboe of downward revisions due to updates to our five-year development plan in contemplation of ongoing market conditions and uncertainty regarding our ability to finance the development of our proved reserves over a five-year period, downward revisions of 208 mmboe due to lower oil, natural gas and NGL prices in 2020, and upward revisions of 45 mmboe due to ongoing portfolio evaluation including performance adjustments. The oil and natural gas prices used in computing our reserves as of December 31, 2020, were $39.57 per bbl and $1.98 per mcf, respectively, before basis differential adjustments.
During 2019, we acquired 235 mmboe primarily related to the acquisition of WildHorse. We recorded extensions and discoveries of 216 mmboe, primarily related to undeveloped well additions in the Marcellus and Eagle Ford operating areas. In addition, we recorded downward revisions of 110 mmboe due to lower oil, natural gas and NGL prices in 2019, and downward revisions of 33 mmboe due to ongoing portfolio evaluation including lateral length adjustments, performance and updates to our five-year development plan. The oil and natural gas prices used in computing our reserves as of December 31, 2019, were $55.69 per bbl and $2.58 per mcf, respectively, before basis differential adjustments.
Standardized Measure of Discounted Future Net Cash Flows
Accounting Standards Codification Topic 932 prescribes guidelines for computing a standardized measure of future net cash flows and changes therein relating to estimated proved reserves. Chesapeake has followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs as of December 31, 2021, 2020 and 2019 were determined by applying the average of the first-day-of-the-month prices for the 12 months of the year and year-end costs to the estimated quantities of oil, natural gas and NGL to be produced. Actual future prices and costs may be materially higher or lower than the prices and costs used. For each year, estimates are made of quantities of proved reserves and the future periods during which they are expected to be produced based on continuation of the economic conditions applied for that year. Estimated future income taxes are computed using current statutory income tax rates including consideration of the current tax basis of the properties and related carryforwards, giving effect to permanent differences and tax credits. The resulting future net cash flows are reduced to present value amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and do not necessarily reflect our expectations of actual revenue to be derived from those reserves nor their present worth. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations since these estimates reflect the valuation process.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
SUPPLEMENTARY INFORMATION - (Continued)
The following summary sets forth our future net cash flows relating to proved oil, natural gas and NGL reserves based on the standardized measure:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2021 | | 2020 | | 2019 | |
| Future cash inflows | | $ | 33,700 | | (a) | $ | 8,247 | | (b) | $ | 29,857 | | (c) |
| Future production costs | | (6,735) | | | (2,963) | | | (6,956) | | |
| Future development costs | | (3,687) | | | (563) | | | (5,757) | | |
| Future income tax provisions | | (2,254) | | | (9) | | | (75) | | |
| Future net cash flows | | 21,024 | | | 4,712 | | | 17,069 | | |
| Less effect of a 10% discount factor | | (8,737) | | | (1,626) | | | (8,069) | | |
| Standardized measure of discounted future net cash flows | | $ | 12,287 | | | $ | 3,086 | | | $ | 9,000 | | |
___________________________________________
(a) Calculated using prices of $66.56 per bbl of oil and $3.60 per mcf of natural gas, before basis differential adjustments.
(b) Calculated using prices of $39.57 per bbl of oil and $1.98 per mcf of natural gas, before basis differential adjustments.
(c) Calculated using prices of $55.69 per bbl of oil and $2.58 per mcf of natural gas, before basis differential adjustments.
The principal sources of change in the standardized measure of discounted future net cash flows are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Standardized measure, beginning of period(a) | | $ | 3,086 | | | $ | 9,000 | | | $ | 9,495 | |
Sales of oil and natural gas produced, net of production costs and gathering, processing and transportation(b) | | (3,414) | | | (1,140) | | | (2,691) | |
| Net changes in prices and production costs | | 6,674 | | | (5,576) | | | (3,457) | |
Extensions and discoveries, net of production and development costs | | 2,834 | | | 71 | | | 991 | |
| Changes in estimated future development costs | | (459) | | | 1,933 | | | 366 | |
Previously estimated development costs incurred during the period | | 130 | | | 665 | | | 775 | |
| Revisions of previous quantity estimates | | 2,034 | | | (1,839) | | | (793) | |
| Purchase of reserves-in-place | | 2,807 | | | — | | | 3,435 | |
| Sales of reserves-in-place | | — | | | (112) | | | (57) | |
| Accretion of discount | | 309 | | | 902 | | | 953 | |
| Net change in income taxes | | (1,423) | | | 14 | | | 17 | |
| Changes in production rates and other | | (291) | | | (832) | | | (34) | |
Standardized measure, end of period(a) | | $ | 12,287 | | | $ | 3,086 | | | $ | 9,000 | |
___________________________________________
(a) The impact of cash flow hedges has not been included in any of the periods presented.
(b) Excludes gains and losses on derivatives.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
SUPPLEMENTARY INFORMATION - (Continued)
| | | | | |
| Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
| | | | | |
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange 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.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2021 that our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
It is the responsibility of the management of Chesapeake Energy Corporation to establish and maintain adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Management utilized the Committee of Sponsoring Organizations of the Treadway Commission's Internal Control-Integrated Framework (2013) in conducting the required assessment of effectiveness of the Company's internal control over financial reporting.
Management has performed an assessment of the effectiveness of the Company's internal control over financial reporting and has determined the Company’s internal control over financial reporting was effective as of December 31, 2021.
Management’s assessment and conclusion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 excludes an assessment of the internal control over financial reporting of Vine Energy, which was acquired in a business combination on November 1, 2021. Vine Energy represents approximately 20% of our consolidated total assets as of December 31, 2021 and approximately 7% of our consolidated revenues for the period from February 10, 2021 through December 31, 2021.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears herein.
| | | | | | | | | | | | | | |
| /s/ DOMENIC J. DELL'OSSO, JR. | |
| Domenic J. Dell'Osso, Jr. |
| President and Chief Executive Officer |
| | |
| /s/ MOHIT SINGH | |
| Mohit Singh |
| Executive Vice President and Chief Financial Officer |
| | | | |
| February 24, 2022 |
| | | | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
SUPPLEMENTARY INFORMATION - (Continued)
| | | | | |
| Item 9B. | Other Information |
Not applicable.
| | | | | |
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
Not applicable.
PART III
| | | | | |
| Item 10. | Directors, Executive Officers and Corporate Governance |
The names of executive officers of the Company and their ages, titles and biographies as of the date hereof are incorporated by reference from Item 1 of Part I of this report. The other information called for by this Item 10 is incorporated herein by reference to the definitive proxy statement to be filed by Chesapeake pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934 not later than May 2, 2022 (the “2022 Proxy Statement”).
| | | | | |
| Item 11. | Executive Compensation |
The information called for by this Item 11 is incorporated herein by reference to the 2022 Proxy Statement.
| | | | | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters |
The information called for by this Item 12 is incorporated herein by reference to the 2022 Proxy Statement.
| | | | | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information called for by this Item 13 is incorporated herein by reference to the 2022 Proxy Statement.
| | | | | |
| Item 14. | Principal Accountant Fees and Services |
The information called for by this Item 14 is incorporated herein by reference to the 2022 Proxy Statement.
PART IV
| | | | | |
| Item 15. | Exhibit and Financial Statement Schedules |
____________________________________________
(a) The following financial statements, financial statement schedules and exhibits are filed as a part of this report:
1.Financial Statements. Chesapeake's consolidated financial statements are included in Item 8 of Part II of this report. Reference is made to the accompanying Index to Financial Statements.
2.Financial Statement Schedules. No financial statement schedules are applicable or required.
3.Exhibits. The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K.
INDEX OF EXHIBITS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | SEC File Number | | Exhibit | | Filing Date | | Filed or Furnished Herewith |
| 2.1 | | | | 8-K | | 001-13726 | | 2.1 | | 1/19/2021 | | |
| | | | | | | | | | | | |
| 2.2 | | | | 8-K | | 001-13726 | | 2.1 | | 8/11/21 | | |
| | | | | | | | | | | | |
| 3.1 | | | | 8-K | | 001-13726 | | 3.1 | | 2/9/2021 | | |
| | | | | | | | | | | | |
3.2 | | | | 8-K | | 001-13726 | | 3.2 | | 2/9/2021 | | |
| | | | | | | | | | | | |
| 3.3 | | | | 10-K | | 001-13726 | | 3.3 | | 3/1/2021 | | |
| | | | | | | | | | | | |
4.1 | | | | 8-A | | 001-13726 | | N/A | | 2/9/2021 | | |
| | | | | | | | | | | | |
10.1 | | | | 8-K | | 001-13726 | | 10.1 | | 6/29/2020 | | |
| | | | | | | | | | | | |
10.2 | | | | 8-K | | 001-13726 | | 10.1 | | 6/29/2020 | | |
| | | | | | | | | | | | |
10.3 | | | | 8-K | | 001-13726 | | 10.1 | | 2/9/2021 | | |
| | | | | | | | | | | | |
10.4
| | | | 8-K | | 001-13726 | | 10.2 | | 2/9/2021 | | |
| | | | | | | | | | | | |
10.5 | | | | 8-K | | 001-13726 | | 10.3 | | 2/9/2021 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
10.6 | | | | 8-K | | 001-13726 | | 10.4 | | 2/9/2021 | | |
| | | | | | | | | | | | |
10.7 | | | | 8-K | | 001-13726 | | 10.5 | | 2/9/2021 | | |
| | | | | | | | | | | | |
| 10.8 | | | | 8-K | | 001-13726 | | 10.6 | | 2/9/2021 | | |
| | | | | | | | | | | | |
| 10.9† | | | | 8-K | | 001-13726 | | 10.7 | | 2/9/2021 | | |
| | | | | | | | | | | | |
| 10.10 | | | | 10-K | | 001-13726 | | 10.10 | | 3/1/2021 | | |
| | | | | | | | | | | | |
| 10.11 | | | | 10-K | | 001-13726 | | 10.11 | | 3/1/2021 | | |
| | | | | | | | | | | | |
| 10.12 | | | | 10-K | | 001-13726 | | 10.12 | | 3/1/2021 | | |
| | | | | | | | | | | | |
| 10.13 | | | | 10-K | | 001-13726 | | 10.13 | | 3/1/2021 | | |
| | | | | | | | | | | | |
| 10.14† | | | | 8-K | | 001-13726 | | 10.3 | | 4/27/2021 | | |
| | | | | | | | | | | | |
| 10.15† | | | | 8-K | | 001-13726 | | 10.1 | | 4/27/2021 | | |
| | | | | | | | | | | | |
| 10.16† | | | | 8-K | | 001-13726 | | 10.2 | | 4/27/2021 | | |
| | | | | | | | | | | | |
| 10.17† | | | | 10-K/A | | 001-13726 | | 10.14 | | 4/27/2021 | | |
| | | | | | | | | | | | |
| 10.18† | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 10.19† | | | | 10-Q | | 001-13726 | | 10.9 | | 5/13/21 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.20 | | | | 8-K | | 001-13726 | | 10.1 | | 6/11/21 | | |
| | | | | | | | | | | | |
| 10.21† | | | | 8-K | | 001-13726 | | 10.2 | | 6/11/21 | | |
| | | | | | | | | | | | |
| 10.22† | | | | 8-K | | 001-13726 | | 10.3 | | 6/11/21 | | |
| | | | | | | | | | | | |
| 10.23 | | | | 8-K | | 001-13726 | | 10.1 | | 6/14/21 | | |
| | | | | | | | | | | | |
| 10.24† | | | | 10-Q | | 001-13726 | | 10.10 | | 8/10/21 | | |
| | | | | | | | | | | | |
| 10.25† | | | | 10-Q | | 001-13726 | | 10.11 | | 8/10/21 | | |
| | | | | | | | | | | | |
| 10.26† | | | | 10-Q | | 001-13726 | | 10.5 | | 8/10/21 | | |
| | | | | | | | | | | | |
| 10.27 | | | | 8-K | | 001-13726 | | 10.1 | | 8/11/21 | | |
| | | | | | | | | | | | |
| 10.28 | | | | 8-K | | 001-13726 | | 10.2 | | 8/11/21 | | |
| | | | | | | | | | | | |
| 10.29† | | | | 8-K | | 001-13726 | | 10.1 | | 10/12/21 | | |
| | | | | | | | | | | | |
| 10.30† | | | | 8-K | | 001-13726 | | 10.2 | | 10/12/21 | | |
| | | | | | | | | | | | |
| 10.31† | | | | 8-K | | 001-13726 | | 10.4 | | 10/12/21 | | |
| | | | | | | | | | | | |
| 10.32† | | | | 8-K | | 001-13726 | | 10.3 | | 10/12/21 | | |
| | | | | | | | | | | | |
| 10.33 | | Second Amendment to Credit Agreement, dated as of October 29, 2021, among Chesapeake Energy Corporation, as borrower, MUFG Bank, Ltd, as administrative agent, MUFG Union Bank, N.A., as collateral agent, and the lenders and other parties party thereto. | | 10-Q | | 001-13726 | | 10.18 | | 11/02/21 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.34 | | | | 8-K | | 001-13726 | | 4.1 | | 11/02/21 | | |
| | | | | | | | | | | | |
| 10.35 | | | | 8-K | | 001-13726 | | 4.2 | | 11/02/21 | | |
| | | | | | | | | | | | |
| 10.36 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 10.37 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 10.38 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 21 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 23.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 23.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 23.3 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 31.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 31.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 32.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 32.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 95.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 99.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101 INS | | Inline XBRL Instance Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 101 SCH | | Inline XBRL Taxonomy Extension Schema Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101 CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101 DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101 LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101 PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
| 104 | | Cover Page Interactive Data file - the Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
* | | Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC. |
† | | Management contract or compensatory plan or arrangement. |
| | | | | | | | | | | | |
PLEASE NOTE: Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed or incorporated by reference the agreements referenced above as exhibits to this Annual Report on Form 10-K. The agreements have been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other factual information about Chesapeake Energy Corporation or its business or operations. In particular, the assertions embodied in any representations, warranties and covenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in confidential disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties and covenants in the agreements may have been used for the purpose of allocating risk between the parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fully reflected in our public disclosures. Accordingly, investors should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about Chesapeake Energy Corporation or its business or operations on the date hereof. |
| | | | | |
| Item 16. | Form 10-K Summary |
Not applicable.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
| | | | | | | | | | | |
| CHESAPEAKE ENERGY CORPORATION |
| | | |
Date: February 24, 2022 | By: | | /s/ DOMENIC J. DELL’OSSO, JR. |
| | | Domenic J. Dell’Osso, Jr. |
| | | President and Chief Executive Officer |
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Domenic J. Dell'Osso, Jr. his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K, and to file the same, with all, exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each, and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and each of them, or the substitute or substitutes of any or all of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Capacity | | Date |
| /s/ DOMENIC J. DELL’OSSO, JR. | | President and Chief Executive Officer (Principal Executive Officer) | | February 24, 2022 |
| Domenic J. Dell’Osso, Jr. |
| | | | |
| /s/ MOHIT SINGH | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | February 24, 2022 |
| Mohit Singh |
| | | | |
| /s/ GREGORY M. LARSON | | Vice President - Accounting & Controller (Principal Accounting Officer) | | February 24, 2022 |
| Gregory M. Larson |
| | | | |
| /s/ MICHAEL WICHTERICH | | Executive Chairman and Chairman of the Board | | February 24, 2022 |
| Michael Wichterich |
| | | | |
| /s/ TIMOTHY S. DUNCAN | | Director | | February 24, 2022 |
| Timothy S. Duncan |
| | | | |
| /s/ BENJAMIN C. DUSTER, IV | | Director | | February 24, 2022 |
| Benjamin C. Duster, IV |
| | | | |
| /s/ SARAH A. EMERSON | | Director | | February 24, 2022 |
| Sarah A. Emerson |
| | | | |
| /s/ MATTHEW M. GALLAGHER | | Director | | February 24, 2022 |
| Matthew M. Gallagher |
| | | | |
| /s/ BRIAN STECK | | Director | | February 24, 2022 |
| Brian Steck |
Exhibit 10.18
RESTRICTED STOCK UNIT AWARD AGREEMENT FOR
CHESAPEAKE ENERGY CORPORATION
LONG TERM INCENTIVE PLAN
THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (the “Agreement”) entered into as of the grant date set forth on the attached Notice of Grant of Restricted Stock Units and Award Agreement (the “Notice”), by and between Chesapeake Energy Corporation, an Oklahoma corporation (the “Company”), and the participant named on the Notice (the “Participant”);
W I T N E S S E T H:
WHEREAS, the Participant is an Employee, and it is important to the Company that the Participant be encouraged to remain an Employee;
WHEREAS, the Company has previously adopted the Chesapeake Energy Corporation 2021 Long Term Incentive Plan effective as of February 9, 2021, as amended, restated or otherwise modified from time to time (the “Plan”); and
WHEREAS, the Company has awarded the Participant Restricted Stock Units under the Plan, as set forth on the Notice, subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants herein contained, the Participant and the Company agree as follows:
1. The Plan. The Plan, a copy of which has been made available to the Participant, is hereby incorporated by reference herein and made a part hereof for all purposes, and when taken with this Agreement shall govern the rights of the Participant and the Company with respect to the Award (as defined below). Any capitalized terms used but not defined in this Agreement have the same meanings given to them in the Plan.
2. Grant of Award. The Company hereby awards to the Participant the number of Restricted Stock Units set forth in the Notice, on the terms and conditions set forth herein and in the Plan (the “Award”). Each Restricted Stock Unit granted pursuant to this Award gives the Participant the right to receive payment, upon satisfaction of the vesting conditions set forth in the Notice and this Agreement, of one share of Common Stock in the manner set forth in Section 5 below.
3. Vesting and Forfeiture.
(a) Vesting. The Restricted Stock Units will vest in accordance with the vesting schedule set forth in the Notice based on the Participant’s continuous employment with or service to the Company, a Subsidiary or an Affiliated Entity.
(b) Forfeiture. In the event the Participant ceases to be an Employee prior to all Restricted Stock Units becoming vested, then any unvested Restricted Stock Units, and any dividends related thereto, shall be absolutely forfeited on the date of termination of service and the Participant shall have no further interest therein of any kind whatsoever.
(c) Acceleration on Death, Disability, Retirement or Involuntary Termination. This Award shall become fully vested upon the Participant’s date of termination if the Participant’s termination occurs by reason of the Participant’s death. The Committee may also, in its discretion, waive the vesting requirements or permit continued vesting of the Restricted Stock Units in the event of the Participant’s Disability or termination of service due to retirement or involuntary termination (as determined by the Committee in its sole discretion).
(d) Acceleration on Termination Without Cause Following a Change of Control. This Award shall become fully vested if the Participant’s service is terminated by the Company without Cause within the 12-month period following the effective date of a Change of Control.
4. Nontransferability of Award. A Restricted Stock Unit is not transferable other than by will or the laws of descent and distribution. Any attempted sale, assignment, transfer, pledge, hypothecation or other disposition of, or the levy of execution, attachment or similar process upon, a Restricted Stock Unit contrary to the provisions hereof shall be void and ineffective, shall give no right to any purported transferee, and may, at the sole discretion of the Committee, result in forfeiture of the Restricted Stock Unit(s) involved in such attempt.
5. Payment. Payment shall be made in the form of an issuance to the Participant of shares of Common Stock equal to the number of vested Restricted Stock Units. Such issuance shall be made to the Participant with respect to a Restricted Stock Unit within sixty (60) days following the vesting date of such Restricted Stock Unit as set forth in the Notice. Provided, that, with respect to non-409A RSUs only, in the event of accelerated vesting in accordance with Section 3, distribution shall be made within sixty (60) days following such accelerated vesting date.
6. Dividends Equivalents. In the event that the Company declares and pays a dividend in respect of its outstanding shares of Common Stock and, on the record date for such dividend, the Participant holds Restricted Stock Units granted pursuant to this Agreement that have not been settled, the Company shall record the amount of such dividend in a bookkeeping account and pay to the Participant an amount in cash equal to the cash dividends the Participant would have received if the Participant was the holder of record, as of such record date, of a number of shares of
Common Stock equal to the number of Restricted Stock Units held by the Participant that have not been settled as of such record date, such payment to be made on the date that shares of Common Stock are issued to the Participant in respect of the Restricted Stock Units in accordance with Section 5 (the “Dividend Equivalents”). For purposes of clarity, if the Restricted Stock Units (or any portion thereof) are forfeited by the Participant pursuant to the terms of this Agreement, then the Participant shall also forfeit the Dividend Equivalents, if any, accrued with respect to such forfeited Restricted Stock Units. No interest will accrue on the Dividend Equivalents between the declaration and payment of the applicable dividends and the settlement of the Dividend Equivalents.
7. Withholding. The Company may make such provision as it may deem appropriate for the withholding of any applicable federal, state or local taxes that it determines it may be obligated to withhold or pay in connection with the Restricted Stock Units. Required withholding taxes as determined by the Company associated with this Award must be paid in cash. Provided, however, the Committee may require the Participant to pay such withholding taxes by directing the Company to withhold from the Award the number of shares of Common Stock having a Fair Market Value on the date of payment equal to the amount of required withholding taxes. The Company in its sole discretion may also withhold any required taxes from Dividend Equivalents paid on the Restricted Stock Units.
8. Amendments. This Award Agreement may be amended by a written agreement signed by the Company and the Participant; provided that the Committee may modify the terms of this Award Agreement without the consent of the Participant in any manner that is not adverse to the Participant.
9. Securities Law Restrictions. Payment of this Award shall not be made in shares of Common Stock unless such issuance is in compliance with the Securities Act of 1933, as amended (the “Act”), and any other applicable securities law, or pursuant to an exemption therefrom. If deemed necessary by the Company to comply with the Act or any applicable laws or regulations relating to the sale of securities, the Participant at the time of payment and as a condition imposed by the Company, shall represent, warrant and agree that the shares of Common Stock subject to the Award are being acquired for investment and not with any present intention to resell the same and without a view to distribution, and the Participant shall, upon the request of the Company, execute and deliver to the Company an agreement to such a fact. The Participant acknowledges that any stock certificate representing Common Stock acquired under such circumstances will be issued with a restricted securities legend.
10. Protection of Business.
(a) Non-Solicitation. The Participant covenants that during the term of his/her employment and for an eighteen (18) month period immediately following the termination of his/her employment for whatever reason, The Participant will neither directly nor indirectly induce or attempt to induce any employee of the Company to terminate his or her employment to go to work for any other entity or third party. The Participant further agrees that during his/her employment hereunder, and for a period of one (1) year thereafter, the Participant shall not directly solicit or contact any established
client or customer of the Company with a view to inducing or encouraging such established client or customer to discontinue or curtail any business relationship with the Company. The Participant further agrees that he/she will not directly request or advise any established clients, customers or suppliers of the Company to withdraw, curtail or cancel their business with the Company.
(b) Non-Disclosure of Confidential and Proprietary Information. The Participant recognizes that, as a result of his/her employment, he/she will have access to confidential information, trade secrets, proprietary methods and other data which is the property of and integral to the operation and success of the Company and therefore agrees to be bound by the provisions of this Agreement, which the parties agree and acknowledge to be reasonable. The Participant acknowledges that he/she will obtain unique benefits from his/her employment and the provisions contained in this Agreement are reasonably necessary to protect the Company’s legitimate business interests, which include, among other things, the substantial relationships between the Company and its clients, referral sources, employees, customers and vendors as well as the goodwill established with these parties over a protracted period of time. The Participant agrees that he/she will not divulge to any person; use to the detriment of the Company; or use in any business competitive with or similar to any business of the Company, any of the Company’s trade secrets and/or the Company’s confidential and proprietary information at any time during the term of the Participant’s employment or thereafter. A trade secret shall include any formula, pattern, device or compilation of information used by the Company in its business. Trade secrets as well as confidential and proprietary information shall also include, without limitation, internal well valuations, compilation of documents necessary to prepare well valuations, geological data and interpretation of geological data obtained, expectations concerning well profitability, production information, test results, economic projections, financial reports, income statements, balance sheets, general ledgers, accounts receivable, business plans, contracts with customers, suppliers and affiliated companies, the identity of customers and suppliers, and information reflecting their interests, preferences, credit-worthiness, risk characteristics, likely receptivity to solicitation for participation in various transactions, as well as any other business information obtained by the Participant, during the course of employment.
Notwithstanding the foregoing, nothing in this Agreement shall prohibit or restrict the Participant from lawfully: (i) initiating communications directly with, cooperating with, providing information to, causing information to be provided to, or otherwise assisting in an investigation by, any governmental authority regarding a possible violation of any law; (ii) responding to any inquiry or legal process directed to the Participant from any such governmental authority; (iii) testifying, participating or otherwise assisting in any action or proceeding by any such governmental authority relating to a possible violation of law; or (iv) making any other disclosures that are protected under the whistleblower provisions of any applicable law. Additionally, pursuant to the federal Defend Trade Secrets Act of 2016, an individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (A) is made (1) in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney and (2) solely for the purpose of reporting or investigating a suspected violation of law; (B) is made to the individual’s attorney in relation to a lawsuit
for retaliation against the individual for reporting a suspected violation of law; or (C) is made in a complaint or other document filed in a lawsuit or proceeding, if such filing is made under seal. Nothing in this Agreement requires the Participant to obtain prior authorization before engaging in any conduct described in this paragraph, or to notify the Company that the Participant has engaged in any such conduct.
11. Participant Misconduct; Compensation Recovery.
(a) Notwithstanding anything in the Plan or this Agreement to the contrary, the Committee shall have the authority to determine that in the event of serious misconduct by the Participant (including violations of this Agreement, employment agreements, confidentiality or other proprietary matters) or any activity of the Participant in competition with the business of the Company or any Subsidiary or Affiliated Entity, the Award may be cancelled, in whole or in part, whether or not vested. The determination of whether the Participant has engaged in a serious breach of conduct or any activity in competition with the business of the Company or any Subsidiary or Affiliated Entity shall be determined by the Committee in good faith and in its sole discretion.
(b) The Award made pursuant to this Agreement is subject to recovery pursuant to the Company’s compensation recovery policy then in effect. To the extent required by applicable laws, rules, regulations or securities exchange listing requirements and the Company’s compensation recovery policy then in effect, the Company shall have the right, and shall take all actions necessary, to recover cash or shares of Common Stock paid to the Participant pursuant to this Award.
12. Notices. All notices or other communications relating to the Plan and this Agreement as it relates to the Participant shall be in electronic or written form. If in writing, such notices shall be deemed to have been made (a) if personally delivered in return for a receipt, (b) if mailed, by regular U.S. mail, postage prepaid, by the Company to the Participant at his last known address evidenced on the payroll records of the Company or (c) if provided electronically, provided to the Participant at his/her e-mail address specified in the Company’s or its Affiliated Entity’s records or as other specified pursuant to and in accordance with the Committee’s applicable administrative procedures.
13. Binding Effect and Governing Law. This Agreement shall be (i) binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and assigns except as may be limited by the Plan and (ii) governed and construed under the laws of the State of Oklahoma.
14. Captions. The captions of specific provisions of this Agreement are for convenience and reference only, and in no way define, describe, extend or limit the scope of this Agreement or the intent of any provision hereof.
15. Counterparts. This Agreement may be executed in any number of identical counterparts, each of which shall be deemed an original for all purposes, but all of which taken together shall form but one agreement.
16. Code Section 409A.
(a) General. This Agreement and the Restricted Stock Units granted hereunder are intended to comply with, or otherwise be exempt from, Code Section 409A. The Agreement and the Restricted Stock Units shall be administered, interpreted, and construed in a manner consistent with Code Section 409A or an exemption therefrom. Should any provision of the Plan or the Agreement be found not to comply with, or otherwise be exempt from, the provisions of Code Section 409A, such provision shall be modified and given effect (retroactively if necessary), in the sole discretion of the Committee, and without the consent of the Participant, in such manner as the Committee determines to be necessary or appropriate to comply with, or to effectuate an exemption from, Code Section 409A. Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under the Plan or this Agreement comply with Code Section 409A and in no event shall the Company be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Participant on account of non-compliance with Code Section 409A. The Participant acknowledges that there may be adverse tax consequences upon the vesting or settlement of the Restricted Stock Units or the disposition of the underlying shares of Common Stock and that the Participant has been advised, and hereby is advised, to consult a tax advisor prior to such vesting, settlement or disposition.
(b) Restrictions on 409A RSUs. Other provisions of this Agreement notwithstanding, in the case of any Restricted Stock Units that constitute a “deferral of compensation” under Code Section 409A (“409A RSUs”), the following restrictions shall apply:
(i) Separation from Service. Any payment in settlement of the 409A RSUs that is triggered by a termination of employment hereunder will occur only at such time as the Participant has had a “separation from service” within the meaning of Treasury Regulation Section 1.409A-1(h).
(ii) Six-Month Delay Rule. The “six-month delay rule” will apply to 409A RSUs if the following four conditions exist:
1. The Participant has a separation from service (within the meaning of Treasury Regulation Section 1.409A-1(h));
2. A payment is triggered by the separation from service (but not due to death);
3. The Participant is a “specified employee” under Code Section 409A; and
4. The payment in settlement of the 409A RSUs would otherwise occur within six months after the separation from service.
If the six-month delay rule applies, payment in settlement of 409A RSUs shall instead occur on the first business day after the date that is six months following the Participant’s separation from service (or death, if earlier), with interest from the date such payment would otherwise have been made at the short-term applicable federal rate, compounded semi-annually, as determined under Section 1274 of the Code, for the month in which payment would have been made but for the delay in payment. During the six-month delay period, accelerated payment will be permitted in the event of the Participant’s death and for no other reason (including no acceleration upon a Change of Control) except to the extent permitted under Code Section 409A.
(iii) Change of Control Rule. Any payment in settlement of 409A RSUs triggered by a Change of Control will be made only if, in connection with the Change of Control, there occurs a change in the ownership of the Company, a change in the effective control of the Company, or a change in ownership of a substantial portion of the assets of the Company as all such terms are defined in Treasury Regulation Section 1.409A-3(i)(5). In the event payment in settlement of 409A RSUs is not allowed by operation of this subparagraph (iii), the payment in settlement of the 409A RSUs will be made within sixty (60) days of the earlier to occur of (A) the applicable vesting date set forth in the Notice regardless of the fact that vesting has been accelerated under the Agreement as a result of the Change of Control, or (B) the occurrence of a permissible time or event that could trigger a payment without violating Code Section 409A.
(c) Other Compliance Provisions. The following provisions apply to Restricted Stock Units (including, if so specified, non-409A RSUs):
(i) The settlement of 409A RSUs may not be accelerated by the Company except to the extent permitted under Code Section 409A.
(ii) Any restriction imposed on 409A RSUs hereunder or under the terms of other documents solely to ensure compliance with Code Section 409A shall not be applied to a Restricted Stock Unit that is not a “deferral of compensation” under Code Section 409A.
(iii) If any mandatory term required for 409A RSUs or non- 409A RSUs to avoid tax penalties under Code Section 409A is not otherwise explicitly provided under this document or other applicable documents, such term is hereby incorporated by reference and fully applicable as though set forth at length herein.
(iv) Each vesting tranche of Restricted Stock Units set forth in the Notice shall be deemed a separate payment for purposes of Code Section 409A.
Notice of Grant of Restricted Stock Units and Award Agreement
| | |
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, OK 73118
ID: 73-1395733 |
| | | | | | | | |
| Name: | Award Number: | |
| Plan: | 2021 LTIP |
| ID: | |
Effective [__________, 20__] (the “Effective Date”), you have been granted an award of _________ Restricted Stock Units. These Restricted Stock Units will vest on the date(s) shown below.
The Award will vest in increments on the vesting date(s) shown.
| | | | | |
Restricted Stock Units | Vesting Date |
_______________ | [_____________, 20__] |
_______________ | [_____________, 20__] |
_______________ | [_____________, 20__] |
Acceptance. You are required to accept the terms and conditions set forth in this Notice, the Agreement and the Plan, all of which are made a part of this document in order for you to receive the Award granted to you hereunder. Any capitalized terms used but not defined in this Notice have the same meanings given to them in the Agreement or the Plan. By your signature and the Company’s signature below, you and the Company agree that this award is granted under and governed by the terms and conditions of the Plan and the Agreement, all of which are attached and made a part of this document.
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| Chesapeake Energy Corporation | Date |
| |
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| Date |
PARTNERSHIP INTEREST PURCHASE AGREEMENT
BY AND AMONG
THE JAN & TREVOR REES-JONES REVOCABLE TRUST,
REES-JONES FAMILY HOLDINGS, LP,
CHIEF E&D PARTICIPANTS, LP, AND
CHIEF E&D (GP) LLC
COLLECTIVELY, AS SELLERS,
AND
CHESAPEAKE APPALACHIA, L.L.C AND
CHESAPEAKE ENERGY CORPORATION
COLLECTIVELY, AS PURCHASERS
___________________________________
DATED AS OF JANUARY 24, 2022
__________________________________
| | | | | |
ARTICLE 1 DEFINITIONS AND INTERPRETATION | 2 |
Section 1.1 Defined Terms | 2 |
Section 1.2 References and Rules of Construction | 2 |
ARTICLE 2 PURCHASE AND SALE | 3 |
Section 2.1 Purchase and Sale | 3 |
Section 2.2 Effective Time; Proration of Costs and Revenues | 3 |
Section 2.3 Procedures | 4 |
Section 2.4 Cash Free, Indebtedness Free | 5 |
ARTICLE 3 PURCHASE PRICE | 6 |
Section 3.1 Purchase Price | 6 |
Section 3.2 Allocation of Purchase Price | 6 |
Section 3.3 Adjustments to Purchase Price | 7 |
Section 3.4 Allocated Values | 9 |
Section 3.5 Escrow Agreement | 10 |
Section 3.6 Withholding | 10 |
ARTICLE 4 TITLE AND ENVIRONMENTAL MATTERS | 10 |
Section 4.1 Sellers’ Title | 10 |
Section 4.2 Title Defects | 11 |
Section 4.3 Title Benefits | 16 |
Section 4.4 Title Disputes | 18 |
Section 4.5 Limitations on Applicability | 20 |
Section 4.6 Consents to Assignment and Preferential Rights to Purchase | 21 |
Section 4.7 Casualty or Condemnation Loss | 23 |
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SellerS | 23 |
Section 5.1 Generally | 23 |
Section 5.2 Existence and Qualification | 24 |
Section 5.3 Power | 24 |
Section 5.4 Authorization and Enforceability | 24 |
Section 5.5 No Conflicts | 24 |
Section 5.6 Capitalization | 24 |
Section 5.7 Liability for Brokers’ Fees | 25 |
Section 5.8 Litigation | 25 |
Section 5.9 Bankruptcy | 25 |
Section 5.10 Investment Intent | 25 |
ARTICLE 6 REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY GROUP AND THE ASSETS | 25 |
Section 6.1 Generally | 25 |
Section 6.2 Existence and Qualification | 26 |
Section 6.3 Power | 26 |
Section 6.4 No Conflicts | 26 |
Section 6.5 Capitalization | 26 |
Section 6.6 Subsidiaries | 27 |
Section 6.7 Litigation | 27 |
| | | | | |
Section 6.8 Taxes and Assessments | 27 |
Section 6.9 Capital Commitments | 29 |
Section 6.10 Compliance with Laws | 29 |
Section 6.11 Material Contracts | 29 |
Section 6.12 Payments for Production and Imbalances | 31 |
Section 6.13 Consents and Preferential Purchase Rights | 31 |
Section 6.14 Non-Consent Operations | 31 |
Section 6.15 Plugging and Abandonment | 31 |
Section 6.16 Environmental Matters | 32 |
Section 6.17 Suspense Funds; Royalties; Expenses | 32 |
Section 6.18 Specified Bank Accounts | 32 |
Section 6.19 Bankruptcy | 33 |
Section 6.20 Credit Support | 33 |
Section 6.21 Bank Accounts | 33 |
Section 6.22 Employee Benefit Matters | 33 |
Section 6.23 Employment and Labor Matters | 33 |
Section 6.24 Insurance | 34 |
Section 6.25 Financial Statements; No Liabilities | 34 |
Section 6.26 Books and Records | 35 |
Section 6.27 Special Warranty | 35 |
Section 6.28 Oil and Gas Properties | 35 |
Section 6.29 Permits | 35 |
Section 6.30 Sufficiency of Assets | 35 |
Section 6.31 Wells | 35 |
Section 6.32 Leases | 36 |
Section 6.33 Condemnation; Casualty Loss | 36 |
Section 6.34 Specified Matters | 36 |
Section 6.35 Absence of Certain Developments | 36 |
ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF PURCHASERS | 37 |
Section 7.1 Generally | 37 |
Section 7.2 Existence and Qualification | 37 |
Section 7.3 Power | 37 |
Section 7.4 Authorization and Enforceability | 37 |
Section 7.5 No Conflicts | 37 |
Section 7.6 Liability for Brokers’ Fees | 38 |
Section 7.7 Litigation | 38 |
Section 7.8 Financing | 38 |
Section 7.9 Contracts | 38 |
Section 7.10 Securities Law Compliance | 38 |
Section 7.11 Opportunity to Verify Information | 38 |
Section 7.12 Independent Evaluation | 39 |
Section 7.13 Consents, Approvals or Waivers | 40 |
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Section 7.14 Bankruptcy | 40 |
Section 7.15 Capitalization | 40 |
Section 7.16 SEC Documents; Financial Statements; No Liabilities | 41 |
Section 7.17 Internal Controls; Nasdaq Listing Matters | 42 |
Section 7.18 Form S-3 | 44 |
Section 7.19 No Stockholder Approval | 44 |
ARTICLE 8 COVENANTS OF THE PARTIES | 44 |
Section 8.1 Access | 44 |
Section 8.2 Government Reviews | 46 |
Section 8.3 Public Announcements; Confidentiality | 46 |
Section 8.4 Operation of Business | 47 |
Section 8.5 Change of Name | 50 |
Section 8.6 Replacement of Bonds, Letters of Credit, and Guaranties | 50 |
Section 8.7 Notification of Breaches | 51 |
Section 8.8 Amendment to Schedules | 51 |
Section 8.9 Further Assurances | 52 |
Section 8.10 Employee Matters | 52 |
Section 8.11 R&W Insurance Policy | 52 |
Section 8.12 Directors and Officers | 53 |
Section 8.13 Cash Distributions | 54 |
Section 8.14 Excluded Assets | 54 |
Section 8.15 Purchaser Reorganization | 54 |
Section 8.16 Certain Nasdaq Matters | 54 |
Section 8.17 Financing and SEC Filing Assistance | 54 |
Section 8.18 Certain Disclaimers | 56 |
ARTICLE 9 CONDITIONS TO CLOSING | 59 |
Section 9.1 Sellers’ Conditions to Closing | 59 |
Section 9.2 Purchasers’ Conditions to Closing | 60 |
ARTICLE 10 CLOSING | 61 |
Section 10.1 Time and Place of Closing | 61 |
Section 10.2 Obligations of Sellers at Closing | 61 |
Section 10.3 Obligations of Purchasers at Closing | 62 |
Section 10.4 Closing Cash Payment and Post-Closing Purchase Price Adjustments | 63 |
ARTICLE 11 TERMINATION | 66 |
Section 11.1 Termination | 66 |
Section 11.2 Effect of Termination | 67 |
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ARTICLE 12 INDEMNIFICATION | 68 |
Section 12.1 Indemnification | 68 |
Section 12.2 Indemnification Actions | 70 |
Section 12.3 Limitations on Actions | 71 |
ARTICLE 13 TAX MATTERS | 73 |
Section 13.1 Tax Filings | 73 |
Section 13.2 Allocation of Taxes | 74 |
Section 13.3 Characterization of Certain Payments | 75 |
Section 13.4 Amended Tax Returns; Tax Elections | 75 |
Section 13.5 Cooperation | 75 |
Section 13.6 Tax Audits | 76 |
Section 13.7 Tax Treatment | 76 |
Section 13.8 Transaction Tax Deductions | 76 |
ARTICLE 14 MISCELLANEOUS | 77 |
Section 14.1 Counterparts | 77 |
Section 14.2 Notice | 77 |
Section 14.3 Tax, Recording Fees, Similar Taxes & Fees | 78 |
Section 14.4 Governing Law; Jurisdiction | 78 |
Section 14.5 Waivers | 80 |
Section 14.6 Assignment | 80 |
Section 14.7 Entire Agreement | 80 |
Section 14.8 Amendment | 80 |
Section 14.9 No Third Party Beneficiaries | 80 |
Section 14.10 Construction | 80 |
Section 14.11 Limitation on Damages | 80 |
Section 14.12 Conspicuous | 81 |
Section 14.13 Time of Essence | 81 |
Section 14.14 Delivery of Records | 81 |
Section 14.15 Severability | 81 |
Section 14.16 Specific Performance | 81 |
Section 14.17 Reliance on Own Judgment; Disclaimer of Reliance | 81 |
Section 14.18 Limitation on Recourse | 82 |
Section 14.19 Schedules | 83 |
Section 14.20 Attorney-Client Privilege; Continued Representation | 84 |
Section 14.21 Party Representatives | 84 |
| | | | | | | | |
Appendices, Exhibits, and Schedules: |
| | |
Appendix A | - | Definitions |
| | |
Exhibit A-1 | - | Leases |
Exhibit A-2 | - | Wells |
Exhibit A-3 | - | Surface Interests |
Exhibit A-4 | - | Certain Excluded Assets |
Exhibit B | - | Form of Assignment Agreement |
Exhibit C | - | Form of Transition Services Agreement |
Exhibit D | - | Form of Registration Rights Agreement |
Exhibit E | - | Employment Transfer Agreement |
| | |
Schedule 1.1(a) | - | Specified Midstream Contracts |
Schedule 1.1(b) | - | Hedges |
Schedule 3.4 | - | Allocated Values |
Schedule 5.1 | - | Knowledge Individuals (Sellers) |
Schedule 5.5 | - | No Conflict (Sellers) |
Schedule 5.8 | - | Litigation (Sellers) |
Schedule 6.1 | - | Knowledge Individuals (Chief GP) |
Schedule 6.4 | - | No Conflict (Company Group) |
Schedule 6.5 | - | Capitalization |
Schedule 6.6 | - | Company Subsidiaries |
Schedule 6.7 | - | Litigation (Company Group) |
Schedule 6.9 | - | Capital Commitments |
Schedule 6.11 | - | Material Contracts |
Schedule 6.12 | - | Payments for Production and Imbalances |
Schedule 6.13 | - | Consents and Preferential Rights to Purchase |
Schedule 6.14 | - | Non-Consent Operations |
Schedule 6.15 | - | Plugging and Abandonment |
Schedule 6.16 | - | Environmental Matters |
Schedule 6.17 | - | Suspense Funds |
Schedule 6.18 | - | Specified Bank Accounts |
Schedule 6.20 | - | Credit Support |
Schedule 6.21 | - | Bank Accounts |
Schedule 6.22 | - | Employee Benefit Matters |
Schedule 6.23(a) | - | Other Workers |
Schedule 6.24 | - | Insurance |
Schedule 6.25 | - | Financial Statement Exceptions |
Schedule 6.31 | - | Wells |
Schedule 7.7 | - | Knowledge Individuals (Purchasers) |
Schedule 7.17(d) | - | SEC Review |
Schedule 8.4 | - | Operations |
Schedule 8.14 | - | Assets to be Transferred |
PARTNERSHIP INTEREST PURCHASE AGREEMENT
This Partnership Interest Purchase Agreement (this “Agreement”) is dated as of January 24, 2022 (the “Execution Date”), by and among, on the one part, The Jan & Trevor Rees-Jones Revocable Trust, a Texas revocable trust (“Rees-Jones Trust”), Rees-Jones Family Holdings, LP, a Texas limited partnership (“Rees-Jones Holdings”), Chief E&D Participants, LP, a Texas limited partnership (“Chief Participants” and together with Rees-Jones Trust and Rees-Jones Holdings, the “Chief LPs”), and Chief E&D (GP) LLC, a Texas limited liability company (“Chief GP” and together with the Chief LPs, the “Sellers” and each a “Seller”), and, on the other part, Chesapeake Energy Corporation, an Oklahoma corporation (“LP Purchaser”), and Chesapeake Appalachia, L.L.C., an Oklahoma limited liability company and a wholly-owned subsidiary of LP Purchaser (“GP Purchaser” and together with LP Purchaser, the “Purchasers” and each a “Purchaser”). Sellers and Purchasers are sometimes referred to herein individually as a “Party” and, collectively, as the “Parties.”
RECITALS
A. The Chief LPs each own an Interest (the “Company LP Interests”) as the limited partners of Chief E&D Holdings LP, a Texas limited partnership (the “Company”).
B. Chief GP owns an Interest (the “Company GP Interest”) as the general partner of the Company.
C. The Company LP Interests and the Company GP Interest collectively represent 100% of the issued and outstanding Interests in the Company (the “Company Interests”).
D. The Company owns 100% of the issued and outstanding Interests of Chief Exploration and Development LLC, a Texas limited liability company (“Chief Exploration”).
E. Chief Exploration owns 100% of the issued and outstanding Interests of Chief Oil & Gas LLC, a Texas limited liability company (“Chief Operating” and, together with the Company and Chief Exploration, the “Company Group”).
F. The Parties desire that, at the Closing, (i) the Chief LPs shall sell and transfer to LP Purchaser, and LP Purchaser shall purchase from the Chief LPs, the Company LP Interests, and (ii) Chief GP shall sell and transfer to GP Purchaser, and GP Purchaser shall purchase from Chief GP, the Company GP Interest, in each case, in the manner and upon the terms and conditions hereafter set forth.
AGREEMENT
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 by Sellers. 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 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 ends 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, (a) (i) the Chief LPs agree to sell, transfer, and convey the Company LP Interests to LP Purchaser, free and clear of any Encumbrances (other than restrictions generally arising under the Organizational Documents of each member of the Company Group, this Agreement, and applicable securities Laws) and (ii) LP Purchaser agrees to purchase, accept, and pay for the Company LP Interests, and (b) (i) Chief GP agree to sell, transfer, and convey the Company GP Interest to GP Purchaser, free and clear of any Encumbrances (other than restrictions generally arising under the Organizational Documents of each member of the Company Group, this Agreement, and applicable securities Laws) and (ii) GP Purchaser agrees to purchase, accept, and pay for the Company GP Interest.
Section 2.2 Effective Time; Proration of Costs and Revenues.
(a) Subject to the other terms and conditions of this Agreement, the Company Interests shall be transferred from Sellers to Purchasers at the Closing, but certain financial benefits and burdens of the Assets shall be transferred effective as of 12:01 a.m., Central Time, on January 1, 2022 (the “Effective Time”), as described below; provided that, for the avoidance of doubt, the Closing shall be treated for income Tax purposes as the time when the Company Interests are transferred from Sellers to Purchasers.
(b) Purchasers shall be entitled to all production of Hydrocarbons from or attributable to the Properties at and after the Effective Time (and all products and proceeds attributable thereto), and to all other income, proceeds, revenue, receipts, and credits earned with respect to the Assets at and after the Effective Time (provided that, notwithstanding the preceding, Sellers and their Affiliates shall be entitled to all proceeds of cash calls and billings and other funds received for the account of Third Parties with respect to any of the Assets operated by Sellers or their Affiliates for all periods prior to the Closing Date, but only to the extent that such proceeds and funds are used by Sellers (or their Affiliate) to pay for expenditures on behalf of such Third Parties in Sellers’ (or their Affiliate’s) role as operator of the Assets prior to the Closing Date), and shall be responsible for (and entitled to any refunds with respect to) all Property Costs incurred at and after the Effective Time.
(c) Sellers shall be entitled to all production of Hydrocarbons from or attributable to the Properties prior to the Effective Time (and all products and proceeds attributable thereto), and to all other income, proceeds, revenue, receipts, and credits earned with respect to the Assets (other than Tax refunds and Tax credits, which are addressed in Section 13.1) prior to the Effective Time, and to proceeds from cash calls and billings and other funds received for the account of Third Parties for all periods prior to the Closing Date, as described in Section 2.2(b), but only to the extent that such proceeds and funds are used by Sellers (or their Affiliate) to pay for expenditures on behalf of such Third Parties in Sellers’ (or their Affiliate’s) role as operator of the Assets prior to the Closing Date, and shall be responsible for (and entitled to any refunds with respect to) all Property Costs incurred prior to the Effective Time.
(d) Should Purchasers or the Company Group receive after Closing any income, proceeds, revenue, or other amounts to which Sellers are entitled under Section 2.2(c), Purchasers shall, and shall cause the Company Group to, fully disclose, account for, and promptly remit the same to Sellers. If, after Closing, Sellers receive any income, proceeds, revenue, or other amounts with respect to the Assets to which Sellers are not entitled pursuant to Section 2.2(c), Sellers shall fully disclose, account for, and promptly remit the same to Purchasers (or their designee).
(e) Should Purchasers or the Company Group pay after Closing any Property Costs for which Sellers are responsible under Section 2.2(c), Sellers shall reimburse Purchasers (or their designee) promptly after receipt of an invoice with respect to such Property Costs, accompanied by copies of the relevant vendor or other invoice and proof of payment. Should Sellers pay after Closing any Property Costs for which Sellers are not responsible under Section 2.2(c), Purchasers shall, or shall cause the Company Group to, reimburse Sellers promptly after receipt of an invoice with respect to such Property Costs, accompanied by copies of the relevant vendor or other invoice and proof of payment.
(f) Except to the extent such amounts are, or are attributable to, the Excluded Assets, Sellers 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 one year anniversary of the Closing Date, except as to amounts for which Purchasers have delivered an invoice of such Property Costs to Sellers pursuant to Section 2.2(e) on or before such date.
(g) Rights-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 at and after the Effective Time. In each case, Purchasers (on behalf of the Company Group) shall be responsible for the portion allocated to the period at and after the Effective Time and Sellers shall be responsible for the portion allocated to the period before the Effective Time.
Section 2.3 Procedures.
(a) For purposes of allocating production (and proceeds 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 LACT meters or similar meters at the initial 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 delivery point sales meters (or other custody transfer meters, whichever is closest to the Well) on the pipelines through which they are transported. Such allocations (along with the adjustments made pursuant to Section 3.3) shall be based on data and information provided by the Third Party operators (if applicable) of the Assets and all other relevant data and information reasonably available to the Parties; provided that, if any such data or information has not been provided by a Third Party operator as of the relevant time, then Sellers shall make a good faith estimate of such allocations or adjustments, as applicable, based on the best data and information available to
Sellers at such time. The terms “earned” and “incurred” shall be interpreted in accordance with generally accepted accounting principles and Council of Petroleum Accountants Society standards, and expenditures that are incurred pursuant to an operating agreement, unit agreement, or similar agreement shall be deemed incurred when expended by the operator of the applicable Property, in accordance with such operator’s then-current practice.
(b) After Closing, each Party shall be entitled to participate in all joint interest audits and other audits of (i) Property Costs for which such Party is entirely or in part responsible under the terms of Section 2.2 or (ii) Hydrocarbons from or attributable to the Properties (and all products and proceeds attributable thereto) or other income, proceeds, revenue, receipts, and credits earned with respect to the Assets, in each case, to which such Party is entirely or in part entitled under the terms of Section 2.2, provided that (A) Purchasers shall, or shall cause the Company Group to, handle all joint interest audits and other audits of Property Costs covering the period for which Sellers are in part responsible with Purchasers under Section 2.2 (and Purchasers (on behalf of the Company Group) shall be solely responsible for Purchasers’ and the Company Group’s out-of-pocket costs and expenses incurred in connection with such audits), (B) Sellers shall handle all joint interest audits and other audits of Hydrocarbons from or attributable to the Properties (and all products and proceeds attributable thereto) or other income, proceeds, revenue, receipts, and credits earned with respect to the Assets, in each case, to which Sellers are entirely or in part entitled under Section 2.2 (and each Seller shall be solely responsible for such Seller’s respective out-of-pocket costs and expenses incurred in connection with such audits), and (C) a Party shall not agree to any adjustments to previously assessed costs for which the other Party is liable, or any compromise of any audit claims to which such other Party would be entitled, without the prior written consent of the other Party, not to be unreasonably withheld, conditioned, or delayed. Purchasers shall, or shall cause the Company Group to, provide Sellers with a copy of all applicable audit reports and written audit agreements received by Purchasers or their Affiliates and relating to periods for which Sellers are wholly or partially responsible or with respect to any Excluded Assets.
Section 2.4 Cash Free, Indebtedness Free. At the Closing, the Company Group will not hold any cash or be responsible for any obligations to repay any Indebtedness. Accordingly, on or prior to the Closing, Sellers will (a) cause the Company Group to distribute to Sellers (or their designee) all cash (irrespective of whether such cash is attributable to Hydrocarbons produced, or events occurring, at or after the Effective Time) held by the Company Group and (b) repay outstanding Indebtedness of the Company Group and all of the Company Group’s accounts payable and other similar liabilities attributable to periods ending prior to the Effective Time. Each Seller represents (with respect to itself only) that such Seller is authorized to perform the actions described in the preceding sentence. Purchasers hereby acknowledge that Sellers shall take such actions prior to Closing and hereby agree and consent to Sellers taking such actions prior to Closing. Notwithstanding anything to the contrary herein, the Parties acknowledge and agree that (x) Sellers’ obligations with respect to Indebtedness under this Section 2.4 shall not include repaying or otherwise settling any liabilities or obligations of the Seller Group (including the Company Group) with respect to Hedges, and (y) the provisions of this Section 2.4 will not prejudice any Party’s rights under Section 3.3 or otherwise modify the adjustment mechanisms set forth therein.
ARTICLE 3
PURCHASE PRICE
Section 3.1 Purchase Price.
(a) The total purchase price for the Company Interests shall be $2,134,301,625 (the “Unadjusted Purchase Price”), comprised of (i) cash in the amount of $1,610,793,679 (the “Base Cash Purchase Price”) and (ii) 7,604,706 shares of CHK Common Stock (such shares of CHK Common Stock the “Stock Purchase Price”), as adjusted and paid, as applicable, pursuant to and in accordance with Section 3.3 and Section 10.4. Notwithstanding the foregoing, if, at any time on or after the date hereof and prior to the Closing, (x) LP Purchaser makes, pays, or effects (or any record date is established with respect thereto) (A) any dividend on the CHK Common Stock payable in CHK Common Stock, (B) any subdivision or split of CHK Common Stock, (C) any combination or reclassification of CHK Common Stock into a smaller number of shares of CHK Common Stock, or (D) any issuance of any securities by reclassification of CHK Common Stock (including any reclassification in connection with a merger, consolidation or business combination in which LP Purchaser is the surviving person) or (y) any merger, consolidation, combination, or other transaction is consummated pursuant to which CHK Common Stock is converted into the right to receive cash or other securities, then the number of shares of CHK Common Stock to be issued to the Sellers (or their designees) as the Stock Purchase Price pursuant to this Agreement shall be proportionately adjusted, including, for the avoidance of doubt, in the cases of clauses (x)(D) and (y) to provide for the receipt by Sellers, in lieu of any CHK Common Stock, the same number or amount of cash and/or securities as is received in exchange for each share of CHK Common Stock in connection with any such transaction described in clauses (x)(D) and (y) hereof. An adjustment made pursuant to the foregoing sentence shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision, split, merger, combination, reclassification or other transaction.
(b) Within one Business Day after the Execution Date, Purchasers shall deliver into the Escrow Account an amount equal to $81,000,000 (together with all interest accrued thereon, the “Deposit”) to be held by the Escrow Agent pursuant to the terms of this Agreement and the Escrow Agreement. If the Closing occurs, the Deposit shall be taken into account in the determination of the Closing Cash Payment pursuant to Section 10.4(a). However, if the Closing does not occur, the Deposit shall be distributed in accordance with Section 11.2.
Section 3.2 Allocation of Purchase Price. The Parties agree that the Adjusted Purchase Price and any liabilities associated with the Assets of the Company Group (to the extent properly taken into account as consideration under the Code) shall be allocated among the Assets of the Company Group for U.S. federal and applicable state and local income Tax purposes in accordance with an allocation schedule, an initial draft of which shall be prepared by Chief GP and delivered to Purchasers for their review and comment within 30 days following the final determination of the Adjusted Purchase Price (as revised and finally determined under this Section 3.2, the “Purchase Price Allocation Schedule”). Purchasers shall have 15 days to review the draft Purchase Price Allocation Schedule delivered by Chief GP. If no comments are delivered by Purchasers to Chief GP within such review period, then the draft Purchase Price Allocation Schedule originally delivered by Chief GP shall become final.
If Purchasers provide any comments within their 15-day review period, then the Parties shall use good faith efforts to resolve any such comments, provided that if they are unable to mutually agree on the final Purchase Price Allocation Schedule within thirty days of receipt of Purchasers’ comments, the Parties shall resolve any such disputes in accordance with the procedures set forth in Section 10.4(c). Subject to any differences required as a result of the agreed Tax treatment described in Section 13.7, the Parties shall use the final Purchase Price Allocation Schedule in reporting this transaction to the applicable taxing authorities, and no Party shall file any Tax Return or otherwise take any position for Tax purposes that is inconsistent with the Purchase Price Allocation Schedule unless otherwise required by applicable Law; provided, however, that neither Sellers nor Purchasers shall be unreasonably impeded in their ability and discretion to negotiate, compromise and/or settle any Tax audit, claim or similar proceedings in connection with the Purchase Price Allocation Schedule; provided further, that if the Adjusted Purchase Price (as determined for applicable Tax purposes) is adjusted subsequent to the initial finalization of the Purchase Price Allocation Schedule (e.g., as a result of indemnification payments), then Chief GP shall be entitled to prepare a revised draft Purchase Price Allocation Schedule, and such revised draft will be delivered to Purchasers and finalized in accordance with the procedures described in this Section 3.2, and upon finalization shall become the Purchase Price Allocation Schedule. Each Party shall promptly notify the other in writing upon receipt of notice of any pending or threatened Tax audit or assessment challenging the agreed Purchase Price Allocation Schedule.
Section 3.3 Adjustments to Purchase Price. All adjustments to the Unadjusted 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 as consistently applied by Sellers, (y) without duplication (in this Agreement or otherwise), and (z) with respect to matters (A) in the case of Section 3.3(b)(iii), for which notice is given on or before the Title Claim Date, and (B) in all of the other cases set forth in Section 3.3(a) and Section 3.3(b), identified on or before the Cut-off Date. Each adjustment to the Unadjusted Purchase Price described in Section 3.3(a) and Section 3.3(b) shall be allocated among the Assets in accordance with Section 3.4. Without limiting the foregoing, the Unadjusted Purchase Price shall be adjusted as follows, with the result of such adjustments to such Unadjusted Purchase Price herein the “Adjusted Purchase Price”:
(a) The Unadjusted Purchase Price shall be adjusted upward by the following amounts (without duplication):
(i) an amount equal to all Property Costs attributable to the ownership or operation of the Assets that are incurred at and after the Effective Time but paid by Sellers (or the Company Group prior to Closing) (as is consistent with Section 2.2(b) and Section 2.2(c)), but excluding any amounts previously reimbursed to Sellers pursuant to Section 2.2(e);
(ii) an amount equal to, to the extent that such amounts have been received by Purchasers (or the Company Group after Closing) and not remitted, distributed, or paid to Sellers, (A) all proceeds from the production of Hydrocarbons from or attributable to the Properties prior to the Effective Time (including, to the extent that Sellers (or their Affiliate) are actually paid such amounts on behalf of such Third Parties in Sellers’ (or their Affiliate’s) role as operator of the Assets, proceeds from cash calls and billings and other funds received for the account of Third Parties with respect to any of the Assets
operated by Sellers (or their Affiliate) for all periods prior to the date on which Sellers’ (or their Affiliate’s) resignation as operator becomes effective), (B) all other income, proceeds, receipts, and credits earned with respect to the Assets prior to the Effective Time, and (C) any other amounts to which Sellers are entitled pursuant to Section 2.2(c);
(iii) the amount of all prepaid expenses (including prepaid bonuses, rentals, cash calls, and advances to Third Party operators for expenses not yet incurred; and scheduled payments) paid by Sellers (or by the Company Group prior to Closing) with respect to the ownership or operation of the Assets after the Effective Time;
(iv) to the extent that the Company Group is under-produced or over-delivered as of the Effective Time as shown with respect to the net Imbalances set forth in Schedule 6.12, as complete and final settlement of all such Imbalances, the amount of the Imbalances multiplied by a price of $1.00 per MMBtu;
(v) the amount of all Asset Taxes and Income Taxes allocated to Purchasers pursuant to Section 13.2 but paid or otherwise economically borne by Sellers or the Company Group prior to Closing (excluding, for the avoidance of doubt, any Asset Taxes that were withheld or deducted from the gross amount paid or payable to Sellers in connection with a transaction to which Section 3.3(b)(ii) applies, and therefore were taken into account in determining the “proceeds received” by Sellers for purposes of applying Section 3.3(b)(ii));
(vi) for the period of time from the Effective Time until Closing, a monthly overhead charge of $1,900,000 per month, prorated for any partial months, as the sole charge under this Agreement in respect of Sellers’, the Company Group’s and their respective Affiliates’ general and administrative expenses (including corporate G&A) with respect to the ownership and operation of the Company Interests and the Assets;
(vii) any other amount provided for elsewhere in this Agreement or otherwise agreed upon in writing by the Parties as an upward adjustment to the Unadjusted Purchase Price.
(b) The Unadjusted Purchase Price shall be adjusted downward by the following amounts (without duplication):
(i) an amount equal to all Property Costs attributable to the ownership or operation of the Assets that are incurred prior to the Effective Time but paid by Purchasers (or by the Company Group after Closing) (as is consistent with Section 2.2(b) and Section 2.2(c)), but excluding any amounts previously reimbursed to Purchasers (or the Company Group) pursuant to Section 2.2(e);
(ii) an amount equal to, to the extent that such amounts have been received by Sellers and not remitted or paid to Purchasers, (A) all proceeds from the production of Hydrocarbons from or attributable to the Properties at and after the Effective Time (excluding, to the extent that Sellers (or their Affiliate) are actually paid such amounts on behalf of such Third Parties in Sellers’ (or their Affiliate’s) role as operator of the Assets, all proceeds of cash calls and billings and other funds received for the account of
Third Parties with respect to any of the Assets operated by Sellers (or their Affiliate) for all periods prior to the date on which Sellers’ (or their Affiliate’s) resignation as operator of such Assets becomes effective), (B) all other income, proceeds, receipts, and credits earned with respect to the Assets at and after the Effective Time, and (C) any other amounts to which Purchasers are entitled pursuant to Section 2.2(b);
(iii) any reductions to the Unadjusted Purchase Price to be made in accordance with Section 4.2 (which shall include, for purposes of certainty, an amount equal to the Allocated Value of any Assets excluded from this transaction pursuant to Section 4.2(c)), reduced by any amounts for Title Benefits determined pursuant to Section 4.3;
(iv) an amount equal to the Allocated Value of any Assets excluded from this transaction pursuant to Section 4.6 or Section 8.1;
(v) to the extent the Company Group is over-produced or under-delivered as of the Effective Time as shown with respect to the net Imbalances set forth in Schedule 6.12, as complete and final settlement of all such Imbalances, the amount of the Imbalances multiplied by a price of $1.00 per MMBtu;
(vi) to the extent not in the Specified Bank Accounts as of Closing, the amount of any Suspense Funds as of Closing, if any, net of any receivables due from applicable Third Party owners;
(vii) the amount of all Asset Taxes allocated to Sellers pursuant to Section 13.2 but paid or otherwise economically borne by Purchasers or the Company Group after Closing (excluding, for the avoidance of doubt, any Asset Taxes that were withheld or deducted from the gross amount paid or payable to Purchasers in connection with a transaction to which Section 3.3(a)(ii) applies, and therefore were taken into account in determining the “proceeds received” by Purchasers for purposes of applying Section 3.3(a)(ii)); and
(viii) any other amount provided for elsewhere in this Agreement or otherwise agreed upon in writing by the Parties as a downward adjustment to the Unadjusted Purchase Price.
(c) Notwithstanding anything to the contrary herein, all adjustments to the Unadjusted Purchase Price made pursuant to this Section 3.3 shall be made to the Base Cash Purchase Price.
Section 3.4 Allocated Values. The “Allocated Values” for the Assets (which are provided for, and allocated among, each of the Leases and Wells) are set forth on Schedule 3.4. Each adjustment shall be allocated to the particular Assets to which such adjustment relates to the extent, and in the proportion which, such adjustment relates to such Assets and to the extent that it is, in the commercially reasonable discretion of Sellers, possible to do so. Any adjustment not allocated to a specific Asset or Assets pursuant to the immediately preceding sentence shall be allocated among the various Assets in proportion to the Unadjusted Purchase Price allocated to each Asset on Schedule 3.4. Sellers have accepted such Allocated Values for purposes of this
Agreement and the transactions contemplated hereby, but make no representation or warranty as to the accuracy of such values.
Section 3.5 Escrow Agreement. Simultaneously with the execution of this Agreement, Sellers and Purchasers have executed, and have obtained execution by the Escrow Agent of, the Escrow Agreement.
Section 3.6 Withholding. The Parties acknowledge and agree that they do not anticipate any deduction or withholding from the consideration otherwise payable to any Person under this Agreement. Notwithstanding the foregoing, Purchasers shall (a) be entitled to deduct and withhold from the consideration otherwise payable to any Person pursuant to this Agreement such amounts as may be required to be deducted and withheld with respect to the making of such payment under any provision of applicable Law (including the Code) and (b) pay any amounts so deducted and withheld to the proper Governmental Body in a timely manner. Any amount deducted or withheld pursuant to this Section 3.6 and paid over to the relevant Governmental Body shall be treated as having been paid to such Person in respect of which such deduction or withholding was made. In the event Purchasers determine that any consideration otherwise payable to any Person pursuant to this Agreement would be subject to withholding under applicable Law, Purchasers shall promptly notify Sellers of such determination, but in no event less than five days prior to the Closing Date. Purchasers shall reasonably cooperate with Sellers in seeking to reduce or eliminate any such deduction or withholding.
ARTICLE 4
TITLE AND ENVIRONMENTAL MATTERS
Section 4.1 Sellers’ Title.
(a) EXCEPT FOR THE SPECIAL WARRANTY BY CHIEF GP SET FORTH IN SECTION 6.27 AND WITHOUT LIMITING PURCHASERS’ RIGHTS AND REMEDIES (1) UNDER SECTION 9.2 OR SECTION 11.1, (2) UNDER THE R&W INSURANCE POLICY, OR (3) FOR TITLE DEFECTS SET FORTH IN THIS ARTICLE 4, SELLERS DO NOT MAKE, SELLERS EXPRESSLY DISCLAIM, AND PURCHASERS WAIVE, ANY WARRANTY OR REPRESENTATION, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, WITH RESPECT TO THE COMPANY GROUP’S TITLE TO, OR ANY OTHER PERSON’S TITLE TO, OR ANY DEFICIENCY IN TITLE TO, ANY OF THE ASSETS OR THE DESCRIPTION THEREOF (INCLUDING ANY LISTINGS OF NET MINERAL ACRES, PERCENTAGE WORKING INTEREST, OR PERCENTAGE NET REVENUE INTEREST FOR ANY ASSET). PURCHASERS HEREBY ACKNOWLEDGE AND AGREE THAT, SUBJECT TO THE FOREGOING EXCEPTIONS AND THE PROVISIONS OF SECTION 4.5, PURCHASERS’ SOLE REMEDY FOR ANY DEFECT OF TITLE OR ANY OTHER TITLE MATTER, INCLUDING ANY TITLE DEFECT, WITH RESPECT TO ANY OF THE ASSETS, (I) ON OR BEFORE THE TITLE CLAIM DATE, SHALL BE AS SET FORTH IN SECTION 4.2 AND (II) FROM AND AFTER THE TITLE CLAIM DATE (WITHOUT DUPLICATION), SHALL BE PURSUANT TO THE SPECIAL WARRANTY BY CHIEF GP SET FORTH IN SECTION 6.27. EXCEPT FOR THE SPECIAL WARRANTY BY CHIEF GP SET FORTH IN SECTION 6.27 AND WITHOUT LIMITING PURCHASERS’ RIGHTS AND REMEDIES (1) UNDER SECTION 9.2 OR SECTION 11.1, (2) UNDER THE R&W INSURANCE POLICY AND
(3) FOR TITLE DEFECTS SET FORTH IN THIS ARTICLE 4, PURCHASERS HEREBY WAIVE ANY RIGHT TO ASSERT ANY TITLE DEFECT OR OTHER TITLE MATTER, OR TO OTHERWISE RECEIVE ANY ADJUSTMENT TO THE UNADJUSTED PURCHASE PRICE IN RESPECT OF, ANY TITLE DEFECT OR OTHER TITLE MATTER.
(b) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, PURCHASERS ACKNOWLEDGE AND AGREE THAT PURCHASERS SHALL NOT BE ENTITLED TO PROTECTION UNDER (NOR HAVE THE RIGHT TO MAKE A CLAIM AGAINST) THE SPECIAL WARRANTY BY CHIEF GP SET FORTH IN SECTION 6.27 FOR ANY TITLE DEFECT ASSERTED (OR ANY MATTER RAISED IN A PRELIMINARY TITLE DEFECT NOTICE) UNDER THIS ARTICLE 4 PRIOR TO THE TITLE DEFECT CLAIM DATE.
Section 4.2 Title Defects.
(a) To assert a claim of a Title Defect, Purchasers must deliver a claim notice to Sellers (a “Title Defect Notice”) promptly after the discovery thereof, but in no event later than 5:00 p.m., Central Time, on February 28, 2022 (such cut-off date, the “Title Claim Date”). To give Sellers an opportunity to commence reviewing and curing alleged Title Defects asserted by Purchasers, Purchasers shall use reasonable efforts to give Sellers, on or before the end of each calendar week prior to the Title Claim Date, written notice of all alleged Title Defects discovered by Purchasers or Purchasers’ Representatives during such calendar week, which notice may be preliminary in nature and supplemented prior to the Title Claim Date; provided that the failure to give such notice shall not preclude Purchasers from asserting a Title Defect on or before the Title Claim Date. To be effective, each Title Defect Notice shall be in writing and include (i) a description of the alleged Title Defect that is reasonably sufficient for Sellers to determine the basis of the alleged Title Defect, (ii) the Asset adversely affected by the Title Defect (a “Title Defect Property”), (iii) the Allocated Value of each Title Defect Property, (iv) all documents upon which Purchasers rely for their assertion of a Title Defect, including, at a minimum, supporting documents reasonably necessary for Sellers (as well as any title attorney or examiner hired by Sellers) to verify the existence of the alleged Title Defect (if, and to the extent, such documents are in Purchasers’ or their Representatives’ possession), and (v) for a Title Defect (other than an Environmental Defect) the amount by which Purchasers reasonably believe the Allocated Value of each Title Defect Property is reduced by the alleged Title Defect and the computations and information upon which Purchasers’ belief is based, including any analysis by any title attorney or examiner hired by Purchasers and, for Title Defects that are Environmental Defects, Purchasers’ computation of the Title Defect Amount (in accordance with Section 4.2(d)(v)) along with a description in reasonable detail of the Remediation proposed for the alleged Environmental Defect and identification of all material assumptions used by Purchasers in calculating such Title Defect Amount, including the standards Purchasers assert must be met to comply with applicable Environmental Laws. Notwithstanding anything herein to the contrary (except for the special warranty by Chief GP set forth in Section 6.27), Purchasers forever waive, and Sellers shall have no liability for, Title Defects not asserted by a Title Defect Notice meeting all of the requirements set forth in the preceding sentence by the Title Claim Date.
(b)
(i) Sellers shall have the right, but not the obligation, to attempt, at their sole cost, to cure or remove (A) at any time prior to the Closing, any Title Defects that are Environmental Defects and (B) on or before the date that is 90 days after the Closing Date (the “Cure Period”) any Title Defects (other than Environmental Defects), in each case of (A) and (B) above for which Sellers have received a Title Defect Notice from Purchasers prior to the Title Claim Date. From and after Closing, with respect to Title Defects (other than Environmental Defects), Purchasers shall take all actions reasonably requested by Sellers to assist them with the cure or removal of any such Title Defects; provided, however, that such actions shall not require Purchasers to incur any costs or spend any money with respect to such assistance.
(ii) At the Closing and except with respect to Title Defects for Title Defect Properties excluded from the Closing or assigned or distributed to Sellers pursuant to Section 4.2(c), the Unadjusted Purchase Price shall be reduced by an amount equal to the Title Defect Amount for any Title Defect that is not cured prior to the Closing; provided, however, that with respect to (A) any Title Defect (other than an Environmental Defect) for which Sellers have provided notice to Purchasers at least two days prior to the Scheduled Closing Date that Sellers intend to attempt to cure such Title Defect during the Cure Period (a “Remedy Notice”) or (B) any Title Defect for which Sellers dispute the existence of such Title Defect, the proper and adequate cure therefore, or the Title Defect Amount attributable to a Title Defect (a “Disputed Defect” and such notice, a “Dispute Notice”), then (1) the Unadjusted Purchase Price shall not be reduced at the Closing by the Title Defect Amount for such Title Defect, (2) Purchasers’ good faith estimate of the Title Defect Amount for such Title Defect (the “Deemed Defect Amount”) shall not be paid to Sellers at the Closing and shall be deposited with the Escrow Agent in accordance with Section 4.2(b)(iii) and (3) the Unadjusted Purchase Price shall be deemed to be reduced for purposes of Section 9.1(e) and Section 9.2(e) based on the Deemed Defect Amount for each Title Defect.
(iii) At Closing, Purchasers shall deposit with the Escrow Agent an amount in cash equal to the aggregate Deemed Defect Amounts for any Title Defects with respect to which a Remedy Notice or Dispute Notice is provided to Purchasers by Sellers in accordance with Section 4.2(b)(ii) (such amount, the “Defect Escrow Amount”), and such Defect Escrow Amount or portions thereof shall be distributed in accordance with this Section 4.2(b)(iii). If (A) before the end of the Cure Period, Sellers and Purchasers agree that such Title Defect has been cured, or (B) Sellers and Purchasers cannot agree, and it is determined by the Title Arbitrator that such Title Defect is fully cured, then within five Business Days after the expiration of the Cure Period (in the case of clause (A)) or the determination of the Title Arbitrator (in the case of clause (B)), the Parties shall jointly direct the Escrow Agent to release the Deemed Defect Amount escrowed for such Title Defect pursuant to this Section 4.2(b)(iii) to Sellers; provided, however, that, if such Title Defect has only been partially cured, the Unadjusted Purchase Price shall be adjusted downward based on the Title Defect Amount for such Title Defect as partially cured, the Parties shall jointly direct the Escrow Agent to release to Purchasers the portion of the Deemed Defect Amount escrowed for such Title Defect pursuant to this Section 4.2(b)(iii) that is equal to such adjustment (or the entirety of such amount if the Title Defect Amount equals or exceeds the amount so escrowed), the Parties shall jointly direct the Escrow
Agent to release to Sellers the remaining amount escrowed for such Title Defect pursuant to this Section 4.2(b)(iii), if any, and such adjustment and releases shall be reflected in the calculations, and any further reconciliation, if necessary, shall be completed under Section 10.4(c). If (1) upon the end of the Cure Period, Sellers and Purchasers agree that such Title Defect has not been cured, or (2) Sellers and Purchasers cannot agree, and it is determined by the Title Arbitrator that such Title Defect is not cured, then, within five Business Days after the expiration of the Cure Period (in the case of clause (1)) or the determination of the Title Arbitrator (in the case of clause (2)), the Parties shall jointly direct the Escrow Agent to release the Deemed Defect Amount escrowed for such Title Defect pursuant to this Section 4.2(b)(iii) to Purchasers, the Unadjusted Purchase Price shall be adjusted downward by the Title Defect Amount for such Title Defect and such adjustment and releases shall be reflected in the calculations, and any further reconciliation, if necessary, shall be completed, under Section 10.4(c). Within five Business Days after the Title Arbitrator has made a determination with respect to any Title Defect or Title Defect Amount, the Parties shall jointly direct the Escrow Agent to disburse the amount as determined by the Title Arbitrator to the Party determined by the Title Arbitrator to be entitled thereto, but only to the extent direction has not been otherwise provided to the Escrow Agent above in this Section 4.2(b)(iii) with respect to such Title Defect or Title Defect Amount, the Unadjusted Purchase Price shall be adjusted downward in accordance with such determination, if applicable, and such adjustment shall be reflected in the calculations, and any further reconciliation, if necessary, shall be completed, under Section 10.4(c). Any interest earned on the Defect Escrow Amount shall be released to the Party receiving such Defect Escrow Amount.
(iv) If any Title Defect with respect to which Sellers provided a Remedy Notice to Purchasers is not cured or resolved within the Cure Period, Sellers shall remedy such Title Defect pursuant to Section 4.2(c) no later than one Business Day after the expiration of the Cure Period (the “Remedy Deadline”); provided, however, that any downward adjustments to the Unadjusted Purchase Price made pursuant to Section 4.2(c) shall occur at the times set forth in Section 4.2(b)(iii) and shall be reflected in the calculations under Section 10.4; and provided further, that if there are any Disputed Defects that have not been cured, waived, or otherwise resolved by the Parties prior to the Remedy Deadline, such Disputed Defect(s) (and any remedies relating thereto) shall be finally and exclusively resolved in accordance with the provisions of Section 4.4. An election by Sellers to attempt to cure a Title Defect shall be without prejudice to their rights under Section 4.4 and shall not constitute an admission against interest or a waiver of Sellers right to dispute the existence, nature, or value of, or cost to cure, the alleged Title Defect.
(c) In the event that any Title Defect is not waived by Purchasers or, subject to Section 4.2(b), not cured or resolved within the Cure Period, (i) with respect to any such Title Defect that is not an Environmental Defect, Sellers shall, subject to the Title Defect Threshold and the Title Defect Deductible, make a downward adjustment to the Unadjusted Purchase Price equal to the Title Defect Amount as being the value of such Title Defect, or (ii) with respect to any such Title Defect that is an Environmental Defect, Sellers shall, at their sole election and subject to the Environmental Defect Threshold and the Environmental Defect Deductible, elect to at Closing (A) make a downward adjustment to the Unadjusted Purchase Price equal to the Title Defect Amount as being the value of such Title Defect, or (B) if and only if the Title Defect Amount alleged by
Purchaser equals or exceeds 100% of the Allocated Value of the Title Defect Property, cause the applicable member of the Company Group to assign or distribute to a Seller (or Sellers’ designee) the entirety of the Title Defect Property that is adversely affected by such Environmental Defect (along with any related Assets), in which event, the Unadjusted Purchase Price shall be adjusted downward by an amount equal to the Allocated Value of such Title Defect Property, and such Title Defect Property shall no longer be included within the definition of Assets for any purpose under this Agreement and shall be included within the definition of Excluded Assets for all purposes of this Agreement.
(d) The “Title Defect Amount” resulting from a Title Defect shall be the amount by which the Allocated Value of the Title Defect Property adversely affected by such Title Defect is reduced as a result of the existence of such Title Defect and shall be determined in accordance with the following methodology, terms, and conditions; provided the Title Defect Amount for a Title Defect that is an Environmental Defect shall be determined without regard to the Allocated Value of the Title Defect Property:
(i) if Purchasers and Sellers agree on the Title Defect Amount, that amount shall be the Title Defect Amount;
(ii) if the Title Defect is a lien, encumbrance, or other charge that is undisputed and liquidated in amount, then the Title Defect Amount shall be the amount necessary to be paid to remove the Title Defect from the Company Group’s interest in the affected Title Defect Property;
(iii) if the Title Defect reflects a discrepancy (with a proportionate decrease in the working interest for the affected Title Defect Property) between (A) the Net Revenue Interest for the affected Title Defect Property and (B) the Net Revenue Interest stated in Exhibit A-1 or Exhibit A-2 (as applicable) for such Title Defect Property, then the Title Defect Amount shall be the product of the Allocated Value of such Title Defect Property multiplied by a fraction, the numerator of which is the amount of the Net Revenue Interest decrease and the denominator of which is the Net Revenue Interest stated in Exhibit A-1 or Exhibit A-2 (as applicable);
(iv) if the Title Defect reflects a discrepancy (based solely on gross acreage in the lands covered by the affected Lease or the undivided percentage interest in oil, gas, and other minerals covered by the affected Lease) between (A) the Net Mineral Acres for the affected Lease and (B) the Net Mineral Acres stated in Exhibit A-1 for the affected Lease, the Title Defect Amount shall be the product of the Allocated Value of such Title Defect Property multiplied by a fraction, the numerator of which is the Net Mineral Acre decrease for such Title Defect Property and the denominator of which is the Net Mineral Acres of such Title Defect Property stated in Exhibit A-1;
(v) if the Title Defect is an Environmental Defect, the Title Defect Amount shall be equal to the estimated costs and expenses of the most cost-effective Remediation of the Environmental Defect (as of the Closing Date) allowed under applicable Environmental Laws without interference with or restrictions on the continued operation of the affected Asset for exploration for, development of and production of Hydrocarbons;
(vi) if the Title Defect represents an obligation, encumbrance, burden, or charge upon or other defect in title to the Title Defect Property of a type not described in subsections (ii), (iii), (iv), or (v) above, the Title Defect Amount shall be determined by taking into account the Allocated Value of the Title Defect Property, the portion of the Title Defect Property adversely affected by the Title Defect, the legal effect of the Title Defect, the potential economic effect of the Title Defect over the life of the Title Defect Property, the values placed upon the Title Defect by Purchasers and Sellers, and such other factors as are necessary to make a proper evaluation;
(vii) the Title Defect Amount with respect to a Title Defect shall be determined without duplication of any costs or losses included in any other Title Defect Amount hereunder, or for which Purchasers otherwise receive credit in the calculation of the Adjusted Purchase Price; and
(viii) notwithstanding anything to the contrary in this Article 4, the aggregate Title Defect Amounts attributable to the effects of all Title Defects upon any Title Defect Property shall not exceed the Allocated Value of such Title Defect Property, other than Title Defects that are Environmental Defects or are of the type described in Section 4.2(d)(ii).
(e) It is understood and agreed that Environmental Defects shall constitute Title Defects for purposes of this Agreement (as is provided in the definition of the term “Title Defects” set forth in Appendix A) and, as such, will be handled in accordance with, and in all instances will be subject to, the provisions of this Section 4.2 and the other applicable provisions of this Article 4 (including the Environmental Defect Threshold and Environmental Defect Deductible set forth in Section 4.5). As such, without limiting the disclaimers and acknowledgements set forth in Article 8:
(i) SUBJECT TO, AND WITHOUT LIMITATION OF, CHIEF GP’S REPRESENTATION SET FORTH IN SECTION 6.16 AND CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), PURCHASERS’ RIGHTS UNDER THE R&W INSURANCE POLICY RELATED TO SUCH REPRESENTATION AND PURCHASERS’ RIGHTS UNDER SECTION 10.3 OR SECTION 11.1 EACH PURCHASER (ON BEHALF OF ITSELF AND ITS AFFILIATES, INCLUDING, FROM AND AFTER CLOSING, THE COMPANY GROUP) HEREBY WAIVES AND RELEASES ANY REMEDIES OR CLAIMS (WHETHER KNOWN OR UNKNOWN, FIXED OR CONTINGENT, LIQUIDATED OR UNLIQUIDATED, AND WHETHER ARISING AT LAW OR IN EQUITY) THAT IT MAY HAVE AGAINST SELLERS, THEIR AFFILIATES, OR ANY OTHER MEMBER OF THE SELLER GROUP UNDER APPLICABLE LAWS WITH RESPECT TO ENVIRONMENTAL DEFECTS (INCLUDING ANY CLAIMS ARISING UNDER CERCLA OR OTHER ENVIRONMENTAL LAWS) OR OTHER ENVIRONMENTAL MATTERS, EXCEPT SOLELY FOR THOSE REMEDIES SET FORTH IN THIS ARTICLE 4.
(ii) PURCHASERS ACKNOWLEDGE THAT THE ASSETS HAVE BEEN USED FOR EXPLORATION, DEVELOPMENT, PRODUCTION, GATHERING, AND TRANSPORTATION OF OIL AND GAS AND THERE MAY BE PETROLEUM, PRODUCED WATER, WASTES, SCALE, NORM, HAZARDOUS SUBSTANCES, OR OTHER SUBSTANCES OR MATERIALS LOCATED IN, ON, OR UNDER THE ASSETS OR ASSOCIATED WITH THE ASSETS. EQUIPMENT AND SITES INCLUDED IN THE ASSETS MAY CONTAIN ASBESTOS, NORM, OR OTHER HAZARDOUS SUBSTANCES. NORM MAY AFFIX OR ATTACH ITSELF TO THE INSIDE OF WELLS, PIPELINES, MATERIALS, AND EQUIPMENT AS SCALE, OR IN OTHER FORMS. THE WELLS, MATERIALS, AND EQUIPMENT LOCATED ON THE ASSETS OR INCLUDED IN THE ASSETS MAY CONTAIN NORM AND OTHER WASTES OR HAZARDOUS SUBSTANCES. NORM CONTAINING MATERIAL OR OTHER WASTES OR HAZARDOUS SUBSTANCES MAY HAVE COME IN CONTACT WITH VARIOUS ENVIRONMENTAL MEDIA, INCLUDING WATER, SOILS, OR SEDIMENT. SPECIAL PROCEDURES MAY BE REQUIRED FOR THE ASSESSMENT, REMEDIATION, REMOVAL, TRANSPORTATION, OR DISPOSAL OF ENVIRONMENTAL MEDIA, WASTES, ASBESTOS, NORM, AND OTHER HAZARDOUS SUBSTANCES FROM THE ASSETS.
(iii) SUBJECT TO, AND WITHOUT LIMITATION OF, CHIEF GP’S REPRESENTATION SET FORTH IN SECTION 6.16 AND CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b) AND WITHOUT LIMITING PURCHASERS’ RIGHTS UNDER THE R&W INSURANCE POLICY, NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT OR ANY OTHER AGREEMENT OR INSTRUMENT DELIVERED HEREUNDER, SELLERS DO NOT MAKE, SELLERS EXPRESSLY DISCLAIM, AND EACH PURCHASER (ON BEHALF OF ITSELF AND ITS AFFILIATES, INCLUDING, FROM AND AFTER CLOSING, THE COMPANY GROUP) WAIVES ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT, EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT TO THE PRESENCE OR ABSENCE OF ASBESTOS, NORM, OR OTHER WASTES OR HAZARDOUS SUBSTANCES IN OR ON THE ASSETS IN QUANTITIES TYPICAL FOR OILFIELD OPERATIONS IN THE AREAS WHERE THE ASSETS ARE LOCATED.
Section 4.3 Title Benefits.
(a) Sellers have the right, but not the obligation, to deliver to Purchasers on or before the Title Claim Date with respect to each Title Benefit discovered by Sellers a notice (a “Title Benefit Notice”) in writing and including (i) a description of the Title Benefit reasonably sufficient to determine the basis of the alleged Title Benefit, (ii) the Lease or Well affected by such Title Benefit (a “Title Benefit Property”), (iii) the Allocated Value of each Title Benefit Property, (iv) all documents upon which Sellers rely for the assertion of a Title Benefit, including, at a minimum, supporting documents reasonably necessary for Purchasers (as well as any title attorney or examiner hired by Purchasers) to verify the existence of the alleged Title Benefit, and (v) the amount by which Sellers reasonably believe the Allocated Value of each Title Benefit Property is increased by such Title Benefit and the computations and information upon which Sellers’ belief
is based on or before the Title Claim Date with respect to each Title Benefit discovered by Sellers. Sellers forever waive Title Benefits not asserted by a Title Benefit Notice meeting all the requirements set forth in the preceding sentence by the Title Claim Date. Purchasers shall, promptly upon discovery, furnish Sellers with written notice of any Title Benefit discovered by Purchasers or their Representatives while conducting Purchasers’ due diligence with respect to the Properties prior to the Title Claim Date.
(b) With respect to each Title Benefit Property affected by Title Benefits reported under Section 4.3(a), the Title Defect Amounts for Title Defects (other than Environmental Defects) shall be decreased by an amount (the “Title Benefit Amount”) equal to the increase in the Allocated Value for such Title Benefit Property, as determined pursuant to Section 4.3(c). For the avoidance of doubt, the application of any Title Benefit Amounts shall be applicable only as an offset to Title Defect Amounts attributable to Title Defects that are not Environmental Defects.
(c) The Title Benefit Amount resulting from a Title Benefit shall be the amount by which the Allocated Value of the Title Benefit Property affected by such Title Benefit is increased as a result of the existence of such Title Benefit and shall be determined in accordance with the following methodology, terms, and conditions:
(i) if Purchasers and Sellers agree on the Title Benefit Amount, that amount shall be the Title Benefit Amount;
(ii) if the Title Benefit reflects a difference (with a proportional increase in the working interest for the affected Title Defect Property) between (A) the Net Revenue Interest for the affected Title Benefit Property and (B) the Net Revenue Interest stated in Exhibit A-1 or Exhibit A-2 (as applicable) for such Title Benefit Property, then the Title Benefit Amount shall be the product of the Allocated Value of such Title Benefit Property multiplied by a fraction, the numerator of which is the amount of the Net Revenue Interest increase and the denominator of which is the Net Revenue Interest stated in Exhibit A-1 or Exhibit A-2 (as applicable);
(iii) if the Title Benefit reflects a difference between (A) the Net Mineral Acres for the affected Lease and (B) the Net Mineral Acres stated in Exhibit A-1 for such Lease, the Title Benefit Amount shall be the product of the Allocated Value of such Title Benefit Property multiplied by a fraction, the numerator of which is the Net Mineral Acres increase for such Title Benefit Property and the denominator of which is the Net Mineral Acres of such Title Benefit Property stated in Exhibit A-1; and
(iv) if the Title Benefit represents a benefit in the ownership or title to the Title Benefit Property of a type not described in subsections (ii) or (iii) above, the Title Benefit Amount shall be determined by taking into account the Allocated Value of the Title Benefit Property, the portion of the Title Benefit Property benefitted by the Title Benefit, the legal effect of the Title Benefit, the potential economic effect of the Title Benefit over the life of the Title Benefit Property, the values placed upon the Title Benefit by Purchasers and Sellers, and such other factors as are necessary to make a proper evaluation.
(d) If the Parties cannot reach an agreement on alleged Title Benefits and Title Benefit Amounts prior to Closing, the provisions of Section 4.4 shall apply.
Section 4.4 Title Disputes.
(a) The Parties shall attempt to agree on all Title Defects, Title Benefits, Title Defect Amounts, and Title Benefit Amounts, respectively, prior to Closing. If the Parties are unable to agree on Title Defects, Title Benefits, Title Defect Amounts, and Title Benefit Amounts, respectively, by the scheduled Closing, then all Deemed Defect Amounts shall be paid into escrow in accordance with Section 4.2(b)(iii). If, on or before the Remedy Deadline, the Parties are unable to agree on an alleged Title Defect/Title Benefit (including, in the case of Title Defects, the adequate cure therefor) or Title Defect Amount/Title Benefit Amount (the “Disputed Title Matters”), such dispute(s), and only such dispute(s), shall be exclusively and finally resolved in accordance with the following provisions of this Section 4.4. By not later than the fifth Business Day following the Remedy Deadline, Sellers shall provide to Purchasers in the case of Title Defects/Title Defect Amounts, and Purchasers shall provide to Sellers in the case of Title Benefit/Title Benefit Amounts, a written notice that such Party is disputing the Disputed Title Matters, together with all supporting documentation for such dispute (with such Party providing the notice being referred to herein as the “Disputing Party”). By not later than 10 Business Days after the other Party’s receipt of the Disputing Party’s written notice, such other Party shall provide to the Disputing Party a written response setting forth the other Party’s position with respect to the Disputed Title Matters together with all supporting documentation.
(b) By not later than 10 Business Days after the Disputing Party’s receipt of the other Party’s written response to the Disputing Party’s written description of the Disputed Title Matters, either Party may initiate a non-administered arbitration of any such dispute(s) conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, to the extent that such rules do not conflict with the terms of this Section 4.4, by written notice (the “Title Arbitration Notice”) to such other Party of any Disputed Title Matters not otherwise mutually resolved or waived that are to be resolved by arbitration (“Final Disputed Title Matters”). Purchasers, with respect to Title Benefits, and Sellers, with respect to Title Defects, shall be deemed to have conclusively waived any dispute or disagreement with respect to unresolved Title Defects or Title Benefits which such Party fails to submit for resolution as provided in this Section 4.4(b) and the Title Defect Amount or Title Benefit Amount, as applicable, set forth in the Title Defect Notice or Title Benefit Notice, respectively, shall be deemed accepted by the Parties.
(c) The arbitration shall be held before a one-member arbitration panel (the “Title Arbitrator”), determined as follows: the Title Arbitrator shall be an attorney with at least 10 years’ experience (i) in the case of Title Defects other than Environmental Defects, examining oil and gas titles in the geographic area where the Assets subject to such dispute are located, and (ii) in the case of Environmental Defects, as an environmental attorney practicing in the geographic area where the Assets subject to such dispute are located; provided, however, that the Title Arbitrator shall not have performed professional services for any Party or any of its Affiliates during the previous five years. Within two Business Days following a Party’s receipt of the Title Arbitration Notice, Sellers and Purchasers shall each exchange lists of three acceptable, qualified arbitrators. Within two Business Days following the exchange of lists of acceptable arbitrators,
the Parties shall select by mutual agreement the Title Arbitrator from their original lists of three acceptable arbitrators. If no such agreement is reached within seven Business Days following the delivery of Title Arbitration Notice, each Party shall appoint one arbitrator from their original list and the two appointed arbitrators shall, within two Business Days following their appointment, select an arbitrator from the original lists provided by the Parties to serve as the Title Arbitrator.
(d) Within three Business Days following the selection of the Title Arbitrator, the Parties shall submit one copy to the Title Arbitrator of (i) this Agreement, with specific reference to this Section 4.4 and the other applicable provisions of this Article 4, (ii) the Title Defect Notice or Title Benefit Notice, as applicable, (iii) the Disputing Party’s written notice of the Final Disputed Title Matters, together with the supporting documents that were provided to the other Party, (iv) the other Party’s written response to the Disputing Party’s written description of the Final Disputed Title Matters, together with the supporting documents that were provided to the Disputing Party, and (v) the Title Arbitration Notice. The Title Arbitrator shall resolve the Final Disputed Title Matters based only on the foregoing submissions. Neither Purchasers nor Sellers shall have the right to submit additional documentation to the Title Arbitrator nor to demand discovery on the other Party.
(e) The Title Arbitrator shall make its determination by written decision within 30 days following receipt of the Title Arbitration Notice by Purchasers or Sellers, as applicable (the “Arbitration Decision”). The Arbitration Decision shall be final and binding upon the Parties, without right of appeal. In making its determination, the Title Arbitrator shall be bound by the provisions of this Article 4. The Title Arbitrator may consult with and engage disinterested Third Parties to advise the Title Arbitrator, but shall disclose to the Parties the identities of such consultants and shall only use such Third Parties to the extent necessary to resolve the Final Disputed Title Matters. Any such consultant shall not have worked as an employee or consultant for any Party or its Affiliates during the five-year period preceding the arbitration nor have any financial interest in the dispute.
(f) The Title Arbitrator shall act as an expert for the limited purpose of determining the specific Disputed Title Matter and shall not be empowered to award damages, interest, or penalties to any Party with respect to any matter.
(g) Each Party shall each bear its own legal fees and other costs of preparing and presenting its case. The fees, costs, and expenses of the Title Arbitrator pursuant to this Section 4.4 shall be borne by Sellers, on the one hand, and the Purchasers, on the other hand, based upon the percentage which the aggregate portion of the contested amount not awarded to each party bears to the aggregate amount actually contested by such Party. For example, if Purchasers claim the Title Defect Amount is $1,000 greater than the amount determined by Sellers, and Sellers contest only $500 of the amount claimed by Purchasers, and if the Title Arbitrator ultimately resolved the dispute by awarding the Sellers $300 of the $500 contested, then the costs and expenses of the Title Arbitrator will be allocated 60% (i.e., 300 ÷ 500) to Purchasers and 40% (i.e., 200 ÷ 500) to Sellers.
(h) The Parties shall implement the Arbitration Decision as follows: (i) in the case of alleged Title Defects determined to be Title Defects, Sellers shall remedy, at their sole election, such Title Defects pursuant to Section 4.2(c) within 10 Business Days following Sellers’
receipt of the Arbitration Decision (with any amounts owed, as a result of such election, to be made and accounted for at the times set forth in Section 4.2(b)(iii) and such remedy and amounts shall be reflected in the calculation, and any further reconciliation, if necessary, shall be completed, under Section 10.4(c)), and (ii) in the case of disputed Title Benefits and Title Benefit Amounts or Title Defect Amounts, any amounts determined to be owed by any Party shall be accounted for at the times set forth in Section 4.2(b)(iii) and such amounts shall be reflected in the calculation, and any further reconciliation, if necessary, shall be completed, under Section 10.4(c). Any alleged Title Defect or Title Benefit determined not to be a Title Defect or Title Benefit (as applicable) under the Arbitration Decision shall be final and binding as not being a Title Defect or Title Benefit, as applicable.
Section 4.5 Limitations on Applicability.
(a) The right of Purchasers or Sellers to assert a Title Defect or Title Benefit, respectively, under this Article 4 shall terminate on the Title Claim Date, except that until the alleged Title Defect, Title Benefit, Title Defect Amount, or Title Benefit Amount, as applicable, is resolved in accordance with this Agreement, there shall be no termination of Purchasers’ or Sellers’ rights under this Article 4 with respect to any alleged Title Defect, Title Benefit, Title Defect Amount, or Title Benefit Amount properly reported in accordance with Section 4.4 on or before the Title Claim Date. Without limiting the foregoing, if a Title Defect under this Article 4 results from any matter that could also result in the breach of (i) any representation or warranty of Sellers as set forth in Article 5 or (ii) any representation or warranty of Chief GP as set forth in Article 6, and Purchaser asserted such matter as a Title Defect (or raised such matter in any preliminary notice of any Title Defects) in accordance with this Article 4 prior to the Title Claim Date, Purchasers shall only be entitled to assert such matter as a Title Defect to the extent permitted by this Article 4 and, for the avoidance of doubt, shall be precluded from also asserting such matter as the basis of the breach of any such representation or warranty.
(b) Notwithstanding anything to the contrary in this Agreement, in no event shall there be any adjustments to the Unadjusted Purchase Price or other remedies available in respect of (i) Title Defects that are not Environmental Defects under this Article 4 (A) for any Title Defect Amount with respect to an individual Title Defect Property, if such amount does not exceed $160,000 with respect to any Title Defect that is not an Environmental Defect (“Title Defect Threshold” ), and (B) unless the amount of all such Title Defect Amounts (provided that each such Title Defect Amount exceeds the Title Defect Threshold) in the aggregate (excluding any Title Defect Amounts with respect to Title Defects cured in accordance with this Article 4) exceeds 1.85% of the Unadjusted Purchase Price (the “Title Defect Deductible”), after which point, subject to the Title Defect Threshold and Section 4.3(b), Purchasers shall be entitled to adjustments to the Unadjusted Purchase Price only with respect to Title Defect Amounts in excess of such Title Defect Deductible and only to the extent that Title Defect Amounts exceed the Title Defect Deductible or (ii) Title Defects that are Environmental Defects under this Article 4 (A) for any Title Defect Amount with respect to an individual Title Defect Property, if such amount does not exceed $150,000 with respect to any Title Defect that is an Environmental Defect (“Environmental Defect Threshold” ), and (B) unless the amount of all such Title Defect Amounts (provided that each such Title Defect Amount exceeds the Environmental Defect Threshold) in the aggregate (excluding any Title Defect Amounts with respect to Title Defects cured in accordance with this Article 4) exceeds 1.75% of the Unadjusted Purchase Price
(the “Environmental Defect Deductible”), after which point, subject to the Environmental Defect Threshold and Section 4.3(b), Purchasers shall be entitled to adjustments to the Unadjusted Purchase Price only with respect to Title Defect Amounts in excess of the Environmental Defect Deductible and only to the extent that Title Defect Amounts exceed the Environmental Defect Deductible.
(c) Notwithstanding anything herein to the contrary, neither the Title Defect Threshold nor the Title Defect Deductible shall apply to (or otherwise limit) Title Defects that are not Environmental Defects to the extent such Title Defects would constitute a breach of the representation in Section 6.27 if a Third Party were to make a claim with respect to the circumstances constituting such Title Defect, and the Unadjusted Purchase Price shall be adjusted by the full Title Defect Amount for any such Title Defect.
(d) Without prejudice to any of the other dates by which performance or the exercise of rights is due hereunder, or the Parties’ rights or obligations in respect thereof, the Parties hereby acknowledge that, as set forth more fully in Section 14.13, time is of the essence in performing their obligations and exercising their rights under this Article 4, and, as such, subject to Section 1.2, each and every date and time by which such performance or exercise is due shall be the firm and final date and time.
Section 4.6 Consents to Assignment and Preferential Rights to Purchase.
(a) No later than two Business Days after the Execution Date, Sellers shall (or shall cause the Company Group to) prepare and send (i) notices to the holders of any required consents to the transactions contemplated hereunder (including the Specified Consent Requirements that are set forth on Schedule 6.13) requesting such consents and (ii) notices to the holders of any applicable preferential rights to purchase, options, puts or calls, rights of first refusal or similar rights (in each case, excluding Hedges) triggered by the transactions contemplated hereunder that are set forth on Schedule 6.13 (“Preferential Rights”) in compliance with the terms of such rights and requesting waivers of such rights. Sellers shall use Commercially Reasonable Efforts to cause such consents and waivers of Preferential Rights (or the exercise thereof) to be obtained and delivered prior to Closing, provided that Sellers and the Company Group shall not be required to make payments or undertake obligations to or for the benefit of the holders of such rights in order to obtain the required consents and waivers. Purchasers shall, and after the Closing shall cause the Company Group to, cooperate with Sellers in seeking to obtain such consents and waivers of Preferential Rights and, to the extent required to obtain the consent of any counterparty to a Specified Midstream Contract set forth on Schedule 6.13, on or prior to Closing, Purchasers shall (and if applicable, shall cause their Affiliates (including, after the Closing, the Company Group) to) provide any bonds, letters of credit, guarantees, credit support and any other assurances as to financial capability, resources, and creditworthiness required in order for such counterparty to provide its consent to the transactions contemplated by this Agreement. Any Preferential Right must be exercised subject to all terms and conditions set forth in this Agreement, including the successful Closing of this Agreement pursuant to Article 10. The consideration payable under this Agreement for any particular Asset for purposes of Preferential Right notices shall be the Allocated Value for such Asset, subject to adjustment pursuant to Section 3.3. If, prior to the Closing Date, any Party discovers any required consents or Preferential Rights for which notices have not been delivered pursuant to the first sentence of this Section 4.6(a), then (x) the Party making such
discovery shall provide the other Party with written notification of such consents or Preferential Rights, as applicable, (y) Sellers, following delivery or receipt of such written notification, will promptly send (or cause the Company Group to send) notices to the holders of the required consents requesting such consents and notices to the holders of Preferential Rights in compliance with the terms of such rights and requesting waivers of such rights, and (z) the terms and conditions of this Section 4.6 shall apply to the Assets subject to such consents or Preferential Rights, as applicable.
(b) In no event shall there be included in the transactions contemplated hereunder any Company Interests or Asset for which a Specified Consent Requirement has not been satisfied, and, notwithstanding anything to the contrary in this Agreement, Sellers shall have the right to (or to cause the Company Group to) convey such Company Interests or Assets to any member of the Seller Group prior to or simultaneously with the Closing in accordance with this Section 4.6. In cases in which the Asset subject to a Specified Consent Requirement is a Contract and Purchasers obtain ownership of the Property or Properties to which the Contract relates (either directly or through the acquisition of the Company Interests), but the Contract is withheld from the transactions contemplated hereunder due to the unwaived Specified Consent Requirement, (i) Sellers shall continue after Closing to use Commercially Reasonable Efforts to satisfy the Specified Consent Requirement so that such Contract can be transferred to a Purchaser (or their designee) upon receipt of the Specified Consent Requirement, (ii) the Contract shall be held by Sellers for the benefit of Purchasers until the Specified Consent Requirement is satisfied or the Contract has terminated, and (iii) Purchasers shall pay all amounts due thereunder, perform all obligations thereunder and indemnify Sellers against any Damages incurred or suffered by Sellers as a consequence of remaining a party to such Contract until the Specified Consent Requirement is satisfied or the Contract has terminated. In cases in which the Asset subject to such a Specified Consent Requirement is a Property and such consent is not satisfied by Closing, the affected Property and the Assets related to that Property shall be withheld from the transactions contemplated hereby, shall be Excluded Assets hereunder, and the Unadjusted Purchase Price shall be reduced by the Allocated Value of the Property and related Assets. If an unsatisfied Specified Consent Requirement with respect to which an adjustment to the Unadjusted Purchase Price is made under Section 3.3 is subsequently satisfied prior to the date of delivery of the final settlement statement under Section 10.4(c), a separate closing shall be held within five Business Days thereof at which (A) Sellers shall convey the affected Property and related Assets to a Purchaser (or Purchasers’ designee) in accordance with this Agreement and (B) Purchasers shall pay an amount equal to the Allocated Value of such Property and related Assets, adjusted in accordance with Section 3.3, to Sellers, and following which such Property shall no longer be an Excluded Asset but shall be an Asset hereunder. If such consent requirement is not satisfied by the date of delivery of the final settlement statement under Section 10.4(c), Sellers shall have no further obligation to sell and convey such Property and related Assets and Purchasers shall have no further obligation to purchase, accept, and pay for such Property, and the affected Property and related Assets shall be deemed to be deleted from the applicable Exhibits and Schedules to this Agreement for all purposes.
(c) If any Preferential Right is exercised prior to Closing, Sellers shall have the right to cause the Company Group to convey the affected Assets to the exercising party prior to or simultaneously with the Closing on the terms and conditions set out in the applicable Preferential Right provision and the Unadjusted Purchase Price shall be decreased by the Allocated Value for
the affected Assets, and such affected Assets shall be deemed to be deleted from the applicable Exhibits and Schedules to this Agreement and shall thereafter constitute Excluded Assets for all purposes. Sellers shall retain the consideration paid by the Third Party and shall have no further obligation with respect to such affected Assets under this Agreement. Should (i) a Third Party fail to exercise or waive its Preferential Right to purchase as to any portion of the Assets prior to Closing, and (A) the time for exercise or waiver has not yet expired by Closing or (B) the validity of the exercise is being contested by Sellers or Purchasers, or (ii) a Third Party exercise its Preferential Right to purchase as to any portion of the Assets prior to the Closing, but such Assets are not conveyed prior to or simultaneously with the Closing, then, in each case, there shall be no adjustment to the Unadjusted Purchase Price on account thereof and, if Closing occurs, Purchasers shall cause the Company Group to comply with the terms and provisions set out in the applicable Preferential Right provision and shall be entitled to the consideration paid by such Third Party.
Section 4.7 Casualty or Condemnation Loss. If, after the Execution Date, but prior to the Closing Date, any portion of the Assets is damaged, destroyed, or made unavailable or unusable for the intended purpose by fire or other casualty or is taken in condemnation or under right of eminent domain (each a “Casualty Loss”), subject to Section 9.2(e), Sellers shall promptly notify Purchasers in writing thereof and Purchasers shall nevertheless be required to close. Furthermore, at or prior to Closing, Sellers shall elect in writing to either (a) restore the Assets affected by such Casualty Loss to substantially their condition as of the Execution Date as promptly as practicable following the Closing or (b) adjust the Unadjusted Purchase Price downward by the amount of the reasonable estimated losses to the Assets as a result of such Casualty Losses. In either event, Sellers shall retain all sums paid by Third Parties by reason of such Casualty Losses and all rights in and to any insurance claims, unpaid awards and other rights, in each case, against Third Parties arising out of such Casualty Losses. Further, in the event clause (a) above is applicable, Purchasers agree to reasonably cooperate (and to cause the Company Group to reasonably cooperate), in each case at no cost to Purchasers or any member of the Company Group, as applicable, with Sellers, including by giving Sellers reasonable access to the affected Assets to the extent necessary or convenient to facilitate Sellers’ efforts to restore such affected Assets.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLERS
Section 5.1 Generally.
(a) Any representation or warranty in this Article 5 qualified to the “knowledge of such Seller” or “to such Seller’s knowledge” or with any similar knowledge qualification is limited to matters within the Actual Knowledge of the individuals listed in Schedule 5.1. As used herein, the term “Actual Knowledge” means information personally known by such individual, without a duty of inquiry or investigation.
(b) Subject to the foregoing provisions of this Section 5.1 and the matters specifically set forth on the Schedules attached to this Agreement, each Seller represents and warrants to Purchasers the matters set forth in Section 5.2 through Section 5.10 on the Execution Date and the Closing Date (except for the representations and warranties that refer to a specified date, which will be deemed made as of such date).
Section 5.2 Existence and Qualification. Such Seller is duly formed, validly existing and in good standing under the Laws of the state of its formation and is duly qualified to do business in all jurisdictions in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary.
Section 5.3 Power. Such Seller has the requisite organizational power to enter into and perform this Agreement and each Transaction Document to which such Seller is or will be a party and to consummate the transactions contemplated by this Agreement and such other Transaction Documents.
Section 5.4 Authorization and Enforceability. The execution, delivery, and performance of this Agreement, all documents required to be executed and delivered by such Seller at Closing and all other Transaction Documents to which such 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 trust, limited partnership, or limited liability company action, as applicable, on the part of such Seller. This Agreement has been duly executed and delivered by such Seller (and all documents required hereunder to be executed and delivered by such Seller at Closing and all other Transaction Documents will be duly executed and delivered by such Seller) and this Agreement constitutes, and at the Closing such other documents to be executed and delivered by such Seller at Closing will constitute, the valid and binding obligations of such 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).
Section 5.5 No Conflicts. Except as set forth on Schedule 5.5, and subject to compliance with the HSR Act, the execution, delivery, and performance of this Agreement and the other Transaction Documents by such Seller, and the transactions contemplated hereby and thereby, will not (a) violate any provision of the Organizational Documents of such Seller, (b) result in a material default (with or without due notice or lapse of time or both) or, except for Permitted Encumbrances, 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 such Seller is a party, (c) violate any judgment, order, writ, injunction, ruling, or decree in any material respect applicable to such Seller as a party in interest, or (d) violate any Laws in any material respect applicable to such Seller.
Section 5.6 Capitalization.
(a) Such Seller is the direct owner, holder of record and beneficial owner of its respective portion of the Company Interests as set forth on Schedule 6.5, free and clear of all Encumbrances other than those arising pursuant to or described in (i) the Organizational Documents of the Company (the “Company Organizational Documents”), or (ii) applicable securities Laws.
(b) At the Closing, the delivery by such Seller to Purchasers of the Assignment Agreement will vest Purchasers with good and valid title to such Seller’s respective portion of the Company Interests free and clear of all Encumbrances, other than restrictions generally arising under the Company Organizational Documents and applicable securities Laws.
Section 5.7 Liability for Brokers’ Fees. Purchasers shall not directly or indirectly have any responsibility, liability, or expense, as a result of undertakings or agreements of such Seller or any of 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 5.8 Litigation. Except as set forth on Schedule 5.8, there are no actions, suits, proceedings, or causes of action pending before any Governmental Body or arbitrator, or to such Seller’s knowledge, threatened in writing, with respect to such Seller seeking to obtain material Damages in connection with, or to prevent the consummation of the transactions contemplated by this Agreement or any other Transaction Document or which is reasonably likely to materially impair or delay such Seller’s ability to perform its obligations under this Agreement or any other Transaction Document.
Section 5.9 Bankruptcy. There are no bankruptcy, insolvency, reorganization, receivership, or similar proceedings pending against, being contemplated by, or, to such Seller’s knowledge, threatened against such Seller.
Section 5.10 Investment Intent. Sellers (a) are experienced and knowledgeable investors, (b) are able to bear the economic risks of an acquisition and ownership of the CHK Common Stock comprising the Stock Purchase Price, (c) have such knowledge and experience in business and financial matters so that each Seller is capable of evaluating (and has evaluated) the merits and risks of an investment in the CHK Common Stock being acquired hereunder, (d) is an “accredited investor,” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act, (e) are acquiring the shares of CHK Common Stock comprising the Stock Purchase Price for their own account and not with a view toward or for sale associated with any distribution thereof, nor with any present intention of making a distribution thereof in violation of the Securities Act and applicable state securities Laws, and (f) acknowledge and understand that (i) the shares of CHK Common Stock comprising the Stock Purchase Price have not been registered under the Securities Act in reliance on an exemption therefrom and (ii) each of the shares of CHK Common Stock comprising the Stock Purchase Price will, upon its acquisition by the Sellers, be characterized as “restricted securities” under state and federal securities Laws and may not be sold, transferred, offered for sale, pledged, hypothecated, or otherwise disposed of without registration under the Securities Act and any applicable foreign and state securities Laws, except under an exemption from such registration under the Securities Act and such Laws.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY GROUP AND THE ASSETS
Section 6.1 Generally.
(a) Any representation or warranty qualified to the “knowledge of Chief GP” or “to Chief GP’s knowledge” or with any similar knowledge qualification is limited to matters
within the Actual Knowledge of the individuals listed in Schedule 6.1. As used herein, the term “Actual Knowledge” means information personally known by such individual, without a duty of inquiry or investigation.
(b) Subject to the foregoing provisions of this Section 6.1 and the exceptions and matters specifically set forth on the Schedules attached to this Agreement, Chief GP represents and warrants to Purchasers the matters set forth in Section 6.2 through Section 6.35 on the Execution Date and the Closing Date (except for the representations and warranties that refer to a specified date, which will be deemed made as of such date).
Section 6.2 Existence and Qualification. (a) The Company is a limited partnership and (b) each of Chief Exploration and Chief Operating is a limited liability company, and each entity is duly formed, validly existing and in good standing under the Laws of the state of its formation, and is duly qualified to do business in all jurisdictions in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary.
Section 6.3 Power. Each member of the Company Group has all requisite organizational power to own, lease, and operate its properties, including the Assets, and to carry on its business as is now 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 the Company Group.
Section 6.4 No Conflicts. Except as set forth on Schedule 6.4 and subject to compliance with the HSR Act, the execution, delivery, and performance of this Agreement and the other Transaction Documents by Chief GP, and the transactions contemplated hereby and thereby, will not (a) violate any provision of the Organizational Documents of any member of the Company Group, (b) result in a material default (with or without due notice or lapse of time or both) or, except for Permitted Encumbrances, 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 any member of the Company Group is a party or that affects the Company Interests or the Assets, (c) violate any judgment, order, writ, injunction, ruling, or decree in any material respect applicable to any member of the Company Group as a party in interest, or (d) violate any Laws in any material respect applicable to any member of the Company Group or the Assets.
Section 6.5 Capitalization.
(a) Schedule 6.5 sets forth, for each member of the Company Group, a true and complete list that accurately reflects all of the issued and outstanding Interests of such member of the Company Group (collectively, the “Company Group Interests”) and the record and beneficial owners thereof.
(b) Except for the Company Group Interests set forth on Schedule 6.5, neither the Company nor any member of the Company Group has issued or agreed to issue any: (i) Interests; (ii) option, warrant, subscription, call or option, or any right or privilege capable of becoming an agreement or option, for the purchase, subscription, allotment or issue of any Interests
of any member of the Company Group; (iii) stock appreciation right, phantom stock, interest in the ownership or earnings of the Company or any member of the Company Group or other equity equivalent or equity-based award or right; or (iv) bond, debenture or other Indebtedness having the right to vote or convertible or exchangeable for Interests having the right to vote.
(c) Without limiting the generality of the foregoing, none of the Company Group Interests are subject to any voting trust, member or partnership agreement or voting agreement or other agreement, right, instrument or understanding with respect to any purchase, sale, issuance, transfer, repurchase, redemption or voting of any Company Group Interests, other than as set forth on Schedule 6.5.
(d) The Company Group Interests are duly authorized, validly issued, fully paid and nonassessable, and were not issued in violation of any preemptive rights, rights of first refusal, right of first offer, purchase option, call option, or other similar rights of any Person.
(e) True, correct, and complete copies of the Organizational Documents of each member of the Company Group have been made available to Purchasers and reflect all material amendments and modifications made thereto at any time prior to the Execution Date.
Section 6.6 Subsidiaries. Schedule 6.6 sets forth a true, correct, and complete list of all Subsidiaries of each member of the Company Group (each a “Company Subsidiary”), and, except for the Company Subsidiaries set forth on Schedule 6.6, none of the members of the Company Group own, either directly or indirectly, any Interests in any Person.
Section 6.7 Litigation. Except as set forth on Schedule 6.7, there are no actions, suits, proceedings, or causes of action pending before any Governmental Body or arbitrator, or to such Seller’s knowledge, threatened in writing, with respect to the Assets or any member of the Company Group or otherwise directly related to the Assets or the Company Group’s or its Affiliates’ ownership or operation of the Assets.
Section 6.8 Taxes and Assessments.
(a) All material Taxes that have become due and payable by or with respect to any member of the Company Group have been timely paid, including any material Taxes of a Texas Combined Group for which any member of the Company Group may be held jointly and severally liable.
(b) All Tax Returns that are required to be filed by any member of the Company Group (or on behalf of a Texas Combined Group) have been timely filed with the appropriate Governmental Body, and all such Tax Returns are true, correct and complete in all material respects.
(c) (i) No Tax action, suit, Governmental Body proceeding, or audit is now in progress or pending with respect to any member of the Company Group or a Texas Combined Group, and (ii) neither Chief GP nor any member of the Company Group has received written notice of any pending claim against any member of the Company Group from any applicable Governmental Body for assessment of Taxes.
(d) All material Taxes that any member of the Company Group has been required to collect or withhold in connection with the business of the Company Group have been duly collected or withheld and have been timely and duly paid to the proper Governmental Body.
(e) No statute of limitations in respect of Taxes of any member of the Company Group has been waived, to the extent such waiver remains outstanding.
(f) There are no Encumbrances for Taxes upon any Asset of any member of the Company Group, other than liens for Taxes not yet due and payable or Taxes that are being contested in good faith by appropriate actions.
(g) No member of the Company Group has engaged in any “listed transaction” within the meaning of Treasury Regulation Section 1.6011-4(b)(2).
(h) The Company is, and has at all times since its formation been, classified as a partnership for U.S. federal income tax purposes, and each other member of the Company Group is, and has since January 1, 2008 been, classified as an entity disregarded as separate from the Company for U.S. federal income tax purposes.
(i) No claim has been made in writing by a Governmental Body in a jurisdiction where Tax Returns of or with respect to operations or assets of any member of the Company Group are not filed that any member of the Company Group is or may be subject to taxation by, or required to file any Tax Return in, that jurisdiction.
(j) No election was made to apply Subchapter C of Chapter 63 of Subtitle F of the Code to the Company for a taxable period beginning prior to January 1, 2018.
(k) No member of the Company Group has (i) to the extent applicable, failed to comply in any material respect with any applicable requirements under Section 2302 of the CARES Act (or any similar provision of state or local law); (ii) failed to comply in any material respect with any applicable legal requirements under Sections 7001 through 7005 of the Families First Coronavirus Response Act and Section 2301 of the CARES Act (or any similar provision of state or local law); (iii) deferred any payroll tax obligations (including those imposed by Sections 3101(a) and 3201 of the Code) pursuant to IRS Notice 2020-65 or IRS Notice 2021-11; or (iv) deferred the payment of any material Taxes under any state or local law enacted in response to the COVID-19 pandemic (to the extent such deferred Taxes have not been paid as of the Effective Time).
(l) No member of the Company Group is a party to or bound by any Tax allocation, sharing or indemnity agreements or arrangements (excluding, for the avoidance of doubt, any commercial agreements or contracts that are not primarily related to Taxes). No member of the Company Group has any liability for the Taxes of any Person under Treasury Regulations Section 1.1502-6 (or any corresponding provisions of state, local or foreign Tax law), or as a transferee or successor, or by contract or otherwise (other than the members of the combined, consolidated or unitary group of which the Company is the common parent).
(m) 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 under Subchapter K of Chapter 1 of Subtitle A of the Code (excluding, for the avoidance of doubt, the Company, which is classified as a partnership for U.S. federal income tax purposes).
This Section 6.8 and Section 6.22 shall be the exclusive representations and warranties of Chief GP with respect to Tax matters, and no other representations and warranties are made in this Agreement by Sellers with respect to such matters.
Section 6.9 Capital Commitments. Except as set forth on Schedule 6.9, as of the Execution Date, there were no outstanding AFEs or other capital commitments to Third Parties that were binding on the Assets or any member of the Company Group and could reasonably be expected to require expenditures by any member of the Company Group after the Execution Date in excess of $250,000, net to the interests of such member of the Company Group.
Section 6.10 Compliance with Laws. The Company Group is in compliance with, and the Assets operated by the Company Group are being operated in compliance with, all applicable Laws in all material respects. To Chief GP’s knowledge, the Assets operated by Third Parties (other than Assets operated by the Purchaser Group) are being operated in compliance with all applicable Laws in all material respects. This Section 6.10 does not include any matters with respect to Environmental Laws, which are exclusively addressed in Article 4 and Section 6.16, or Tax matters, which are exclusively addressed in Section 6.8 and Section 6.22.
Section 6.11 Material Contracts.
(a) Schedule 6.11 sets forth all Contracts as of the Execution Date of the type described below, in each case, (x) to which any member of the Company Group is a party (or is a successor or assign of a party) and (y) which will be binding on the Company Group or the Assets after the Closing (collectively, the “Material Contracts”):
(i) any Contract that can reasonably be expected to result in aggregate payments by any member of the Company Group of more than $250,000, net to such member of the Company Group’s interest, during the current or any subsequent calendar year (in each case based solely on the terms thereof and current volumes, without regard to any expected increase in volumes or revenues), except for (A) any Contract that terminates or can be terminated by such member of the Company Group on not greater than 60 days’ notice, and (B) customary joint operating agreements entered into in the ordinary course of business;
(ii) any Contract that can reasonably be expected to result in aggregate revenues to any member of the Company Group of more than $250,000, net to such member of the Company Group’s interest, during the current or any subsequent calendar year (in each case, based solely on the terms thereof and current volumes, without regard to any expected increase in volumes or revenues), except for (A) any Contract that terminates or can be terminated by such member of the Company Group on not greater than 60 days’ notice, and (B) customary joint operating agreements entered into in the ordinary course of business;
(iii) any Hydrocarbon purchase and sale, storage, marketing, transportation, processing, gathering, treatment, separation, compression, or similar Contract, except for any Contract that terminates or can be terminated by the applicable member of the Company Group on not greater than 60 days’ notice;
(iv) any Contract that is an indenture, mortgage, loan, credit agreement, sale-leaseback, guaranty of any obligation, bond, letter of credit or similar Contract;
(v) any Contract that constitutes a lease under which any member of the Company Group is the lessor or the lessee of real or personal property which lease involves an annual base rental of more than $100,000, except for any Contract that terminates or can be terminated by such member of the Company Group on not greater than 60 days’ notice;
(vi) any farmout or farmin agreement, participation agreement, partnership agreement, joint venture agreement, exploration agreement, development agreement, joint operating agreement (other than customary joint operating agreements entered into in the ordinary course of business), unit agreement (other than customary unit agreements entered into in the ordinary course of business), or similar Contract;
(vii) any Contract that (A) contains or constitutes an existing area of mutual interest agreement or (B) includes non-competition restrictions or other similar restrictions on doing business;
(viii) any Contract of a member of the Company Group 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;
(ix) any Contract between a member of the Company Group and any Seller or Affiliate of such Seller (other than another member of a Company Group) that will not be terminated prior to Closing;
(x) any Contract that contains calls upon or options to purchase production, or is a dedication of production or otherwise requires production to be transported processed or sold in a particular fashion or requires the payment of deficiency payments if specified production volume levels are not achieved;
(xi) any Contract that would obligate Purchasers to drill additional wells or conduct other material development operations after the Closing;
(xii) any Contract that provides for the maintenance of credit support by Sellers or any member of the Company Group not otherwise set forth on Schedule 1.1(a) or Schedule 6.20;
(xiii) any Contract that is a seismic or other geophysical acquisition agreement;
(xiv) any Contract relating to the pending acquisition (direct or indirect) by any member of the Company Group of any material properties or any operating business or the capital stock of any other Person; and
(xv) any Contract that would give rise to the payment of a fee, penalty or similar obligation upon the Closing of the transactions contemplated hereby.
(b) As of the Execution Date, the Material Contracts are in full force and effect as to the applicable member of the Company Group and, to Chief GP’s knowledge, each counterparty (excluding any Material Contract that terminates as a result of expiration of its existing term). Except as set forth on Schedule 6.11, there exists no default in any material respect under any Material Contract by a member of the Company Group or, to Chief GP’s knowledge, by any other Person that is a party to such Material Contract and no event has occurred that with notice or lapse of time or both would constitute any material default under any such Material Contract by a member of the Company Group or, to Chief GP’s knowledge, any other Person who is a party to such Material Contract. Prior to the execution of this Agreement, Chief GP has made available to Purchasers complete copies of each Material Contract and all material amendments thereto.
Section 6.12 Payments for Production and Imbalances. Except as set forth on Schedule 6.12, (a) no member of the Company Group is obligated by virtue of any take-or-pay payment, advance payment, or other similar payment (other than (i) royalties, overriding royalties, and similar arrangements reflected in the Net Revenue Interest figures set forth on Exhibit A-1 or Exhibit A-2; (ii) rights of any lessor to take free gas under the terms of the relevant Lease for its use on the lands covered thereby; (iii) gas balancing arrangements; and (iv) non-consent provisions in the Contracts) to deliver Hydrocarbons, or proceeds from the sale thereof, attributable to the Properties at some future time without receiving payment therefor at or after the time of delivery, and (b) there are not any Imbalances attributable to the Properties.
Section 6.13 Consents and Preferential Purchase Rights. Except as set forth on Schedule 6.13, and subject to compliance with the HSR Act, none of the Assets, or any portion thereof, is subject to any Preferential Right or Specified Consent Requirement that may be applicable to the transactions contemplated by this Agreement, except consents that are customarily obtained after Closing (including Customary Post-Closing Consents).
Section 6.14 Non-Consent Operations. Except as set forth on Schedule 6.14 or otherwise reflected on Exhibit A-1 or Exhibit A-2, as applicable, as of the Execution Date, no operations are being conducted or have been conducted on the Properties with respect to which an applicable member of the Company Group has elected to be a non-consenting party under the applicable operating agreement and with respect to which all of such member of the Company Group’s rights have not yet reverted to it.
Section 6.15 Plugging and Abandonment. Except as set forth on Schedule 6.15, with regard to the Properties operated by a member of the Company Group or its Affiliates, and, to the knowledge of Chief GP, with regard to Properties operated by Third Parties: (a) no member of the Company Group has received any written notices or demands from Governmental Bodies or other Third Parties to plug or abandon any Wells, (b) there are no Wells that the operator thereof is
currently obligated by applicable Law to plug and abandon that have not been plugged and abandoned in accordance in all material respects with applicable Law, (c) the Wells that are neither in use for purposes of production or injection, nor temporarily suspended or temporarily abandoned in accordance with applicable Law, have been plugged and abandoned to the extent required by, and in accordance in all material respects with, applicable Law.
Section 6.16 Environmental Matters. Except as set forth on Schedule 6.16, as of the Execution Date, (a) with regard to the Properties operated by a member of the Company Group or its Affiliates, and, to the knowledge of Chief GP, with regard to Properties operated by Third Parties, the Properties and the operation thereof are and during the three year time period prior to the Execution Date have been in compliance with applicable Environmental Laws, including any environmental Permits, in all material respects, (b) no member of the Company Group nor, to Chief GP’s knowledge, any Third Party operator, has received any written notice of material violation of any Environmental Laws relating to the Assets where such violation has not been previously cured or otherwise resolved to the satisfaction of the relevant Governmental Body, (c) with respect to the three year time period prior to the Execution Date, Chief GP has provided Purchasers with copies of all material reports and correspondence addressing the environmental condition of the Assets that are in Chief GP’s or its Affiliates’ possession or control, and (d) with respect to the Properties, no member of the Company Group has entered into, or is subject to, any agreements, consents, orders, decrees, judgments, license or permit conditions, or other directives of any Governmental Body that are in existence as of the Execution Date, that are based on any Environmental Laws and that relate to the future use of any of the Properties and that require any change in the present condition of any of the Properties. Notwithstanding any provision in this Agreement to the contrary, this Section 6.16 shall be the exclusive representations and warranties of Chief GP with respect to Environmental Laws, Environmental Liabilities, and other environmental matters, and no other representations or warranties are made in this Agreement by Sellers with respect to such matters.
Section 6.17 Suspense Funds; Royalties; Expenses. Except as set forth on Schedule 6.17 and the Specified Bank Accounts, as of the Execution Date, no member of the Company Group holds any Third Party funds in suspense with respect to production of Hydrocarbons from any of the Assets (collectively, “Suspense Funds”) other than amounts less than the statutory minimum amount that the Company Group is permitted to accumulate prior to payment. Except for Suspense Funds, the Company Group has properly and timely paid all royalties, overriding royalties, and other burdens upon, measured by, or payable out of production and other interest owners’ revenues or proceeds attributable to sales of Hydrocarbons produced from or attributable to the Assets in accordance with applicable Leases and Laws, in each case, due by the Company Group. Subject to the foregoing, to Chief GP’s knowledge, no material expenses (including bills for labor, materials and supplies used or furnished for use in connection with the Assets) are owed and delinquent in payment by any member of the Company Group that relate to the ownership or operation of the Assets.
Section 6.18 Specified Bank Accounts. Schedule 6.18 sets forth a list of bank accounts maintained by the Company Group in connection with the accumulation of certain Suspense Funds required to be deposited in such accounts (the “Specified Bank Accounts”), together with the names and addresses of the banks or financial institutions maintaining each such account and the authorized signatories on each such account.
Section 6.19 Bankruptcy. There are no bankruptcy, insolvency, reorganization, receivership, or similar proceedings pending against, being contemplated by, or, to Chief GP’s knowledge, threatened against any member of the Company Group.
Section 6.20 Credit Support. Schedule 6.20 contains a true and complete list of all surety bonds, letters of credit, guarantees, and other forms of credit support currently maintained, posted, or otherwise provided by any member of the Company Group with respect to the Assets.
Section 6.21 Bank Accounts. Schedule 6.21 sets forth a true, complete, and correct list of (a) all bank accounts or safe deposit boxes under the control or for the benefit of any member of the Company Group (including the names of the financial institutions maintaining each such account, and the purpose for which such account is established), (b) the names of all persons authorized to draw on or have access to such accounts and safe deposit boxes, and (c) all outstanding powers of attorney or similar authorizations granted by or with respect to any member of the Company Group.
Section 6.22 Employee Benefit Matters. Schedule 6.22 sets forth a true, correct and complete list of all Benefit Plans, copies of which have been made available to Purchasers. Each Benefit Plan has been operated in all material respects in accordance with its terms. No member of the Company Group, nor any of their ERISA Affiliates, has in the past six years maintained, established, sponsored, participated in, or contributed to, or had any obligation or liability to, any (a) plan which is an “employee pension benefit plan,” within the meaning of Section 3(2) of ERISA, that is subject to Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code, (b) “funded welfare plan” within the meaning of Section 419 of the Code, (c) “multiple employer welfare benefit arrangement” as described in Section 3(40)(A) of ERISA, or (d) “multiemployer plan,” as defined in Section 3(37) of ERISA. No member of the Company Group nor any of their ERISA Affiliates has incurred, nor does any such party expect to incur, any liability under Title IV of ERISA or Section 412 of the Code. Upon and after the Closing, no member of the Company Group shall have any liability or potential liability with respect to any Benefit Plan. Except as set forth on Schedule 6.22, the consummation of the transactions contemplated by this Agreement or any Transaction Document, either alone or in conjunction with any other event, will not (i) result in Purchasers or the Company Group incurring any liability with respect to any Benefit Plan, (ii) entitle any Employee or Other Worker to change of control pay, retention pay, severance pay, unemployment compensation, bonus payment or any other payment or (iii) accelerate the time of payment or vesting of, or increase the amount of, compensation due to any Employee or Other Worker, or due under any Benefit Plan. In connection with the transactions contemplated hereby, no member of the Company Group shall have any obligation to gross-up, indemnify or otherwise be obligated with respect to Taxes imposed under Section 4999 or 409A of the Code, any Taxes incurred by any Employee or Other Worker or any interest or penalty related thereto.
Section 6.23 Employment and Labor Matters.
(a) Other than those individuals listed on Schedule 6.23(a), there are no (i) Employees or (ii) contingent workers or contractors who primarily provide services either to the Company Group or in connection with the Assets (“Other Workers”). Subject to compliance with any data privacy or other applicable Laws, Sellers have made available to LP Purchaser each such individual’s name, title, annual target compensation (including base salary or fee and all
bonuses or other performance incentives and benefits), engaging entity, date of hire, active or inactive status, location, status of any required visa or work permit, severance or termination payment rights, status as full-time or part-time and exempt or non-exempt, and indication as to whether such individual’s engagement will be transferred to a Seller entity that is outside the scope of the Company Group prior to, or at, the Closing. To the knowledge of Chief GP, no Employee has any plans to terminate employment with the Company Group or Sellers, as applicable.
(b) No Employee or Other Worker is a party to any labor or collective bargaining contract and, to the knowledge of Chief GP, there have been no activities by any labor union to organize any Employees or Other Workers since January 1, 2020. The Company Group and its Affiliates have complied, and are in compliance, with all applicable Laws relating to employment and labor matters in respect of the Employees and Other Workers. There are no civil, criminal or administrative claims, actions, cases, grievances, investigations, audits, suits, arbitrations, mediations, causes of action or other proceedings by or before any Governmental Body or any arbitrator or, to Chief GP’s knowledge, threatened in writing, concerning labor, employment or pay matters with respect to any member of the Company Group, any Employees or any Other Workers. No member of the Company Group or any of its Affiliates has made any commitments or representations to any Person regarding (i) potential employment by Purchasers or any Affiliate of Purchasers, or (ii) any terms and conditions of such potential employment by Purchasers or any Affiliate thereof.
(c) Since January 1, 2020, to Chief GP’s knowledge, there has not been any proceeding relating to, or any act or allegation of or relating to, sex-based discrimination, sexual harassment or sexual misconduct, or breach of any sex-based discrimination, sexual harassment or sexual misconduct policy of the Company Group applicable to the Company Group or any Employee or Other Worker relating to the foregoing, in each case involving the Company Group or any Employee or Other Worker, nor has there been, to the knowledge of Chief GP, any settlement or similar out-of-court or pre-litigation arrangement relating to any such matters, nor to the knowledge of Chief GP has any such proceeding been threatened.
Section 6.24 Insurance. Schedule 6.24 sets forth a true and complete list of all material insurance policies in force with respect to the Company Group or under which the Assets are insured, copies of which have been made available to Purchasers. As of the Execution Date, all of such policies are in full force and effect and there is no material claim pending under any such policies as to which coverage has been denied by the insurer other than customary indications as to reservation of rights by insurers and no member of the Company Group has received written notice of cancellation of any such insurance policies.
Section 6.25 Financial Statements; No Liabilities.
(a) Chief GP has delivered to Purchasers true and correct copies of (i) the audited balance sheet of the Company Group as of December 31, 2020 and audited income statements, statements of cash flows and members’ equity of the Company Group for the fiscal year ended December 31, 2020 and (ii) unaudited balance sheet of the Company Group as of September 30, 2021 and unaudited income statements, statements of cash flows and members’ equity of the Company Group for the nine-month period ended September 30, 2021 (collectively, the “Company Financial Statements”). Except as set forth on Schedule 6.25, each of the
Company Financial Statements has been prepared in accordance with GAAP consistently applied by the Company Group and presents fairly in all material respects the financial position, results of operations and cash flows of the Company Group as at the dates and for the periods indicated therein.
(b) There are no liabilities of or with respect to the Company Group that would be required by GAAP to be reserved, reflected, or otherwise disclosed on a consolidated balance sheet of the Company other than (i) liabilities reserved, reflected, or otherwise disclosed in the Company Financial Statements, (ii) Environmental Liabilities (which are exclusively addressed in Article 4 and Section 6.16), (iii) liabilities incurred in the ordinary course of business consistent with past practice since September 30, 2021, (iv) for Taxes (which are exclusively addressed in Section 6.8 and Section 6.22), (v) asset retirement obligations, or (vi) Suspense Funds.
Section 6.26 Books and Records. All books and records of the Company Group are being maintained and, to the knowledge of Chief GP, have been maintained by the Company Group in accordance with all applicable Law in all material respects and in the ordinary course of business consistent with past practice. The minute books of each Company Group member contain true, complete and accurate records of all meetings and accurately reflect all other actions taken by the (a) members or other equity holders and (b) board of managers, officers, or similar governing body and all committees of such Company Group member.
Section 6.27 Special Warranty. Subject to the Permitted Encumbrances, as of the Title Claim Date and the Closing Date, the Company Group holds Defensible Title to the Leases and Wells from and against the claims of any and all Persons claiming or to claim the same or any part thereof, in each case, by, through and/or under any member of the Company Group or any of their respective Affiliates, but not otherwise.
Section 6.28 Oil and Gas Properties. No Seller, nor any Affiliate of a Seller (other than a member of the Company Group), owns any interest in the Properties.
Section 6.29 Permits. The Company Group has all material Permits required to permit the operation of the Properties as presently operated by the Company Group (excluding those required under Environmental Laws) and each of the material Permits is in full force and effect and has been duly and validly issued. There are no outstanding violations in any material respect of any of the Company Group’s Permits.
Section 6.30 Sufficiency of Assets. As of the Execution Date, (a) the Properties are, in all material respects, in an operable state of repair adequate to maintain normal operations consistent with the Company Group’s past practices, ordinary wear and tear excepted, and (b) the Properties constitute and include, in all material respects, all of the assets necessary for the conduct of the Company Group’s business, as currently conducted, with respect to the ownership and operation of the Properties.
Section 6.31 Wells. There is no Well included in the Properties drilled by a member of the Company Group or its Affiliates that has been drilled and completed in a manner that is not within the limits permitted by all applicable Laws, Leases and Contracts. No Well operated by a member of the Company Group or its Affiliates, and to Chief GP’s knowledge no other Well (other
than Wells operated by the Purchaser Group), is subject to material penalties on allowable production because of any overproduction. Schedule 6.31 contains a list of the status as of the date(s) set forth in such Schedule, of any “payout” balance for the Wells listed on Exhibit A-2 that are subject to a reversion or other adjustment at some level of cost recovery or payout (or passage of time or other event other than termination of a Lease by its terms), with such list being true and correct in all material respects, assuming the accuracy of the information provided by Third Parties.
Section 6.32 Leases. Except as reflected on Schedule 6.7, (a) there is no material default under any of the Leases, (b) no member of the Company Group has received written notice from a lessor of any requirements or demands to drill additional wells on any of the Leases, which requirements or demands have not been resolved in writing, and (c) no party to any Lease or any successor to the interest of such party has filed or, to Chief GP’s knowledge, threatened to file any action to terminate, cancel, rescind or procure judicial reformation of any Lease.
Section 6.33 Condemnation; Casualty Loss. As of the Execution Date, there is no actual or, to Chief GP’s knowledge, threatened in writing, taking (whether permanent, temporary, whole, or partial) of any material part of the Properties by reason of condemnation or the threat of condemnation. As of the Execution Date, there has been no Casualty Loss since the Effective Time with respect to any Property with damages estimated to exceed $1,000,000 net to the interest of the Company Group.
Section 6.34 Specified Matters. There are no Damages incurred by, suffered by or owing by the Company Group as of the Closing caused by, arising out of, or resulting from the following matters, to the extent attributable to the ownership, use or operation of any of the Properties:
(a) except with respect to any Casualty Losses, any Third Party injury or death, or damage of Third Party properties (excluding any such property damage that is related to or caused by any Environmental Defect or properly charged or chargeable to the joint account by the operator under the applicable operating or unit agreement) occurring on or with respect to the ownership or operation of any Properties prior to the Closing Date;
(b) any material civil fines or penalties or criminal sanctions imposed on a member of the Company Group, to the extent resulting from any pre-Closing violation of Law (including any Environmental Law);
(c) any transportation or disposal of Hazardous Substances (other than Hydrocarbons) from any Property to a site that is not a Property prior to Closing that would be in material violation of applicable Environmental Law or that would arise out of a material liability under applicable Environmental Law; or
(d) any of the Excluded Assets.
Section 6.35 Absence of Certain Developments. Except as expressly contemplated by this Agreement, since December 31, 2020 and until the Execution Date, to the extent not otherwise reflected in the Company Financial Statements, there has not occurred any event, change, occurrence, or circumstance that, individually or in the aggregate with any other events, changes, occurrences, or circumstances, has had a Material Adverse Effect.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
Section 7.1 Generally. Each Purchaser (on behalf of itself only) represents and warrants to Sellers the matters set forth in Section 7.2 through Section 7.14 on the Execution Date and the Closing Date (except for representations and warranties that refer to a specified date, which will be deemed made as of such date). LP Purchaser represents and warrants to Sellers on the matters set forth in Section 7.15 through Section 7.19 on the Execution Date and the Closing Date (except for representations and warranties that refer to a specified date, which will be deemed made as of such date).
Section 7.2 Existence and Qualification. Such Purchaser is validly existing and in good standing under the Laws of the state of its formation and is duly qualified to do business in all jurisdictions in which the Assets are located and has, or as of the Closing will have, complied with all necessary requirements of Governmental Bodies required for such Purchaser’s ownership and operation of the Company Interests and the Assets, as applicable.
Section 7.3 Power. Such Purchaser has the requisite power to enter into and perform this Agreement and each other 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.
Section 7.4 Authorization and Enforceability. The execution, delivery, and performance of this Agreement, all documents required to be executed and delivered by such Purchaser at Closing and all other Transaction Documents to which such Purchaser 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, corporate, or partnership action on the part of such Purchaser. This Agreement has been duly executed and delivered by such Purchaser (and all documents required hereunder to be executed and delivered by such Purchaser at Closing and all other Transaction Documents will be duly executed and delivered by such Purchaser) and this Agreement constitutes, and at the Closing such documents to be executed and delivered by such Purchaser at Closing will constitute, the valid and binding obligations of such Purchaser, 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 7.5 No Conflicts. Subject to compliance with the HSR Act, the execution, delivery, and performance of this Agreement and the other Transaction Documents by such Purchaser, and the transactions contemplated hereby and thereby, will not (a) violate any provision of the certificate of incorporation, bylaws, agreement of limited partnership, or other Organizational Documents of such Purchaser, (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 of the terms, conditions, or provisions of any note, bond, mortgage, indenture, license, or other financing instrument to which such Purchaser is a party, (c) violate any judgment, order, ruling, or regulation applicable to such Purchaser as a party in interest, or (d) violate any Laws applicable to such Purchaser or any of its assets.
Section 7.6 Liability for Brokers’ Fees. Sellers shall not directly or indirectly have any responsibility, liability, or expense, as a result of undertakings or agreements of such Purchaser or any of 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 7.7 Litigation. There are no actions, suits, or proceedings pending, or to such Purchaser’s knowledge, threatened in writing, before any Governmental Body or arbitrator against such Purchaser that are reasonably likely to materially impair such Purchaser’s ability to perform its obligations under this Agreement or any document required to be executed and delivered by such Purchaser at Closing. As used in this Section 7.7, “such Purchaser’s knowledge” is limited to information personally known by one or more of the individuals listed in Schedule 7.7 without a duty of inquiry or investigation.
Section 7.8 Financing. Such Purchaser will have as of Closing sufficient cash, available lines of credit, or other sources of immediately available funds (in Dollars) to enable it to pay the Closing Cash Payment to Sellers, the Defect Escrow Amount, if any, and the Post-Closing Escrow Amount, if any, at the Closing.
Section 7.9 Contracts. The execution, delivery, and performance of this Agreement by such Purchaser, and the transactions contemplated by this Agreement, will not result in a material default (with due notice or lapse of time or both) under any of the terms, conditions, or provisions of any contract to which such Purchaser is a party.
Section 7.10 Securities Law Compliance. Such Purchaser is an “accredited investor,” as such term is defined in Regulation D of the Securities Act of 1933, as amended, (the “Securities Act”) and is acquiring the Company Interests for its own account for use in its trade or business, and not with a view toward or for sale associated with any distribution thereof, nor with any present intention of making a distribution thereof within the meaning of the Securities Act and applicable state securities Laws. Such Purchaser has such knowledge and experience in business and financial matters so that such Purchaser is capable of evaluating the merits and risks of an investment in the Company Interests being acquired hereunder. Such Purchaser agrees that the Company Interests may not be sold, transferred, offered for sale, pledged, hypothecated, or otherwise disposed of without registration under the Securities Act and any applicable foreign and state securities Laws, except under an exemption from such registration under the Securities Act and such Laws.
Section 7.11 Opportunity to Verify Information. As of the Closing Date, subject to Sellers’ compliance with the terms of this Agreement, such Purchaser and its Representatives have (a) been permitted full and complete access to all materials relating to the Company Interests and the Assets, (b) been afforded the opportunity to ask all questions of Sellers (or one or more Persons acting on Sellers’ behalf) concerning the Company Interests and the Assets, (c) been afforded the opportunity to investigate the condition, including the subsurface condition, of the Assets, and (d) had the opportunity to take such other actions and make such other independent investigations as
such Purchaser deems necessary to evaluate the Company Interests and the Assets and understand the merits and risks of an investment therein and to verify the truth, accuracy, and completeness of the materials, documents, and other information provided or made available to such Purchaser (whether by Sellers or otherwise). SUCH PURCHASER ACKNOWLEDGES AND AGREES THAT SELLERS HAVE NOT MADE ANY REPRESENTATIONS OR WARRANTIES, EXPRESS, STATUTORY, OR IMPLIED, WRITTEN OR ORAL, AS TO THE ACCURACY OR COMPLETENESS OF ANY MATERIALS, DOCUMENTS, OR OTHER INFORMATION PROVIDED OR MADE AVAILABLE TO SUCH PURCHASER (WHETHER OR NOT BY SELLERS) (INCLUDING ANY MATERIALS, DOCUMENTS, OR OTHER INFORMATION PROVIDED PURSUANT TO SECTION 8.1). SUCH PURCHASER HEREBY WAIVES ANY CLAIMS ARISING OUT OF ANY MATERIALS, DOCUMENTS, OR OTHER INFORMATION PROVIDED OR MADE AVAILABLE TO SUCH PURCHASER (WHETHER OR NOT BY SELLERS) (INCLUDING ANY MATERIALS, DOCUMENTS, OR OTHER INFORMATION PROVIDED PURSUANT TO SECTION 8.1), WHETHER UNDER THIS AGREEMENT, AT COMMON LAW, BY STATUTE, OR OTHERWISE.
Section 7.12 Independent Evaluation.
(a) SUCH PURCHASER IS KNOWLEDGEABLE OF THE OIL AND GAS BUSINESS AND OF THE USUAL AND CUSTOMARY PRACTICES OF OIL AND GAS PRODUCERS, INCLUDING THOSE IN THE AREAS WHERE THE ASSETS ARE LOCATED.
(b) SUCH PURCHASER IS A PARTY CAPABLE OF MAKING SUCH INVESTIGATION, INSPECTION, REVIEW, AND EVALUATION OF THE COMPANY INTERESTS AND THE ASSETS AS A PRUDENT PURCHASER WOULD DEEM APPROPRIATE UNDER THE CIRCUMSTANCES, INCLUDING WITH RESPECT TO ALL MATTERS RELATING TO THE COMPANY INTERESTS AND THE ASSETS AND THEIR VALUE, OPERATION, AND SUITABILITY.
(c) IN MAKING THE DECISION TO ENTER INTO THIS AGREEMENT AND CONSUMMATE THE TRANSACTIONS CONTEMPLATED HEREBY, SUCH PURCHASER HAS RELIED SOLELY ON THE BASIS OF ITS OWN INDEPENDENT DUE DILIGENCE INVESTIGATION OF THE COMPANY INTERESTS AND THE ASSETS AND THE TERMS AND CONDITIONS OF THIS AGREEMENT, AND SUCH PURCHASER HAS NOT RELIED ON ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT, EXPRESS, STATUTORY, OR IMPLIED, ORAL OR WRITTEN, OR ANY OTHER STATEMENT, ORAL OR WRITTEN, OTHER THAN THE REPRESENTATIONS AND WARRANTIES OF SELLERS CONTAINED IN ARTICLE 5, THE REPRESENTATIONS AND WARRANTIES OF CHIEF GP CONTAINED IN ARTICLE 6 AND CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), AND THEN ONLY TO THE EXTENT REPRESENTED AND WARRANTED (OR CONFIRMED) THEREIN.
(d) WITHOUT LIMITING THE FOREGOING, SUCH PURCHASER EXPRESSLY ACKNOWLEDGES THE PROVISIONS SET FORTH IN SECTION 8.18, SECTION 14.17, AND SECTION 14.18.
(e) SUCH PURCHASER AGREES, TO THE FULLEST EXTENT PERMITTED BY LAW, THAT THE SELLER GROUP SHALL NOT HAVE ANY LIABILITY OR RESPONSIBILITY WHATSOEVER TO THE PURCHASER GROUP, OR THEIR RESPECTIVE EQUITY HOLDERS, FINANCING SOURCES, INVESTORS OR CONTROLLING PERSONS ON ANY BASIS (INCLUDING IN CONTRACT OR TORT, UNDER FEDERAL OR STATE SECURITIES LAWS OR OTHERWISE) RESULTING FROM THE FURNISHING TO THE PURCHASER GROUP OR ANY FINANCING SOURCES OR INVESTORS (OR ANY USE BY THE PURCHASER GROUP OR ANY FINANCING SOURCES OR INVESTORS OF) ANY DUE DILIGENCE INFORMATION (INCLUDING, FOR THE AVOIDANCE OF DOUBT, ANY INFORMATION MADE AVAILABLE TO SUCH PURCHASER PURSUANT TO SECTION 8.1 OR OTHERWISE BY OR ON BEHALF OF SELLERS OR THEIR REPRESENTATIVES).
(f) SUCH PURCHASER UNDERSTANDS AND ACKNOWLEDGES THAT NO FEDERAL, STATE OR FOREIGN AGENCY HAS PASSED UPON THE MERITS OF AN INVESTMENT IN (OR WITH RESPECT TO) THE COMPANY INTERESTS OR THE ASSETS, OR MADE ANY FINDING OR DETERMINATION CONCERNING (i) THE FAIRNESS OR ADVISABILITY OF SUCH AN INVESTMENT OR (ii) THE ACCURACY OR ADEQUACY OF THE DISCLOSURES AND INFORMATION MADE TO SUCH PURCHASER UNDER THIS AGREEMENT.
Section 7.13 Consents, Approvals or Waivers. Subject to compliance with the HSR Act, such Purchaser’s execution, delivery, and performance of this Agreement (and any document required to be executed and delivered by such Purchaser at Closing) is not and will not be subject to any consent, approval, or waiver from any Governmental Body or other Third Party, except consents and approvals of assignments by Governmental Bodies that are customarily obtained after Closing.
Section 7.14 Bankruptcy. There are no bankruptcy, insolvency, reorganization, or receivership proceedings pending against, being contemplated by, or threatened against such Purchaser or any of its Affiliates.
Section 7.15 Capitalization.
(a) As of the close of business on January 24, 2022 (the “Measurement Date”), the authorized capital of LP Purchaser consisted solely of (i) 118,207,814 shares of CHK Common Stock, of which 118,207,814 shares of CHK Common Stock were issued and 118,207,814 shares of CHK Common Stock were outstanding.
(b) All of the issued and outstanding shares of CHK Common Stock have been duly authorized and validly issued in accordance with the Organizational Documents of LP Purchaser are fully paid and non-assessable, and were not issued in violation of any preemptive rights, rights of first refusal, or other similar rights of any Person. The CHK Common Stock to be issued pursuant to this Agreement, when issued, will be validly issued, fully paid and nonassessable and not subject to preemptive rights, will have the rights, preferences and privileges specified in the Organizational Documents of LP Purchaser and will, in the hands of Sellers and their Affiliates, be free of any Encumbrance, other than restrictions on transfer pursuant to applicable securities Laws.
(c) There are no preemptive rights and, except as disclosed in the SEC Documents or issuable pursuant to LP Purchaser’s long term incentive plans, other outstanding rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, agreements, arrangements, calls, subscription agreements, commitments or rights of any kind that obligate LP Purchaser to issue or sell any equity interests of LP Purchaser or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any equity interests in LP Purchaser, and, except as disclosed in the SEC Documents and those issuable pursuant to LP Purchaser’s long term incentive plans, no securities or obligations evidencing such rights are authorized, issued or outstanding.
(d) LP Purchaser does not have any outstanding bonds, debentures, notes, or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the stockholders of LP Purchaser on any matter.
(e) As of the close of business on the Measurement Date, LP Purchaser is the indirect owner of all Interests of GP Purchaser, free and clear of all encumbrances other than those arising pursuant to or described in (i) the Organizational Documents of Purchaser, (ii) applicable securities Laws or (iii) this Agreement.
(f) LP Purchaser is not now, and immediately after the issuance and sale of the CHK Common Stock comprising the Stock Purchase Price will not be, required to register as an “investment company” or a company “controlled by” an entity required to register as an “investment company” within the meaning of the Investment Company Act of 1940.
Section 7.16 SEC Documents; Financial Statements; No Liabilities.
(a) LP Purchaser has timely filed or furnished with the SEC all reports, schedules, forms, statements, and other documents (including exhibits and other information incorporated therein) required to be filed or furnished by it since January 1, 2020 under the Securities Act or the Exchange Act (all such documents, together with all exhibits and schedules to the foregoing materials and all information incorporated therein by reference, the “SEC Documents”). The SEC Documents, including any audited or unaudited financial statements and any notes thereto or schedules included therein (the “Financial Statements”), at the time filed or furnished (except to the extent corrected by a subsequently filed or furnished SEC Document filed or furnished prior to the Execution Date) (i) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein (in the light of the circumstances under which they were made) not misleading, (ii) complied in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as applicable, (iii) in the case of the Financial Statements, complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, (iv) in the case of the Financial Statements, were prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Rule 10-01 of Regulation S-X) and subject, in the case of unaudited interim financial
statements, to normal and recurring year-end audit adjustments, (v) in the case of the Financial Statements, fairly present in all material respects the consolidated financial position of LP Purchaser and its Subsidiaries as of the dates thereof and their respective consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal and recurring year-end audit adjustments), and (vi) in the case of the Financial Statements have been prepared in a manner consistent with the books and records of LP Purchaser and its Subsidiaries. Since January 1, 2020, LP Purchaser has not made any material change in the accounting practices or policies applied in the preparation of its financial statements, except as required by GAAP, SEC rule or policy or applicable law. The books and records of LP Purchaser and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP (to the extent applicable) and any other applicable legal and accounting requirements and reflect only actual transactions.
(b) There are no liabilities of or with respect to the Purchasers that would be required by GAAP to be reserved, reflected, or otherwise disclosed on a consolidated balance sheet of LP Purchaser other than (i) liabilities accrued, reserved, reflected, or otherwise disclosed in the consolidated balance sheet of LP Purchaser and its Subsidiaries as of December 31, 2020 (including the notes thereto) included in the Financial Statements, (ii) liabilities incurred in the ordinary course of business consistent with past practice since December 31, 2020, (iii) liabilities under this Agreement and the other Transaction Documents or incurred in connection with the transactions contemplated by this Agreement and the other Transaction Documents or (iv) liabilities that, individually or in the aggregate, would not reasonably be expected to have a Purchaser Material Adverse Effect.
Section 7.17 Internal Controls; Nasdaq Listing Matters.
(a) LP Purchaser has established and maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Such disclosure controls and procedures are reasonably designed to ensure that material information required to be disclosed by LP Purchaser in the reports it files or submits to the SEC under the Exchange Act is made known to LP Purchaser’s chief executive officer and its chief financial officer by others within those entities to allow timely decisions regarding required disclosures as required under the Exchange Act. The chief executive officer and chief financial officer of LP Purchaser have evaluated the effectiveness of LP Purchaser’s disclosure controls and procedures and, to the extent required by applicable Law, presented in any applicable filed SEC Document that is a report on Form 10-K or Form 10-Q, or any amendment thereto, his or her conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by such report or amendment based on such evaluation.
(b) LP Purchaser has established and maintains a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that is effective in providing reasonable assurance regarding the reliability of LP Purchaser’s financial reporting and the preparation of the Financial Statements for external purposes in accordance with GAAP. LP Purchaser has disclosed, based on its most recent evaluation of LP Purchaser’s internal control over financial reporting prior to the date hereof, to LP Purchaser’s auditors and audit committee (i) any significant deficiencies and material weaknesses in the design or operation of LP Purchaser’s internal control over financial reporting which would reasonably be expected to adversely affect LP Purchaser’s ability to record, process, summarize and report financial information and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in LP Purchaser’s internal control over financial reporting.
(c) Since December 31, 2020, (i) neither LP Purchaser nor any of its subsidiaries nor, to the knowledge of LP Purchaser, any director, officer, employee, auditor, accountant or representative of LP Purchaser or any of its Subsidiaries has received or otherwise had or obtained knowledge of any material complaint, allegation, assertion or claim, whether written or oral, regarding the accounting or auditing practices, procedures, methodologies or methods of LP Purchaser or any of its subsidiaries or their respective internal accounting controls, including any material complaint, allegation, assertion or claim that LP Purchaser or any of its Subsidiaries has engaged in questionable accounting or auditing practices and (ii) no attorney representing LP Purchaser or any of its subsidiaries, whether or not employed by LP Purchaser or any of its subsidiaries, has reported evidence of a material violation of securities Laws, breach of fiduciary duty or similar violation by LP Purchaser or any of its subsidiaries or any of their respective officers, directors, employees or agents to the board of directors of LP Purchaser or any committee thereof or to any director or officer of LP Purchaser or any of its subsidiaries.
(d) As of the Execution Date, there are no outstanding or unresolved comments in the comment letters received from the SEC staff with respect to the filed SEC Documents. Except as set forth in Schedule 7.17(d), to the knowledge of LP Purchaser, none of the filed SEC Documents is subject to ongoing review or outstanding SEC comment or investigation.
(e) Neither LP Purchaser nor any of its subsidiaries is a party to, or has any commitment to become a party to, any joint venture, off balance sheet partnership or any similar contract (including any contract or arrangement relating to any transaction or relationship between or among LP Purchaser and any of its Subsidiaries, on the one hand, and any unconsolidated affiliate, including any structured finance, special purpose or limited purpose entity or Person, on the other hand, or any “off balance sheet arrangements” (as defined in Item 303(a) of Regulation S-K under the Exchange Act)), where the result, purpose or intended effect of such contract is to avoid disclosure of any material transaction involving, or material liabilities of, LP Purchaser or any of its subsidiaries in LP Purchaser’s or such subsidiary’s published financial statements or other filed SEC Documents.
(f) LP Purchaser is in compliance in all material respects with (i) the provisions of the Sarbanes-Oxley Act and (ii) the rules and regulations of the Nasdaq, in each case, that are applicable to LP Purchaser.
(g) The CHK Common Stock is registered under Section 12(b) of the Exchange Act and listed on the Nasdaq, and LP Purchaser has not received any notice of deregistration or delisting from the SEC or Nasdaq, as applicable. No judgment, order, ruling, decree, injunction, or award of any securities commission or similar securities regulatory authority or any other Governmental Body, or of the Nasdaq, preventing or suspending trading in any securities of LP Purchaser has been issued, and no proceedings for such purpose are, to LP Purchaser’s knowledge, pending, contemplated or threatened. LP Purchaser has taken no action that is designed to terminate the registration of the CHK Common Stock under the Exchange Act.
Section 7.18 Form S-3. As of the Execution Date, LP Purchaser is eligible to register the resale of the CHK Common Stock comprising the Stock Purchase Price by the Sellers under Form S-3 promulgated under the Securities Act.
Section 7.19 No Stockholder Approval. The transactions contemplated hereby do not require any vote of the stockholders of LP Purchaser under applicable Law, the rules and regulations of the Nasdaq (or other national securities exchange on which the CHK Common Stock is then listed) or the Organizational Documents of LP Purchaser.
ARTICLE 8
COVENANTS OF THE PARTIES
Section 8.1 Access.
(a) Between the Execution Date and the Closing Date (or the earlier termination of this Agreement), Chief GP will, and will cause its Affiliates (including the Company Group) to (i) give Purchasers and their Representatives reasonable access, during normal business hours, to the Assets (subject to obtaining any required consents of Third Parties, including any Third Party operators of the Assets), and access to and the right to copy, at Purchasers’ sole cost, risk, and expense, the Records (or originals thereof) in Sellers’ or the Company Group’s possession and (ii) use Commercially Reasonable Efforts to secure for Purchasers and their Representatives access to the Properties (to the extent requested by Purchasers) from applicable Third Party operators for the purpose of conducting a reasonable due diligence review of the Assets, but only to the extent that Chief GP or the Company Group may do so without violating any obligations to any Third Party. Chief GP shall also make available to Purchasers and their Representatives, upon reasonable prior written notice during normal business hours, Chief GP’s personnel knowledgeable with respect to the Assets in order that Purchasers may make such diligence investigation as Purchasers reasonably consider necessary or appropriate. To the extent permitted by the Third Party operator (if applicable), Purchasers will be entitled to conduct a Phase I Environmental Site Assessment of the Assets and may conduct visual inspections and record reviews relating to the Assets, including their condition and compliance with Environmental Laws. However, Purchasers (and their Representatives) shall not operate any equipment or conduct any invasive testing, sampling, or other similar activity of soil, groundwater, or other materials (including any testing or sampling for Hazardous Substances, Hydrocarbons, or NORM) on or with respect to the Assets prior to Closing as part of its Phase I Environmental Site Assessment. If a Phase I Environmental Site Assessment identifies in good faith any “Recognized Environmental Conditions,” as such conditions are defined or described under the current ASTM International Standard Practice Designation E1527-13, then Purchasers may request Chief GP’s consent (which consent may be withheld in Chief GP’s sole discretion) to conduct additional environmental property assessments on the affected Assets, including the collection and analysis of environmental samples (collectively, the “Phase II Environmental Site Assessment”). The Phase II Environmental Site Assessment procedures and plan concerning any additional investigation shall be submitted to Chief GP in a written workplan, and shall be reasonably based on the recognized environmental concerns identified by the Phase I Environmental Site Assessment. If Chief GP denies such a request by Purchasers to undertake such a Phase II Environmental Site Assessment on any Assets, Purchasers shall have the right to exclude such Assets from the transactions contemplated by this Agreement, in which event Chief GP shall cause
the Company Group to convey such Assets to a Seller (or Sellers’ designee) and the Unadjusted Purchase Price shall be reduced by the Allocated Value of such excluded Assets (or, solely with respect to any Asset that does not have an Allocated Value, by an amount equal to the Allocated Value of related or associated Assets to the extent applicable or relating to, used in connection with, servicing or burdening the subject Asset) pursuant to Section 3.3(b). Purchasers shall abide by the safety rules, regulations, and operating policies provided to Purchasers in writing (including the execution and delivery of any documentation or paperwork, e.g., boarding agreements or liability releases, required by Third Party operators with respect to Purchasers’ access to any of the Assets) of any applicable Third Party operator while conducting its due diligence evaluation of the Assets. Any conclusions made from any examination done by Purchasers shall result from Purchasers’ own independent review and judgment.
(b) The access granted to Purchasers by Chief GP under this Section 8.1 shall be limited to Chief GP’s normal business hours, and Purchasers’ investigation shall be conducted in a manner that minimizes interference with the operation of the Assets. Purchasers shall coordinate its access rights with Chief GP (and with applicable Third Party operators) to reasonably minimize any inconvenience to or interruption of the conduct of business by Sellers and the Company Group. Sellers shall have the right to accompany Purchasers (and any Representatives of Purchasers) in connection with any physical inspection of the Assets.
(c) Purchasers acknowledge that, pursuant to its right of access to the Assets, Purchasers will become privy to confidential and other information of Sellers and their Affiliates and that such confidential information (which includes Purchasers’ conclusions with respect to its evaluations) shall be held confidential by Purchasers in accordance with the terms of the Confidentiality Agreement and Section 8.3(b) and any applicable privacy Laws regarding personal information.
(d) In connection with the rights of access, examination, and inspection granted to Purchasers under this Section 8.1, (i) EACH PURCHASER (ON BEHALF OF ITSELF AND ITS AFFILIATES, INCLUDING, FROM AND AFTER CLOSING, THE COMPANY GROUP) WAIVES AND RELEASES ALL CLAIMS AGAINST THE SELLER GROUP ARISING IN ANY WAY THEREFROM OR IN ANY WAY CONNECTED THEREWITH AND (ii) PURCHASERS HEREBY AGREE TO INDEMNIFY, DEFEND, AND HOLD HARMLESS EACH MEMBER OF THE SELLER GROUP AND THIRD PARTY OPERATORS FROM AND AGAINST ANY AND ALL DAMAGES, INCLUDING THOSE ATTRIBUTABLE TO PERSONAL INJURY, DEATH, OR PHYSICAL PROPERTY DAMAGE, OR VIOLATION OF THE SELLER GROUP’S OR ANY THIRD PARTY OPERATOR’S RULES, REGULATIONS OR OPERATING POLICIES, IN EACH CASE PROVIDED IN WRITING TO PURCHASERS PRIOR TO PURCHASERS’ ACCESS TO THE PROPERTIES, ARISING OUT OF, RESULTING FROM, OR RELATING TO ANY FIELD VISIT OR OTHER DUE DILIGENCE ACTIVITY CONDUCTED BY PURCHASERS WITH RESPECT TO THE ASSETS, 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 THE SELLER GROUP OR THIRD PARTY OPERATORS, EXCEPTING ONLY LIABILITIES TO THE EXTENT ACTUALLY RESULTING FROM (A) THE GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR FRAUD OF ANY MEMBER OF THE SELLER GROUP OR THIRD
PARTY OPERATOR OR (B) FROM MATTERS DISCOVERED OR UNCOVERED BY PURCHASERS AND THEIR REPRESENTATIVES IN THE COURSE OF SUCH DUE DILIGENCE INVESTIGATION TO THE EXTENT SUCH DISCOVERIES ARE OF PRE-EXISTING CONDITIONS (INCLUDING ANY ENVIRONMENTAL DEFECTS) NOT CAUSED OR EXACERBATED (WHICH TERM SHALL SPECIFICALLY EXCLUDE THE DISCOVERY OF SUCH CONDITIONS) BY PURCHASERS OR THEIR REPRESENTATIVES.
Section 8.2 Government Reviews. In a timely manner, the Parties shall (a) make, or cause to be made, all required filings, prepare all required applications, and conduct negotiations with each Governmental Body as to which such filings, applications, or negotiations are reasonably necessary or appropriate in order to consummate 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 five Business Days following the execution by Purchasers and Sellers of this Agreement, Purchasers and Chief GP (on behalf of itself and the Chief LPs) will each prepare and simultaneously file, or cause to be filed, 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. Purchasers and Chief GP 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. Purchasers and Chief GP shall cooperate with each other and shall promptly furnish all information to the other Party that is necessary in connection with Purchasers’ and Chief GP’s compliance with the HSR Act. Purchasers and Chief GP 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. Purchasers and Chief GP shall use their reasonable efforts to take all actions reasonably necessary or appropriate in connection with any HSR Act filing to consummate the transactions consummated hereby. All filing fees incurred in connection with the HSR Act filings made pursuant to this Section 8.2 shall be borne 50% by Purchasers and 50% by Sellers; for the avoidance of doubt, Purchasers shall not be responsible for filing fees incurred in connection with any HSR Act filings required by Sellers in connection with their receipt of CHK Common Stock as transaction consideration.
Section 8.3 Public Announcements; Confidentiality.
(a) No Party (or any of its Affiliates) shall make any press release or other public announcement 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”). The Public Announcement Restrictions shall not restrict disclosures to the extent (i) necessary for a Party to perform this Agreement (including disclosures to Governmental Bodies or Third Parties holding Preferential Rights, 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, (iii) made to Representatives, or (iv) that such Party has given the other Party a reasonable opportunity to review such disclosure prior to its release and no objection is raised. In the case of the disclosures described under subsections (i) and (ii) of this Section 8.3(a), each Party shall use its reasonable 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 (i) relating to the existence of this Agreement, the contents hereof, or the transactions contemplated hereby, or (ii) that is or was (at any point) subject to restrictions on disclosure pursuant to the terms and conditions of the Confidentiality Agreement (including, for the avoidance of doubt, any information made available to Purchasers pursuant to Section 8.1 or otherwise by or on behalf of Sellers or their Representatives prior to Closing) strictly confidential, except (A) for disclosures to Representatives of the Parties (in which event, the disclosing Party will be responsible for making sure that the Representatives keep such information and data confidential), (B) as required to perform this Agreement, (C) to the extent expressly contemplated by this Agreement (including in connection with the resolution of disputes hereunder), (D) for disclosures that are 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, (E) for disclosures to Governmental Bodies as required by Law, or (F) as to any information or data that is or becomes available to the public other than through the act or omission of such Party or its Representatives in violation of this Section 8.3(b); provided that, prior to making any disclosures permitted under subsection (A) above, the Party disclosing such information shall obtain an undertaking of confidentiality from the Person receiving such information.
(c) To the extent that the foregoing provisions of this Section 8.3 conflict with the provisions of the Confidentiality Agreement, the provisions of this Section 8.3 shall prevail and control to the extent of such conflict. If Closing should occur, the Confidentiality Agreement shall terminate as of the Closing, except as to (i) such portion of the Assets that are not conveyed to Purchasers (either directly or indirectly through the acquisition of the Company Interests) pursuant to the provisions of this Agreement, and (ii) any assets or properties of Sellers that are not “Assets” under this Agreement (including the Excluded Assets).
Section 8.4 Operation of Business. Except (i) for the operations set forth in Schedule 6.9, (ii) for the matters set forth on Schedule 8.4, (iii) for the matters described in Section 8.14 or set forth on Schedule 8.14, (iv) for operations, activities, or payments required pursuant to any applicable Law (including any Public Health Measures), (v) as required in the event of an emergency to protect life, property, or the environment, (vi) as expressly required by the terms of this Agreement, or (vii) as otherwise approved in writing by Purchasers (which approval shall not be unreasonably withheld, conditioned, or delayed), from the Execution Date until the Closing Date (or the earlier termination of this Agreement), Chief GP shall, and shall cause each member of the Company Group to:
(a) conduct its business related to the Assets (i) in the ordinary course consistent with Chief GP’s and the Company Group’s recent practices, subject to interruptions resulting from force majeure, mechanical breakdown, or scheduled maintenance, (ii) as would a reasonable and prudent owner/operator, and (iii) in accordance with all applicable Laws;
(b) not propose, elect to participate in or non-consent to any operation reasonably anticipated by the Company Group to require future capital expenditures by the owner of the Assets in excess of $250,000, net to the interest of the applicable member of the Company Group;
(c) except for expenditures required by a Material Contract, not make any capital expenditure or other expenditure which, individually, is in excess of $250,000;
(d) pay promptly when due all royalties, overriding royalties and similar burdens on production, Taxes, Property Costs and other payments that become due and payable in connection with the Assets; provided that, for the avoidance of doubt, that to the extent such Taxes are allocated to Purchasers pursuant to Section 13.2, such payment shall be on behalf of Purchasers, and promptly following the Closing Date, Purchasers shall pay to Sellers any such Taxes, but only to the extent that such amounts have not already been accounted for under Section 3.3;
(e) not voluntarily terminate, materially amend, execute, or extend any Material Contracts or enter into any contract that, if entered into on or prior to the Execution Date, would have constituted a Material Contract hereunder;
(f) maintain its existing insurance coverage on the Assets presently furnished by nonaffiliated Third Parties in the amounts and of the types presently in force;
(g) maintain all material Permits, approvals, bonds, and guaranties affecting the Assets, and make all filings that Sellers or the Company Group are required to make under applicable Law with respect to the Assets;
(h) not transfer, farmout, sell, hypothecate, encumber, mortgage, pledge or dispose of any Properties or Equipment except for sales and dispositions of Equipment or Hydrocarbons made in the ordinary course of business consistent with past practices;
(i) provide Purchasers with prompt written notice of any claim or investigation by any Third Party (including Governmental Bodies) made against any member of the Company Group after such member of the Company Group receives written notice thereof that materially affects, or could reasonably be likely to materially affect, the Company Interests or the Assets;
(j) provide Purchasers with prompt written notice of (i) any material Casualty Loss and (ii) any emergency with respect to the Assets and any related emergency operations;
(k) not waive, release, assign, settle, or compromise any claim of Damages attributable to the Assets or any member of the Company Group, except for any settlement that (i) requires payment of less than $100,000 by the Company Group, and (ii) would not impose any material obligations or restrictions on the Assets or the business or operations of the Company Group, in each case, after the Closing;
(l) maintain the books, accounts and Records of each member of the Company Group and Records relating to the Assets in the ordinary course of business consistent with past practice and in compliance with all applicable Laws and contractual obligations;
(m) not amend or otherwise change the Organizational Documents of any member of the Company Group;
(n) not issue, sell, pledge, transfer, dispose of, or otherwise subject to any Encumbrance any Interests in any member of the Company Group, or any options, warrants, convertible securities or other rights of any kind to acquire any such shares, or any other Interest in any member of the Company Group;
(o) not declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property) in respect of, any Interests in any member of the Company Group;
(p) not reclassify, combine, split, subdivide or redeem, or purchase or otherwise acquire, directly or indirectly, any Interests in any member of the Company Group, or make any other change with respect to the Company Group’s capital structure;
(q) not acquire any corporation, partnership, limited liability company, other business organization, or division thereof, or enter into any joint venture, strategic alliance, exclusive dealing, noncompetition, or similar contract or arrangement;
(r) not acquire any material amount of assets as to which the aggregate amount of the consideration paid or transferred by the Company Group in connection with all such acquisitions would not exceed $250,000;
(s) not (i) amend or terminate any Benefit Plan with respect to Employees; (ii) adopt any plan, contract, arrangement or agreement that would be a Benefit Plan with respect to Employees if in effect on the date of this Agreement; (iii) grant any new entitlements under any Benefit Plan (including adding additional participants or increasing the benefits of existing participants) with respect to Employees; (iv) grant any equity awards to any Employee or Other Worker under any stock plan sponsored or maintained by any member of the Company Group or otherwise; (v) increase or make any other change that would result in increased cost to any member of the Company Group with respect to the cash compensation (whether base salary or wage rate, target incentive compensation or consulting fee) owed to any current or former Employee or Other Worker; or (vi) take any action to accelerate the vesting or payment of any compensation owed to any current or former Employee or Other Worker;
(t) not (i) hire any Employee or Other Worker other than to fill an open position; (ii) terminate, other than for cause or due to death or disability, the employment or service of any Employee or Other Worker; or (iii) enter into, extend the term of, or otherwise amend any employment or consulting arrangement with any Person who performs or shall perform services in connection with the Assets;
(u) not enter into, amend or terminate any collective bargaining agreement, labor union contract, works council agreement or other contract with any union or similar organization;
(v) 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 any member of the Company Group’s corporate structure;
(w) not make any change in any method of accounting or accounting practice or policy, except as required by GAAP;
(x) not make any settlement of or compromise any material Tax liability, make, adopt or change any material Tax election or Tax method of accounting; surrender any right to claim a material refund of Taxes; consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment; and
(y) not enter into an agreement with respect to or otherwise commit to do any of the foregoing.
Requests for approval of any action restricted by this Section 8.4 shall be delivered to either of the following individuals by electronic correspondence (at the email addresses set forth below), each of whom shall have full authority to grant or deny such requests for approval on behalf of Purchasers (such approval not to be unreasonably withheld, conditioned or delayed):
| | | | | |
| Derek Dixon | Benjamin E. Russ |
| Email: derek.dixon@chk.com | Email: ben.russ@chk.com |
Purchasers’ approval of any action restricted by this Section 8.4 shall be considered granted within 10 days after Chief GP’s notice to Purchasers requesting such consent unless Purchasers notify Chief GP to the contrary during that period. In the event of an emergency, Chief GP (or the applicable member of the Company Group) may take such action as a prudent owner or operator would take and shall notify Purchasers of such action promptly thereafter. In cases in which neither Sellers nor their Affiliate is the operator of the affected Assets, to the extent that the actions described in this Section 8.4 may only be taken by (or are the primary responsibility of) the operator of such Assets, the provisions of this Section 8.4 shall be construed to require only that Chief GP use, or cause the applicable member of the Company Group 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 8.5 Change of Name. Within 90 days after the end of the term of the Transition Services Agreement, Purchasers shall (a) eliminate the name “Chief,” and any variants thereof, from the Assets and shall have no right to use any logos, trademarks, or trade names belonging to Sellers or any of their Affiliates and (b) shall take all necessary company action (including filing all necessary documentation with applicable jurisdictions) to cause the name of each member of the Company Group to be changed to a name that does not include “Chief” or any variants thereof.
Section 8.6 Replacement of Bonds, Letters of Credit, and Guaranties.
(a) The Parties understand that none of the bonds, letters of credit, and guaranties, if any, posted by Sellers or their Affiliates (other than the Company Group) with Governmental Bodies or Third Parties relating to the Company Group or the Assets will be transferred to Purchasers. On or prior to Closing, Purchasers shall obtain, or cause to be obtained in the name of Purchasers, replacements for such bonds, letters of credit and guaranties with Third
Parties to the extent set forth on Schedule 6.20 and with Governmental Bodies, to the extent such replacements are necessary to permit the cancellation of the bonds, letters of credit, and guaranties posted by Sellers or their Affiliates (other than the Company Group) or to consummate the transactions contemplated by this Agreement. From and after Closing, to the extent Purchasers have not obtained, or caused to be obtained in the name of Purchasers, replacements for any such bonds, letters of credit, and guaranties with Third Parties to the extent set forth on Schedule 6.20 or with Governmental Bodies, Purchasers shall indemnify the Seller Group against all Damages and liabilities incurred by the Seller Group under any such bond, letters or credit, or guaranties, as applicable, for which Purchasers have not obtained replacements, or caused replacements to be obtained in the name of Purchasers, to the extent such Damages and liabilities arise after Closing and relate to Purchasers’ ownership of the Company Interests or the Assets after Closing.
(b) To the extent required by a counterparty under any Specified Midstream Contract, on or prior to Closing, Purchasers shall, and if applicable, shall cause their Affiliates to, provide such bonds, letters of credit, guarantees, credit support and any other assurances as to financial capability, resources and creditworthiness in order for such counterparty to release Sellers and their Affiliates (other than the Company Group) (if applicable) from all obligations under such Specified Midstream Contract.
Section 8.7 Notification of Breaches. Between the Execution Date and the Closing Date:
(a) Without limitation of Purchasers’ rights to indemnity under this Agreement or the R&W Insurance Policy, Purchasers shall notify Sellers promptly after Purchasers obtain actual knowledge that any representation or warranty of any Seller contained in this Agreement is untrue in any material respect or will be untrue in any material respect as of the Closing Date or that any covenant or agreement to be performed or observed by Sellers prior to or on the Closing Date has not been so performed or observed in any material respect.
(b) Without limitation of Sellers’ rights to indemnity under this Agreement, Sellers shall notify Purchasers promptly after Sellers obtain actual knowledge that any representation or warranty of any Purchaser contained in this Agreement is untrue in any material respect or will be untrue in any material respect as of the Closing Date or that any covenant or agreement to be performed or observed by Purchasers prior to or on the Closing Date has not been so performed or observed in any material respect.
(c) If any of Purchasers’ or Sellers’ representations or warranties is untrue or shall become untrue in any material respect between the Execution Date and the Closing Date, or if any of Purchasers’ or Sellers’ covenants or agreements to be performed or observed prior to or on the Closing Date shall not have been so performed or observed in any material respect, but if such breach of representation, warranty, covenant, or agreement shall (if curable) be cured by the Closing (or, if the Closing does not occur, by the Scheduled Closing Date), then such breach shall be considered not to have occurred for all purposes of this Agreement.
Section 8.8 Amendment to Schedules. As of the Closing Date, all Schedules to this Agreement, as applicable, shall be deemed amended and supplemented by Sellers to include reference to any matter that results in an adjustment to the Adjusted Purchase Price pursuant to
Section 3.3 as a result of the removal under the terms of this Agreement of any of the Assets. Until two (2) Business Days prior to the Scheduled Closing Date, (a) Sellers shall have the right to supplement their Schedules relating to the representations and warranties set forth in Article 5, and (b) Chief GP shall have the right to supplement its Schedules relating to the representations and warranties set forth in Article 6, in each case, with respect to any matters occurring subsequent to the Execution Date. However, all such supplements shall be disregarded for purposes of determining whether the condition to Purchasers’ obligation to close the transaction pursuant to Section 9.2(a) has been satisfied. If Sellers have supplemented their Schedules pursuant to this Section 8.8, and, based upon the matters relating to such supplements, Purchasers’ obligation to close the transaction pursuant to Section 9.2(a) has not been satisfied and Sellers provide Purchasers notice that such obligation to close has not been satisfied but Purchasers nevertheless elect to close the transactions contemplated hereunder, then, from and after the Closing Date, the matters that caused such obligation to close the transaction not to be satisfied shall be waived for all purposes, and Purchasers shall not be entitled to make a claim with respect thereto pursuant to the terms of this Agreement.
Section 8.9 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 8.10 Employee Matters. Contemporaneously with the execution of this Agreement, Sellers and Purchasers (or their Affiliates) will enter into an Employment Transfer Agreement in the form attached hereto as Exhibit E, which will govern the process by which Purchasers may identify employees of the Company Group, Sellers or their Affiliates to whom Purchasers may, but shall not be obligated to, offer employment and which further specifies the process by which Purchasers and Sellers have agreed Purchasers (or their Affiliate) may solicit such identified employees to accept employment with Purchasers (or their Affiliate). For the avoidance of doubt, the Company Group (and not Sellers or their Affiliates) shall remain responsible for all long-term incentive payments pursuant to the arrangement specified in Schedule 6.22 and all employment Taxes with respect thereto; provided that Sellers shall be responsible for any such long-term incentive payments and employment Taxes with respect thereto to the extent such amounts are in excess of $9,300,000 (the “LTIP Cap”). To the extent that any amount owed with respect to such arrangement is owed after the Closing Date to any Employee of Sellers or their Affiliates, subject to the LTIP Cap, Purchasers or the Company Group shall remit such amounts (including the employer share of any employment Taxes) to Sellers no less than ten Business Days before such amount is payable, and Sellers shall make such payments to such Employees. To the extent that the Company Group or Purchasers owe any amount with respect to such arrangement after the Closing Date that is in excess of the LTIP Cap, then Sellers shall remit such excess amounts to Purchasers no less than ten Business Days before such amount is payable, and the Company Group shall make such payments.
Section 8.11 R&W Insurance Policy. The R&W Insurance Policy, to the extent obtained by Purchasers, shall (a) include terms to the effect that the R&W Insurer waives its rights to bring any claim against any member of the Seller Group by way of subrogation, claims for contribution or otherwise, other than with respect to a claim for Fraud, and (b) name the Seller Group as express third-party beneficiaries of such waiver. Purchasers agree to not make any
amendment, variation or waiver of the R&W Insurance Policy (or do anything that has a similar effect) that would be adverse to Sellers without Sellers’ prior written consent or do anything that causes any right under the R&W Insurance Policy not to have full force and effect that would be adverse to Sellers without Sellers’ prior written consent. Notwithstanding anything to the contrary in this Agreement, for the avoidance of doubt, Purchasers acknowledge and agree that (x) obtaining of the R&W Insurance Policy is not a condition to the Closing and (y) in the event that Purchasers do not obtain the R&W Insurance Policy (irrespective of the reason therefor), Purchasers shall remain obligated, subject only to the satisfaction or waiver of the conditions set forth in Section 9.2 of this Agreement, to consummate the transactions contemplated by this Agreement.
Section 8.12 Directors and Officers.
(a) Purchasers agree that all rights to indemnification, exculpation or advancement now existing in favor of any present or former directors, officers, employees, partners, members and agents of any member of the Company Group, as provided in the Organizational Documents of any member of the Company Group, whether asserted or claimed prior to, at or after the Closing (including, for the avoidance of doubt, in connection with (i) the transactions contemplated by this Agreement and (ii) actions to enforce this provision or any other indemnification, exculpation or advancement right of any of the foregoing), shall survive the Closing and shall continue in full force and effect for a period of not less than six years and that each member of the Company Group will perform and discharge the obligations to provide such indemnity, exculpation and advancement after the Closing; provided, however, that all rights to indemnification, exculpation and advancement in respect of any action, suit or proceeding arising out of or relating to matters existing or occurring at or prior to the Closing Date and asserted or made within such six-year period shall continue until the final disposition of such action, suit or proceeding. From and after the Closing, Purchasers shall not, and shall cause each of its Subsidiaries and Affiliates (including the members of the Company Group) not to, amend, repeal or otherwise modify the indemnification provisions of its Organizational Documents as in effect at the Closing in any manner that would adversely affect the rights thereunder of any present or former directors, officers, employees, partners, members and agents of any member of the Company Group.
(b) Each Purchaser hereby covenants, for itself and its Affiliates, successors and assigns, that it and they shall not institute any action, suit or proceeding in any court or before any administrative agency or before any other tribunal against any present or former directors, officers, employees, partners, members or agents of any member of the Company Group, in their capacity as such, with respect to the execution of their duties up to the termination of their appointment, including in connection with, arising out of, resulting from or in any way related to the transactions contemplated hereby, with respect to any liabilities, actions or causes of action, judgments, claims, or demands of any nature or description (consequential, compensatory, punitive or otherwise), excluding however, in each case, instances of Fraud.
(c) In the event any Purchaser or any member of the Company Group or any of their respective successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity in such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any Person, then and in either such case, Purchasers shall make proper provision so that the successors and assigns of such Purchaser or such member of the Company Group, as the case may be, shall assume the obligations set forth in this Section 8.12.
(d) The provisions of this Section 8.12 shall survive the consummation of the Closing and continue for the periods specified herein. This Section 8.12 is intended to benefit the directors, officers, employees, partners, members and agents of the members of the Company Group and any other Person or entity (and their respective heirs, successors and assigns) referenced in this Section 8.12 or indemnified hereunder, each of whom may enforce the provisions of this Section 8.12 (whether or not parties to this Agreement). Each of the Persons referenced in the immediately preceding sentence are intended to be third party beneficiaries of this Section 8.12.
Section 8.13 Cash Distributions. Pursuant to Section 2.4, the Parties acknowledge and agree that, notwithstanding any other provision of this Agreement, Sellers shall have the right, prior to Closing, to cause each member of the Company Group to transfer to Sellers or any Affiliate of Sellers any cash and cash equivalents of such member of the Company Group on hand or on deposit in any bank or brokerage account of such member of the Company Group.
Section 8.14 Excluded Assets. Prior to the Closing Date, Sellers shall (a) cause the Company (i) to form a new limited partnership (“RetainCo”) and (ii) to admit Chief GP as a non-economic general partner of RetainCo; (b) cause each member of the Company Group to convey to RetainCo (whether by assignment, distribution, disbursement, dividend, or otherwise) all of its right, title, and interest in and to, and cause RetainCo to assume all obligations and liabilities relating to, the Excluded Assets (including any Asset excluded from this transaction pursuant to Article 4 or Section 8.1) and the items set forth on Schedule 8.14; and (c) cause the Company to distribute to its partners all of its Interests in RetainCo pro rata in accordance with such partners’ interest in the Company. Prior to effectuating the steps in clauses (a)-(c) above, Sellers shall provide Purchasers with the relevant conveyance and distribution documents, which documents shall be in a form reasonably acceptable to Purchasers.
Section 8.15 Purchaser Reorganization. Prior to or simultaneously with the Closing, if required, Purchasers and their Affiliates shall restructure the Purchaser Group such that GP Purchaser is disregarded as separate from LP Purchaser for U.S. federal income tax purposes.
Section 8.16 Certain Nasdaq Matters. LP Purchaser shall use its reasonable best efforts to cause the shares of CHK Common Stock comprising the Stock Purchase Price to be approved for listing on the Nasdaq, subject to official notice of issuance, prior to the Closing.
Section 8.17 Financing and SEC Filing Assistance.
(a) Prior to the Closing and during the term of the Transition Services Agreement, Sellers shall, and shall cause the Company Group and their respective Representatives to, use Commercially Reasonable Efforts to provide to Purchasers, at Purchasers’ sole cost and expense, such reasonable and customary cooperation in connection with any financing by Purchasers or any of its Affiliates in connection with the transactions contemplated by this Agreement, in each case as may be reasonably requested by Purchasers or their Representatives. Without limiting the generality of the foregoing, the Sellers shall, and shall cause the Company
Group and their respective Representatives to, upon reasonable request, (i) furnish the report of the Company Group’s auditor on the three most recently available audited consolidated financial statements of the Company Group, and the report of the Company Group’s reserve engineer, and use its Commercially Reasonable Efforts to obtain the consent of such auditor and reserve engineer to the use of such reports, including in documents filed with the SEC under the Securities Act, in accordance with normal custom and practice and use Commercially Reasonable Efforts to cause such auditor and reserve engineer to provide customary comfort letters to the arrangers, underwriters, initial purchasers or placement agents, as applicable, in connection with any such financing; (ii) furnish any additional financial statements, schedules, business or other financial data, including reserve data, relating to the Company Group as may be reasonably necessary to consummate any such financing; it being understood that LP Purchaser shall be responsible for the preparation of any pro forma financial information or pro forma financial statements required pursuant to the Securities Act or as may be customary in connection with any such financing; (iii) provide direct contact between (x) senior management and advisors, including auditors, of the Company Group and (y) the proposed arrangers, lenders, underwriters, initial purchasers or placement agents, as applicable, and/or LP Purchaser’s auditors, as applicable, in connection with any such financing, at reasonable times and upon reasonable advance notice; (iv) make available the employees and advisors of the Company Group to provide reasonable assistance with LP Purchaser’s or its Affiliate’s preparation of business projections, financing documents and offer materials; (v) obtain the cooperation and assistance of counsel to the Company Group in providing customary legal opinions and other services; (vi) assist in the preparation of (but not entering into or executing) documents, opinions and certificates, and other agreements (including indentures or supplemental indentures) and take other actions that are or may be customary in connection with any such financing or necessary or desirable to permit LP Purchaser or its Affiliates to fulfill conditions or obligations under the financing documents, provided that such agreements shall be conditioned upon, and shall not take effect until, the Effective Time; (vii) assist in the preparation of one or more confidential information memoranda, prospectuses, offering memoranda and other marketing and syndication materials reasonably requested by LP Purchaser; (viii) permit LP Purchaser or its Affiliates’ reasonable use of the Company Group’s logos for syndication and underwriting, as applicable, in connection with any such financing (subject to advance review of and consultation with respect to such use), (ix) participate in a reasonable number of meetings, drafting sessions, due diligence sessions and presentations with arrangers and prospective lenders and investors, as applicable (including the participation in such meetings of the Company Group’s senior management), in each case at times and locations to be mutually agreed, and (x) use Commercially Reasonable Efforts to assist in procuring any necessary rating agency ratings or approvals.
(b) Prior to the Closing and during the term of the Transition Services Agreement, Sellers shall, and shall cause the Company Group and their respective Representatives to, use Commercially Reasonable Efforts to provide Purchasers, at Purchasers’ sole cost and expense, reasonable and customary cooperation in connection with the obligations of Purchasers or any of their Affiliates under 17 C.F.R. § 210.3-05 in connection with the transactions contemplated by this Agreement, in each case as may be reasonably requested by Purchasers or their Representatives.
(c) All of the information provided by Sellers, the Company Group and their respective Representatives pursuant to Section 8.17(a) is given without any representation or warranty, express or implied, and none of the Seller Group shall have any liability or responsibility with respect thereto. Notwithstanding anything to the contrary contained in this Section 8.17, nothing in this Section 8.17 shall require any such cooperation to the extent that it would (i) require any of Sellers, the Company Group or any of their respective Representatives, as applicable, to agree to pay any commitment or other similar fees, or incur any liability or give any indemnities or otherwise commit to take any similar action, (ii) require Sellers, the Company Group or any of their respective Representatives to provide any information that is not reasonably available to Sellers, the Company Group or such Representative, (iii) require Sellers, the Company Group or any of their respective Representatives to take any action that will conflict with or violate such Persons’ Organizational Documents, as applicable, or any applicable Laws or result in a violation or breach of, or default under, any Contract with a non-Affiliate to which such Person, as applicable, is a party, result in any officer or director of any such Person incurring any personal liability with respect to any matters relating to the financings by Purchasers or any of their Affiliates, or (iv) unreasonably interfere with the operations of the Sellers or any of the Company Group. Purchasers shall promptly upon request by any Seller reimburse Sellers for all reasonable and documented out-of-pocket costs and expenses incurred by Sellers in complying with this Section 8.17.
(d) Purchasers shall indemnify, defend, and hold harmless the Seller Group from and against all Damages incurred by, suffered by, or asserted against, such Persons, caused by, arising out of, or resulting from the provision to or use by Purchasers or any of their Affiliates, agents or representatives of information provided pursuant to this Section 8.17 to the fullest extent permitted by applicable Law; EVEN IF SUCH DAMAGES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT, OR CONCURRENT), STRICT LIABILITY, OR OTHER LEGAL FAULT OF THE SELLER GROUP, BUT EXCLUDING HOWEVER, IN EACH SUCH CASE, DAMAGES TO THE EXTENT ACTUALLY CAUSED BY THE FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY MEMBER OF THE SELLER GROUP.
Section 8.18 Certain Disclaimers.
(a) EXCEPT AS AND TO THE EXTENT EXPRESSLY REPRESENTED OTHERWISE BY SELLERS IN ARTICLE 5 AND CHIEF GP IN ARTICLE 6 OR CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b) AND WITHOUT LIMITING PURCHASERS’ RIGHTS UNDER THE R&W INSURANCE POLICY, SELLERS DO NOT MAKE, SELLERS EXPRESSLY DISCLAIM, AND PURCHASERS WAIVE, REPRESENT, AND WARRANT THAT PURCHASERS HAVE NOT RELIED UPON, ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT, 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, WARRANTY, OR OTHER STATEMENT, ORAL OR WRITTEN, AS TO (i) TITLE TO ANY OF THE COMPANY 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, OR RESERVE INFORMATION (OR ANY ANALYSIS OR INTERPRETATION
THEREOF) RELATING TO THE COMPANY INTERESTS OR 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 COMPANY INTERESTS OR THE ASSETS OR FUTURE REVENUES GENERATED BY THE COMPANY INTERESTS 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, MATERIALS, OR INFORMATION (INCLUDING AS TO THE ACCURACY, COMPLETENESS, OR CONTENTS OF THE RECORDS) THAT MAY HAVE BEEN MADE AVAILABLE OR COMMUNICATED TO THE PURCHASER GROUP OR ANY FINANCING SOURCES OR INVESTORS IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY DISCUSSION OR PRESENTATION RELATING THERETO (INCLUDING ANY ACCOUNTING MATERIALS, LEASE OPERATING STATEMENTS, OR OTHER ITEMS PROVIDED IN CONNECTION WITH SECTION 8.1); AND SELLERS FURTHER DISCLAIM, AND PURCHASERS WAIVE, ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT, 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 OTHERWISE BY SELLERS IN ARTICLE 5 AND CHIEF GP IN ARTICLE 6 OR CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), THE COMPANY INTERESTS AND THE ASSETS ARE BEING TRANSFERRED “AS IS, WHERE IS,” WITH ALL FAULTS AND DEFECTS, AND THAT PURCHASERS HAVE MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS PURCHASERS DEEM APPROPRIATE. PURCHASERS SPECIFICALLY DISCLAIM ANY OBLIGATION OR DUTY BY SELLERS OR ANY MEMBER OF THE SELLER GROUP TO MAKE ANY DISCLOSURES OF FACT NOT REQUIRED TO BE DISCLOSED PURSUANT TO THE EXPRESS REPRESENTATIONS AND WARRANTIES SET FORTH HEREIN AND PURCHASERS EXPRESSLY ACKNOWLEDGE AND COVENANT THAT PURCHASERS DO NOT HAVE, WILL NOT HAVE, AND WILL NOT ASSERT ANY CLAIM, DAMAGES, OR EQUITABLE REMEDIES WHATSOEVER AGAINST ANY MEMBER OF THE SELLER GROUP EXCEPT FOR CLAIMS, DAMAGES, AND EQUITABLE REMEDIES AGAINST SELLERS FOR BREACH OF AN EXPRESS REPRESENTATION, WARRANTY, OR COVENANT OF A SELLER UNDER THIS AGREEMENT. PURCHASERS ACKNOWLEDGE AND AGREE THAT NONE OF THE SELLER GROUP SHALL HAVE ANY RESPONSIBILITY FOR FAILING OR OMITTING TO DISCLOSE ANY CONDITION, AGREEMENT, DOCUMENT, DATA, INFORMATION OR OTHER MATERIALS RELATING TO THE COMPANY INTERESTS OR THE ASSETS THAT IS NOT EXPRESSLY ADDRESSED BY THIS AGREEMENT.
(b) EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN ARTICLE 4 OR IN CHIEF GP’S REPRESENTATION AND WARRANTY SET FORTH IN SECTION 6.16, SELLERS SHALL NOT HAVE ANY LIABILITY IN CONNECTION WITH AND HAVE NOT AND WILL NOT MAKE (AND HEREBY DISCLAIM) ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT REGARDING ANY MATTER OR CIRCUMSTANCE RELATING TO ENVIRONMENTAL LAWS, ENVIRONMENTAL DEFECTS, 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 NOTHING IN THIS AGREEMENT OR OTHERWISE SHALL BE CONSTRUED AS SUCH A REPRESENTATION, WARRANTY, OR OTHER STATEMENT, AND PURCHASERS SHALL BE DEEMED TO BE TAKING THE ASSETS “AS IS, WHERE IS” FOR PURPOSES OF THEIR ENVIRONMENTAL CONDITION. PURCHASERS SHALL HAVE INSPECTED, OR WAIVED (AND UPON CLOSING SHALL BE DEEMED TO HAVE WAIVED) THEIR 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, OTHER MAN-MADE FIBERS, AND NORM. PURCHASERS ARE RELYING SOLELY UPON THE TERMS OF THIS AGREEMENT, EACH OTHER TRANSACTION DOCUMENT, AND THEIR OWN INSPECTION OF THE COMPANY INTERESTS AND THE ASSETS. AS OF CLOSING, PURCHASERS HAVE MADE ALL SUCH REVIEWS AND INSPECTIONS OF THE COMPANY INTERESTS AND THE ASSETS AND THE RECORDS AS PURCHASERS HAVE DEEMED NECESSARY OR APPROPRIATE TO CONSUMMATE THE TRANSACTION.
(c) PURCHASERS ACKNOWLEDGE THAT THEY SHALL ASSUME ALL RISK OF LOSS WITH RESPECT TO (i) CHANGES IN COMMODITY OR PRODUCT PRICES AND ANY OTHER MARKET FACTORS OR CONDITIONS (INCLUDING ANY PRICING DIFFERENTIALS) FROM AND AFTER THE EFFECTIVE TIME; (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 THE EXECUTION DATE; AND (iii) DEPRECIATION OF ANY ASSETS THAT CONSTITUTE PERSONAL PROPERTY THROUGH ORDINARY WEAR AND TEAR.
(d) SELLERS AND PURCHASERS AGREE THAT, TO THE EXTENT REQUIRED BY APPLICABLE LAW TO BE EFFECTIVE OR ENFORCEABLE, THE DISCLAIMERS OF CERTAIN REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE 5, ARTICLE 6, AND THE REST OF THIS AGREEMENT ARE “CONSPICUOUS” DISCLAIMERS FOR THE PURPOSE OF ANY APPLICABLE LAW.
ARTICLE 9
CONDITIONS TO CLOSING
Section 9.1 Sellers’ Conditions to Closing. The obligations of Sellers to consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by Sellers) on or prior to Closing of each of the following conditions precedent:
(a) Representations. (i) Each Purchaser’s non-Fundamental Representations set forth in Article 7 shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date (except for the representations and warranties that refer to a specified date, which need only be true and correct on and as of such specified date), and (ii) each Purchaser’s Fundamental Representations set forth in set forth in Article 7 shall be true and correct in all but de minimis respects as of the Closing Date as though made on and as of the Closing Date (other than representations and warranties that refer to a specified date, which need only be true and correct on and as of such specified date);
(b) Performance. Purchasers shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by Purchasers 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 (i) have been issued by any Governmental Body having jurisdiction over any Party and (ii) remain in force;
(d) Governmental Consents; HSR Act. (i) All material consents and approvals of any Governmental Body (including those required by the HSR Act) required for the transactions contemplated in this Agreement, except consents and approvals by Governmental Bodies 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) any HSR Act waiting period (and any extension thereof) applicable to the transactions contemplated under the terms of this Agreement, and any extensions to such waiting periods, shall have expired or shall have been terminated;
(e) Impairments. The sum of (without duplication of any amounts) (i) the aggregate amount of all Title Defects Amounts determined under Section 4.2 with respect to Title Defects (including Environmental Defects) less the sum of all Title Benefit Amounts determined under Section 4.3 with respect to Title Benefits, plus (ii) the aggregate sum of all Allocated Values of the Assets excluded from the transactions contemplated herein pursuant to Section 4.6, plus (iii) the aggregated amount of Casualty Losses, does not equal or exceed 15% of the Unadjusted Purchase Price;
(f) Deliveries. Purchasers shall deliver (or be ready, willing, and able to deliver at Closing) to Sellers duly executed counterparts of the documents and certificates to be delivered by Purchaser under Section 10.3; and
(g) Nasdaq Listing Approval. The shares of CHK Common Stock issuable as the Stock Purchase Price shall have been authorized for listing on the Nasdaq, subject to official notice of issuance.
Section 9.2 Purchasers’ Conditions to Closing. The obligations of Purchasers to consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by Purchasers) on or prior to Closing of each of the following conditions precedent:
(a) Representations. (i) Each Seller’s non-Fundamental Representations set forth in Article 5 and Chief GP’s non-Fundamental Representations set forth in Article 6, in each case, shall be true and correct as of the Closing Date (without regard to materiality, Material Adverse Effect or similar qualifiers) as though made on and as of the Closing Date (other than 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 such breaches, if any, as would not, individually or in the aggregate, have a Material Adverse Effect, and (ii) each Seller’s Fundamental Representations set forth in Article 5 and Chief GP’s Fundamental Representations set forth in Article 6, in each case, shall be true and correct in all but de minimis respects as of the Closing Date as though made on and as of the Closing Date (other than representations and warranties that refer to a specified date, which need only be true and correct on and as of such specified date);
(b) Performance. Each Seller shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by such Seller under this Agreement prior to or on the Closing Date (other than the covenants and agreements set forth in Section 8.17);
(c) No Action. No injunction, order, or award restraining, enjoining, or otherwise prohibiting the consummation of the transactions contemplated by this Agreement shall (i) have been issued by any Governmental Body having jurisdiction over any Party and (ii) remain in force;
(d) Governmental Consents; HSR Act. (i) All material consents and approvals of any Governmental Body required for the transactions contemplated in this Agreement, except consents and approvals by Governmental Bodies that are customarily obtained after closing (including Customary Post-Closing Consents), shall have been granted, or the necessary waiting period shall have expired, or early termination of the waiting period shall have been granted, and (ii) any HSR Act waiting period (and any extension thereof) applicable to the transactions contemplated under the terms of this Agreement, and any extensions to such waiting periods, shall have expired or shall have been terminated;
(e) Impairments. The sum of (without duplication of any amounts) (i) the aggregate amount of all Title Defects Amounts determined under Section 4.2 with respect to Title Defects (including Environmental Defects) less the sum of all Title Benefit Amounts determined under Section 4.3 with respect to Title Benefits, plus (ii) the aggregate sum of all Allocated Values of the Assets excluded from the transactions contemplated herein pursuant to Section 4.6, plus (iii) the aggregated amount of Casualty Losses, does not equal or exceed 15% of the Unadjusted Purchase Price;
(f) Related Transactions. All conditions precedent to the closing of the transactions pursuant to the R2KPA MIPA and the Tug Hill MIPA shall have been satisfied and/or waived (as applicable) by the parties thereto, and the transactions thereunder shall be capable of being closed and completed concurrently with the Closing hereunder; provided that if such conditions precedent are not satisfied or the transactions thereunder are not capable of being closed and completed concurrently with the Closing, in each case solely as a result of Purchasers material breach of either the R2KPA MIPA or Tug Hill MIPA, then this condition precedent shall be deemed waived by Purchasers for all purposes hereunder; and
(g) Deliveries. Sellers shall deliver (or be ready, willing, and able to deliver at Closing) to Purchasers duly executed counterparts of the documents and certificates to be delivered by Sellers under Section 10.2.
ARTICLE 10
CLOSING
Section 10.1 Time and Place of Closing. Consummation of the purchase and sale transaction as contemplated by this Agreement (the “Closing”), shall, unless otherwise agreed to in writing by Purchasers and Sellers, take place at the offices of Gibson, Dunn & Crutcher LLP, counsel to Sellers, located at 811 Main Street, Suite 3000, Houston, Texas 77002, at 10:00 a.m., Central Time, on March 9, 2022 (“Scheduled Closing Date”), or if all conditions in Article 9 to be satisfied prior to Closing have not yet been satisfied or waived on the Scheduled Closing Date, within five Business Days of such conditions having 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), subject to the rights of the Parties under Article 11. The date on which the Closing occurs is herein referred to as the “Closing Date.”
Section 10.2 Obligations of Sellers at Closing. At the Closing, upon the terms and subject to the conditions of this Agreement, and subject to the simultaneous performance by Purchasers of their obligations pursuant to Section 10.3, Sellers shall deliver or cause to be delivered to Purchasers the following:
(a) Counterparts of the Assignment Agreement transferring the Company Interests to Purchasers, duly executed by Sellers;
(b) A certificate duly executed by an authorized officer of each Seller, dated as of Closing, certifying on behalf of such Seller (and not on behalf of the other Sellers) that the conditions applicable to such Seller set forth in Section 9.2(a) and Section 9.2(b) have been fulfilled;
(c) A valid and duly executed Internal Revenue Service Form W-9 (or applicable successor form) from each Seller (or, if such Seller is disregarded for U.S. federal income tax purposes, its regarded owner);
(d) Where approvals are received by Sellers pursuant to a filing or application under Section 8.2, copies of those approvals;
(e) Duly executed counterparts of the Registration Rights Agreement, executed by Seller’s designees whom Seller designates as a party thereto as identified in writing to Purchaser at least two Business Days prior to the Closing Date;
(f) Duly executed counterparts of joint written instructions in compliance with the Escrow Agreement, instructing the Escrow Agent to disburse the Deposit to Sellers;
(g) Resignations of each individual who serves as an officer or director of a member of the Company Group in his or her capacity as such, effective as of the Closing Date;
(h) If applicable, (i) releases and terminations of any mortgages, deeds of trust, assignments of production, financing statements, fixture filings, liens, and other recorded encumbrances, in each case, burdening the Assets and securing borrowed monies or other substantially similar indebtedness incurred by Sellers or any of their Affiliates (including the Company Group), including under any debt or other similar instrument that is burdening the Assets, and (ii) authorizations to file UCC-3 termination statements releases in all applicable jurisdictions to evidence the release of all such liens on the Assets securing due and payable obligations, including under any debt or other similar instrument;
(i) Counterparts of the Transition Services Agreement, duly executed by Chief Operating; and
(j) All other instruments, documents, and other items reasonably necessary to effectuate the terms of this Agreement, as may be reasonably requested by Purchasers.
Section 10.3 Obligations of Purchasers at Closing. At the Closing, upon the terms and subject to the conditions of this Agreement, and subject to the simultaneous performance by Sellers of their obligations pursuant to Section 10.2, Purchasers shall deliver or cause to be delivered to Sellers the following:
(a) A wire transfer of the Closing Cash Payment to the account(s) designated by Sellers in immediately available funds, a wire transfer of the Defect Escrow Amount (if applicable), and a wire transfer of the Post-Closing Escrow Amount (if applicable) to the Escrow Agent in immediately available funds;
(b) The number of shares of CHK Common Stock comprising the Stock Purchase Price to Sellers (and/or, if applicable, to those Seller designees to whom Seller designates to receive all or a portion of the shares of CHK Common Stock identified in writing to Purchasers at least two Business Days prior to the Closing Date), free and clear of all encumbrances and restrictions other than restrictions set forth in the Registration Rights Agreement or otherwise imposed by applicable securities Laws;
(c) Duly executed counterparts of the Registration Rights Agreement, executed by LP Purchaser;
(d) Counterparts of the Assignment Agreement, duly executed by Purchasers;
(e) A certificate by an authorized officer of each Purchaser, dated as of Closing, certifying on behalf of such Purchaser (and not on behalf of the other Purchaser) that the conditions applicable to such Purchaser set forth in Section 9.1(a) and Section 9.1(b) have been fulfilled;
(f) Where approvals are received by Purchasers pursuant to a filing or application under Section 8.2, copies of those approvals;
(g) Duly executed counterparts of joint written instructions in compliance with the Escrow Agreement, instructing the Escrow Agent to disburse the Deposit to Sellers;
(h) Evidence of replacement bonds, guaranties, and letters of credit pursuant to Section 8.6;
(i) Counterparts of the Transition Services Agreement, duly executed by Purchasers; and
(j) All other instruments, documents, and other items reasonably necessary to effectuate the terms of this Agreement, as may be reasonably requested by Sellers.
Section 10.4 Closing Cash Payment and Post-Closing Purchase Price Adjustments.
(a) Not later than five Business Days prior to the Scheduled Closing Date (or, if the Closing will not occur on the Scheduled Closing Date, three Business Days prior to the Closing Date), Sellers shall prepare in good faith and deliver to Purchasers, in accordance with customary industry accounting practices and based upon the best information then available to Sellers, a preliminary settlement statement (i) estimating the initial Adjusted Purchase Price (including an estimate of the Base Cash Purchase Price) after giving effect to all adjustments to the Unadjusted Purchase Price set forth in Section 3.3, the Defect Escrow Amount and the Post-Closing Escrow Amount, (ii) setting forth the calculations for each adjustment, (iii) enclosing reasonable documentation available to support any credit, charge, receipt, or other item included in such statement and (iv) setting forth Sellers’ account for the wire transfer of funds. Within two Business Days after Purchasers’ receipt of the preliminary settlement statement, Purchasers shall deliver to Sellers a written report containing all changes that Purchasers propose in good faith to be made to the preliminary settlement statement together with the explanation therefor. The Parties shall in good faith attempt to agree in writing on the preliminary settlement statement as soon as possible after Sellers’ receipt of Purchasers’ written report. The estimate of the initial Base Cash Purchase Price component of the Adjusted Purchase Price set forth in the preliminary settlement statement as agreed upon in writing by the Parties, less the Deposit, less the Defect Escrow Amount (if applicable) and less the Post-Closing Escrow Amount shall constitute the Dollar amount to be paid by Purchasers to Sellers at the Closing (the “Closing Cash Payment”); provided that if the Parties do not agree in writing upon any or all of the adjustments set forth in the preliminary settlement statement, then the amount of such adjustment(s) used to adjust the Unadjusted Purchase Price at the Closing and to calculate the Closing Cash Payment shall be that amount set forth in the draft preliminary settlement statement delivered by Sellers to Purchasers pursuant to this Section 10.4(a). Final adjustments to the Unadjusted Purchase Price will be made pursuant to Section 10.4(c).
(b) At Closing, Purchasers shall deposit or cause to be deposited with the Escrow Agent in a separate account established pursuant to the terms and conditions of the Escrow Agreement an amount in cash equal to $5,000,000 to be held solely for purposes of securing the adjustments provided in Section 10.4(c) (such amount, the “Post-Closing Escrow Amount”).
(c) Sellers shall prepare in good faith and deliver to Purchasers a statement setting forth the final calculation of the Adjusted Purchase Price (including a final calculation of the Base Cash Purchase Price) and showing the calculation of each adjustment, based, to the extent possible, on actual credits, charges, receipts and other items before and after the Effective Time no later than the later of (i) the 120th day following the Closing Date and (ii) the date on which the Parties or the Title Arbitrator, as applicable, finally determines all Title Defect Amounts and Title Benefit Amounts under Section 4.4. Sellers shall, at Purchasers’ request, supply reasonable documentation available to support any credit, charge, receipt, or other item included in such statement. Purchasers shall deliver to Sellers a written report containing any changes that Purchasers propose be made to Sellers’ statement no later than the 60th day following Purchasers’ receipt thereof. The Parties shall undertake to agree on the final statement of the Adjusted Purchase Price no later than 210 days after the Closing Date. However, if the date on which the Parties or the Title Arbitrator, as applicable, finally determines all Title Defect Amounts and Title Benefit Amounts under Section 4.4 is later than the 120th day following the Closing Date, such 210-day period shall be extended the same number of days that such final determination occurs beyond the 120th day following the Closing Date. In the event that the Parties cannot reach agreement within such period of time, any Party may refer the remaining matters in dispute to the Houston office of KPMG US, LLP, or such other independent nationally recognized accounting firm mutually agreed upon by the Parties, 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 that such rules do not conflict with the terms of this Section 10.4(c). Neither Party may have any ex parte communications with the accounting firm concerning the accounting firm’s determination of the disputed matters. The accounting firm shall agree in writing to keep strictly confidential the specifics and existence of any matters submitted as well as all proprietary records of the Parties, if any, reviewed by the accounting firm in the process of resolving such disputes. The accounting firm’s determination shall be made within 30 days after submission of the matters in dispute and shall be final and binding on both Parties, without right of appeal. In determining the proper amount of any adjustment to the Unadjusted Purchase Price, the accounting firm shall not increase the Unadjusted Purchase Price more than the increase proposed by Sellers nor decrease the Unadjusted Purchase Price more than the decrease proposed by Purchasers, as applicable. The accounting firm shall act for the limited purpose of determining the specific disputed matters submitted by the Parties and may not award damages or penalties to the Parties with respect to any matter. Any decision rendered by the accounting firm pursuant hereto shall be final, conclusive and binding on Sellers and Purchasers and, absent fraud or manifest error, and enforceable against any of the Parties in any court of competent jurisdiction. The Parties shall each bear its own legal fees and other costs of presenting its case. Sellers, on the one hand, shall bear one-half and Purchasers, on the other hand, shall bear one-half of the costs and expenses of the accounting firm.
(d) Within ten days after the earlier of (x) the expiration of Purchasers’ 60-day review period described in Section 10.4(c) without delivery of any written report or (y) the date on which the Parties finally determine the Adjusted Purchase Price or the accounting firm finally determines the disputed matters, as applicable:
(i) if the Base Cash Purchase Price component of the Adjusted Purchase Price (after deducting the Deposit, Defect Escrow Amount (if any), and the Post-Closing Escrow Amount) exceeds the Closing Cash Payment, then:
(A) Purchasers shall pay to Sellers the amount by which the Base Cash Purchase Price component of the Adjusted Purchase Price (after deducting the Deposit, Defect Escrow Amount (if any), and the Post-Closing Escrow Amount) exceeds the Closing Cash Payment; and
(B) the Parties shall jointly instruct the Escrow Agent to distribute the entirety of the Post-Closing Escrow Amount to Sellers; or
(ii) if the Closing Cash Payment exceeds the Base Cash Purchase Price component of the Adjusted Purchase Price (after deducting the Deposit, Defect Escrow Amount (if any), and the Post-Closing Escrow Amount) (such excess amount, the “Adjustment Excess”), then:
(A) the Parties shall instruct the Escrow Agent to distribute to Purchasers from the Post-Closing Escrow Amount an amount equal to the lesser of (1) the Adjustment Excess and (2) the Post-Closing Escrow Amount;
(B) if the Adjustment Excess is less than the Post-Closing Escrow Amount, then the Parties shall instruct the Escrow Agent to distribute to Sellers from the Post-Closing Escrow Amount an amount equal to the Post-Closing Escrow Amount less the Adjustment Excess; and
(iii) if the Post-Closing Escrow Amount is less than the Adjustment Excess, Sellers shall pay to Purchasers an amount equal to the Adjustment Excess less the Post-Closing Escrow Amount.
(e) Purchasers shall, and shall cause each member of the Company Group to, assist Sellers in the preparation of the final statement of the Adjusted Purchase Price under Section 10.4(c) by furnishing invoices, receipts, reasonable access to personnel, and such other assistance as may be reasonably requested by Sellers to facilitate such process post-Closing.
(f) All payments made or to be made under this Agreement to Sellers shall be made by electronic transfer of immediately available funds to the account(s) designated by Sellers in writing. All payments made or to be made under this Agreement to Purchasers shall be made by electronic transfer of immediately available funds to the account(s) designated by Purchasers in writing to Sellers.
ARTICLE 11
TERMINATION
Section 11.1 Termination. This Agreement and the transactions contemplated herein may be terminated at any time prior to Closing (by written notice from the terminating Party to the other Parties):
(a) by the mutual prior written consent of the Parties;
(b) by any Party if the Closing does not occur on the Scheduled Closing Date as a result of the closing conditions described in Section 9.1(e) and Section 9.2(e) not being satisfied as of such date; or
(c) by any Party if Closing has not occurred on or before 30 days after the Scheduled Closing Date (the “Outside 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 9.1 and Section 9.2 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, so long as the Parties are able to satisfy such conditions), then the Outside Date will automatically be extended to the date that is 90 days after the Execution Date;
(d) by Sellers, at Sellers’ option, if any of the conditions set forth in Section 9.1(a) or Section 9.1(b) have not been satisfied on or at any time after the Scheduled Closing Date (or, with respect to those conditions that can only be satisfied at the Closing, are not capable of being satisfied on or at any time after the Scheduled Closing Date), and, at such time, but for the material breach of Purchasers that causes any of the conditions set forth in Section 9.1(a) or Section 9.1(b) to be unsatisfied, Sellers are ready, willing and able to proceed to Closing; provided, however, that in the case of a breach that is capable of being cured, Purchasers shall have a period of ten Business Days following written notice from Sellers to Purchasers specifying the reason such condition is unsatisfied (including any breach by Purchasers of this Agreement) to cure such breach prior to the end of such ten Business Day period; provided, further, if (i) Purchasers’ conditions to Closing have been satisfied or waived in full and (ii) all of Sellers’ conditions to Closing have been satisfied or waived (other than Section 9.1(f)), then the refusal or willful or negligent delay by Purchasers to timely close the contemplated transactions shall constitute a failure of Sellers’ conditions to Closing (including Section 9.1(f)) and be a material breach of Purchasers’ obligations under this Agreement; or
(e) by Purchasers, at Purchasers’ option, if any of the conditions set forth in Section 9.2(a) or Section 9.2(b) have not been satisfied on or at any time after the Scheduled Closing Date (or, with respect to those conditions that can only be satisfied at the Closing, are not capable of being satisfied on or at any time after the Scheduled Closing Date), and, at such time, but for the material breach of Sellers that causes any of the conditions set forth in Section 9.2(a) or Section 9.2(b) to be unsatisfied, Purchasers are ready, willing and able to proceed to Closing; provided, however, that in the case of a breach that is capable of being cured, Sellers shall have a period of ten Business Days following written notice from Purchasers to Sellers specifying the reason such condition is unsatisfied (including any breach by Sellers of this Agreement) to cure
such breach prior to the end of such ten Business Day period; provided, further, if (i) Sellers’ conditions to Closing have been satisfied or waived in full and (ii) all of Purchasers’ conditions to Closing have been satisfied or waived (other than Section 9.2(g)), then the refusal or willful or negligent delay by Sellers to timely close the contemplated transactions shall constitute a failure of Purchasers’ conditions to Closing (including Section 9.2(g)) and be a material breach of Sellers’ obligations under this Agreement;
provided, however, that no Party shall be entitled to terminate this Agreement under Section 11.1(c), Section 11.1(d) or Section 11.1(e) if the Closing has failed to occur because such Party failed to perform or observe in any material respect its covenants or agreements hereunder or is otherwise in material breach under this Agreement.
Section 11.2 Effect of Termination.
(a) If this Agreement is terminated pursuant to Section 11.1, this Agreement shall become void and of no further force or effect (except for the provisions of Section 5.7, Section 7.6, Section 8.1(d), Section 8.17, Section 8.3, Article 11, Article 14 (other than Section 14.14) and Appendix A, which shall continue in full force and effect) and, without prejudice to their rights under Section 11.2(c) (if applicable), Sellers shall be free immediately to enjoy all rights of ownership of the Assets and to sell, transfer, encumber, or otherwise dispose of the Assets or the Company Interests to any Person without any restriction under this Agreement.
(b) If this Agreement is terminated or may be terminated pursuant to Section 11.1(e), then Purchasers shall promptly elect in writing, as the sole and exclusive remedy of the Purchaser Group against any member of the Seller Group for the failure to consummate the transactions contemplated hereunder at Closing, to either (A) exercise its right to specific performance of this Agreement pursuant to Section 14.16, or (B) terminate this Agreement and receive the entirety of the Deposit for the sole account and use of Purchasers (and the Parties shall promptly provide joint written instructions to the Escrow Agent to deliver the Deposit to Purchasers), and Purchasers shall be entitled to seek additional damages from, or pursue other remedies against, Chief GP with respect to any breach by Sellers of their obligations under this Agreement.
(c) If this Agreement is terminated pursuant to Section 11.1(d), then Sellers shall be entitled, as the sole and exclusive remedy of the Seller Group against any member of the Purchaser Group for the failure to consummate the transactions contemplated hereunder at Closing, to either (i) exercise their right to specific performance of this Agreement pursuant to Section 14.16 or (ii) terminate this Agreement and receive the entirety of the Deposit as liquidated damages (and the Parties shall promptly provide joint written instructions to the Escrow Agent to deliver the Deposit to Sellers) for the sole account and use of Sellers. IT IS EXPRESSLY STIPULATED BY THE PARTIES THAT THE ACTUAL AMOUNT OF DAMAGES RESULTING FROM SUCH TERMINATION WOULD BE DIFFICULT IF NOT IMPOSSIBLE TO DETERMINE ACCURATELY BECAUSE OF THE UNIQUE NATURE OF THIS AGREEMENT, THE UNIQUE NATURE OF THE COMPANY INTERESTS AND ASSETS, THE UNCERTAINTIES OF APPLICABLE COMMODITY MARKETS AND DIFFERENCES OF OPINION WITH RESPECT TO SUCH MATTERS, AND THAT THE LIQUIDATED DAMAGES PROVIDED FOR HEREIN ARE A REASONABLE ESTIMATE BY THE PARTIES OF SUCH DAMAGES UNDER THE CIRCUMSTANCES AND DO NOT CONSTITUTE A PENALTY.
(d) If this Agreement is terminated under Section 11.1 under circumstances other than those described in Section 11.2(b) or Section 11.2(c), the Parties shall promptly provide joint written instructions to the Escrow Agent to deliver the Deposit to Purchasers, free of any claims by Sellers or any other Person with respect thereto.
(e) 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 11.
ARTICLE 12
INDEMNIFICATION
Section 12.1 Indemnification.
(a) From and after Closing, subject to Purchasers’ right to indemnity pursuant to Section 12.1(b), Purchasers shall indemnify, defend, and hold harmless the Seller Group from and against all Damages incurred by, suffered by, or asserted against such Persons:
(i) caused by, arising out of, or resulting from Purchasers’ breach of any covenant or agreement made by Purchasers contained in this Agreement that by its terms applies or is to be performed in whole or in part after Closing; or
(ii) caused by, arising out of, or resulting from the commitments, contractual arrangements, business, operations, or activities of the Company Group, or the ownership of the Company Group Interests (or ownership or operation of the Assets, including, for purposes of certainty, Environmental Liabilities under CERCLA) regardless of whether such Damages arose prior to, at, or after the Effective Time;
EVEN IF SUCH DAMAGES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT, OR CONCURRENT), STRICT LIABILITY, OR OTHER LEGAL FAULT OF THE SELLER GROUP, BUT EXCLUDING HOWEVER, IN EACH SUCH CASE, DAMAGES TO THE EXTENT ACTUALLY CAUSED BY THE FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY MEMBER OF THE SELLER GROUP.
(b) From and after Closing, subject to the limitations set forth in Section 12.3, Sellers jointly and severally shall indemnify, defend, and hold harmless the Purchaser Group from and against all Damages incurred by, suffered by, or asserted against such Persons caused by, arising out of, or resulting from any Seller’s breach of any covenant or agreement made by such Seller contained in this Agreement that by its terms applies or is to be performed in whole or in part after Closing.
EVEN IF SUCH DAMAGES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT, OR CONCURRENT), STRICT LIABILITY, OR OTHER LEGAL FAULT OF THE PURCHASER GROUP, BUT EXCLUDING HOWEVER, IN EACH SUCH CASE, DAMAGES TO THE EXTENT ACTUALLY CAUSED BY THE FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY MEMBER OF THE PURCHASER GROUP.
(c) From and after Closing, subject to the limitations set forth in Section 12.3, Chief GP shall indemnify, defend, and hold harmless the Purchaser Group from and against all Damages incurred by, suffered by, or asserted against such Persons caused by, arising out of, or resulting from the Excluded Assets.
(d) Notwithstanding anything to the contrary contained in this Agreement, subject to, and without limitation of Section 8.1(d), Section 8.17(d), Article 11, Section 14.16 and Purchasers’ rights under the R&W Insurance Policy, from and after the Closing, this Section 12.1 contains the Parties’ exclusive remedies against each other with respect to the transactions contemplated hereby (except with respect to Fraud), including any breaches of the representations, warranties, covenants, and agreements of the Parties in this Agreement or any of the other Transaction Documents. Except for the remedies contained in this Section 12.1, Section 8.1(d), Section 8.17, Article 11, and Section 14.16, and without limitation of Purchasers’ rights under the R&W Insurance Policy, EACH SELLER (ON BEHALF OF ITSELF AND ON BEHALF OF THE SELLER GROUP) AND EACH PURCHASER (ON BEHALF OF ITSELF AND ON BEHALF OF THE PURCHASER GROUP) EACH KNOWINGLY, WILLINGLY, IRREVOCABLY, EXPRESSLY, AND TO THE FULLEST EXTENT PERMITTED UNDER APPLICABLE LAW, 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, THE TRANSACTION DOCUMENTS, AND ANY TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY; (ii) SELLERS’ OWNERSHIP OR USE OF THE COMPANY INTERESTS; (iii) THE BUSINESS OR OPERATIONS OF THE COMPANY GROUP; (iv) THE COMPANY GROUP’S OWNERSHIP, USE, MANAGEMENT, OR OPERATION OF THE ASSETS; OR (v) 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 SELLERS, ANY MEMBER OF THE COMPANY GROUP, AND ANY PERSONS WHO ARE AFFILIATES OF SELLERS, AND RIGHTS UNDER INSURANCE MAINTAINED BY SELLERS, THE COMPANY GROUP, OR ANY PERSON WHO IS AN AFFILIATE OF SELLERS, 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; PROVIDED, HOWEVER, THAT THE FOREGOING PROVISIONS OF THIS SECTION 12.1(d) SHALL NOT LIMIT ANY PARTY’S RIGHTS TO PURSUE CLAIMS FOR FRAUD.
(e) The indemnity of each Party provided in this Section 12.1 shall be for the benefit of and extend to each Person included in the Seller Group and the Purchaser Group, as applicable. Any claim for indemnity under this Section 12.1 by any Third Party must be brought and administered by a Party to this Agreement. No Indemnified Person (including any Person within the Seller Group and the Purchaser Group) other than the Parties shall have any rights against Sellers or Purchasers under the terms of this Section 12.1 except as may be exercised on its behalf by Purchasers or Sellers, as applicable, pursuant to this Section 12.1(e). The Parties may elect to exercise or not exercise indemnification rights under this Section 12.1 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 12.1.
Section 12.2 Indemnification Actions. All claims for indemnification under Section 12.1 shall be asserted and resolved as follows:
(a) For purposes hereof, (i) the term “Indemnifying Person” when used in connection with particular Damages shall mean the Person or Persons having an obligation to indemnify another Person or Persons with respect to such Damages pursuant to this Article 12 and (ii) the term “Indemnified Person” when used in connection with particular Damages shall mean the Person or Persons having the right to be indemnified with respect to such Damages by another Person or Persons pursuant to this Article 12.
(b) To make a claim for indemnification under Section 12.1, an Indemnified Person shall notify the Indemnifying Person of its claim under this Section 12.2, 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 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 12.2 shall not relieve the Indemnifying Person of its obligations under Section 12.1 except 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 prejudices the Indemnifying Person’s ability to defend against the Third Person Claim. In the event that the claim for indemnification is based upon an inaccuracy or breach of a covenant or agreement, the Claim Notice shall specify the covenant or agreement that was inaccurate or breached.
(c) In the case of a claim for indemnification 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 this Article 12. 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 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.
(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. The Indemnifying Person shall have full control of such defense and proceedings, including any compromise or settlement thereof. 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 controlled by the Indemnifying Person pursuant to this Section 12.2(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) or (ii) may materially and adversely affect the Indemnified Person (other than as a result of money damages covered by the indemnity).
(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 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 at any time prior to settlement or final determination thereof. If the Indemnifying Person has not yet admitted its obligation to provide indemnification 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 10 days following receipt of such notice to (i) admit in writing its obligation to provide indemnification with respect to the Third Person Claim and if its obligation is so admitted, either (A) consent to the proposed settlement or (B) reject, in its reasonable judgment, the proposed settlement or (ii) deny its obligation to provide indemnification. Any failure by the Indemnifying Person to respond to such notice shall be deemed an election under clause (ii) immediately above.
(f) In the case of a claim for indemnification 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, (ii) admit its obligation to provide indemnification with respect to such Damages, or (iii) dispute the claim for such indemnification. If the Indemnifying Person does not notify the Indemnified Person within such 30-day period that it has cured the Damages or that it disputes the claim for such indemnification, the Indemnifying Person shall be deemed to have disputed such claim for indemnification. If the Indemnifying Person does not admit or otherwise does deny its liability against a claim for indemnification not based upon a Third Person Claim within the 30-day time period set forth in this Section 12.2(f), then the Indemnified Person shall diligently and in good faith pursue its rights and remedies under this Agreement with respect to such claim for indemnification.
Section 12.3 Limitations on Actions.
(a) The representations and warranties of Sellers in Article 5 and of Chief GP in Article 6 shall, without limiting Purchasers’ rights under the R&W Insurance Policy, terminate as of the Closing Date. The representations and warranties of Purchasers in Article 7 shall terminate as of the Closing Date. Each of the respective covenants and performance obligations
of Sellers and Purchasers set forth in this Agreement that are to be complied with or performed by Sellers or Purchasers, as applicable, at or prior to the Closing shall terminate as of the Closing Date. All other respective covenants and performance obligations of Sellers and Purchasers set forth in this Agreement that by their terms require performance after the Closing and the corresponding indemnity obligations hereunder shall survive the Closing and remain in full force and effect until fully satisfied and/or performed in accordance with the terms hereof. Notwithstanding anything to the contrary in this Section 12.3, the acknowledgements, disclaimers, and other terms, as applicable, in, Section 7.11, Section 7.12, Section 8.18, Section 14.17, Section 14.18, and Section 14.20 shall survive the Closing indefinitely. The provisions of Article 13 shall survive Closing until 30 days after the expiration of the applicable statute of limitations closes the taxable year to which the subject Taxes relate.
(b) Without limiting the generality of this Section 12.3 from and after the Closing, no action, suit, claim, investigation or proceeding will be brought, encouraged, supported, or maintained by, or on behalf of, Purchasers against any member of the Seller Group, and no recourse will be sought or granted against any member of the Seller Group, by virtue of, or based upon, any alleged misrepresentation or inaccuracy in, or breach of, any of the representations, warranties, covenants, or agreements of Sellers set forth or contained in this Agreement or any other document contemplated hereby or any certificate, instrument, agreement, or other document delivered hereunder (other than, and solely with respect to, any of the covenants in this Agreement that survive the Closing), the subject matter of this Agreement, or any other document contemplated hereby, the transactions contemplated by this Agreement, the ownership, operation, management, or use of the Assets, the business or operations of the Company Group, the ownership of the Company Interests, or any actions or omissions at, or prior to, the Closing. Without limiting the generality of this Section 12.3, from and after the Closing, Purchasers will not be entitled to rescind this Agreement or, subject to Article 11, treat this Agreement as terminated by reason of any breach of this Agreement, and Purchasers knowingly, willingly, irrevocably, and expressly waive any and all rights of rescission it may have in respect of any such matter.
(c) The indemnities in Section 12.1(a)(i) and Section 12.1(b) shall terminate as of the termination date of each covenant or agreement that is subject to indemnification thereunder, except in each case as to matters for which a specific written claim for indemnity has been delivered to the Indemnifying Person on or before such termination date. The indemnities in Section 12.1(a)(ii) and Section 12.1(c) shall continue without time limit.
(d) The foregoing provisions of this Section 12.3 shall not limit any Party’s rights to pursue claims for Fraud.
(e) The amount of any Damages for which an Indemnified Person is entitled to indemnity under this Article 12 shall be reduced by the amount of insurance proceeds realized 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).
(f) In no event shall any Indemnified Person be entitled to duplicate compensation with respect to the same Damage, liability, loss, cost, expense, claim, award, or judgment under more than one provision of this Agreement and the Transaction Documents.
(g) Each Indemnified Person shall take all reasonable steps to mitigate all Damages or other liabilities, losses, costs, and expenses after becoming actually aware of any event that could reasonably be expected to give rise to any Damages or other liabilities, losses, costs, or expenses that are indemnifiable or recoverable under this Agreement.
(h)
(i) Effective as of immediately prior to the Closing, Sellers hereby fully and unconditionally release, acquit and forever discharge the members of the Company Group from any and all manner of actions, causes of actions, claims obligations, demands, damages, costs, expenses, compensation or other relief, whether known or unknown, whether in law or equity, of any kind, Sellers now have or have ever had against the members of the Company Group, arising out of or relating to Sellers’ ownership of the Company Interests. The foregoing notwithstanding, the release and discharge provided for herein shall not release (A) the members of the Company Group of their respective obligations or liabilities, if any, pursuant to this Agreement, (B) the members of the Company of any indemnification and/or exculpation obligations of such Person to Sellers as a manager of such Person, in any Seller’s capacity as such, pursuant to such Person’s Organizational Documents or applicable Law or (C) be deemed to constitute a waiver of the availability of insurance to cover claims.
(ii) Effective as of the Closing, the Purchasers, for themselves and on behalf of the Company Group and each of their respective equity holders, successors and assigns, hereby fully and unconditionally releases, acquits, and forever discharges (A) Sellers and (B) all directors, managers, officers, employees, members, partners, and agents of such member of the Company Group and its respective Affiliates holding such position at any time prior to the Closing from any and all manner of actions, causes of actions, claims, obligations, demands, damages, costs, expenses, compensation or other relief, whether known or unknown, whether in law or equity, of any kind, which such member of the Company Group now has or has ever had against such Persons, arising out of or relating to (x) in respect of Sellers, Sellers’ ownership of the Company Interests and (y) in respect of such directors, managers, officers, employees, members, partners, and agents, acts and omissions on behalf of such member of the Company Group or its Affiliates or the relationship with such member of the Company Group or its Affiliates, in each case, other than with respect to their respective obligations and liabilities, if any, under this Agreement or the Transaction Documents or for claims of Fraud.
ARTICLE 13
TAX MATTERS
Section 13.1 Tax Filings. Chief GP shall prepare (or shall cause to be prepared) and shall file (or cause to be filed) all Flow-Through Returns of the Company Group for any taxable period ending on or before the Closing Date, including, for the avoidance of doubt, the Company’s final U.S. federal information return on IRS Form 1065 for the period ending on the Closing Date.
Chief GP shall be responsible for filing (or causing to be filed) with the applicable Governmental Bodies the Tax Returns of the Company Group required to be filed on or before the Closing Date, and for reporting all tax items of the members of Company Group for Texas franchise tax purposes that are required to be reported by any Seller or an Affiliate thereof on a unitary or combined basis, and Sellers shall be responsible for paying (or causing to be paid) the Taxes reflected on such Tax Returns as due and owing (provided that to the extent such Taxes are allocated to Purchasers pursuant to Section 13.2, such payment shall be on behalf of Purchasers, and no later than five days following Sellers’ delivery of evidence of the payment thereof, Purchasers shall pay to Sellers any such Taxes, but only to the extent that such amounts have not already been accounted for under Section 3.3). Purchasers shall be responsible for the filing with the appropriate taxing authorities the Tax Returns of the Company Group (other than Flow-Through Returns and Texas franchise tax returns for which the Chief GP is responsible under the preceding sentence) for all taxable periods beginning prior to the Closing Date that are required to be filed after the Closing Date and paying the Taxes reflected on such Tax Returns as due and owing and shall do so consistently with past practice unless otherwise required by applicable Law (provided, that to the extent such Taxes are allocated to Sellers pursuant to Section 13.2, such payment shall be on behalf of Sellers, and, no later than five days following Purchasers’ delivery to Sellers of evidence of the payment thereof, Sellers shall pay to Purchasers any such Taxes, but only to the extent that such amounts have not already been accounted for under Section 3.3; provided, however, that in the event that Sellers are required by applicable Tax Law to file a Tax Return with respect to Taxes of the Company Group after the Closing Date which includes all or a portion of a Tax period for which Purchasers are liable for such Taxes, no later than five days following Chief GP’s request therefor and delivery to Purchasers of evidence of the payment thereof, Purchasers shall pay to Sellers all such Taxes allocable to Purchasers pursuant to Section 13.2, but only to the extent that such amounts have not already been accounted for under Section 3.3, in each case, whether such Taxes arise out of the filing of an original return or a subsequent audit or assessment of Taxes). Sellers shall be entitled to all Tax credits and Tax refunds that relate to any such Taxes allocable to any Tax period, or portion thereof, (a) with respect to non-Income Taxes, ending before the Effective Time or (b) with respect to Income Taxes, ending at the end of the Closing Date, as applicable, and Purchasers shall promptly pay to Sellers an amount equal to the value of any such Tax credit or Tax refund received by Purchasers or the Company Group after the Closing Date, net of any reasonable third party costs and expenses incurred by Purchasers or the Company Group in obtaining such credit or refund. Sellers shall repay to Purchasers the amount of any Tax credit or Tax refund paid to Sellers pursuant to this Section 13.1 (plus any applicable penalties, interest or other charges imposed by the relevant Governmental Body and paid by Purchasers) in the event that Purchasers or any of their Affiliates is required to repay such credit or refund (including any applicable penalties, interest, or other charges imposed by the relevant Governmental Body) to such Governmental Body.
Section 13.2 Allocation of Taxes. For purposes of Section 3.3, Section 8.4(d), Section 13.1, and Section 13.4, in each case, notwithstanding that such Asset Taxes are payable by the Company Group (and not Sellers or Purchasers directly), (a) Asset Taxes that are ad valorem, property or other Asset Taxes imposed on a periodic basis that are assessed against the Assets with respect to a Tax period (or portion thereof) beginning at or after the Effective Time, but excluding any such Taxes that are based on the severance or production of Hydrocarbons or the Pennsylvania Impact Fee, shall be allocated entirely to Purchasers, and such Asset Taxes assessed against the
Assets with respect to a Tax period (or portion thereof) ending prior to the Effective Time, shall be allocated entirely to Sellers, (b) Asset Taxes that are imposed on the severance or production of Hydrocarbons (including the Pennsylvania Impact Fee) shall be allocated between the Parties based on the number of units or value of production actually produced, as applicable, before, and at or after, the Effective Time, as applicable and (c) Asset Taxes based upon sales or receipts or resulting from specific transactions such as the sale or other transfer of property, shall be allocated to the period (i.e., prior to the Effective Time or following the Effective Time) in which the transaction giving rise to such Asset Taxes occurred (i.e., prior to the Effective Time or following the Effective Time). For purposes of clause (b) of the immediately preceding sentence, the Pennsylvania Impact Fee shall be allocated between the Parties based on the period to which the underlying production relates, not the year in which the payment of the fee is due. For purposes of clause (b) of the initial sentence of this Section 13.2, Sellers shall be allocated any Pennsylvania Impact Fee resulting from production periods prior to the Effective Time and Purchasers shall be allocated any Pennsylvania Impact Fee resulting from production periods after the Effective Time. For example, the year one Pennsylvania Impact Fee for a well spud in the 2021 calendar year and for which the fee is due in 2022 shall be allocated entirely to Sellers and the fee associated with the same well’s year two production, occurring in the 2022 calendar year and payable in the 2023 calendar year, shall be allocated entirely to Purchasers. For purposes of Section 3.3, Section 13.1, and Section 13.4, in the case of Income Taxes imposed on the Company Group (or any member thereof), the amount of such Taxes allocated to Sellers shall be determined by closing the books of the Company Group as of the end of the Closing Date notwithstanding that such Taxes are payable by the Company Group (and not Sellers or Purchasers directly).
Section 13.3 Characterization of Certain Payments. The Parties agree that any payments made pursuant to this Article 13, Article 12, Section 2.2, or Section 10.4 shall be treated for all Tax purposes as an adjustment to the Unadjusted Purchase Price unless otherwise required by Law.
Section 13.4 Amended Tax Returns; Tax Elections. In each case to the extent doing so would cause Sellers or any of their Affiliates to be liable for any Taxes (including amounts for which Sellers are liable under this Agreement), Purchasers will not, without the prior written consent of Chief GP (such consent not to be unreasonably withheld, conditioned or delayed), cause or permit any of their Affiliates to (a) file or amend or otherwise modify any Tax Return that relates in whole or in part to any Tax period, or portion thereof, for which Sellers are allocated responsibility for payment pursuant to Section 13.2 (other than to file Tax Returns in the ordinary course of business in accordance with Section 13.1), (b) make or change any election for, or that has retroactive effect to, any Tax period, or portion thereof, for which Sellers are allocated responsibility for payment pursuant to Section 13.2, (c) enter into any voluntary disclosure Tax program, agreement or arrangement with any Tax authority with respect to any Taxes attributable to any Tax period, or portion thereof, for which Sellers are allocated responsibility for payment pursuant to Section 13.2, or (d) extend or waive the statute of limitations with respect to any Tax period, or portion thereof, for which Sellers are allocated responsibility for payment pursuant to Section 13.2.
Section 13.5 Cooperation. Purchasers and Chief GP shall cooperate fully, as and to the extent reasonably requested by the other Party, in connection with (a) the filing of any Tax Returns pursuant to this Article 13 and (b) any Tax examination, audit, litigation or similar proceeding. Such cooperation shall include the retention and (upon the other Party’s request) the provision of such records and information which are reasonably relevant to any such Tax Return or examination, audit, litigation, or similar proceeding.
Section 13.6 Tax Audits. After the Closing Date, if Purchasers or any of their Affiliates receives notice of any audit, demand, claim, proposed adjustment, assessment, examination or other administrative or court proceeding with respect to any of the Company Group (a) that concerns Income Taxes (including, for the avoidance of doubt, any Taxes related to a Flow-Through Return) with respect to any Pre-Closing Tax Period (an “Income Tax Contest”) or (b) for all other Taxes, with respect to a Pre-Effective Time Tax Period (a “Non-Income Tax Contest” and, together with an Income Tax Contest, a “Tax Contest”), Purchasers shall notify Chief GP as soon as practicable and in any event within ten days of receipt of such notice. Chief GP shall have the right to control any such Tax Contest, provided that Purchasers shall have the right to participate, at Purchasers’ sole cost and expense, in the conduct of any Tax Contest involving a Straddle Period or any material Taxes of a Texas Combined Group for which any member of the Company Group may be held jointly and severally liable. If Chief GP elects not to control such Tax Contest, Purchasers shall control, at their sole cost and expense, such Tax Contest and Chief GP shall have the right to participate in such Tax Contest; provided, however, that, under such circumstances, Purchasers shall have no obligation to defend the Tax Contest or mitigate liabilities of Sellers with respect to such Tax Contest. Notwithstanding the foregoing, the controlling Party shall keep the other Party reasonably informed of the progress of such Tax Contest, and shall not settle any such Tax Contest that would reasonably be expected to have an adverse Tax impact on the other Party without the prior written consent of the other Party (which shall not be unreasonably withheld, conditioned or delayed). Notwithstanding anything in this Agreement to the contrary, the Parties shall cause there to be made or otherwise cooperate in the making, to the maximum extent provided by applicable Law, of one or more elections under Section 6226 of the Code (or any corresponding provision of state, local or non-U.S. Law) relating to any Pre-Closing Tax Period. Chief GP shall cause the partnership representative of the Company to comply with the provisions of this Section 13.6.
Section 13.7 Tax Treatment. The Parties agree that the transactions contemplated by this Agreement will be treated for U.S. federal income Tax purposes as (a) a sale of partnership interests of the Company by the Sellers, which shall, for the avoidance of doubt, cause the Company’s taxable year as a partnership to close as of the end of the Closing Date for U.S. federal income tax purposes, and (b) an acquisition of the assets of the Company Group (other than the Excluded Assets), as described in Revenue Ruling 99-6, situation 2. No Party or any Affiliate thereof shall take a position inconsistent with the preceding sentence for any purpose unless otherwise required pursuant to a “determination” within the meaning of Section 1313(a) of the Code or corresponding provision of applicable U.S. state or local Law.
Section 13.8 Transaction Tax Deductions. Any Transaction Tax Deductions, to the fullest extent permitted by applicable Law (including electing the application of Revenue Procedure 2011-29 to deduct 70% of any “success-based fees” within the meaning of Treasury Regulations Section 1.263(a)-5(f)), shall be reported in a taxable period of the Company Group ending on or prior to the Closing Date (the benefit of which, for the avoidance of doubt, shall accrue to Sellers). In the event a Transaction Tax Deduction cannot be fully reported in such a period but can be taken into account on a Tax Return for a Straddle Period, any item of deduction
attributable to a Transaction Tax Deduction shall be treated (to the fullest extent permitted by applicable Law) as deductible in the pre-Closing portion of the Straddle Period (and the Purchasers shall take such actions as are permitted under applicable Law that are required to cause those deductions to be reported in the pre-Closing portion of the Straddle Period).
ARTICLE 14
MISCELLANEOUS
Section 14.1 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. Each 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 14.2 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 if sent during normal business hours of the recipient or on the next day if sent after normal business hours of the recipient with receipt acknowledged, with the receiving Party affirmatively obligated to promptly acknowledge receipt. Such notices and other communications must be sent to the following addresses or email addresses:
If to Sellers:
Chief Oil & Gas LLC
8111 Westchester Drive, Suite 900
Dallas, Texas 75225
Attn: Justin Clarke, Senior Vice President and General Counsel
Email: jclarke@chiefog.com
With a copy to (which shall not constitute notice):
Gibson, Dunn & Crutcher LLP
811 Main Street, Suite 3000
Houston, Texas 77002
Attn: Michael P. Darden; Jeffrey A. Chapman
Email: mpdarden@gibsondunn.com; jchapman@gibsondunn.com
If to Purchasers:
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Attn: Derek Dixon
Telephone: (405) 935-4020
Email: derek.dixon@chk.com
With a copy to (which shall not constitute notice):
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Attention: Benjamin E. Russ
Telephone: (405) 935-6462
Email: ben.russ@chk.com
Any 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 14.3 Tax, Recording Fees, Similar Taxes & Fees. Purchasers, on the one hand, and Sellers, on the other hand, shall each bear and pay 50% of any Transfer Taxes and similar Taxes and fees incurred and imposed upon, or with respect to, the transactions contemplated hereby. If such transactions are exempt from any such Taxes or fees upon the filing of an appropriate certificate or other evidence of exemption, Purchasers or Sellers, as applicable, will timely furnish to the other Party such certificate or evidence. Except as otherwise provided herein, all costs and expenses (including legal and financial advisory fees and expenses) incurred in connection with, or in anticipation of, this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses. For the avoidance of doubt, all fees, costs and expenses of the R&W Insurance Policy shall be paid by Purchasers, and Sellers will not have any liability with respect thereto.
Section 14.4 Governing Law; Jurisdiction.
(a) THIS AGREEMENT, THE LEGAL RELATIONS BETWEEN THE PARTIES, AND ALL CLAIMS OR CAUSES OF ACTION (WHETHER IN TORT, CONTRACT, OR STATUTE) THAT MAY BE BASED UPON, ARISE OUT OF, OR RELATE TO THIS AGREEMENT, OR THE NEGOTIATION, EXECUTION OR PERFORMANCE OF THIS AGREEMENT, SHALL BE GOVERNED BY, CONSTRUED, AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (INCLUDING ITS STATUTES OF LIMITATIONS) WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION; PROVIDED, HOWEVER, THAT ANY MATTER RELATED TO TITLE TO ANY REAL PROPERTY INCLUDED IN THE ASSETS SHALL BE GOVERNED BY THE LAWS OF THE STATE WHERE SUCH ASSETS ARE LOCATED.
(b) THE PARTIES HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA LOCATED IN DALLAS COUNTY, TEXAS (OR, IF REQUIREMENTS FOR FEDERAL JURISDICTION ARE NOT MET, STATE COURTS LOCATED IN DALLAS 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 (EXCEPT TO THE EXTENT A DISPUTE, CONTROVERSY, OR CLAIM ARISING OUT OF, IN RELATION TO, OR IN CONNECTION WITH THE RESOLUTION OF ANY DISPUTED TITLE DEFECTS OR ENVIRONMENTAL
DEFECTS, OR TITLE BENEFITS PURSUANT TO SECTION 4.4, OR THE DETERMINATION OF PURCHASE PRICE ADJUSTMENTS PURSUANT TO SECTION 10.4(c) IS REFERRED TO AN EXPERT PURSUANT TO THOSE SECTIONS), 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 ADDRESS SET OUT IN SECTION 14.2 OF THIS AGREEMENT 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 IN RESPECT OF ANY ACTION, SUIT, OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
(d) EACH PARTY, FOR ITSELF OR ANY OF ITS ASSETS, HEREBY WAIVES ANY IMMUNITY TO THE FULLEST EXTENT PERMITTED BY THE LAWS OF ANY APPLICABLE JURISDICTION. THIS WAIVER INCLUDES IMMUNITY FROM: (i) JURISDICTION; (ii) SERVICE OF PROCESS; (iii) ANY LITIGATION, EXPERT DETERMINATION, MEDIATION, OR ARBITRATION PROCEEDING COMMENCED UNDER THIS AGREEMENT; (iv) ANY JUDICIAL, ADMINISTRATIVE, OR OTHER PROCEEDINGS THAT ARE PART OF, OR IN AID OF, THE LITIGATION, EXPERT DETERMINATION, MEDIATION, OR ARBITRATION COMMENCED UNDER THIS AGREEMENT; AND (v) ANY EFFORT TO CONFIRM, ENFORCE, OR EXECUTE ANY DECISION, SETTLEMENT, AWARD, JUDGMENT, SERVICE OF PROCESS, EXECUTION ORDER, OR ATTACHMENT (INCLUDING PRE-JUDGMENT ATTACHMENT) THAT RESULTS FROM LITIGATION, EXPERT DETERMINATION, MEDIATION, ARBITRATION, OR ANY JUDICIAL OR ADMINISTRATIVE PROCEEDINGS COMMENCED UNDER THIS AGREEMENT. FOR THE PURPOSES OF THIS WAIVER, PURCHASERS ACKNOWLEDGES THAT THEIR RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT ARE OF A COMMERCIAL AND NOT A GOVERNMENTAL NATURE.
Section 14.5 Waivers. Any failure by any 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 14.6 Assignment. Neither Sellers nor Purchasers shall assign all or any part of this Agreement, and shall not assign or delegate any of its rights or duties hereunder, without the prior written consent of the other Party (which consent may be withheld in such other Party’s sole discretion) and any assignment or delegation made without such consent 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 assigns.
Section 14.7 Entire Agreement. This Agreement (including, for purposes of certainty, the Appendix, Exhibits, and Schedules attached hereto), the documents to be executed hereunder, the Confidentiality Agreement, and the Escrow Agreement 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 14.8 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 14.9 No Third Party Beneficiaries. Nothing in this Agreement shall entitle any Person other than Purchasers and Sellers to any claims, cause of action, remedy, or right of any kind, except the rights expressly provided in Section 8.1(d), Section 8.12, Section 8.17, Section 12.1(e), and Section 14.18 to the Persons described therein.
Section 14.10 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 arm’s-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.
Section 14.11 Limitation on Damages. NOTWITHSTANDING ANYTHING TO THE CONTRARY, EXCEPT IN CONNECTION WITH ANY DAMAGES INCURRED BY THIRD PARTIES FOR WHICH INDEMNIFICATION IS SOUGHT UNDER THE TERMS OF THIS AGREEMENT, NONE OF PURCHASERS, SELLERS, OR ANY OF THEIR RESPECTIVE AFFILIATES 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 PURCHASER AND EACH SELLER, FOR ITSELF AND ON BEHALF OF ITS RESPECTIVE AFFILIATES, HEREBY EXPRESSLY WAIVES
ANY RIGHT TO CONSEQUENTIAL, SPECIAL, INDIRECT, PUNITIVE, OR EXEMPLARY DAMAGES IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 14.12 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 14.13 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 (including any payment required hereunder) is not a Business Day (or if the period during which any notice is required or permitted to be given or any action taken expires on a date that 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 or permitted to be given or action taken) shall be the next day that is a Business Day.
Section 14.14 Delivery of Records. Sellers, at Purchasers’ cost and expense, shall deliver the Records to Purchasers within 30 days following Closing. Sellers may retain copies of the Records.
Section 14.15 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 14.16 Specific Performance. The Parties agree that if any of the provisions of this Agreement were not performed 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 Parties shall be entitled to specific performance of the terms hereof and immediate injunctive relief, in addition to any other remedy available at Law or in equity. Each of the Parties hereby further waives (a) any defense in any action for specific performance that a remedy at Law would be adequate and (b) any requirement under any Law to post security as a prerequisite to obtaining equitable relief.
Section 14.17 Reliance on Own Judgment; Disclaimer of Reliance. THE PARTIES AGREE THAT THE TERMS OF THIS AGREEMENT ARE NEGOTIATED TERMS AND NOT BOILERPLATE. PRIOR TO SIGNING THIS AGREEMENT, ALL TERMS WERE OPEN FOR NEGOTIATION. THE PARTIES ACKNOWLEDGE THAT THEY WERE EACH REPRESENTED BY COUNSEL AND RELIED UPON SUCH COUNSEL TO ADVISE THEM
IN CONNECTION WITH THE NEGOTIATION AND DRAFTING OF THIS AGREEMENT. THE PARTIES ACKNOWLEDGE AND AGREE THAT THEY ARE EACH SOPHISTICATED AND KNOWLEDGEABLE IN BUSINESS MATTERS AND HAVE DEALT WITH EACH OTHER AT ARM’S LENGTH IN NEGOTIATING THIS AGREEMENT. BY SIGNING BELOW, EACH PARTY REPRESENTS THAT IT HAS CAREFULLY REVIEWED THIS AGREEMENT, UNDERSTANDS ITS TERMS, HAS SOUGHT AND OBTAINED INDEPENDENT LEGAL ADVICE WITH RESPECT TO THE NEGOTIATION AND PREPARATION OF THIS AGREEMENT, HAS RELIED WHOLLY UPON ITS OWN JUDGMENT, KNOWLEDGE, AND INVESTIGATION, AND THE ADVICE OF ITS RESPECTIVE COUNSEL, AND THAT IT HAS NOT RELIED UPON OR BEEN INFLUENCED TO ANY EXTENT IN MAKING OR ENTERING INTO THIS AGREEMENT BY ANY REPRESENTATIONS OR STATEMENTS MADE BY ANY OTHER PARTY, OR BY ANYONE ACTING ON BEHALF OF ANY OTHER PARTY, EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN THIS AGREEMENT OR CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), OR IN ANY OTHER TRANSACTION DOCUMENT. THE PARTIES ALSO ACKNOWLEDGE AND AGREE THAT THE OTHER PARTY HAS NO DUTY TO MAKE ANY DISCLOSURES TO ANY OTHER PERSON IN CONNECTION WITH MAKING OR ENTERING INTO THIS AGREEMENT. THE PARTIES EXPRESSLY DISCLAIM RELIANCE ON ANY REPRESENTATION OR STATEMENT NOT MADE IN THIS AGREEMENT IN DECIDING TO ENTER INTO THIS AGREEMENT OR CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), OR IN ANY OTHER TRANSACTION DOCUMENT. IT IS UNDERSTOOD AND AGREED THAT, IN ENTERING INTO THIS AGREEMENT, EACH OF THE PARTIES EXPRESSLY ASSUMES THE RISK THAT A FACT NOW BELIEVED TO BE TRUE MAY HEREAFTER BE FOUND TO BE OTHER THAN TRUE, OR FOUND TO BE DIFFERENT IN MATERIAL OR IMMATERIAL RESPECTS FROM THAT WHICH IS NOW BELIEVED, AND THE PARTIES FURTHER UNDERSTAND AND AGREE THAT THIS AGREEMENT SHALL BE AND WILL REMAIN EFFECTIVE WITHOUT REGARD FOR ANY DIFFERENCES IN FACT, OR DIFFERENCES IN THE PERCEPTION OF FACTS, THAT MAY HEREAFTER BE FOUND. THE PARTIES WAIVE AND DISCLAIM ANY RIGHT OR ABILITY TO SEEK TO REVOKE, RESCIND, VACATE, OR OTHERWISE AVOID THE OPERATION AND EFFECT OF THIS AGREEMENT ON THE BASIS OF AN ALLEGED FRAUDULENT INDUCEMENT, MISREPRESENTATION, OR MATERIAL OMISSION, OR ON THE BASIS OF A MUTUAL OR UNILATERAL MISTAKE OF FACT OR LAW, OR NEWLY DISCOVERED INFORMATION.
Section 14.18 Limitation on Recourse. THE PARTIES ACKNOWLEDGE AND AGREE THAT NO PAST, PRESENT, OR FUTURE DIRECTOR, MANAGER, OFFICER, EMPLOYEE, INCORPORATOR, MEMBER, PARTNER, STOCKHOLDER, AGENT, ATTORNEY, REPRESENTATIVE, AFFILIATE, OR FINANCING SOURCE AND THEIR RESPECTIVE PAST, PRESENT, OR FUTURE DIRECTORS, MANAGERS, OFFICERS, EMPLOYEES, INCORPORATORS, MEMBERS, PARTNERS, STOCKHOLDERS, AGENTS, ATTORNEYS, REPRESENTATIVES, AFFILIATES (OTHER THAN ANY OF THE PARTIES), OR FINANCING SOURCES OF ANY OF THE PARTIES (EACH, A “NON-RECOURSE PERSON” FOR PURPOSES OF THIS PROVISION), IN SUCH CAPACITY, SHALL HAVE ANY LIABILITY OR RESPONSIBILITY (IN CONTRACT, TORT, OR
OTHERWISE) FOR ANY AND ALL SUITS, LEGAL OR ADMINISTRATIVE PROCEEDINGS, CLAIMS, DEMANDS, DAMAGES, LOSSES, COSTS, LIABILITIES, INTEREST, OR CAUSES OF ACTION WHATSOEVER, AT LAW OR IN EQUITY, KNOWN OR UNKNOWN, WHICH ARE ARISING FROM, BASED UPON, RELATED TO, OR ASSOCIATED WITH THE NEGOTIATION, PERFORMANCE, AND CONSUMMATION OF THIS AGREEMENT OR THE TRANSACTION CONTEMPLATED HEREUNDER. THIS AGREEMENT MAY ONLY BE ENFORCED AGAINST, AND ANY DISPUTE, CONTROVERSY, MATTER, OR CLAIM ARISING FROM, BASED UPON, RELATED TO, OR ASSOCIATED WITH THIS AGREEMENT, OR THE NEGOTIATION, PERFORMANCE, OR CONSUMMATION OF THIS AGREEMENT, MAY ONLY BE BROUGHT AGAINST THE ENTITIES THAT ARE EXPRESSLY NAMED AS PARTIES, AND THEN ONLY WITH RESPECT TO THE SPECIFIC OBLIGATIONS SET FORTH HEREIN WITH RESPECT TO SUCH PARTY. EACH NON-RECOURSE PERSON IS EXPRESSLY INTENDED AS A THIRD PARTY BENEFICIARY OF THIS SECTION 14.18 AND, NOTWITHSTANDING ANYTHING TO THE CONTRARY, SHALL HAVE THE RIGHT TO ENFORCE THIS PROVISION.
Section 14.19 Schedules. Neither the Schedules, any disclosure made in or by virtue of the Schedules, nor the inclusion of any matter or information on a Schedule, (a) constitutes or implies any representation, warranty, or covenant by Sellers not expressly set out in this Agreement, (b) has the effect of, or may be construed as, adding to, broadening, deleting from, or revising the scope of any of the representations, warranties, or covenants of Sellers in this Agreement, (c) is not an admission of liability under any applicable Law and does not mean that such information is required to be disclosed by this Agreement, that such information is material, or that such information does, or may, have a Material Adverse Effect, and (d) shall not be deemed an indication that such matter necessarily would, or may, breach a representation, warranty, or covenant absent its inclusion on such Schedule; rather, the Schedules, any disclosure made in or by virtue of the Schedules, and the inclusion of any matter or information on a Schedule are intended only to qualify the representations, warranties, and covenants in this Agreement and to set forth other information as may be required by this Agreement. Matters reflected in the Schedules are not limited to matters required by this Agreement to be reflected in the Schedules, and may be set forth on a Schedule for information purposes only. Neither the specification of any Dollar amount, item, or matter in any representation, warranty, or covenant contained in this Agreement, nor the inclusion of any specific item or matter in any Schedule, is intended to imply that such amount, or a higher or lower amount, or the item or matter so included, or any other item or matter, is or is not material or in the ordinary course of business, and no Person shall use the setting forth of any such amount or the inclusion of any such item or matter in any dispute or controversy between the Parties as to whether any obligation, item, or matter described or not described therein or included or not included in the Schedules is or is not material or in the ordinary course of business for purposes of this Agreement. The information set forth on the Schedules shall not be used as a basis for interpreting the terms “material,” “materially,” “materiality,” “Material Adverse Effect,” or any similar qualification in this Agreement. The disclosure of any matter in any Schedule shall be deemed to be a disclosure under any other Schedule to the extent that the relevance of such matter to such other Schedule is readily apparent on its face. Headings have been inserted in the Schedules for reference only and do not amend the descriptions of the disclosed items set forth in this Agreement.
Section 14.20 Attorney-Client Privilege; Continued Representation. Purchasers agree, on their own behalf and on behalf of their respective directors, officers, managers, employees, and Affiliates, that, following the Closing, Gibson, Dunn & Crutcher LLP may serve as counsel to Sellers or any of their Affiliates in connection with any matters related to this Agreement and the transactions contemplated hereunder, including any litigation, claim or obligation arising out of or relating to this Agreement or the transactions contemplated hereunder notwithstanding any representation by Gibson, Dunn & Crutcher LLP prior to the Closing Date of the Company Group. Each Purchaser, on behalf of itself and each member of the Company Group, hereby (a) waives any claim they have or may have that Gibson, Dunn & Crutcher LLP has a conflict of interest or is otherwise prohibited from engaging in such representation and (b) agrees that, in the event that a dispute arises after the Closing between Purchasers and Sellers or any of their respective Affiliates, Gibson, Dunn & Crutcher LLP may represent Sellers or any of their Affiliates in such dispute even though the interests of such Person(s) may be directly adverse to Purchasers or any member of the Company Group and even though Gibson, Dunn & Crutcher LLP may have represented the Company Group in a matter substantially related to such dispute. Purchasers and the Company Group also further agree that, as to all communications prior to Closing among Gibson, Dunn & Crutcher LLP and the Company Group, Sellers, or any of their respective Affiliates and representatives that primarily relate to the negotiation of transactions contemplated hereunder, the attorney-client privilege, and the expectation of client confidence belongs to Sellers and may be controlled by Sellers and shall not pass to or be claimed by Purchasers or the members of the Company Group. Notwithstanding the foregoing, in the event that a dispute arises between Purchasers, the Company Group, and a Third Party other than a Party after the Closing, the members of the Company Group may assert the attorney-client privilege to prevent disclosure of confidential communications by Gibson, Dunn & Crutcher LLP to such Third Party; provided, however, that the members of the Company Group may not waive such privilege without the prior written consent of Sellers (not to be unreasonably withheld, conditioned, or delayed).
Section 14.21 Party Representatives.
(a) For purposes of this Agreement, Sellers, without any further action, shall be deemed to have appointed, and do hereby appoint, Chief GP as their representative (in such capacity, the “Seller Representative”), as the attorney-in-fact for and on behalf of Sellers (both individually and collectively), with respect to the exercise of any decision, right, consent, election, or other action that any Seller is required or permitted to make or take under the terms of this Agreement (the “Seller Delegated Matters”), and Purchasers may rely on the decisions of Seller Representative with respect to all Seller Delegated Matters. For the avoidance of doubt, notwithstanding anything to the contrary contained herein, Sellers will be treated as a single party for purposes of any notice, election, exercise of a right, consent or similar action to be made by Sellers under this Agreement. The Parties further acknowledge that Purchasers shall have no responsibility to determine the portion of the Closing Cash Payment to be paid to Sellers and shall be entitled to rely on the preliminary settlement statement and the final settlement statement, as well as instructions by the Seller Representative, as to the portion of the Closing Cash Payment payable to each Seller. Sellers shall be jointly and severally liable for any Damages of any Seller or Sellers under this Agreement or any Transaction Document; provided, however that in no event shall Sellers be liable in any respect for any Damages of Radler 2000 Limited Partnership and Tug Hill Inc. under the R2KPA MIPA or the Tug Hill MIPA.
(b) For purposes of this Agreement, Purchasers, without any further action, shall be deemed to have appointed, and do hereby appoint, LP Purchaser as their representative (in such capacity, the “Purchaser Representative”), as the attorney-in-fact for and on behalf of Purchasers (both individually and collectively), with respect to the exercise of any decision, right, consent, election, or other action that any Purchaser is required or permitted to make or take under the terms of this Agreement (the “Purchaser Delegated Matters”), and Sellers may rely on the decisions of Purchaser Representative with respect to all Purchaser Delegated Matters. For the avoidance of doubt, notwithstanding anything to the contrary contained herein, Purchasers will be treated as a single party for purposes of any notice, election, exercise of a right, consent or similar action to be made by Purchasers under this Agreement.
[Signature Pages Follow]
IN WITNESS WHEREOF, this Agreement has been signed by each of the Parties on the Execution Date.
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| SELLERS: |
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THE JAN & TREVOR REES-JONES REVOCABLE TRUST |
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| By: | /s/ Trevor D. Rees-Jones |
| Name: | Trevor D. Rees-Jones |
| Title: | Co-Trustee |
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| By: | /s/ Janice M. Rees-Jones |
| Name: | Janice M. Rees-Jones |
| Title: | Co-Trustee |
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| REES-JONES FAMILY HOLDINGS, LP |
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| By: | R-J (GP) Capital LLC, its general partner |
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| By: | /s/ Trevor D. Rees-Jones |
| Name: | Trevor D. Rees-Jones |
| Title: | President |
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| CHIEF E&D PARTICIPANTS, LP |
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| By: | Chief E&D (GP) LLC, its general partner |
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| By: | /s/ Trevor D. Rees-Jones |
| Name: | Trevor D. Rees-Jones |
| Title: | President and CEO |
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| CHIEF E&D (GP) LLC |
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| By: | /s/ Trevor D. Rees-Jones |
| Name: | Trevor D. Rees-Jones |
| Title: | President and CEO |
Signature Page to Partnership Interest Purchase Agreement
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| PURCHASERS: |
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| CHESAPEAKE APPALACHIA, L.L.C. |
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| By: | /s/ Domenic J. Dell'Osso, Jr. |
| Name: | Domenic J. Dell'Osso, Jr. |
| Title: | President and Chief Executive Officer |
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| CHESAPEAKE ENERGY CORPORATION |
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| By: | /s/ Domenic J. Dell'Osso, Jr. |
| Name: | Domenic J. Dell'Osso, Jr. |
| Title: | President and Chief Executive Officer |
Signature Page to Partnership Interest Purchase Agreement
APPENDIX A
ATTACHED TO AND MADE A PART OF THAT
CERTAIN PARTNERSHIP INTEREST PURCHASE AGREEMENT, DATED AS OF THE EXECUTION DATE, BY AND AMONG SELLERS AND PURCHASERS
DEFINITIONS
“Actual Knowledge” has the meaning set forth in Section 5.1(a).
“Adjusted Purchase Price” has the meaning set forth in Section 3.3.
“Adjustment Excess” has the meaning set forth in Section 10.4(d)(ii).
“AFEs” means authorization for expenditures issued pursuant to a Contract.
“Affiliate” means, with respect to any Person, any Person that directly or indirectly Controls, is Controlled by, or is under common Control with such Person. Notwithstanding anything to the contrary herein, (a) prior to Closing, each member of the Company Group shall be deemed to be an Affiliate of Sellers, and not Purchasers, and (b) from and after the Closing, each member of the Company Group shall be deemed to be an Affiliate of Purchasers, and not Sellers.
“Agreement” has the meaning set forth in the Preamble of this Agreement.
“Allocated Value” has the meaning set forth in Section 3.4.
“Arbitration Decision” has the meaning set forth in Section 4.4(e).
“Asset Taxes” means ad valorem, property, excise, severance, production, Pennsylvania Impact Fee, sales, use, or similar Taxes based upon the operation or ownership of the Assets or the production of Hydrocarbons therefrom or the receipt of proceeds therefrom; but excluding, for the avoidance of doubt, Income Taxes and Transfer Taxes.
“Assets” means, excluding the Excluded Assets, all of the assets and properties owned or leased by any member of the Company Group, including all of the Company Group’s right, title, and interest in and to the following:
(a) the oil, gas, and mineral leases, subleases, and other leaseholds, royalties, overriding royalties, net profits interests, carried interests, farmout rights, and mineral fee interests described on Exhibit A-1, whether producing or non-producing, together with all leasehold estates created thereby, in each case, subject to the terms, conditions, covenants, and obligations set forth in such leases (collectively, the “Leases”), together with all pooled, communitized, or unitized acreage or rights that includes or constitutes all or part of any Leases (the “Units”), and all tenements, hereditaments, and appurtenances belonging to the Leases and Units;
(b) all oil, gas, water, disposal, injection, monitoring, and other wells located on the Leases or Units, whether producing, shut-in, completed, or temporarily or permanently plugged and abandoned, including the oil and gas wells described on Exhibit A-2 (collectively, the “Wells” and together with the Units and the Leases, the “Properties”); and all tangible personal property, supplies, inventory, equipment, fixtures, and improvements, in each case, to the extent they are primarily owned or held for use in connection with the operation, production, treating, gathering, storing, transportation, or marketing of Hydrocarbons from the Wells (the “Equipment”);
(c) all contracts, agreements, and instruments (including any amendments thereto) that are binding on the Properties or relate to the ownership or operation of the Properties to the extent the foregoing primarily cover or are attributable to the Properties or the production of Hydrocarbons from the Properties, including operating agreements, unitization, pooling and communitization agreements, declarations and orders, area of mutual interest agreements, joint venture agreements, farmin and farmout agreements, bottom-hole agreements, participation agreements, exchange agreements, balancing agreements, Hydrocarbon gathering and transportation agreements, agreements for the sale and purchase of Hydrocarbons, and processing agreements; provided, however, the foregoing shall not include (i) any contracts, agreements, or instruments to the extent they relate to any of the Excluded Assets and (ii) the Leases, the Surface Interests, the Permits, and other instruments creating or evidencing an interest in the ownership of the Assets (subject to such exclusions, the “Contracts”); and
(d) all surface fee interests, easements, licenses, servitudes, rights-of-way, surface leases, and other surface rights appurtenant to, and used or held for use primarily in connection with, the Properties, including those surface interests set forth on Exhibit A-3, and all improvements, fixtures, structures, facilities and appurtenances (including any field offices or yards) located thereon or relating thereto (the “Surface Interests”).
“Assignment Agreement” means the assignment of the Company Interest from Sellers to Purchasers substantially in the form attached hereto as Exhibit B.
“Base Cash Purchase Price” has the meaning set forth in Section 3.1(a).
“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 that the Company Group or its ERISA Affiliates sponsors, maintains, contributes to or is required to contribute to for the benefit of any current or former Employees or Other Workers.
“Business Day” means each calendar day except Saturdays, Sundays, and federal holidays.
“Casualty Loss” has the meaning set forth in Section 4.7.
“Central Time” means the central time zone of the United States of America.
“CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq., as amended.
“CHK Common Stock” means the common stock, par value $0.01 per share, of LP Purchaser.
“Chief Exploration” has the meaning set forth in the Recitals of this Agreement.
“Chief GP” has the meaning set forth in the Preamble of this Agreement.
“Chief LPs” has the meaning set forth in the Preamble of this Agreement.
“Chief Operating” has the meaning set forth in Recitals of this Agreement.
“Chief Participants” has the meaning set forth in the Preamble of this Agreement.
“Claim Notice” has the meaning set forth in Section 12.2(b).
“Closing” has the meaning set forth in Section 10.1.
“Closing Cash Payment” has the meaning set forth in Section 10.4(a).
“Closing Date” has the meaning set forth in Section 10.1.
“Code” means the United States Internal Revenue Code of 1986, as amended.
“Combined Group Report” means any Tax Return filed for a Texas Combined Group consistent with reporting requirements in Section 3.590 of Title 34 of the Texas Admin. Code.
“Commercially Reasonable Efforts” means reasonable efforts of a Party under existing circumstances; provided, however, that such efforts shall not include the incurring of any liability or obligation or the payment of any money (unless the other Party has agreed in writing to pay such costs).
“Company” has the meaning set forth in the Recitals of this Agreement.
“Company Financial Statements” has the meaning set forth in Section 6.25(a).
“Company GP Interest” has the meaning set forth in the Recitals of this Agreement.
“Company Group” has the meaning set forth in the Recitals of this Agreement.
“Company Group Interests” has the meaning set forth in Section 6.5(a).
“Company Interests” has the meaning set forth in the Recitals of this Agreement.
“Company LP Interests” has the meaning set forth in the Recitals of this Agreement.
“Company Organizational Documents” has the meaning set forth in Section 5.6(a).
“Company Subsidiary” has the meaning set forth in Section 6.6.
“Confidentiality Agreement” means that certain Confidentiality Agreement dated October 20, 2021 by and among Chief Operating, Chief Exploration, Tug Hill Marcellus, LLC, Radler 2000, LP, and Chesapeake Energy Corporation.
“Contracts” has the meaning set forth in the definition of “Assets”.
“Control” means the ability to direct the management and policies of a Person through ownership of voting shares or other equity rights, pursuant to a written agreement, or otherwise. The terms “Controls” and “Controlled by” and other derivatives shall be construed accordingly.
“COVID-19” means SARS-CoV-2 or COVID-19, and any variants or evolutions thereof or related or associated epidemics, pandemics or disease outbreaks.
“Cure Period” has the meaning set forth in Section 4.2(b)(i).
“Customary Post-Closing Consents” means the consents and approvals from Governmental Bodies with respect to the transactions contemplated hereunder that are customarily obtained after the consummation of similar transactions.
“Cut-off Date” means the day that is one year after Closing.
“Damages” means the amount of any actual liability, loss, cost, expense, claim, award, or judgment incurred or suffered by any Person, whether attributable to personal injury or death, property damage, contract claims (including contractual indemnity claims), torts, statutory or common law claims or otherwise, including reasonable fees and expenses of attorneys, consultants, accountants, or other agents and experts reasonably incident to matters indemnified against, and the reasonable costs of investigation and monitoring of such matters, and the reasonable costs of enforcement of the indemnity; provided, however, that the term “Damages” shall not include (i) lost profits or other consequential damages suffered by the Party claiming indemnification, or any punitive damages(except as otherwise provided herein), and (ii) any liability, loss, cost, expense, claim, award, or judgment to the extent directly resulting from or to the extent increased by the actions or omissions of any Indemnified Person after the Closing Date.
“Deemed Defect Amount” has the meaning set forth in Section 4.2(b)(ii).
“Defect Escrow Amount” has the meaning set forth in Section 4.2(b)(iii).
“Defensible Title” means that title of the Company Group with respect to each Lease and Well (as applicable) that is deducible of record or created or caused by a joint operating agreement, a pooling agreement, a unitization agreement, a farmout agreement, or any similar agreement, and that, except for and subject to the Permitted Encumbrances:
(i) with respect only to the Target Formation of each Lease or Well, as applicable, entitles the Company Group to receive Hydrocarbons within, produced, saved, and marketed from the Target Formation of such Lease or Well, as applicable, throughout the duration of the productive life of such Lease or Well, of not less than the Net Revenue Interest shown on Exhibit A-1 or Exhibit A-2 (as applicable) for such Lease or Well, except for (a) decreases in connection with those operations in which the Company Group may be a nonconsenting co-owner
(if and to the extent permitted by this Agreement), (b) decreases resulting from the establishment or amendment of pools or units from and after the Effective Time (if and to the extent permitted by this Agreement), (c) decreases required to allow other working interest owners to make up past underproduction or pipelines to make up past under-deliveries, and (d) as otherwise expressly shown on Exhibit A-1 or Exhibit A-2 (as applicable);
(ii) with respect only to the Target Formation of each Well, obligates the Company Group to bear a percentage of the costs and expenses for the ownership, operation, maintenance, and development of, and operations relating to, such Well not greater than the working interest shown in Exhibit A-2 for such Well without increase throughout the productive life of such Well, except for (a) increases that are accompanied by at least a proportionate increase in the Company Group’s Net Revenue Interest with respect to the Target Formation of the affected Well, (b) increases resulting from contribution requirements with respect to defaults by co-owners under the applicable operating agreement, and (c) as otherwise expressly shown on Exhibit A-2;
(iii) with respect only to the Target Formation of each Lease, entitles the Company Group to the Net Mineral Acres for such Lease as set forth on Exhibit A-1 throughout the productive life thereof, except for increases due to (a) increased working interests that are accompanied by at least a proportionate increase in the Company Group’s Net Revenue Interest with respect to the Target Formation of the affected Lease, (b) increased working interests resulting from contribution requirements with respect to defaults by co-owners under the applicable operating agreement, and (c) increased working interests resulting from matters otherwise expressly shown on Exhibit A-1; and
(iv) is free and clear of liens or similar encumbrances.
“Deposit” has the meaning set forth in Section 3.1(b).
“Dispute Notice” has the meaning set forth in Section 4.2(b)(ii).
“Disputed Defect” has the meaning set forth in Section 4.2(b)(ii).
“Disputed Title Matters” has the meaning set forth in Section 4.4(a).
“Disputing Party” has the meaning set forth in Section 4.4(a).
“DOJ” means the Department of Justice.
“Dollars” means U.S. Dollars.
“Effective Time” has the meaning set forth in Section 2.2(a).
“Employee” means any director, manager, officer or employee of the Company Group or any director, manager, officer or employee of Sellers who provide services primarily in connection with the Assets.
“Encumbrance” means any charge, claim, license, limitation, condition, equitable interest, mortgage, lien, pledge, security interest, or similar encumbrance, right of first refusal
and/or right 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 Defect” means (i) a condition that is the subject of any written notice from a Governmental Body asserting or alleging a violation of an Environmental Law attributable to the use, ownership or operation of the Assets, (ii) a condition on or affecting an Asset that violates or causes an Asset (or a member of the Company Group with respect to an Asset) not to be in compliance with any Environmental Law, or (iii) a condition on or otherwise affecting or arising from any Asset with respect to which investigation, reporting, monitoring, remedial, response, or corrective action is required under Environmental Law; provided, however, that the following shall not be considered Environmental Defects for any purpose of this Agreement: (a) any matter listed on Schedule 6.16 as of the Execution Date, and (b) any matter to the extent affecting an Asset that is operated by Purchasers or any of their Affiliates as of the Execution Date to the extent Purchasers had knowledge of such matter prior to the Title Claim Date.
“Environmental Defect Deductible” has the meaning set forth in Section 4.5(b).
“Environmental Defect Threshold” has the meaning set forth in Section 4.5(b).
“Environmental Laws” means, as the same have been amended to the Execution Date, 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. § 1471 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.; and the Safe Drinking Water Act, 42 U.S.C. §§ 300f through 300j; and all similar Laws as of the Execution Date of any Governmental Body having jurisdiction over the property in question addressing pollution or protection of the environment, natural resources or threatened, endangered or otherwise protected species, including those Laws relating to the storage, handling and use of Hazardous Substances and those Laws relating to the generation, processing, treatment, storage, handling, use, transportation, disposal or other management thereof, and all regulations implementing the foregoing that are applicable to the ownership, operation and maintenance of the Assets.
“Environmental Liabilities” means any and all environmental response costs (including costs of remediation), damages, natural resource damages, settlements, consulting fees, expenses, penalties, fines, orphan share, prejudgment and post-judgment interest, court costs, attorneys’ fees, and other liabilities incurred or imposed (i) pursuant to any order, notice of responsibility (including requirements embodied in Environmental Laws), injunction, judgment, or similar act (including settlements) by any Governmental Body or court of competent jurisdiction to the extent arising out of any violation of, or remedial obligation under, any Environmental Laws that are attributable to the ownership or operation of the Assets or (ii) pursuant to any claim or cause of action by a Governmental Body or other Person for personal injury, property damage, damage to natural resources, remediation, or response costs to the extent arising out of any violation of, or any remediation obligation under, any Environmental Laws that are attributable to the ownership or operation of the Assets.
“Equipment” has the meaning set forth in the definition of “Assets.”
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
“ERISA Affiliate” means any person or entity under common control with any member of the Company Group within the meaning of Section 414(b), (c), (m), or (o) of the Code and the rules and regulations issued thereunder.
“Escrow Account” means the escrow account established and maintained pursuant to the Escrow Agreement.
“Escrow Agent” means JPMorgan Chase Bank, N.A.
“Escrow Agreement” means the escrow agreement, dated as of the Execution Date, executed by Sellers, Purchasers, and the Escrow Agent, in respect of the receipt, holding, and distribution, as the case may be, of the Deposit.
“Excluded Assets” means: (a) the Excluded Records; (b) except for Imbalances, all trade credits, accounts receivable, and other proceeds, income, or revenues attributable to the Assets with respect to any period of time prior to the Effective Time; (c) to the extent they do not relate to matters for which Purchasers are providing indemnification hereunder, all claims, audit rights, and causes of action of Sellers or their Affiliates arising under or with respect to any Contract that are attributable to the period of time prior to the Effective Time (including claims for adjustments or refunds); (d) all claims, rights, and interests of Sellers or their Affiliates (i) under any policy or agreement of insurance or indemnity agreement, (ii) under any bond or security instrument or (iii) to any insurance or condemnation proceeds or awards arising, in each case, from acts, omission or events, or damage to or destruction of property prior to the Effective Time or matters for which Sellers are otherwise required to provide indemnification to Purchasers hereunder; (e) any Tax refunds or Tax carry-forward amounts attributable to (i) the Assets or the Company Group (A) prior to the Effective Time (with respect to non-Income Taxes) or (B) prior to the Closing Date (with respect to Income Taxes) or (ii) to Sellers’ businesses generally; (f) all of Sellers’ and their Affiliates’ software licenses, proprietary computer software, patents, trade secrets, copyrights, names, trademarks, logos, and other intellectual property; (g) all data and Contracts that cannot be disclosed to Purchasers as a result of confidentiality arrangements under agreements with Third Parties (provided that Sellers use Commercially Reasonable Efforts to obtain a waiver of any such confidentiality restriction); (h) any of the Assets excluded from the transactions contemplated hereunder pursuant to Section 4.6, Section 8.1, Section 8.14, or otherwise excluded under this Agreement; (i) all seismic, geological, geophysical and similar licenses held by a member of the Company Group, (j) all right, title, and interest to the properties (including personal property) or other assets (including contractual rights) set forth on Exhibit A-4, which properties and assets, for the avoidance of doubt, will be assigned to Sellers pursuant to Section 8.14; (k) any contract evidencing any indebtedness of any Seller or the Company Group; and (l) all Benefit Plans other than the long-term incentive plan specified in Schedule 6.22.
“Excluded Defect” has the meaning set forth in the definition of “Title Defect”.
“Excluded Records” means (i) all corporate, financial, income, and franchise Tax and legal records of Sellers that relate to Sellers’ businesses generally (whether or not relating to the
Assets), (ii) any records to the extent disclosure or transfer is restricted by any Third Party license agreement, other Third Party agreement, or applicable Law (provided that Sellers use Commercially Reasonable Efforts to obtain a waiver of any such restriction), (iii) Sellers’ and their Affiliates’ (other than the Company Group) computer software, (iv) all legal records and legal files of Sellers and all other work product of and attorney-client communications with any of Sellers’ legal counsel (other than copies of (a) title opinions, (b) Contracts, and (c) records and files with respect to any previous litigation matters), (v) personnel records, (vi) records relating to the sale of the Assets, including bids received from and records of negotiations with Third Parties, and (vii) any records with respect to the other Excluded Assets.
“Execution Date” has the meaning set forth in Preamble of this Agreement.
“Final Disputed Title Matters” has the meaning set forth in Section 4.4(b).
“Financial Statements” has the meaning set forth in Section 7.16(a).
“Flow-Through Return” means a Tax Return reporting income of the Company Group that is allocable to and reportable as income of the direct or indirect beneficial owner(s) of the Company under applicable Law, including any Combined Group Report filed for a Texas Combined Group.
“Fraud” means an actual, intentional, and willful misrepresentation by a Party with respect to the making of any representation or warranty set forth in Article 5, Article 6, or Article 7 of this Agreement, as applicable; provided, that (a) the Party making such representation or warranty had actual knowledge that the applicable representation or warranty, as may be qualified in this Agreement, was false at the time it was made, (b) the representation or warranty was made with the intention that the other Party rely thereon to its detriment, (c) the representation or warranty was relied upon by the other Party to such other Party’s detriment, and (d) “Fraud” does not include constructive fraud or other claims based upon constructive knowledge, negligent misrepresentation, recklessness, or other similar theories.
“FTC” means the Federal Trade Commission.
“Fundamental Representations” means (a) with respect to each Seller, the representations and warranties of such Seller in Section 5.2, Section 5.3, Section 5.4, Section 5.5(a), Section 5.6(a), Section 5.7 and Section 5.9, (b) with respect to Chief GP, the representations and warranties of Chief GP in Section 6.2, Section 6.3, Section 6.4(a), Section 6.5(a), Section 6.6, and Section 6.19 and (c) with respect to each Purchaser, the representations and warranties of such Purchaser in Section 7.2, Section 7.3, Section 7.4, Section 7.5, Section 7.6, and Section 7.10.
“GAAP” means U.S. generally accepted accounting principles as in effect on the Execution Date.
“Governmental Body” 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, tribal, or other government or political subdivision thereof, or any quasi-governmental or private body exercising any administrative, executive, judicial, legislative, police, regulatory, taxing, importing, tribal, or other governmental or quasi-governmental authority.
“GP Purchaser” has the meaning set forth in the Preamble of this Agreement.
“Hazardous Substances” means any pollutants, contaminants, toxic or hazardous or radioactive 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 (but excluding any Hydrocarbons and NORM).
“Hedges” means any future, hedge, derivative, swap, collar, put, call, cap, option, or other contract that is intended to benefit from, relate to, or reduce or eliminate the risk of fluctuations in interest rates, basis risk, or the price of commodities, including Hydrocarbons or securities, to which Sellers, their Affiliates (including the Company Group), or the Properties are bound, including the Hedges listed on Schedule 1.1(b).
“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.
“Imbalances” means any imbalance at the wellhead between the amount of Hydrocarbons produced from any of the Wells and allocated to the interests of the Company Group therein and the shares of production from the relevant Well to which the Company Group 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 the Company Group and the Hydrocarbons actually delivered on behalf of the Company Group at that point.
“Income Tax Contest” has the meaning set forth in Section 13.6.
“Income Taxes” means any income, franchise, capital gains and similar Taxes.
“Indebtedness” of any Person means, without duplication, (a) the principal of and accrued and unpaid interest, prepayment premiums or penalties, and fees and expenses in respect of indebtedness of such Person for borrowed money; (b) all obligations (contingent or otherwise) of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable incurred in the ordinary and usual course of business of normal day-to-day operations of the business consistent with past practice); (c) all capitalized lease obligations; (d) all obligations of the type referred to in clauses (a) through (c) of any Persons the payment of which such Person is responsible or liable, directly or indirectly, as obligor, guarantor, surety or otherwise; and (e) all obligations of the type referred to in clauses (a) through (d) of other Persons secured by any lien on any property or asset of such Person (whether or not such obligation is assumed by such Person); provided that the definition of “Indebtedness” shall not include any liabilities or obligations of any kind or character of the Seller Group (including the Company Group) with respect to Hedges.
“Indemnified Person” has the meaning set forth in Section 12.2(a).
“Indemnifying Person” has the meaning set forth in Section 12.2(a).
“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.
“Laws” means all Permits, statutes, rules, regulations, ordinances, orders, and codes of Governmental Bodies.
“Leases” has the meaning set forth in the definition of “Assets.”
“LP Purchaser” has the meaning set forth in the Preamble of this Agreement.
“LTIP Cap” has the meaning set forth in Section 8.10.
“Marcellus Formation” means the interval from the stratigraphic equivalent of the top of the Marcellus Shale at 6,905 ft MD through to the stratigraphic equivalent of the top of the Onondaga Limestone at 7,305 ft MD, as such intervals are generally shown in the Bishop Unit 7 wellbore (API: 37115213110000) located in Susquehanna County; Auburn Township, Pennsylvania.
“Material Adverse Effect” means any event, occurrence, change, circumstance, development, state of facts, effect, or condition that, individually or in the aggregate, (a) has been, or would be reasonably likely to be, materially adverse to (I) for the Sellers, any of the Company Interests or the Assets, in each case, taken as a whole and as currently owned and operated, or (II) for the Purchasers, the business, liabilities, financial condition, or results of operations of LP Purchaser or (b) materially and adversely affects the ability of the applicable Party to timely 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 or prospective change in applicable Laws or accounting standards or the interpretation or enforcement thereof; (ii) any change in economic, political, or business conditions or financial, credit, debt, or securities market conditions generally, including changes in interest rates, exchange rates, commodity prices, electricity prices, or fuel costs; (iii) any legal, regulatory, or other change generally affecting the industries, industry sectors, or geographic sectors (A) for the Sellers, of the Assets, or (B) for the Purchasers, of LP Purchaser, in each case, including any change in the prices of oil, natural gas, or other Hydrocarbon products 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 regulators); (v) any change resulting or arising from political, geopolitical, social, or regulatory
conditions, including any outbreak, continuation, or escalation of any military conflict, declared or undeclared war, armed hostilities, civil unrest, public demonstrations, or acts of foreign or domestic terrorism or sabotage (including any cyber-attack or hacking), or the escalation of any of the foregoing; (vi) any epidemic, pandemic, or outbreak of disease (including, for the avoidance of doubt, COVID-19), or the escalation of any of the foregoing; (vii) any natural or manmade disasters or calamities, weather conditions including hurricanes, floods, tornados, tsunamis, earthquakes, and wild fires, or other force majeure events, or the escalation of any of the foregoing; (viii) any change resulting or arising from the taking of, or failure to take, any action by Sellers, the Company Group, or any of their respective Affiliates, required or otherwise expressly contemplated by this Agreement or consented to or requested by Purchasers; or (ix) any change resulting or arising from the taking of, or failure to take, any action by Purchasers, the Purchaser Group, or any of their respective Affiliates, required or otherwise expressly contemplated by this Agreement or consented to or requested by Sellers. For the avoidance of doubt, a Material Adverse Effect shall not be measured against any forward-looking statements, financial projections, or forecasts applicable to the Assets.
“Material Contracts” has the meaning set forth in Section 6.11(a).
“Measurement Date” has the meaning set forth in Section 7.15(a).
“Net Mineral Acres” means, as computed separately with respect to each Lease, (i) the number of gross acres in the land covered by such Lease, multiplied by (ii) the lessor’s undivided mineral interest in the Hydrocarbons in the Target Formation in such lands covered by such Lease, multiplied by (iii) the Company Group’s working interest in such Lease; provided, however, if items (i) and (ii) of this definition vary as to different areas within any tracts or parcels burdened by such Lease, a separate calculation shall be performed with respect to each such area.
“Net Revenue Interest” means, with respect to each Lease or Well (limited, however to the Target Formation with respect to each Lease and Well), the interest in and to all Hydrocarbons produced and saved or sold from or allocated to the Target Formation of such Lease or Well, in each case, after giving effect to all royalties, overriding royalties, net profits interests, or other similar burdens on or measured by production of Hydrocarbons.
“Non-Income Tax Contest” has the meaning set forth in Section 13.6.
“Non-Recourse Person” has the meaning set forth in Section 14.18.
“NORM” means naturally occurring radioactive material.
“Organizational Documents” means (a) with respect to any Person that is a corporation, its articles or certificate of incorporation or memorandum and articles of association, as the case may be, and bylaws, (b) with respect to any Person that is a partnership, its certificate of partnership and partnership agreement, (c) with respect to any Person that is a limited liability company, its certificate of formation and limited liability company or operating agreement, (d) with respect to any Person that is a trust or other entity, its declaration or agreement of trust or other constituent document, (e) in each case of the preceding clauses, all other similar documents, instruments, or certificates executed, adopted, or filed in connection with the creation, formation, or organization of any such Person, including any amendments thereto, and (f) with respect to any other Person, its comparable organizational documents.
“Other Workers” has the meaning set forth in Section 6.23(a).
“Outside Date” has the meaning set forth in Section 11.1(c).
“Party” and “Parties” have the meanings set forth in the Preamble of this Agreement.
“Pennsylvania Impact Fee” means the Pennsylvania unconventional gas well fee provided for in Pa. Cons. Stat. Ann. § 2302.
“Permits” means any permits, approvals or authorizations by, or filings with, Governmental Bodies.
“Permitted Encumbrances” means any or all of the following:
(i) royalties and any overriding royalties, net profits interests, production payments, reversionary interests, and other similar burdens on the production of Hydrocarbons to the extent that the net cumulative effect of such burdens does not (a) reduce the Company Group’s Net Revenue Interest with respect to the Target Formation for any Lease or Well below that shown in Exhibit A-1 or Exhibit A-2 (as applicable) for such Lease or Wells, (b) increase the Company Group’s Net Mineral Acres (due to an increased working interest) with respect to the Target Formation in any Lease or working interest in any Lease or Well above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) without, in each case, a proportionate increase in the Net Revenue Interest of the Company Group with respect to the Target Formation or (c) decrease the Company Group’s Net Mineral Acres with respect to the Target Formation in any Lease below that shown in Exhibit A-1;
(ii) 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, to the extent that the net cumulative effect of such instruments does not (a) reduce the Company Group’s Net Revenue Interest with respect to the Target Formation for any Lease or Well below that shown in Exhibit A-1 or Exhibit A-2 (as applicable) (b) increase the Company Group’s Net Mineral Acres (due to an increased working interest) with respect to the Target Formation in any Lease or working interest in any Lease or Well above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) without, in each case, a proportionate increase in the Net Revenue Interest of the Company Group with respect to the Target Formation or (c) decrease the Company Group’s Net Mineral Acres with respect to the Target Formation in any Lease below that shown in Exhibit A-1;
(iii) Preferential Rights, Third Party consents to assignment or similar transfer restrictions; provided that, with respect to Preferential Rights and Specified Consent Requirements, the Sellers shall have complied with the provisions of Section 4.6;
(iv) liens for Taxes or assessments not yet delinquent or, if delinquent, being contested in good faith by appropriate actions;
(v) any (a) inchoate liens or charges constituting or securing the payment of expenses incurred incidental to maintenance, development, production, or operation of the Leases and Wells or for the purpose of developing, producing, or processing Hydrocarbons therefrom or therein, and (b) 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 (including any amounts being withheld as provided by Law), or if delinquent, being contested in good faith by appropriate actions;
(vi) all rights to consent by, required notices to, filings with, or other actions by Governmental Bodies in connection with the transactions contemplated hereby, if they are not required or customarily obtained in the region where the Assets are located prior to sale or conveyance, including Customary Post-Closing Consents;
(vii) 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;
(viii) easements, rights-of-way, restrictions, covenants, servitudes, Permits, surface leases, rights in respect of surface operations, and other encumbrances or rights that do not prevent or adversely affect operations as currently conducted on the Properties;
(ix) calls on production under existing Contracts;
(x) gas balancing and other production balancing obligations, and obligations to balance or furnish make-up Hydrocarbons under Hydrocarbon sales, gathering, processing, or transportation contracts;
(xi) all rights reserved to or vested in any Governmental Bodies (a) 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 Body or under any right, franchise, grant, license, or Permit issued or afforded by any Governmental Body, or (b) to terminate any right, franchise, grant, license, or Permit issued or afforded by such Governmental Body;
(xii) any lien, charge, or other encumbrance on or affecting the Assets that is discharged by Sellers or the Company Group at or prior to Closing;
(xiii) any lien or trust arising under worker’s compensation, unemployment insurance, pension or employment Laws, or regulations;
(xiv) the terms and conditions of the Leases (including any free gas arrangements under the Leases), including any depth limitations or similar limitations that may be set forth therein, to the extent that the net cumulative effect of such terms and conditions does not (a) reduce the Company Group’s Net Revenue Interest with respect to the Target Formation for any Lease or Well below that shown in Exhibit A-1 or Exhibit A-2 (as applicable) for such Lease or Well, (b) increase the Company Group’s Net Mineral Acres (due to an increased working interest) with respect to the Target Formation in any Lease or working interest in any Lease or Well above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) without, in each case, a proportionate increase in the Net Revenue Interest of the Company Group with respect to the Target Formation or (c) decrease the Company Group’s Net Mineral Acres with respect to the Target Formation in any Lease below that shown in Exhibit A-1;
(xv) the terms and conditions of the Contracts to the extent that the net cumulative effect of such instruments does not (a) reduce the Company Group’s Net Revenue Interest with respect to the Target Formation for any Lease or Well below that shown in Exhibit A-1 or Exhibit A-2 (as applicable) for such Lease or Well, (b) increase the Company Group’s Net Mineral Acres (due to an increased working interest) with respect to the Target Formation in any Lease or working interest in any Lease or Well above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) without, in each case, a proportionate increase in the Net Revenue Interest of the Company Group with respect to the Target Formation or (c) decrease the Company Group’s Net Mineral Acres with respect to the Target Formation in any Lease below that shown in Exhibit A-1;
(xvi) any matters shown on Schedule 3.4, Exhibit A-1, Exhibit A-2, Schedule 5.8, and Schedule 6.7, as applicable;
(xvii) any lien, mortgage, security interest, pledge, charge, or similar encumbrance resulting from Sellers’ or the Company Group’s conduct of business in compliance with this Agreement;
(xviii) the terms and conditions of the following agreements and contracts: (a) that certain Amended and Restated Participation Agreement dated May 2, 2019 between The Quillin-Morgan Trust, Robert Quillin & Vanessa Morgan, Trustees, The Robbs Family Trust, Edward E. Robbs & Belinda Robbs, Co-Trustees; The Schnerk Revocable Trust, George C. Schnerk, Trustee, Source Oil & Gas, LLC, Giana Resources, LLC, Denpeer Energy, LP, XYR Oil and Gas, LLC, Reach Petroleum, LLC, Unconventionals Natural Gas, LLC, Chief Exploration & Development LLC, Radler 2000 Limited Partnership, Tug Hill Marcellus, LLC, and Enerplus Resources (USA) Corporation, as amended by that certain First Amendment of Amended and Restated Participation Agreement dated October 13, 2020, (b) that certain Side Letter Agreement related to Amended and Restated Participation Agreement dated May 2, 2019 between The Quillin-Morgan Trust, Robert Quillin & Vanessa Morgan, Trustees, The Robbs Family Trust, Edward E. Robbs & Belinda Robbs, Co-Trustees; The Schnerk Revocable Trust, George C. Schnerk, Trustee, Source Oil & Gas, LLC, Giana Resources, LLC, Denpeer Energy, LP, XYR Oil and Gas, LLC, Reach Petroleum, LLC, Unconventionals Natural Gas, LLC, Chief Exploration & Development LLC, Radler 2000 Limited Partnership, Tug Hill Marcellus, LLC, and Enerplus Resources (USA) Corporation, (c) that certain Participation Agreement between Seaspin Pty Ltd, as trustee of the Aphrodite Trust, Craig Ian Burton, as trustee of the CI Burton Family Trust, and eCorp Resource Partners I, LP, dated February 2006, as amended by that certain Amendment to Participation Agreement dated November 20, 2006, and (d) that certain Agreement related to Participation Agreement between Seaspin Pty Ltd, as trustee of the Aphrodite Trust, Craig Ian Burton, as trustee of the CI Burton Family Trust, and eCorp Resource Partners I, LP, dated March 15, 2008;
(xix) any Excluded Defects; and
(xx) any (a) lien, mortgage, security interest, pledge, charge or similar encumbrance in favor of, or held by, any member of the Purchaser Group, and (b) consent to assignment or similar transfer restriction in favor of, or held by, any member of the Purchaser Group.
“Person” means any individual, firm, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization, Governmental Body, or any other entity.
“Phase I Environmental Site Assessment” means an environmental site assessment performed pursuant to the American Society for Testing and Materials ASTM-1527-13, or any similar environmental assessment.
“Phase II Environmental Site Assessment” has the meaning set forth in Section 8.1(a).
“Post-Closing Escrow Amount” has the meaning set forth in Section 10.4(b).
“Pre-Closing Tax Period” means any taxable period ending on or before the Closing Date and the portion of any Straddle Period up to and including the Closing Date.
“Pre-Effective Time Tax Period” means any taxable period ending before the Effective Time.
“Preferential Rights” has the meaning set forth in Section 4.6(a).
“Properties” has the meaning set forth in the definition of “Assets”.
“Property Costs” means (i) all operating and production expenses (including costs of insurance, rentals, shut-in payments and royalty payments; title examination and curative actions; and gathering, processing, and transportation costs in respect of Hydrocarbons produced from the Properties) and capital expenditures (including bonuses, broker fees, lease acquisition costs, lease renewal costs, and lease extension costs (in each case, other than costs to correct, cure, and remedy any Title Defect), costs of drilling and completing wells, and costs of acquiring equipment) incurred in the ownership or operation of the Assets in the ordinary course of business and, where applicable, in accordance with the relevant operating or unit agreement or pooling order, if any, (ii) monthly Hedge settlement payments in the ordinary course of business, and (iii) Third Party overhead costs charged to the Assets under the applicable operating agreement; provided, however, “Property Costs” shall not include obligations and liabilities attributable to (a) personal injury or death, property damage, torts, breach of Contract claims or violation of Law, (b) obligations related to the abandonment or plugging of wells, dismantling or decommissioning facilities, or closing pits and restoring the surface around such wells, facilities or pits, (c) the remediation of any Environmental Liabilities, including obligations to remediate any contamination of groundwater, surface water, soil, sediments, or personalty under applicable Environmental Laws, (d) the costs to correct, cure, and remedy any Title Defect or any Casualty Loss, (e) obligations to pay royalties, overriding royalties, net profits interests, or other similar burdens paid to Third Parties on or measured by production of Hydrocarbons relating to the Assets, including those held in suspense, (f) obligations with respect to any Imbalances associated with the Assets, (g) obligations with respect to Hedges (other than monthly Hedge settlement payments in the ordinary course of business); (h) claims for indemnification or reimbursement from Third Parties with respect to costs of the types described in the preceding clauses (a) through (g), (i) Asset Taxes, Income Taxes or Transfer Taxes and (j) any and all general and administrative expenses (including corporate G&A) of the Company Group or Sellers, the sole adjustment for which shall be handled exclusively pursuant to Section 3.3(a)(vi).
“Public Announcement Restrictions” has the meaning set forth in Section 8.3(a).
“Public Health Measures” means any closures, “shelter-in-place,” “stay at home,” workforce reduction, social distancing, shut down, closure, curfew or other restrictions or any other Laws, orders, directives, guidelines or recommendations issued by any Governmental Body, the Centers for Disease Control and Prevention, the World Health Organization or any industry group in connection with COVID-19 or any other epidemic, pandemic or outbreak of disease, or in connection with or in response to any other public health conditions.
“Purchase Price Allocation Schedule” has the meaning set forth in Section 3.2.
“Purchaser” and “Purchasers” have the meaning set forth in the Preamble of this Agreement.
“Purchaser Delegated Matters” has the meaning set forth in Section 14.21(b).
“Purchaser Group” means Purchasers, their current and former Affiliates, and each of their respective officers, directors, employees, agents, advisors, and other Representatives.
“Purchaser Material Adverse Effect” means a Material Adverse Effect with respect to the Purchasers, taken as a whole.
“Purchaser Representative” has the meaning set forth in Section 14.21(b).
“R&W Insurance Policy” means that certain buyer-side representations and warranties insurance policy described in Section 8.11 in the name and for the benefit of Purchasers, their Affiliates, and their respective officers, directors, employees, and agents.
“R&W Insurer” means the insurer providing the R&W Insurance Policy.
“R2KPA MIPA” means that certain Membership Interest Purchase Agreement entered on the Execution Date by and among Radler 2000 Limited Partnership and Tug Hill Inc. and GP Purchaser in relation to the sale and purchase of all membership interests in Radler 2000 PA, LLC.
“Records” means the books, records, and files of each member of the Company Group, to the extent in the possession or control of Sellers or their Affiliates, whether written or electronically stored, relating to the Assets, including: (i) land and title records (including abstracts of title, title opinions, and title curative documents); (ii) Contract files; (iii) operations, environmental, production, and accounting records; and (iv) production, facility, and well records and data; provided, however, that the term “Records” shall not include any of the foregoing items that are Excluded Records and any information that cannot, without unreasonable effort or expense that Purchasers do not agree to undertake or pay, as applicable, be separated from any files, records, maps, information, and data related to the Excluded Assets.
“Rees-Jones Holdings” has the meaning set forth in the Preamble of this Agreement.
“Rees-Jones Trust” has the meaning set forth in the Preamble of this Agreement.
“Registration Rights Agreement” means the Registration Rights Agreement in the form attached hereto as Exhibit D to be executed and delivered at Closing by LP Purchaser and the Sellers (and those Sellers’ designees whom Seller designates as a party thereto as identified in writing to Purchaser at least two Business Days prior to the Closing Date).
“Remediation” means with respect to an Environmental Defect, the implementation and completion of any remedial, removal, response, or other corrective actions, including monitoring, to the extent but only to the extent required under Environmental Laws to correct or remove such Environmental Defect.
“Remedy Deadline” has the meaning set forth in Section 4.2(b)(iv).
“Remedy Notice” has the meaning set forth in Section 4.2(b)(ii).
“Representatives” means (i) any prospective purchaser of a Party or an interest in a Party; (ii) partners, employees, officers, directors, members, equity owners, and counsel of a Party or any of its Affiliates or of any of the parties listed in subsection (i) above; (iii) any consultant or agent retained by a Party or the parties listed in subsection (i) or (ii) above; and (iv) any bank, other financial institution, or entity funding, or proposing to fund, such Party’s operations in connection with the Assets, including any consultant retained by such bank, other financial institution, or entity.
“RetainCo” has the meaning set forth in Section 8.14.
“Scheduled Closing Date” has the meaning set forth in Section 10.1.
“SEC Documents” has the meaning set forth in Section 7.16(a).
“Securities Act” has the meaning set forth in Section 7.10.
“Seller” and “Sellers” have the meaning set forth in the Preamble of this Agreement.
“Seller Delegated Matters” has the meaning set forth in Section 14.21(a).
“Seller Group” means Sellers, their current and former Affiliates (except, from and after the Closing, the Company Group), and each of their respective officers, directors, employees, agents, advisors, and other Representatives.
“Seller Representative” has the meaning set forth in Section 14.21(a).
“Specified Bank Accounts” has the meaning set forth in Section 6.18.
“Specified Consent Requirement” means a requirement to obtain a lessor’s or other Person’s prior consent to assignment or transfer of an interest in a Company Interest or an Asset that (i) is triggered by the transactions contemplated by this Agreement and (ii) expressly provides
that (a) any purported assignment or transfer in the absence of such consent first having been obtained is void, invalid, or unenforceable against such Person, (b) the Person holding the right may terminate the applicable Lease, Permit, Contract, or other instrument creating Sellers’ or the Company Group’s rights in the affected Company Interest or Property, or (c) the Person holding the right may impose additional conditions on the proposed assignee or transferee that involve the payment of money, the posting of collateral security, or the performance of other obligations by the assignee or transferee that would not be required in the absence of the transactions contemplated by this Agreement.
“Specified Midstream Contracts” means the Contracts set forth on Schedule 1.1(a).
“Stock Purchase Price” has the meaning set forth in Section 3.1(a).
“Straddle Period” means any Tax period beginning on or prior to and ending after the Closing Date.
“Subsidiary” means, with respect to any Person, any other Person of which at least 50% of the outstanding voting securities or other voting equity interests are owned, directly or indirectly, by such first Person.
“Surface Interests” has the meaning set forth in the definition of “Assets.”
“Suspense Funds” has the meaning set forth in Section 6.17.
“Target Formation” means (a) with respect to each Well, the currently producing formation of such Well, and (b) with respect to each Lease, to the extent not allocated to a Well, the Marcellus Formation.
“Tax Contest” has the meaning set forth in Section 13.6.
“Tax Return” means any return (including any information 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 Body with respect to any Tax.
“Taxes” means all federal, state, local, and foreign income, profits, franchise, sales, use, ad valorem, property, severance, production, excise, stamp, documentary, real property transfer or gain, gross receipts, goods and services, registration, capital, transfer, or withholding taxes or other assessments, duties, fees, or charges imposed by any Governmental Body, including any interest, penalties, or additional amounts that may be imposed with respect thereto.
“Texas Combined Group” means any “combined group” as defined in Section 3.590(b)(2) of Title 34 of the Texas Admin. Code in which any member of the Company Group has been included for purposes of filing a Combined Group Report for any reporting period ending on or before the Closing Date.
“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 12.2(b).
“Title Arbitration Notice” has the meaning set forth in Section 4.4(b).
“Title Arbitrator” has the meaning set forth in Section 4.4(c).
“Title Benefit” means any right, circumstance, or condition that operates to (i) increase the Net Revenue Interest of the Company Group in the Target Formation of any Lease or Well as set forth on Exhibit A-1 or Exhibit A-2 (as applicable) above that shown on Exhibit A-1 or Exhibit A-2 (as applicable) with respect to such Lease or Well without a greater than proportionate increase in the Company Group’s working interest above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) for the applicable Lease or Well, or (ii) in the case of any Lease, increase the Net Mineral Acres for such Lease in the Target Formation as set forth in Exhibit A-1 above that shown on Exhibit A-1 as a result of an increase in (a) the number of gross acres in the lands covered by such Lease or (b) the undivided percentage interest in oil, gas, and other minerals covered by the Lease in such lands.
“Title Benefit Amount” has the meaning set forth in Section 4.3(b).
“Title Benefit Notice” has the meaning set forth in Section 4.3(a).
“Title Benefit Property” has the meaning set forth in Section 4.3(a).
“Title Claim Date” has the meaning set forth in Section 4.2(a).
“Title Defect” means (i) an Environmental Defect or (ii) any lien, charge, encumbrance, obligation, defect, or other similar matter that causes the Company Group not to have Defensible Title in and to the Leases and the Wells, as applicable, as of the Title Claim Date or the Closing Date; provided, however, that the following shall not be considered Title Defects for any purpose of this Agreement (each an “Excluded Defect”):
(a) defects in the chain of title consisting of the failure to recite marital status in a document or omissions of successions of heirship or estate proceedings, unless Purchasers provide affirmative evidence that such failure or omission could reasonably be expected to result in another Person’s superior claim of title to the relevant Asset;
(b) defects arising out of lack of survey, unless a survey is expressly required by applicable Laws;
(c) defects based on a gap in the Company Group’s chain of title in the federal records as to federal Leases, the state’s records as to state Leases, or in the county records as to other Leases, unless, in the case of any of the foregoing, such gap is affirmatively shown to exist in the county records by an abstract of title, title opinion, or landman’s title chain or runsheet, which documents shall be included in a Title Defect Notice;
(d) defects as a consequence of cessation of production, insufficient production, or failure to conduct operations on any of the Properties held by production, or lands pooled, communitized, or unitized therewith, except to the extent the cessation of production, insufficient production, or failure to conduct operations could reasonably be expected to give rise to a right to terminate the Lease in question, evidence of which shall be included in a Title Defect Notice;
(e) defects based (i) solely on the lack of information in Sellers’ or the Company Group’s files, or (ii) solely on information in Sellers’ or the Company Group’s files, in each case, unless Purchasers provide evidence that such lack of information could reasonably result in another Person’s superior claim of title to the relevant Property;
(f) defects based solely on references to a document because such document is not in Sellers’ or the Company Group’s files;
(g) defects based on Tax assessment, Tax payment or similar records (or the absence of such activities or records);
(h) defects arising out of (i) lack of corporate or other entity authorization or (ii) failure to demonstrate of record proper authority for execution by a Person on behalf of a corporation, limited liability company, partnership, trust, or other entity, in each case, unless such lack of authorization or failure to demonstrate of record proper authority results in a Third Party’s actual and superior claim of title to the relevant property;
(i) defects that have been cured by the passage of time or such other means that would render such defect invalid according to applicable Law, or as to which the applicable Laws of limitations or prescription would bar any attack or claim;
(j) defects, encumbrances, or loss of title affecting ownership interests in formations other than the relevant Target Formation;
(k) defects based upon the failure to record any federal, state, or Indian Leases (or assignments thereof), in any applicable county records;
(l) defects that affect only which person has the right to receive royalty (or similar) payments (rather than the amount or the proper payment of such royalty payment);
(m) defects arising from prior oil and gas leases in the chain of title that are not surrendered of record, unless Purchasers affirmatively demonstrate that such prior oil and gas leases had not expired prior to the creation of the Asset in question;
(n) defects or irregularities arising out of the lack of recorded powers of attorney from any Person to execute and deliver documents on their behalf, unless affirmative evidence exists (and is provided) that the action was not authorized and results in a Person’s assertion of superior title;
(o) defects or irregularities resulting from the failure to record releases of liens, mortgages, security interests, pledges, charges, or similar encumbrances that have expired by their own terms;
(p) defects based on or arising out of the failure of the Company Group or any Third Party to enter into, be party to, or be bound by, pooling provisions, a pooling agreement, declaration or order, production sharing agreement, production allocation agreement, production handling agreement, or other similar agreement with respect to any horizontal Well that crosses more than one Lease or tract, to the extent that (i) such Well has been permitted by the applicable Governmental Body or (ii) the allocation of Hydrocarbons produced from such Well among such Leases or tracts is based upon the length of the “as drilled” horizontal wellbore open for production, take points, the total length of the horizontal wellbore, or other methodology that is intended to reasonably attribute to each such Lease or tract its share of such production; or
(q) defects arising from any Encumbrance created by a mineral owner, which has not been subordinated to the lessee’s interest.
“Title Defect Amount” has the meaning set forth in Section 4.2(d).
“Title Defect Deductible” has the meaning set forth in Section 4.5(b).
“Title Defect Notice” has the meaning set forth in Section 4.2(a).
“Title Defect Property” has the meaning set forth in Section 4.2(a).
“Title Defect Threshold” has the meaning set forth in Section 4.5(b).
“Transaction Documents” means this Agreement and any other documents executed in connection with this Agreement.
“Transaction Tax Deductions” means the Tax deductions related to or arising by reason of, without duplication, (i) the payment of Indebtedness contemplated by this Agreement (including any deferred financing costs) and (ii) any other amounts paid by (or treated for U.S. federal income Tax purposes as paid by) the Company Group at or prior to the Closing or otherwise economically borne by any of the Sellers that would not have been paid in the absence of the transactions contemplated by this Agreement.
“Transfer Taxes” means all transfer, documentary, sales, use, stamp, stamp duty, registration, recording, deed recording fee, value added, mortgage, license, lease, leasehold interest, filing, gross receipts, excise, stock, and conveyance taxes and other such Taxes and fees (including any penalties and interest, but excluding any Income Taxes) incurred in connection with the transactions contemplated by this Agreement and the documents to be delivered hereunder (or under any Transaction Document).
“Transition Services Agreement” means the Transition Services Agreement to be entered into between Chief Operating and Purchasers, in substantially the form attached hereto as Exhibit C.
“Tug Hill MIPA” means that certain Membership Interest Purchase Agreement entered on the Execution Date by and among Radler 2000 Limited Partnership and Tug Hill Inc. and GP Purchaser in relation to the sale and purchase of all membership interests in Tug Hill Marcellus, LLC.
“Unadjusted Purchase Price” has the meaning set forth in Section 3.1(a)
“Units” has the meaning set forth in the definition of “Assets”.
“Wells” has the meaning set forth in the definition of “Assets”.
MEMBERSHIP INTEREST PURCHASE AGREEMENT
BY AND AMONG
RADLER 2000 LIMITED PARTNERSHIP, AND
TUG HILL, INC.,
TOGETHER, AS SELLERS,
AND
CHESAPEAKE ENERGY CORPORATION
AND
CHESAPEAKE APPALACHIA, L.L.C.,
TOGETHER, AS PURCHASERS
___________________________________
DATED AS OF JANUARY 24, 2022
__________________________________
| | | | | |
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 Costs and Revenues | 3 |
Section 2.3 Procedures | 4 |
Section 2.4 Cash Free, Indebtedness Free | 5 |
ARTICLE 3 PURCHASE PRICE | 5 |
Section 3.1 Purchase Price | 5 |
Section 3.2 Allocation of Purchase Price | 6 |
Section 3.3 Adjustments to Purchase Price | 7 |
Section 3.4 Allocated Values | 9 |
Section 3.5 Escrow Agreement | 9 |
Section 3.6 Withholding | 9 |
ARTICLE 4 TITLE AND ENVIRONMENTAL MATTERS | 10 |
Section 4.1 Sellers’ Title | 10 |
Section 4.2 Title Defects | 10 |
Section 4.3 Title Benefits | 16 |
Section 4.4 Title Disputes | 17 |
Section 4.5 Limitations on Applicability | 19 |
Section 4.6 Consents to Assignment and Preferential Rights to Purchase | 21 |
Section 4.7 Casualty or Condemnation Loss | 23 |
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLERS | 23 |
Section 5.1 Generally | 23 |
Section 5.2 Existence and Qualification | 23 |
Section 5.3 Power | 23 |
Section 5.4 Authorization and Enforceability | 23 |
Section 5.5 No Conflicts | 24 |
Section 5.6 Capitalization | 24 |
Section 5.7 Liability for Brokers’ Fees | 24 |
Section 5.8 Litigation | 24 |
Section 5.9 Bankruptcy | 25 |
Section 5.10 Investment Intent | 25 |
TABLE OF CONTENTS
(Cont.)
| | | | | |
ARTICLE 6 REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY AND THE ASSETS | 25 |
Section 6.1 Generally | 25 |
Section 6.2 Existence and Qualification | 25 |
Section 6.3 Power | 26 |
Section 6.4 No Conflicts | 26 |
Section 6.5 Capitalization | 26 |
Section 6.6 Subsidiaries | 26 |
Section 6.7 Litigation | 27 |
Section 6.8 Taxes and Assessments | 27 |
Section 6.9 Capital Commitments | 28 |
Section 6.10 Compliance with Laws | 28 |
Section 6.11 Material Contracts | 28 |
Section 6.12 Payments for Production and Imbalances | 30 |
Section 6.13 Consents and Preferential Purchase Rights | 30 |
Section 6.14 Non-Consent Operations | 30 |
Section 6.15 Plugging and Abandonment | 30 |
Section 6.16 Environmental Matters | 31 |
Section 6.17 Suspense Funds; Royalties; Expenses | 31 |
Section 6.18 [Reserved.] | 31 |
Section 6.19 Bankruptcy | 31 |
Section 6.20 Credit Support | 31 |
Section 6.21 Bank Accounts | 32 |
Section 6.22 Employee Benefit Matters | 32 |
Section 6.23 Employment and Labor Matters | 32 |
Section 6.24 Insurance | 32 |
Section 6.25 [Reserved.] | 33 |
Section 6.26 Books and Records | 33 |
Section 6.27 Special Warranty | 33 |
Section 6.28 Oil and Gas Properties | 33 |
Section 6.29 Permits | 33 |
Section 6.30 Sufficiency of Assets | 33 |
Section 6.31 Wells | 33 |
Section 6.32 Leases | 33 |
Section 6.33 Condemnation; Casualty Loss | 33 |
Section 6.34 Specified Matters | 34 |
Section 6.35 Absence of Certain Developments | 34 |
ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF PURCHASERS | 34 |
Section 7.1 Generally | 34 |
Section 7.2 Existence and Qualification | 34 |
Section 7.3 Power | 34 |
TABLE OF CONTENTS
(Cont.)
| | | | | |
Section 7.4 Authorization and Enforceability | 35 |
Section 7.5 No Conflicts | 35 |
Section 7.6 Liability for Brokers’ Fees | 35 |
Section 7.7 Litigation | 35 |
Section 7.8 Financing | 35 |
Section 7.9 Contracts | 36 |
Section 7.10 Securities Law Compliance | 36 |
Section 7.11 Opportunity to Verify Information | 36 |
Section 7.12 Independent Evaluation | 36 |
Section 7.13 Consents, Approvals or Waivers | 38 |
Section 7.14 Bankruptcy | 38 |
Section 7.15 Capitalization | 38 |
Section 7.16 SEC Documents; Financial Statements; No Liabilities | 39 |
Section 7.17 Internal Controls; Nasdaq Listing Matters | 40 |
Section 7.18 Form S-3 | 41 |
Section 7.19 No Stockholder Approval | 41 |
ARTICLE 8 COVENANTS OF THE PARTIES | 41 |
Section 8.1 Access | 41 |
Section 8.2 [Reserved] | 43 |
Section 8.3 Public Announcements; Confidentiality | 43 |
Section 8.4 Operation of Business | 44 |
Section 8.5 Change of Name | 47 |
Section 8.6 Replacement of Bonds, Letters of Credit, and Guaranties | 47 |
Section 8.7 Notification of Breaches | 48 |
Section 8.8 Amendment to Schedules | 48 |
Section 8.9 Further Assurances | 49 |
Section 8.10 [Reserved.] | 49 |
Section 8.11 R&W Insurance Policy | 49 |
Section 8.12 Directors and Officers | 49 |
Section 8.13 Cash Distributions | 50 |
Section 8.14 Excluded Assets | 50 |
Section 8.15 [Reserved.] | 50 |
Section 8.16 Certain Nasdaq Matters | 50 |
Section 8.17 Financing and SEC Filing Assistance | 50 |
Section 8.18 Certain Disclaimers | 52 |
Section 8.19 Company Financials | 55 |
ARTICLE 9 CONDITIONS TO CLOSING | 55 |
Section 9.1 Sellers’ Conditions to Closing | 55 |
Section 9.2 Purchasers’ Conditions to Closing | 56 |
ARTICLE 10 CLOSING | 57 |
Section 10.1 Time and Place of Closing | 57 |
TABLE OF CONTENTS
(Cont.)
| | | | | |
Section 10.2 Obligations of Sellers at Closing | 57 |
Section 10.3 Obligations of Purchasers at Closing | 58 |
Section 10.4 Closing Cash Payment and Post-Closing Purchase Price Adjustments | 59 |
ARTICLE 11 TERMINATION | 62 |
Section 11.1 Termination | 62 |
Section 11.2 Effect of Termination | 63 |
ARTICLE 12 INDEMNIFICATION | 64 |
Section 12.1 Indemnification | 64 |
Section 12.2 Indemnification Actions | 66 |
Section 12.3 Limitations on Actions | 68 |
ARTICLE 13 TAX MATTERS | 69 |
Section 13.1 Tax Filings | 69 |
Section 13.2 Allocation of Taxes | 70 |
Section 13.3 Characterization of Certain Payments | 71 |
Section 13.4 Amended Tax Returns; Tax Elections | 71 |
Section 13.5 Cooperation | 71 |
Section 13.6 Tax Audits | 72 |
Section 13.7 Tax Treatment | 72 |
Section 13.8 Transaction Tax Deductions | 72 |
ARTICLE 14 MISCELLANEOUS | 72 |
Section 14.1 Counterparts | 73 |
Section 14.2 Notice | 73 |
Section 14.3 Tax, Recording Fees, Similar Taxes & Fees | 74 |
Section 14.4 Governing Law; Jurisdiction | 74 |
Section 14.5 Waivers | 76 |
Section 14.6 Assignment | 76 |
Section 14.7 Entire Agreement | 76 |
Section 14.8 Amendment | 76 |
Section 14.9 No Third Party Beneficiaries | 76 |
Section 14.10 Construction | 76 |
Section 14.11 Limitation on Damages | 76 |
Section 14.12 Conspicuous | 77 |
Section 14.13 Time of Essence | 77 |
Section 14.14 Delivery of Records | 77 |
Section 14.15 Severability | 77 |
Section 14.16 Specific Performance | 77 |
Section 14.17 Reliance on Own Judgment; Disclaimer of Reliance | 77 |
Section 14.18 Limitation on Recourse | 78 |
Section 14.19 Schedules | 79 |
TABLE OF CONTENTS
(Cont.)
| | | | | |
Section 14.20 Attorney-Client Privilege; Continued Representation | 80 |
Section 14.21 Party Representatives | 80 |
Section 14.22 Purchaser Group Consent | 81 |
TABLE OF CONTENTS
(Cont.)
| | | | | | | | |
Appendices, Exhibits, and Schedules: |
| | |
Appendix A | - | Definitions |
| | |
Exhibit A-1 | - | Leases |
Exhibit A-2 | - | Wells |
Exhibit A-3 | - | Surface Interests |
Exhibit A-4 | - | Certain Excluded Assets |
Exhibit B | - | Form of Assignment Agreement |
Exhibit C | - | Form of Registration Rights Agreement |
| | |
Schedule 1.1 | - | Specified Midstream Contracts |
Schedule 3.4 | - | Allocated Values |
Schedule 5.1 | - | Knowledge Individuals (Sellers) |
Schedule 5.5 | - | No Conflict (Sellers) |
Schedule 5.8 | - | Litigation (Sellers) |
Schedule 6.1 | - | Knowledge Individuals (Company) |
Schedule 6.4 | - | No Conflict (Company) |
Schedule 6.5 | - | Capitalization |
Schedule 6.7 | - | Litigation (Company) |
Schedule 6.9 | - | Capital Commitments |
Schedule 6.11 | - | Material Contracts |
Schedule 6.12 | - | Payments for Production and Imbalances |
Schedule 6.13 | - | Consents and Preferential Rights to Purchase |
Schedule 6.14 | - | Non-Consent Operations |
Schedule 6.15 | - | Plugging and Abandonment |
Schedule 6.16 | - | Environmental Matters |
Schedule 6.17 | - | Suspense Funds |
Schedule 6.20 | - | Credit Support |
Schedule 6.21 | - | Bank Accounts |
Schedule 6.24 | - | Insurance |
Schedule 7.7 | - | Knowledge Individuals (Purchasers) |
Schedule 7.17(c) | - | SEC Review |
Schedule 8.4 | - | Operations |
Schedule 8.14 | - | Assets to be Transferred |
MEMBERSHIP INTEREST PURCHASE AGREEMENT
This Membership Interest Purchase Agreement (this “Agreement”) is dated as of January 24, 2022 (the “Execution Date”), by and among, on the one part, Radler 2000 Limited Partnership, a Texas limited partnership (“R2KLP”) and Tug Hill Inc., a Nevada corporation (“THI” and together with R2KLP, the “Sellers” and each, a “Seller”), and, on the other part, Chesapeake Energy Corporation, an Oklahoma corporation (“CHK Parent”) and Chesapeake Appalachia, L.L.C., an Oklahoma limited liability company and a wholly-owned subsidiary of CHK Parent (“CHK Purchaser” and together with CHK Parent, the “Purchasers” and each a “Purchaser”). Sellers and Purchasers are sometimes referred to herein individually as a “Party” and, collectively, as the “Parties.”
RECITALS
A. THI owns the preferred membership Interests (the “Company Preferred Interests”) of Radler 2000 PA, LLC, a Texas limited liability company (the “Company”).
B. R2KLP owns the common membership Interests (the “Company Common Interests”) of the Company.
C. The Company Preferred Interests and the Company Common Interests collectively represent 100% of the issued and outstanding Interests in the Company (the “Company Interests”).
D. The Parties desire that, at the Closing, (i) R2KLP shall sell and transfer to CHK Purchaser, and CHK Purchaser shall purchase from R2KLP, the Company Common Interests, and (ii) THI shall sell and transfer to CHK Purchaser, and CHK Purchaser shall purchase from THI, the Company Preferred Interests, in each case, in the manner and upon the terms and conditions hereafter set forth.
AGREEMENT
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 by Sellers. 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 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 ends 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, (a) (i) R2KLP agrees to sell, transfer, and convey the Company Common Interests to CHK Purchaser, free and clear of any Encumbrances (other than restrictions generally arising under the Company Organizational Documents, this Agreement, and applicable securities Laws) and (ii) CHK Purchaser agrees to purchase, accept, and pay for the Company Common Interests, and (b) (i) THI agrees to sell, transfer, and convey the Company Preferred Interests to CHK Purchaser, free and clear of any Encumbrances (other than restrictions generally arising under the Company Organizational Documents, this Agreement, and applicable securities Laws) and (ii) CHK Purchaser agrees to purchase, accept, and pay for the Company Preferred Interests.
Section 2.2 Effective Time; Proration of Costs and Revenues.
(a) Subject to the other terms and conditions of this Agreement, the Company Interests shall be transferred from Sellers to Purchasers at the Closing, but certain financial benefits and burdens of the Assets shall be transferred effective as of 12:01 a.m., Central Time, on January 1, 2022 (the “Effective Time”), as described below; provided that, for the avoidance of doubt, the Closing shall be treated for income Tax purposes as the time when the Company Interests are transferred from Sellers to Purchasers.
(b) Purchasers shall be entitled to all production of Hydrocarbons from or attributable to the Properties at and after the Effective Time (and all products and proceeds attributable thereto), and to all other income, proceeds, revenue, receipts, and credits earned with respect to the Assets at and after the Effective Time (provided that, notwithstanding the preceding, Sellers and their Affiliates shall be entitled to all proceeds of cash calls and billings and other funds received for the account of Third Parties with respect to any of the Assets operated by Sellers or their Affiliates for all periods prior to the Closing Date, but only to the extent that such proceeds and funds are used by Sellers (or their Affiliate) to pay for expenditures on behalf of such Third Parties in Sellers’ (or their Affiliate’s) role as operator of the Assets prior to the Closing Date), and shall be responsible for (and entitled to any refunds with respect to) all Property Costs incurred at and after the Effective Time.
(c) Sellers shall be entitled to all production of Hydrocarbons from or attributable to the Properties prior to the Effective Time (and all products and proceeds attributable thereto), and to all other income, proceeds, revenue, receipts, and credits earned with respect to the Assets (other than Tax refunds and Tax credits, which are addressed in Section 13.1) prior to the Effective Time, and to proceeds from cash calls and billings and other funds received for the account of Third Parties for all periods prior to the Closing Date, as described in Section 2.2(b), but only to the extent that such proceeds and funds are used by Sellers (or their Affiliate) to pay for expenditures on behalf of such Third Parties in Sellers’ (or their Affiliate’s) role as operator of the Assets prior to the Closing Date, and shall be responsible for (and entitled to any refunds with respect to) all Property Costs incurred prior to the Effective Time.
(d) Should Purchasers or the Company receive after Closing any income, proceeds, revenue, or other amounts to which Sellers are entitled under Section 2.2(c), Purchasers shall, and shall cause the Company to, fully disclose, account for, and promptly remit the same to Sellers. If, after Closing, Sellers receive any income, proceeds, revenue, or other amounts with respect to the Assets to which Sellers are not entitled pursuant to Section 2.2(c), Sellers shall fully disclose, account for, and promptly remit the same to Purchasers (or their designee).
(e) Should Purchasers or the Company pay after Closing any Property Costs for which Sellers are responsible under Section 2.2(c), Sellers shall reimburse Purchasers (or their designee) promptly after receipt of an invoice with respect to such Property Costs, accompanied by copies of the relevant vendor or other invoice and proof of payment. Should Sellers pay after Closing any Property Costs for which Sellers are not responsible under Section 2.2(c), Purchasers shall, or shall cause the Company to, reimburse Sellers promptly after receipt of an invoice with respect to such Property Costs, accompanied by copies of the relevant vendor or other invoice and proof of payment.
(f) Except to the extent such amounts are, or are attributable to, the Excluded Assets, Sellers 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 one year anniversary of the Closing Date, except as to amounts for which Purchasers have delivered an invoice of such Property Costs to Sellers pursuant to Section 2.2(e) on or before such date.
(g) Rights-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 at and after the Effective Time. In each case, Purchasers (on behalf of the Company) shall be responsible for the portion allocated to the period at and after the Effective Time and Sellers shall be responsible for the portion allocated to the period before the Effective Time.
Section 2.3 Procedures.
(a) For purposes of allocating production (and proceeds 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 LACT meters or similar meters at the initial 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 delivery point sales meters (or other custody transfer meters, whichever is closest to the Well) on the pipelines through which they are transported. Such allocations (along with the adjustments made pursuant to Section 3.3) shall be based on data and information provided by the Third Party operators (if applicable) of the Assets and all other relevant data and information reasonably available to the Parties; provided that, if any such data or information has not been provided by a Third Party operator as of the relevant time, then Sellers shall make a good faith estimate of such allocations or adjustments, as applicable, based on the best data and information available to Sellers at such time. The terms “earned” and “incurred” shall be interpreted in accordance with generally accepted accounting principles and Council of Petroleum Accountants Society standards, and expenditures that are incurred pursuant to an operating agreement, unit agreement, or similar agreement shall be deemed incurred when expended by the operator of the applicable Property, in accordance with such operator’s then-current practice.
(b) After Closing, each Party shall be entitled to participate in all joint interest audits and other audits of (i) Property Costs for which such Party is entirely or in part responsible under the terms of Section 2.2 or (ii) Hydrocarbons from or attributable to the Properties (and all products and proceeds attributable thereto) or other income, proceeds, revenue, receipts, and credits earned with respect to the Assets, in each case, to which such Party is entirely or in part entitled under the terms of Section 2.2, provided that (A) Purchasers shall, or shall cause the Company to, handle all joint interest audits and other audits of Property Costs covering the period for which Sellers are in part responsible with Purchasers under Section 2.2 (and Purchasers (on
behalf of the Company) shall be solely responsible for Purchasers’ and the Company’s out-of-pocket costs and expenses incurred in connection with such audits), (B) Sellers shall handle all joint interest audits and other audits of Hydrocarbons from or attributable to the Properties (and all products and proceeds attributable thereto) or other income, proceeds, revenue, receipts, and credits earned with respect to the Assets, in each case, to which Sellers are entirely or in part entitled under Section 2.2 (and each Seller shall be solely responsible for such Seller’s respective out-of-pocket costs and expenses incurred in connection with such audits), and (C) a Party shall not agree to any adjustments to previously assessed costs for which the other Party is liable, or any compromise of any audit claims to which such other Party would be entitled, without the prior written consent of the other Party, not to be unreasonably withheld, conditioned, or delayed. Purchasers shall, or shall cause the Company to, provide Sellers with a copy of all applicable audit reports and written audit agreements received by Purchasers or their Affiliates and relating to periods for which Sellers are wholly or partially responsible or with respect to any Excluded Assets.
Section 2.4 Cash Free, Indebtedness Free. At the Closing, the Company will not hold any cash or be responsible for any obligations to repay any Indebtedness. Accordingly, on or prior to the Closing, Sellers will (a) cause the Company to distribute to Sellers (or their designee) all cash (irrespective of whether such cash is attributable to Hydrocarbons produced, or events occurring, at or after the Effective Time) held by the Company and (b) repay outstanding Indebtedness of the Company and all of the Company’s accounts payable and other similar liabilities attributable to periods ending prior to the Effective Time. Each Seller represents (with respect to itself only) that such Seller is authorized to perform the actions described in the preceding sentence. Purchasers hereby acknowledge that Sellers shall take such actions prior to Closing and hereby agree and consent to Sellers taking such actions prior to Closing. Notwithstanding anything to the contrary herein, the Parties acknowledge and agree that the provisions of this Section 2.4 will not prejudice any Party’s rights under Section 3.3 or otherwise modify the adjustment mechanisms set forth therein.
ARTICLE 3
PURCHASE PRICE
Section 3.1 Purchase Price.
(a) The total purchase price for the Company Interests shall be $433,946,495 (the “Unadjusted Purchase Price”), comprised of (i) cash in the amount of $327,506,789 (the “Base Cash Purchase Price”) and (ii) 1,546,190 shares of CHK Common Stock (such shares of CHK Common Stock the “Stock Purchase Price”), as adjusted and paid, as applicable, pursuant to and in accordance with Section 3.3 and Section 10.4. Notwithstanding the foregoing, if, at any time on or after the date hereof and prior to the Closing, (x) CHK Parent makes, pays, or effects (or any record date is established with respect thereto) (A) any dividend on the CHK Common Stock payable in CHK Common Stock, (B) any subdivision or split of CHK Common Stock, (C) any combination or reclassification of CHK Common Stock into a smaller number of shares of CHK Common Stock, or (D) any issuance of any securities by reclassification of CHK Common Stock (including any reclassification in connection with a merger, consolidation or business combination in which CHK Parent is the surviving person) or (y) any merger, consolidation, combination, or other transaction is consummated pursuant to which CHK Common Stock is converted into the right to receive cash or other securities, then the number of shares of CHK Common Stock to be issued to the Sellers (or their designees) as the Stock Purchase Price pursuant to this Agreement shall be proportionately adjusted, including, for the avoidance of doubt, in the cases of clauses (x)(D) and (y) to provide for the receipt by Sellers, in lieu of any CHK
Common Stock, the same number or amount of cash and/or securities as is received in exchange for each share of CHK Common Stock in connection with any such transaction described in clauses (x)(D) and (y) hereof. An adjustment made pursuant to the foregoing sentence shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision, split, merger, combination, reclassification or other transaction.
(b) Within one Business Day after the Execution Date, Purchasers shall deliver into the Escrow Account an amount equal to $15,200,000 (together with all interest accrued thereon, the “Deposit”) to be held by the Escrow Agent pursuant to the terms of this Agreement and the Escrow Agreement. If the Closing occurs, the Deposit shall be taken into account in the determination of the Closing Cash Payment pursuant to Section 10.4(a). However, if the Closing does not occur, the Deposit shall be distributed in accordance with Section 11.2.
Section 3.2 Allocation of Purchase Price. The Parties agree that the Adjusted Purchase Price and any liabilities associated with the Assets of the Company (to the extent properly taken into account as consideration under the Code) shall be allocated among the Assets of the Company for U.S. federal and applicable state and local income Tax purposes in accordance with an allocation schedule, an initial draft of which shall be prepared by R2KLP and delivered to Purchasers for their review and comment within 30 days following the final determination of the Adjusted Purchase Price (as revised and finally determined under this Section 3.2, the “Purchase Price Allocation Schedule”). Purchasers shall have 15 days to review the draft Purchase Price Allocation Schedule delivered by R2KLP. If no comments are delivered by Purchasers to R2KLP within such review period, then the draft Purchase Price Allocation Schedule originally delivered by R2KLP shall become final. If Purchasers provide any comments within their 15-day review period, then the Parties shall use good faith efforts to resolve any such comments, provided that if they are unable to mutually agree on the final Purchase Price Allocation Schedule within thirty days of receipt of Purchasers’ comments, the Parties shall resolve any such disputes in accordance with the procedures set forth in Section 10.4(c). Subject to any differences required as a result of the agreed Tax treatment described in Section 13.7, the Parties shall use the final Purchase Price Allocation Schedule in reporting this transaction to the applicable taxing authorities, and no Party shall file any Tax Return or otherwise take any position for Tax purposes that is inconsistent with the Purchase Price Allocation Schedule unless otherwise required by applicable Law; provided, however, that neither Sellers nor Purchasers shall be unreasonably impeded in their ability and discretion to negotiate, compromise and/or settle any Tax audit, claim or similar proceedings in connection with the Purchase Price Allocation Schedule; provided further, that if the Adjusted Purchase Price (as determined for applicable Tax purposes) is adjusted subsequent to the initial finalization of the Purchase Price Allocation Schedule (e.g., as a result of indemnification payments), then R2KLP shall be entitled to prepare a revised draft Purchase Price Allocation Schedule, and such revised draft will be delivered to Purchasers and finalized in accordance with the procedures described in this Section 3.2, and upon finalization shall become the Purchase Price Allocation Schedule. Each Party shall promptly notify the other in writing upon receipt of notice of any pending or threatened Tax audit or assessment challenging the agreed Purchase Price Allocation Schedule.
Section 3.3 Adjustments to Purchase Price. All adjustments to the Unadjusted 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 as consistently applied by Sellers, (y) without duplication (in this Agreement or otherwise), and (z) with respect to matters (A) in the case of Section 3.3(b)(iii), for which notice is given on or before the Title Claim Date, and (B) in all of the other cases set forth in Section 3.3(a) and Section 3.3(b), identified on or before the Cut-off Date. Each adjustment to the Unadjusted Purchase Price described in Section 3.3(a) and Section 3.3(b) shall be allocated among the Assets in accordance with Section 3.4. Without limiting the foregoing, the Unadjusted Purchase Price shall be adjusted as follows, with the result of such adjustments to such Unadjusted Purchase Price herein the “Adjusted Purchase Price”:
(a) The Unadjusted Purchase Price shall be adjusted upward by the following amounts (without duplication):
(i) an amount equal to all Property Costs attributable to the ownership or operation of the Assets that are incurred at and after the Effective Time but paid by Sellers (or the Company prior to Closing) (as is consistent with Section 2.2(b) and Section 2.2(c)), but excluding any amounts previously reimbursed to Sellers pursuant to Section 2.2(e);
(ii) an amount equal to, to the extent that such amounts have been received by Purchasers (or the Company after Closing) and not remitted, distributed, or paid to Sellers, (A) all proceeds from the production of Hydrocarbons from or attributable to the Properties prior to the Effective Time (including, to the extent that Sellers (or their Affiliate) are actually paid such amounts on behalf of such Third Parties in Sellers’ (or their Affiliate’s) role as operator of the Assets, proceeds from cash calls and billings and other funds received for the account of Third Parties with respect to any of the Assets operated by Sellers (or their Affiliate) for all periods prior to the date on which Sellers’ (or their Affiliate’s) resignation as operator becomes effective), (B) all other income, proceeds, receipts, and credits earned with respect to the Assets prior to the Effective Time, and (C) any other amounts to which Sellers are entitled pursuant to Section 2.2(c);
(iii) the amount of all prepaid expenses (including prepaid bonuses, rentals, cash calls, and advances to Third Party operators for expenses not yet incurred; and scheduled payments) paid by Sellers (or by the Company prior to Closing) with respect to the ownership or operation of the Assets after the Effective Time;
(iv) to the extent that the Company is under-produced or over-delivered as of the Effective Time as shown with respect to the net Imbalances set forth in Schedule 6.12, as complete and final settlement of all such Imbalances, the amount of the Imbalances multiplied by a price of $1.00 per MMBtu;
(v) the amount of all Asset Taxes and Income Taxes allocated to Purchasers pursuant to Section 13.2 but paid or otherwise economically borne by Sellers or the Company prior to Closing (excluding, for the avoidance of doubt, any Asset Taxes
that were withheld or deducted from the gross amount paid or payable to Sellers in connection with a transaction to which Section 3.3(b)(ii) applies, and therefore were taken into account in determining the “proceeds received” by Sellers for purposes of applying Section 3.3(b)(ii)); and
(vi) any other amount provided for elsewhere in this Agreement or otherwise agreed upon in writing by the Parties as an upward adjustment to the Unadjusted Purchase Price.
(b) The Unadjusted Purchase Price shall be adjusted downward by the following amounts (without duplication):
(i) an amount equal to all Property Costs attributable to the ownership or operation of the Assets that are incurred prior to the Effective Time but paid by Purchasers (or by the Company after Closing) (as is consistent with Section 2.2(b) and Section 2.2(c)), but excluding any amounts previously reimbursed to Purchasers (or the Company) pursuant to Section 2.2(e);
(ii) an amount equal to, to the extent that such amounts have been received by Sellers and not remitted or paid to Purchasers, (A) all proceeds from the production of Hydrocarbons from or attributable to the Properties at and after the Effective Time (excluding, to the extent that Sellers (or their Affiliate) are actually paid such amounts on behalf of such Third Parties in Sellers’ (or their Affiliate’s) role as operator of the Assets, all proceeds of cash calls and billings and other funds received for the account of Third Parties with respect to any of the Assets operated by Sellers (or their Affiliate) for all periods prior to the date on which Sellers’ (or their Affiliate’s) resignation as operator of such Assets becomes effective), (B) all other income, proceeds, receipts, and credits earned with respect to the Assets at and after the Effective Time, and (C) any other amounts to which Purchasers are entitled pursuant to Section 2.2(b);
(iii) any reductions to the Unadjusted Purchase Price to be made in accordance with Section 4.2 (which shall include, for purposes of certainty, an amount equal to the Allocated Value of any Assets excluded from this transaction pursuant to Section 4.2(c)), reduced by any amounts for Title Benefits determined pursuant to Section 4.3;
(iv) an amount equal to the Allocated Value of any Assets excluded from this transaction pursuant to Section 4.6 or Section 8.1;
(v) to the extent the Company is over-produced or under-delivered as of the Effective Time as shown with respect to the net Imbalances set forth in Schedule 6.12, as complete and final settlement of all such Imbalances, the amount of the Imbalances multiplied by a price of $1.00 per MMBtu;
(vi) [Reserved.]
(vii) the amount of all Asset Taxes allocated to Sellers pursuant to Section 13.2 but paid or otherwise economically borne by Purchasers or the Company after Closing (excluding, for the avoidance of doubt, any Asset Taxes that were withheld or deducted from the gross amount paid or payable to Purchasers in connection with a transaction to which Section 3.3(a)(ii) applies, and therefore were taken into account in determining the “proceeds received” by Purchasers for purposes of applying Section 3.3(a)(ii)); and
(viii) any other amount provided for elsewhere in this Agreement or otherwise agreed upon in writing by the Parties as a downward adjustment to the Unadjusted Purchase Price.
(c) Notwithstanding anything to the contrary herein, all adjustments to the Unadjusted Purchase Price made pursuant to this Section 3.3 shall be made to the Base Cash Purchase Price.
Section 3.4 Allocated Values. The “Allocated Values” for the Assets (which are provided for, and allocated among, each of the Leases and Wells) are set forth on Schedule 3.4. Each adjustment shall be allocated to the particular Assets to which such adjustment relates to the extent, and in the proportion which, such adjustment relates to such Assets and to the extent that it is, in the commercially reasonable discretion of Sellers, possible to do so. Any adjustment not allocated to a specific Asset or Assets pursuant to the immediately preceding sentence shall be allocated among the various Assets in proportion to the Unadjusted Purchase Price allocated to each Asset on Schedule 3.4. Sellers have accepted such Allocated Values for purposes of this Agreement and the transactions contemplated hereby, but make no representation or warranty as to the accuracy of such values.
Section 3.5 Escrow Agreement. Simultaneously with the execution of this Agreement, Sellers and Purchasers have executed, and have obtained execution by the Escrow Agent of, the Escrow Agreement.
Section 3.6 Withholding. The Parties acknowledge and agree that they do not anticipate any deduction or withholding from the consideration otherwise payable to any Person under this Agreement. Notwithstanding the foregoing, Purchasers shall (a) be entitled to deduct and withhold from the consideration otherwise payable to any Person pursuant to this Agreement such amounts as may be required to be deducted and withheld with respect to the making of such payment under any provision of applicable Law (including the Code), and (b) pay any amounts so deducted and withheld to the proper Governmental Body in a timely manner. Any amount deducted or withheld pursuant to this Section 3.6 and paid over to the relevant Governmental Body shall be treated as having been paid to such Person in respect of which such deduction or withholding was made. In the event Purchasers determine that any consideration otherwise payable to any Person pursuant to this Agreement would be subject to withholding under applicable Law, Purchasers shall promptly notify Sellers of such determination, but in no event less than five days prior to the Closing Date. Purchasers shall reasonably cooperate with Sellers in seeking to reduce or eliminate any such deduction or withholding.
ARTICLE 4
TITLE AND ENVIRONMENTAL MATTERS
Section 4.1 Sellers’ Title.
(a) EXCEPT FOR THE SPECIAL WARRANTY BY R2KLP SET FORTH IN SECTION 6.27 AND WITHOUT LIMITING PURCHASERS’ RIGHTS AND REMEDIES (1) UNDER SECTION 9.2 OR SECTION 11.1, (2) UNDER THE R&W INSURANCE POLICY, OR (3) FOR TITLE DEFECTS SET FORTH IN THIS ARTICLE 4, SELLERS DO NOT MAKE, SELLERS EXPRESSLY DISCLAIM, AND PURCHASERS WAIVE, ANY WARRANTY OR REPRESENTATION, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, WITH RESPECT TO THE COMPANY’S TITLE TO, OR ANY OTHER PERSON’S TITLE TO, OR ANY DEFICIENCY IN TITLE TO, ANY OF THE ASSETS OR THE DESCRIPTION THEREOF (INCLUDING ANY LISTINGS OF NET MINERAL ACRES, PERCENTAGE WORKING INTEREST, OR PERCENTAGE NET REVENUE INTEREST FOR ANY ASSET). PURCHASERS HEREBY ACKNOWLEDGE AND AGREE THAT, SUBJECT TO THE FOREGOING EXCEPTIONS AND THE PROVISIONS OF SECTION 4.5, PURCHASERS’ SOLE REMEDY FOR ANY DEFECT OF TITLE OR ANY OTHER TITLE MATTER, INCLUDING ANY TITLE DEFECT, WITH RESPECT TO ANY OF THE ASSETS, (I) ON OR BEFORE THE TITLE CLAIM DATE, SHALL BE AS SET FORTH IN SECTION 4.2 AND (II) FROM AND AFTER THE TITLE CLAIM DATE (WITHOUT DUPLICATION), SHALL BE PURSUANT TO THE SPECIAL WARRANTY BY R2KLP SET FORTH IN SECTION 6.27. EXCEPT FOR THE SPECIAL WARRANTY BY R2KLP SET FORTH IN SECTION 6.27 AND WITHOUT LIMITING PURCHASERS’ RIGHTS AND REMEDIES (1) UNDER SECTION 9.2 OR SECTION 11.1, (2) UNDER THE R&W INSURANCE POLICY AND (3) FOR TITLE DEFECTS SET FORTH IN THIS ARTICLE 4, PURCHASERS HEREBY WAIVE ANY RIGHT TO ASSERT ANY TITLE DEFECT OR OTHER TITLE MATTER, OR TO OTHERWISE RECEIVE ANY ADJUSTMENT TO THE UNADJUSTED PURCHASE PRICE IN RESPECT OF, ANY TITLE DEFECT OR OTHER TITLE MATTER.
(b) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, PURCHASERS ACKNOWLEDGE AND AGREE THAT PURCHASERS SHALL NOT BE ENTITLED TO PROTECTION UNDER (NOR HAVE THE RIGHT TO MAKE A CLAIM AGAINST) THE SPECIAL WARRANTY BY R2KLP SET FORTH IN SECTION 6.27 FOR ANY TITLE DEFECT ASSERTED (OR ANY MATTER RAISED IN A PRELIMINARY TITLE DEFECT NOTICE) UNDER THIS ARTICLE 4 PRIOR TO THE TITLE DEFECT CLAIM DATE.
Section 4.2 Title Defects.
(a) To assert a claim of a Title Defect, Purchasers must deliver a claim notice to Sellers (a “Title Defect Notice”) promptly after the discovery thereof, but in no event later than 5:00 p.m., Central Time, on February 28, 2022 (such cut-off date, the “Title Claim Date”). To give Sellers an opportunity to commence reviewing and curing alleged Title Defects asserted by Purchasers, Purchasers shall use reasonable efforts to give Sellers, on or before the end of each calendar week prior to the Title Claim Date, written notice of all alleged Title Defects
discovered by Purchasers or Purchasers’ Representatives during such calendar week, which notice may be preliminary in nature and supplemented prior to the Title Claim Date; provided that the failure to give such notice shall not preclude Purchasers from asserting a Title Defect on or before the Title Claim Date. To be effective, each Title Defect Notice shall be in writing and include (i) a description of the alleged Title Defect that is reasonably sufficient for Sellers to determine the basis of the alleged Title Defect, (ii) the Asset adversely affected by the Title Defect (a “Title Defect Property”), (iii) the Allocated Value of each Title Defect Property, (iv) all documents upon which Purchasers rely for their assertion of a Title Defect, including, at a minimum, supporting documents reasonably necessary for Sellers (as well as any title attorney or examiner hired by Sellers) to verify the existence of the alleged Title Defect (if, and to the extent, such documents are in Purchasers’ or their Representatives’ possession), and (v) for a Title Defect (other than an Environmental Defect) the amount by which Purchasers reasonably believe the Allocated Value of each Title Defect Property is reduced by the alleged Title Defect and the computations and information upon which Purchasers’ belief is based, including any analysis by any title attorney or examiner hired by Purchasers and, for Title Defects that are Environmental Defects, Purchasers’ computation of the Title Defect Amount (in accordance with Section 4.2(d)(v)) along with a description in reasonable detail of the Remediation proposed for the alleged Environmental Defect and identification of all material assumptions used by Purchasers in calculating such Title Defect Amount, including the standards Purchasers assert must be met to comply with applicable Environmental Laws. Notwithstanding anything herein to the contrary (except for the special warranty by R2KLP set forth in Section 6.27), Purchasers forever waive, and Sellers shall have no liability for, Title Defects not asserted by a Title Defect Notice meeting all of the requirements set forth in the preceding sentence by the Title Claim Date.
(b)
(i) Sellers shall have the right, but not the obligation, to attempt, at their sole cost, to cure or remove (A) at any time prior to the Closing, any Title Defects that are Environmental Defects and (B) on or before the date that is 90 days after the Closing Date (the “Cure Period”), any Title Defects (other than Environmental Defects), in each case of (A) and (B) above for which Sellers have received a Title Defect Notice from Purchasers prior to the Title Claim Date. From and after Closing, with respect to Title Defects (other than Environmental Defects), Purchasers shall take all actions reasonably requested by Sellers to assist them with the cure or removal of any such Title Defects; provided, however, that such actions shall not require Purchasers to incur any costs or spend any money with respect to such assistance.
(ii) At the Closing and except with respect to Title Defects for Title Defect Properties excluded from the Closing or assigned or distributed to Sellers pursuant to Section 4.2(c), the Unadjusted Purchase Price shall be reduced by an amount equal to the Title Defect Amount for any Title Defect that is not cured prior to the Closing; provided, however, that with respect to (A) any Title Defect (other than an Environmental Defect) for which Sellers have provided notice to Purchasers at least two days prior to the Scheduled Closing Date that Sellers intend to attempt to cure such Title Defect during the Cure Period (a “Remedy Notice”) or (B) any Title Defect for which Sellers dispute the existence of such Title Defect, the proper and adequate cure therefore, or the Title Defect
Amount attributable to a Title Defect (a “Disputed Defect” and such notice, a “Dispute Notice”), then (1) the Unadjusted Purchase Price shall not be reduced at the Closing by the Title Defect Amount for such Title Defect, (2) Purchasers’ good faith estimate of the Title Defect Amount for such Title Defect (the “Deemed Defect Amount”) shall not be paid to Sellers at the Closing and shall be deposited with the Escrow Agent in accordance with Section 4.2(b)(iii) and (3) the Unadjusted Purchase Price shall be deemed to be reduced for purposes of Section 9.1(e) and Section 9.2(e) based on the Deemed Defect Amount for each Title Defect.
(iii) At Closing, Purchasers shall deposit with the Escrow Agent an amount in cash equal to the aggregate Deemed Defect Amounts for any Title Defects with respect to which a Remedy Notice or Dispute Notice is provided to Purchasers by Sellers in accordance with Section 4.2(b)(ii) (such amount, the “Defect Escrow Amount”), and such Defect Escrow Amount or portions thereof shall be distributed in accordance with this Section 4.2(b)(iii). If (A) before the end of the Cure Period, Sellers and Purchasers agree that such Title Defect has been cured, or (B) Sellers and Purchasers cannot agree, and it is determined by the Title Arbitrator that such Title Defect is fully cured, then within five Business Days after the expiration of the Cure Period (in the case of clause (A)) or the determination of the Title Arbitrator (in the case of clause (B)), the Parties shall jointly direct the Escrow Agent to release the Deemed Defect Amount escrowed for such Title Defect pursuant to this Section 4.2(b)(iii) to Sellers; provided, however, that, if such Title Defect has only been partially cured, the Unadjusted Purchase Price shall be adjusted downward based on the Title Defect Amount for such Title Defect as partially cured, the Parties shall jointly direct the Escrow Agent to release to Purchasers the portion of the Deemed Defect Amount escrowed for such Title Defect pursuant to this Section 4.2(b)(iii) that is equal to such adjustment (or the entirety of such amount if the Title Defect Amount equals or exceeds the amount so escrowed), the Parties shall jointly direct the Escrow Agent to release to Sellers the remaining amount escrowed for such Title Defect pursuant to this Section 4.2(b)(iii), if any, and such adjustment and releases shall be reflected in the calculations, and any further reconciliation, if necessary, shall be completed under Section 10.4(c). If (1) upon the end of the Cure Period, Sellers and Purchasers agree that such Title Defect has not been cured, or (2) Sellers and Purchasers cannot agree, and it is determined by the Title Arbitrator that such Title Defect is not cured, then, within five Business Days after the expiration of the Cure Period (in the case of clause (1)) or the determination of the Title Arbitrator (in the case of clause (2)), the Parties shall jointly direct the Escrow Agent to release the Deemed Defect Amount escrowed for such Title Defect pursuant to this Section 4.2(b)(iii) to Purchasers, the Unadjusted Purchase Price shall be adjusted downward by the Title Defect Amount for such Title Defect and such adjustment and releases shall be reflected in the calculations, and any further reconciliation, if necessary, shall be completed, under Section 10.4(c). Within five Business Days after the Title Arbitrator has made a determination with respect to any Title Defect or Title Defect Amount, the Parties shall jointly direct the Escrow Agent to disburse the amount as determined by the Title Arbitrator to the Party determined by the Title Arbitrator to be entitled thereto, but only to the extent direction has not been otherwise provided to the Escrow Agent above in this Section 4.2(b)(iii) with respect to such Title Defect or Title Defect Amount, the Unadjusted Purchase Price shall be adjusted downward in accordance with such determination, if applicable, and such adjustment shall be reflected in the calculations, and any further reconciliation, if necessary, shall be completed, under Section 10.4(c). Any interest earned on the Defect Escrow Amount shall be released to the Party receiving such Defect Escrow Amount.
(iv) If any Title Defect with respect to which Sellers provided a Remedy Notice to Purchasers is not cured or resolved within the Cure Period, Sellers shall remedy such Title Defect pursuant to Section 4.2(c) no later than one Business Day after the expiration of the Cure Period (the “Remedy Deadline”); provided, however, that any downward adjustments to the Unadjusted Purchase Price made pursuant to Section 4.2(c) shall occur at the times set forth in Section 4.2(b)(iii) and shall be reflected in the calculations under Section 10.4; and provided further, that if there are any Disputed Defects that have not been cured, waived, or otherwise resolved by the Parties prior to the Remedy Deadline, such Disputed Defect(s) (and any remedies relating thereto) shall be finally and exclusively resolved in accordance with the provisions of Section 4.4. An election by Sellers to attempt to cure a Title Defect shall be without prejudice to their rights under Section 4.4 and shall not constitute an admission against interest or a waiver of Sellers right to dispute the existence, nature, or value of, or cost to cure, the alleged Title Defect.
(c) In the event that any Title Defect is not waived by Purchasers or, subject to Section 4.2(b), not cured or resolved within the Cure Period, (i) with respect to any such Title Defect that is not an Environmental Defect, Sellers shall, subject to the Title Defect Threshold and the Title Defect Deductible, make a downward adjustment to the Unadjusted Purchase Price equal to the Title Defect Amount as being the value of such Title Defect, or (ii) with respect to any such Title Defect that is an Environmental Defect, Sellers shall, at their sole election and subject to the Environmental Defect Threshold and the Environmental Defect Deductible, elect to at Closing (A) make a downward adjustment to the Unadjusted Purchase Price equal to the Title Defect Amount as being the value of such Title Defect, or (B) if and only if the Title Defect Amount alleged by Purchasers equals or exceeds 100% of the Allocated Value of the Title Defect Property, cause the Company to assign or distribute to a Seller (or Sellers’ designee) the entirety of the Title Defect Property that is adversely affected by such Environmental Defect (along with any related Assets), in which event, the Unadjusted Purchase Price shall be adjusted downward by an amount equal to the Allocated Value of such Title Defect Property, and such Title Defect Property shall no longer be included within the definition of Assets for any purpose under this Agreement and shall be included within the definition of Excluded Assets for all purposes of this Agreement.
(d) The “Title Defect Amount” resulting from a Title Defect shall be the amount by which the Allocated Value of the Title Defect Property adversely affected by such Title Defect is reduced as a result of the existence of such Title Defect and shall be determined in accordance with the following methodology, terms, and conditions; provided the Title Defect Amount for a Title Defect that is an Environmental Defect shall be determined without regard to the Allocated Value of the Title Defect Property:
(i) if Purchasers and Sellers agree on the Title Defect Amount, that amount shall be the Title Defect Amount;
(ii) if the Title Defect is a lien, encumbrance, or other charge that is undisputed and liquidated in amount, then the Title Defect Amount shall be the amount necessary to be paid to remove the Title Defect from the Company’s interest in the affected Title Defect Property;
(iii) if the Title Defect reflects a discrepancy (with a proportionate decrease in the working interest for the affected Title Defect Property) between (A) the Net Revenue Interest for the affected Title Defect Property and (B) the Net Revenue Interest stated in Exhibit A-1 or Exhibit A-2 (as applicable) for such Title Defect Property, then the Title Defect Amount shall be the product of the Allocated Value of such Title Defect Property multiplied by a fraction, the numerator of which is the amount of the Net Revenue Interest decrease and the denominator of which is the Net Revenue Interest stated in Exhibit A-1 or Exhibit A-2 (as applicable);
(iv) if the Title Defect reflects a discrepancy (based solely on gross acreage in the lands covered by the affected Lease or the undivided percentage interest in oil, gas, and other minerals covered by the affected Lease) between (A) the Net Mineral Acres for the affected Lease and (B) the Net Mineral Acres stated in Exhibit A-1 for the affected Lease, the Title Defect Amount shall be the product of the Allocated Value of such Title Defect Property multiplied by a fraction, the numerator of which is the Net Mineral Acre decrease for such Title Defect Property and the denominator of which is the Net Mineral Acres of such Title Defect Property stated in Exhibit A-1;
(v) if the Title Defect is an Environmental Defect, the Title Defect Amount shall be equal to the estimated costs and expenses of the most cost-effective Remediation of the Environmental Defect (as of the Closing Date) allowed under applicable Environmental Laws without interference with or restrictions on the continued operation of the affected Asset for exploration for, development of and production of Hydrocarbons;
(vi) if the Title Defect represents an obligation, encumbrance, burden, or charge upon or other defect in title to the Title Defect Property of a type not described in subsections (ii), (iii), (iv), or (v) above, the Title Defect Amount shall be determined by taking into account the Allocated Value of the Title Defect Property, the portion of the Title Defect Property adversely affected by the Title Defect, the legal effect of the Title Defect, the potential economic effect of the Title Defect over the life of the Title Defect Property, the values placed upon the Title Defect by Purchasers and Sellers, and such other factors as are necessary to make a proper evaluation;
(vii) the Title Defect Amount with respect to a Title Defect shall be determined without duplication of any costs or losses included in any other Title Defect Amount hereunder, or for which Purchasers otherwise receive credit in the calculation of the Adjusted Purchase Price; and
(viii) notwithstanding anything to the contrary in this Article 4, the aggregate Title Defect Amounts attributable to the effects of all Title Defects upon any Title Defect Property shall not exceed the Allocated Value of such Title Defect Property, other than Title Defects that are Environmental Defects or are of the type described in Section 4.2(d)(ii).
(e) It is understood and agreed that Environmental Defects shall constitute Title Defects for purposes of this Agreement (as is provided in the definition of the term “Title Defects” set forth in Appendix A) and, as such, will be handled in accordance with, and in all instances will be subject to, the provisions of this Section 4.2 and the other applicable provisions of this Article 4 (including the Environmental Defect Threshold and Environmental Defect Deductible set forth in Section 4.5). As such, without limiting the disclaimers and acknowledgements set forth in Article 8:
(i) SUBJECT TO, AND WITHOUT LIMITATION OF, R2KLP’S REPRESENTATION SET FORTH IN SECTION 6.16 AND CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), PURCHASERS’ RIGHTS UNDER THE R&W INSURANCE POLICY RELATED TO SUCH REPRESENTATION AND PURCHASERS’ RIGHTS UNDER SECTION 10.3 OR SECTION 11.1, EACH PURCHASER (ON BEHALF OF ITSELF AND ITS AFFILIATES, INCLUDING, FROM AND AFTER CLOSING, THE COMPANY) HEREBY WAIVES AND RELEASES ANY REMEDIES OR CLAIMS (WHETHER KNOWN OR UNKNOWN, FIXED OR CONTINGENT, LIQUIDATED OR UNLIQUIDATED, AND WHETHER ARISING AT LAW OR IN EQUITY) THAT IT MAY HAVE AGAINST SELLERS, THEIR AFFILIATES, OR ANY OTHER MEMBER OF THE SELLER GROUP UNDER APPLICABLE LAWS WITH RESPECT TO ENVIRONMENTAL DEFECTS (INCLUDING ANY CLAIMS ARISING UNDER CERCLA OR OTHER ENVIRONMENTAL LAWS) OR OTHER ENVIRONMENTAL MATTERS, EXCEPT SOLELY FOR THOSE REMEDIES SET FORTH IN THIS ARTICLE 4.
(ii) PURCHASERS ACKNOWLEDGE THAT THE ASSETS HAVE BEEN USED FOR EXPLORATION, DEVELOPMENT, PRODUCTION, GATHERING, AND TRANSPORTATION OF OIL AND GAS AND THERE MAY BE PETROLEUM, PRODUCED WATER, WASTES, SCALE, NORM, HAZARDOUS SUBSTANCES, OR OTHER SUBSTANCES OR MATERIALS LOCATED IN, ON, OR UNDER THE ASSETS OR ASSOCIATED WITH THE ASSETS. EQUIPMENT AND SITES INCLUDED IN THE ASSETS MAY CONTAIN ASBESTOS, NORM, OR OTHER HAZARDOUS SUBSTANCES. NORM MAY AFFIX OR ATTACH ITSELF TO THE INSIDE OF WELLS, PIPELINES, MATERIALS, AND EQUIPMENT AS SCALE, OR IN OTHER FORMS. THE WELLS, MATERIALS, AND EQUIPMENT LOCATED ON THE ASSETS OR INCLUDED IN THE ASSETS MAY CONTAIN NORM AND OTHER WASTES OR HAZARDOUS SUBSTANCES. NORM CONTAINING MATERIAL OR OTHER WASTES OR HAZARDOUS SUBSTANCES MAY HAVE COME IN CONTACT WITH VARIOUS ENVIRONMENTAL MEDIA, INCLUDING WATER, SOILS, OR SEDIMENT. SPECIAL PROCEDURES MAY BE REQUIRED FOR THE ASSESSMENT, REMEDIATION, REMOVAL, TRANSPORTATION, OR DISPOSAL OF ENVIRONMENTAL MEDIA, WASTES, ASBESTOS, NORM, AND OTHER HAZARDOUS SUBSTANCES FROM THE ASSETS.
(iii) SUBJECT TO, AND WITHOUT LIMITATION OF, R2KLP’S REPRESENTATION SET FORTH IN SECTION 6.16 AND CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b) AND WITHOUT LIMITING PURCHASERS’ RIGHTS UNDER THE R&W INSURANCE POLICY, NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT OR ANY OTHER AGREEMENT OR INSTRUMENT DELIVERED HEREUNDER, SELLERS DO NOT MAKE, SELLERS EXPRESSLY DISCLAIM, AND EACH PURCHASER (ON BEHALF OF ITSELF AND ITS AFFILIATES, INCLUDING, FROM AND AFTER CLOSING, THE COMPANY) WAIVES ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT, EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT TO THE PRESENCE OR ABSENCE OF ASBESTOS, NORM, OR OTHER WASTES OR HAZARDOUS SUBSTANCES IN OR ON THE ASSETS IN QUANTITIES TYPICAL FOR OILFIELD OPERATIONS IN THE AREAS WHERE THE ASSETS ARE LOCATED.
Section 4.3 Title Benefits.
(a) Sellers have the right, but not the obligation, to deliver to Purchasers on or before the Title Claim Date with respect to each Title Benefit discovered by Sellers a notice (a “Title Benefit Notice”) in writing and including (i) a description of the Title Benefit reasonably sufficient to determine the basis of the alleged Title Benefit, (ii) the Lease or Well affected by such Title Benefit (a “Title Benefit Property”), (iii) the Allocated Value of each Title Benefit Property, (iv) all documents upon which Sellers rely for the assertion of a Title Benefit, including, at a minimum, supporting documents reasonably necessary for Purchasers (as well as any title attorney or examiner hired by Purchasers) to verify the existence of the alleged Title Benefit, and (v) the amount by which Sellers reasonably believe the Allocated Value of each Title Benefit Property is increased by such Title Benefit and the computations and information upon which Sellers’ belief is based on or before the Title Claim Date with respect to each Title Benefit discovered by Sellers. Sellers forever waive Title Benefits not asserted by a Title Benefit Notice meeting all the requirements set forth in the preceding sentence by the Title Claim Date. Purchasers shall, promptly upon discovery, furnish Sellers with written notice of any Title Benefit discovered by Purchasers or their Representatives while conducting Purchasers’ due diligence with respect to the Properties prior to the Title Claim Date.
(b) With respect to each Title Benefit Property affected by Title Benefits reported under Section 4.3(a), the Title Defect Amounts for Title Defects (other than Environmental Defects) shall be decreased by an amount (the “Title Benefit Amount”) equal to the increase in the Allocated Value for such Title Benefit Property, as determined pursuant to Section 4.3(c). For the avoidance of doubt, the application of any Title Benefit Amounts shall be applicable only as an offset to Title Defect Amounts attributable to Title Defects that are not Environmental Defects.
(c) The Title Benefit Amount resulting from a Title Benefit shall be the amount by which the Allocated Value of the Title Benefit Property affected by such Title Benefit is increased as a result of the existence of such Title Benefit and shall be determined in accordance with the following methodology, terms, and conditions:
(i) if Purchasers and Sellers agree on the Title Benefit Amount, that amount shall be the Title Benefit Amount;
(ii) if the Title Benefit reflects a difference (with a proportional increase in the working interest for the affected Title Defect Property) between (A) the Net Revenue Interest for the affected Title Benefit Property and (B) the Net Revenue Interest stated in Exhibit A-1 or Exhibit A-2 (as applicable) for such Title Benefit Property, then the Title Benefit Amount shall be the product of the Allocated Value of such Title Benefit Property multiplied by a fraction, the numerator of which is the amount of the Net Revenue Interest increase and the denominator of which is the Net Revenue Interest stated in Exhibit A-1 or Exhibit A-2 (as applicable);
(iii) if the Title Benefit reflects a difference between (A) the Net Mineral Acres for the affected Lease and (B) the Net Mineral Acres stated in Exhibit A-1 for such Lease, the Title Benefit Amount shall be the product of the Allocated Value of such Title Benefit Property multiplied by a fraction, the numerator of which is the Net Mineral Acres increase for such Title Benefit Property and the denominator of which is the Net Mineral Acres of such Title Benefit Property stated in Exhibit A-1; and
(iv) if the Title Benefit represents a benefit in the ownership or title to the Title Benefit Property of a type not described in subsections (ii) or (iii) above, the Title Benefit Amount shall be determined by taking into account the Allocated Value of the Title Benefit Property, the portion of the Title Benefit Property benefitted by the Title Benefit, the legal effect of the Title Benefit, the potential economic effect of the Title Benefit over the life of the Title Benefit Property, the values placed upon the Title Benefit by Purchasers and Sellers, and such other factors as are necessary to make a proper evaluation.
(d) If the Parties cannot reach an agreement on alleged Title Benefits and Title Benefit Amounts prior to Closing, the provisions of Section 4.4 shall apply.
Section 4.4 Title Disputes.
(a) The Parties shall attempt to agree on all Title Defects, Title Benefits, Title Defect Amounts, and Title Benefit Amounts, respectively, prior to Closing. If the Parties are unable to agree on Title Defects, Title Benefits, Title Defect Amounts, and Title Benefit Amounts, respectively, by the scheduled Closing, then all Deemed Defect Amounts shall be paid into escrow in accordance with Section 4.2(b)(iii). If, on or before the Remedy Deadline, the Parties are unable to agree on an alleged Title Defect/Title Benefit (including, in the case of Title Defects, the adequate cure therefor) or Title Defect Amount/Title Benefit Amount (the “Disputed Title Matters”), such dispute(s), and only such dispute(s), shall be exclusively and finally resolved in accordance with the following provisions of this Section 4.4. By not later than the fifth Business Day following the Remedy Deadline, Sellers shall provide to Purchasers in the case of Title Defects/Title Defect Amounts, and Purchasers shall provide to Sellers in the case of Title Benefit/Title Benefit Amounts, a written notice that such Party is disputing the Disputed Title Matters, together with all supporting documentation for such dispute (with such Party providing the notice being referred to herein as the “Disputing Party”). By not later than 10 Business Days after the other Party’s receipt of the Disputing Party’s written notice, such other Party shall provide to the Disputing Party a written response setting forth the other Party’s position with respect to the Disputed Title Matters together with all supporting documentation.
(b) By not later than 10 Business Days after the Disputing Party’s receipt of the other Party’s written response to the Disputing Party’s written description of the Disputed Title Matters, either Party may initiate a non-administered arbitration of any such dispute(s) conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, to the extent that such rules do not conflict with the terms of this Section 4.4, by written notice (the “Title Arbitration Notice”) to such other Party of any Disputed Title Matters not otherwise mutually resolved or waived that are to be resolved by arbitration (“Final Disputed Title Matters”). Purchasers, with respect to Title Benefits, and Sellers, with respect to Title Defects, shall be deemed to have conclusively waived any dispute or disagreement with respect to unresolved Title Defects or Title Benefits which such Party fails to submit for resolution as provided in this Section 4.4(b) and the Title Defect Amount or Title Benefit Amount, as applicable, set forth in the Title Defect Notice or Title Benefit Notice, respectively, shall be deemed accepted by the Parties.
(c) The arbitration shall be held before a one-member arbitration panel (the “Title Arbitrator”), determined as follows: the Title Arbitrator shall be an attorney with at least 10 years’ experience (i) in the case of Title Defects other than Environmental Defects, examining oil and gas titles in the geographic area where the Assets subject to such dispute are located, and (ii) in the case of Environmental Defects, as an environmental attorney practicing in the geographic area where the Assets subject to such dispute are located; provided, however, that the Title Arbitrator shall not have performed professional services for any Party or any of its Affiliates during the previous five years. Within two Business Days following a Party’s receipt of the Title Arbitration Notice, Sellers and Purchasers shall each exchange lists of three acceptable, qualified arbitrators. Within two Business Days following the exchange of lists of acceptable arbitrators, the Parties shall select by mutual agreement the Title Arbitrator from their original lists of three acceptable arbitrators. If no such agreement is reached within seven Business Days following the delivery of Title Arbitration Notice, each Party shall appoint one arbitrator from their original list and the two appointed arbitrators shall, within two Business Days following their appointment, select an arbitrator from the original lists provided by the Parties to serve as the Title Arbitrator.
(d) Within three Business Days following the selection of the Title Arbitrator, the Parties shall submit one copy to the Title Arbitrator of (i) this Agreement, with specific reference to this Section 4.4 and the other applicable provisions of this Article 4, (ii) the Title Defect Notice or Title Benefit Notice, as applicable, (iii) the Disputing Party’s written notice of the Final Disputed Title Matters, together with the supporting documents that were provided to the other Party, (iv) the other Party’s written response to the Disputing Party’s written description of the Final Disputed Title Matters, together with the supporting documents that were provided to the Disputing Party, and (v) the Title Arbitration Notice. The Title Arbitrator shall resolve the Final Disputed Title Matters based only on the foregoing submissions. Neither Purchasers nor Sellers shall have the right to submit additional documentation to the Title Arbitrator nor to demand discovery on the other Party.
(e) The Title Arbitrator shall make its determination by written decision within 30 days following receipt of the Title Arbitration Notice by Purchasers or Sellers, as applicable
(the “Arbitration Decision”). The Arbitration Decision shall be final and binding upon the Parties, without right of appeal. In making its determination, the Title Arbitrator shall be bound by the provisions of this Article 4. The Title Arbitrator may consult with and engage disinterested Third Parties to advise the Title Arbitrator, but shall disclose to the Parties the identities of such consultants and shall only use such Third Parties to the extent necessary to resolve the Final Disputed Title Matters. Any such consultant shall not have worked as an employee or consultant for any Party or its Affiliates during the five-year period preceding the arbitration nor have any financial interest in the dispute.
(f) The Title Arbitrator shall act as an expert for the limited purpose of determining the specific Disputed Title Matter and shall not be empowered to award damages, interest, or penalties to any Party with respect to any matter.
(g) Each Party shall each bear its own legal fees and other costs of preparing and presenting its case. The fees, costs, and expenses of the Title Arbitrator pursuant to this Section 4.4 shall be borne by Sellers, on the one hand, and the Purchasers, on the other hand, based upon the percentage which the aggregate portion of the contested amount not awarded to each party bears to the aggregate amount actually contested by such Party. For example, if Purchasers claim the Title Defect Amount is $1,000 greater than the amount determined by Sellers, and Sellers contest only $500 of the amount claimed by Purchasers, and if the Title Arbitrator ultimately resolved the dispute by awarding the Sellers $300 of the $500 contested, then the costs and expenses of the Title Arbitrator will be allocated 60% (i.e., 300 ÷ 500) to Purchasers and 40% (i.e., 200 ÷ 500) to Sellers.
(h) The Parties shall implement the Arbitration Decision as follows: (i) in the case of alleged Title Defects determined to be Title Defects, Sellers shall remedy, at their sole election, such Title Defects pursuant to Section 4.2(c) within 10 Business Days following Sellers’ receipt of the Arbitration Decision (with any amounts owed, as a result of such election, to be made and accounted for at the times set forth in Section 4.2(b)(iii) and such remedy and amounts shall be reflected in the calculation, and any further reconciliation, if necessary, shall be completed, under Section 10.4(c)), and (ii) in the case of disputed Title Benefits and Title Benefit Amounts or Title Defect Amounts, any amounts determined to be owed by any Party shall be accounted for at the times set forth in Section 4.2(b)(iii) and such amounts shall be reflected in the calculation, and any further reconciliation, if necessary, shall be completed, under Section 10.4(c). Any alleged Title Defect or Title Benefit determined not to be a Title Defect or Title Benefit (as applicable) under the Arbitration Decision shall be final and binding as not being a Title Defect or Title Benefit, as applicable.
Section 4.5 Limitations on Applicability.
(a) The right of Purchasers or Sellers to assert a Title Defect or Title Benefit, respectively, under this Article 4 shall terminate on the Title Claim Date, except that until the alleged Title Defect, Title Benefit, Title Defect Amount, or Title Benefit Amount, as applicable, is resolved in accordance with this Agreement, there shall be no termination of Purchasers’ or Sellers’ rights under this Article 4 with respect to any alleged Title Defect, Title Benefit, Title Defect Amount, or Title Benefit Amount properly reported in accordance with Section 4.4 on or before the Title Claim Date. Without limiting the foregoing, if a Title Defect under this
Article 4 results from any matter that could also result in the breach of (i) any representation or warranty of Sellers as set forth in Article 5 or (ii) any representation or warranty of R2KLP as set forth in Article 6, and Purchaser asserted such matter as a Title Defect (or raised such matter in any preliminary notice of any Title Defects) in accordance with this Article 4 prior to the Title Claim Date, Purchasers shall only be entitled to assert such matter as a Title Defect to the extent permitted by this Article 4 and, for the avoidance of doubt, shall be precluded from also asserting such matter as the basis of the breach of any such representation or warranty.
(b) Notwithstanding anything to the contrary in this Agreement, in no event shall there be any adjustments to the Unadjusted Purchase Price or other remedies available in respect of (i) Title Defects that are not Environmental Defects under this Article 4 (A) for any Title Defect Amount with respect to an individual Title Defect Property, if such amount does not exceed $30,000 with respect to any Title Defect that is not an Environmental Defect (“Title Defect Threshold”), and (B) unless the amount of all such Title Defect Amounts (provided that each such Title Defect Amount exceeds the Title Defect Threshold) in the aggregate (excluding any Title Defect Amounts with respect to Title Defects cured in accordance with this Article 4) exceeds 1.85% of the Unadjusted Purchase Price (the “Title Defect Deductible”), after which point, subject to the Title Defect Threshold and Section 4.3(b), Purchasers shall be entitled to adjustments to the Unadjusted Purchase Price only with respect to Title Defect Amounts in excess of such Title Defect Deductible and only to the extent that Title Defect Amounts exceed the Title Defect Deductible, or (ii) Title Defects that are Environmental Defects under this Article 4 (A) for any Title Defect Amount with respect to an individual Title Defect Property, if such amount does not exceed $27,000 with respect to any Title Defect that is an Environmental Defect (“Environmental Defect Threshold” ), provided that if the same Environmental Defect affects the same Title Defect Property under the R2KPA MIPA, then such Title Defect Amounts may be aggregated only for purposes of determining if they exceed the Environmental Defect Threshold, and (B) unless the amount of all such Title Defect Amounts (provided that each such Title Defect Amount exceeds the Environmental Defect Threshold) in the aggregate (excluding any Title Defect Amounts with respect to Title Defects cured in accordance with this Article 4) exceeds 1.75% of the aggregate Unadjusted Purchase Prices under this Agreement and the R2KPA MIPA (the “Environmental Defect Deductible”), after which point, subject to the Environmental Defect Threshold and Section 4.3(b), Purchasers shall be entitled to adjustments to the Unadjusted Purchase Price only with respect to Title Defect Amounts in excess of the Environmental Defect Deductible and only to the extent that Title Defect Amounts exceed the Environmental Defect Deductible, provided that any Title Defect Amount adjustments to the Unadjusted Purchase Price resulting from the same Environmental Defect affecting the same Title Defect Property under this Agreement and the R2KPA MIPA shall be allocated 20% to this Agreement and 80% to the R2KPA MIPA.
(c) Notwithstanding anything herein to the contrary, neither the Title Defect Threshold nor the Title Defect Deductible shall apply to (or otherwise limit) Title Defects that are not Environmental Defects to the extent such Title Defects (i) would constitute a breach of the representation in Section 6.27 if a Third Party were to make a claim with respect to the circumstances constituting such Title Defect, and the Unadjusted Purchase Price shall be adjusted by the full Title Defect Amount for any such Title Defect (ii) result from, arise out of or relate to the conveyances delivered pursuant to that certain Amended and Restated Contribution Agreement dated effective January 1, 2022, between R2KLP and the Company.
(d) Without prejudice to any of the other dates by which performance or the exercise of rights is due hereunder, or the Parties’ rights or obligations in respect thereof, the Parties hereby acknowledge that, as set forth more fully in Section 14.13, time is of the essence in performing their obligations and exercising their rights under this Article 4, and, as such, subject to Section 1.2, each and every date and time by which such performance or exercise is due shall be the firm and final date and time.
Section 4.6 Consents to Assignment and Preferential Rights to Purchase.
(a) No later than two Business Days after the Execution Date, Sellers shall (or shall cause the Company to) prepare and send (i) notices to the holders of any required consents to the transactions contemplated hereunder (including the Specified Consent Requirements that are set forth on Schedule 6.13) requesting such consents and (ii) notices to the holders of any applicable preferential rights to purchase, options, puts or calls, rights of first refusal or similar rights (in each case excluding hedges) triggered by the transactions contemplated hereunder that are set forth on Schedule 6.13 (“Preferential Rights”) in compliance with the terms of such rights and requesting waivers of such rights. Sellers shall use Commercially Reasonable Efforts to cause such consents and waivers of Preferential Rights (or the exercise thereof) to be obtained and delivered prior to Closing, provided that Sellers and the Company shall not be required to make payments or undertake obligations to or for the benefit of the holders of such rights in order to obtain the required consents and waivers. Purchasers shall, and after the Closing shall cause the Company to, cooperate with Sellers in seeking to obtain such consents and waivers of Preferential Rights and, to the extent required to obtain the consent of any counterparty to a Specified Midstream Contract set forth on Schedule 6.13, on or prior to Closing, Purchasers shall (and if applicable, shall cause their Affiliates (including, after the Closing, the Company) to) provide any bonds, letters of credit, guarantees, credit support and any other assurances as to financial capability, resources, and creditworthiness required in order for such counterparty to provide its consent to the transactions contemplated by this Agreement. Any Preferential Right must be exercised subject to all terms and conditions set forth in this Agreement, including the successful Closing of this Agreement pursuant to Article 10. The consideration payable under this Agreement for any particular Asset for purposes of Preferential Right notices shall be the Allocated Value for such Asset, subject to adjustment pursuant to Section 3.3. If, prior to the Closing Date, any Party discovers any required consents or Preferential Rights for which notices have not been delivered pursuant to the first sentence of this Section 4.6(a), then (x) the Party making such discovery shall provide the other Party with written notification of such consents or Preferential Rights, as applicable, (y) Sellers, following delivery or receipt of such written notification, will promptly send (or cause the Company to send) notices to the holders of the required consents requesting such consents and notices to the holders of Preferential Rights in compliance with the terms of such rights and requesting waivers of such rights, and (z) the terms and conditions of this Section 4.6 shall apply to the Assets subject to such consents or Preferential Rights, as applicable.
(b) In no event shall there be included in the transactions contemplated hereunder any Company Interests or Asset for which a Specified Consent Requirement has not been satisfied, and, notwithstanding anything to the contrary in this Agreement, Sellers shall have the right to (or to cause the Company to) convey such Company Interests or Assets to any member of the Seller Group prior to or simultaneously with the Closing in accordance with this
Section 4.6. In cases in which the Asset subject to a Specified Consent Requirement is a Contract and Purchasers obtain ownership of the Property or Properties to which the Contract relates (either directly or through the acquisition of the Company Interests), but the Contract is withheld from the transactions contemplated hereunder due to the unwaived Specified Consent Requirement, (i) Sellers shall continue after Closing to use Commercially Reasonable Efforts to satisfy the Specified Consent Requirement so that such Contract can be transferred to a Purchaser (or their designee) upon receipt of the Specified Consent Requirement, (ii) the Contract shall be held by Sellers for the benefit of Purchasers until the Specified Consent Requirement is satisfied or the Contract has terminated, and (iii) Purchasers shall pay all amounts due thereunder, perform all obligations thereunder and indemnify Sellers against any Damages incurred or suffered by Sellers as a consequence of remaining a party to such Contract until the Specified Consent Requirement is satisfied or the Contract has terminated. In cases in which the Asset subject to such a Specified Consent Requirement is a Property and such consent is not satisfied by Closing, the affected Property and the Assets related to that Property shall be withheld from the transactions contemplated hereby, shall be Excluded Assets hereunder, and the Unadjusted Purchase Price shall be reduced by the Allocated Value of the Property and related Assets. If an unsatisfied Specified Consent Requirement with respect to which an adjustment to the Unadjusted Purchase Price is made under Section 3.3 is subsequently satisfied prior to the date of delivery of the final settlement statement under Section 10.4(c), a separate closing shall be held within five Business Days thereof at which (A) Sellers shall convey the affected Property and related Assets to a Purchaser (or Purchasers’ designee) in accordance with this Agreement and (B) Purchasers shall pay an amount equal to the Allocated Value of such Property and related Assets, adjusted in accordance with Section 3.3, to Sellers, and following which such Property shall no longer be an Excluded Asset but shall be an Asset hereunder. If such consent requirement is not satisfied by the date of delivery of the final settlement statement under Section 10.4(c), Sellers shall have no further obligation to sell and convey such Property and related Assets and Purchasers shall have no further obligation to purchase, accept, and pay for such Property, and the affected Property and related Assets shall be deemed to be deleted from the applicable Exhibits and Schedules to this Agreement for all purposes.
(c) If any Preferential Right is exercised prior to Closing, Sellers shall have the right to cause the Company to convey the affected Assets to the exercising party prior to or simultaneously with the Closing on the terms and conditions set out in the applicable Preferential Right provision and the Unadjusted Purchase Price shall be decreased by the Allocated Value for the affected Assets, and such affected Assets shall be deemed to be deleted from the applicable Exhibits and Schedules to this Agreement and shall thereafter constitute Excluded Assets for all purposes. Sellers shall retain the consideration paid by the Third Party and shall have no further obligation with respect to such affected Assets under this Agreement. Should (i) a Third Party fail to exercise or waive its Preferential Right to purchase as to any portion of the Assets prior to Closing, and (A) the time for exercise or waiver has not yet expired by Closing or (B) the validity of the exercise is being contested by Sellers or Purchasers, or (ii) a Third Party exercise its Preferential Right to purchase as to any portion of the Assets prior to the Closing, but such Assets are not conveyed prior to or simultaneously with the Closing, then, in each case, there shall be no adjustment to the Unadjusted Purchase Price on account thereof and, if Closing occurs, Purchasers shall cause the Company to comply with the terms and provisions set out in the applicable Preferential Right provision and shall be entitled to the consideration paid by such Third Party.
Section 4.7 Casualty or Condemnation Loss. If, after the Execution Date, but prior to the Closing Date, any portion of the Assets is damaged, destroyed, or made unavailable or unusable for the intended purpose by fire or other casualty or is taken in condemnation or under right of eminent domain (each a “Casualty Loss”), subject to Section 9.2(e), Sellers shall promptly notify Purchasers in writing thereof and Purchasers shall nevertheless be required to close. Furthermore, at or prior to Closing, Sellers shall elect in writing to either (a) restore the Assets affected by such Casualty Loss to substantially their condition as of the Execution Date as promptly as practicable following the Closing or (b) adjust the Unadjusted Purchase Price downward by the amount of the reasonable estimated losses to the Assets as a result of such Casualty Losses. In either event, Sellers shall retain all sums paid by Third Parties by reason of such Casualty Losses and all rights in and to any insurance claims, unpaid awards and other rights, in each case, against Third Parties arising out of such Casualty Losses. Further, in the event clause (a) above is applicable, Purchasers agree to reasonably cooperate (and to cause the Company to reasonably cooperate), in each case at no cost to Purchasers or the Company, as applicable, with Sellers, including by giving Sellers reasonable access to the affected Assets to the extent necessary or convenient to facilitate Sellers’ efforts to restore such affected Assets.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLERS
Section 5.1 Generally.
(a) Any representation or warranty in this Article 5 qualified to the “knowledge of such Seller” or “to such Seller’s knowledge” or with any similar knowledge qualification is limited to matters within the Actual Knowledge of the individuals listed in Schedule 5.1. As used herein, the term “Actual Knowledge” means information personally known by such individual, without a duty of inquiry or investigation.
(b) Subject to the foregoing provisions of this Section 5.1 and the matters specifically set forth on the Schedules attached to this Agreement, each Seller represents and warrants to Purchasers the matters set forth in Section 5.2 through Section 5.10 on the Execution Date and the Closing Date (except for the representations and warranties that refer to a specified date, which will be deemed made as of such date).
Section 5.2 Existence and Qualification. Such Seller is duly formed, validly existing and in good standing under the Laws of the state of its formation and is duly qualified to do business in all jurisdictions in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary.
Section 5.3 Power. Such Seller has the requisite organizational power to enter into and perform this Agreement and each Transaction Document to which such Seller is or will be a party and to consummate the transactions contemplated by this Agreement and such other Transaction Documents.
Section 5.4 Authorization and Enforceability. The execution, delivery, and performance of this Agreement, all documents required to be executed and delivered by such Seller at Closing and all other Transaction Documents to which such 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 corporate, limited partnership, or limited liability company action, as applicable, on the part of such Seller. This Agreement has been duly executed and delivered by such Seller (and all documents required hereunder to be executed and delivered by such Seller at Closing and all other Transaction Documents will be duly executed and delivered by such Seller) and this Agreement constitutes, and at the Closing such other documents to be executed and delivered by such Seller at Closing will constitute, the valid and binding obligations of such 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).
Section 5.5 No Conflicts. Except as set forth on Schedule 5.5, and subject to compliance with the HSR Act, the execution, delivery, and performance of this Agreement and the other Transaction Documents by such Seller, and the transactions contemplated hereby and thereby, will not (a) violate any provision of the Organizational Documents of such Seller, (b) result in a material default (with or without due notice or lapse of time or both) or, except for Permitted Encumbrances, 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 such Seller is a party, (c) violate any judgment, order, writ, injunction, ruling, or decree in any material respect applicable to such Seller as a party in interest, or (d) violate any Laws in any material respect applicable to such Seller.
Section 5.6 Capitalization.
(a) Such Seller is the direct owner, holder of record and beneficial owner of its respective portion of the Company Interests as set forth on Schedule 6.5, free and clear of all Encumbrances other than those arising pursuant to or described in (i) the Organizational Documents of the Company (the “Company Organizational Documents”), or (ii) applicable securities Laws.
(b) At the Closing, the delivery by such Seller to Purchasers of the Assignment Agreement will vest Purchasers with good and valid title to such Seller’s respective portion of the Company Interests free and clear of all Encumbrances, other than restrictions generally arising under the Company Organizational Documents and applicable securities Laws.
Section 5.7 Liability for Brokers’ Fees. Purchasers shall not directly or indirectly have any responsibility, liability, or expense, as a result of undertakings or agreements of such Seller or any of 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 5.8 Litigation. Except as set forth on Schedule 5.8, there are no actions, suits, proceedings, or causes of action pending before any Governmental Body or arbitrator, or to such Seller’s knowledge, threatened in writing, with respect to such Seller seeking to obtain material Damages in connection with, or to prevent the consummation of the transactions contemplated by this Agreement or any other Transaction Document, or which is reasonably likely to materially impair or delay such Seller’s ability to perform its obligations under this Agreement or any other Transaction Document.
Section 5.9 Bankruptcy. There are no bankruptcy, insolvency, reorganization, receivership, or similar proceedings pending against, being contemplated by, or, to such Seller’s knowledge, threatened against such Seller.
Section 5.10 Investment Intent. Such Seller (a) is an experienced and knowledgeable investor, (b) is able to bear the economic risks of an acquisition and ownership of the CHK Common Stock comprising the Stock Purchase Price, (c) has such knowledge and experience in business and financial matters so that such Seller is capable of evaluating (and has evaluated) the merits and risks of an investment in the CHK Common Stock being acquired hereunder, (d) is an “accredited investor,” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act, (e) is acquiring the shares of CHK Common Stock comprising the Stock Purchase Price for its own account and not with a view toward or for sale associated with any distribution thereof, nor with any present intention of making a distribution thereof in violation of the Securities Act and applicable state securities Laws, and (f) acknowledges and understands that (i) the shares of CHK Common Stock comprising the Stock Purchase Price have not been registered under the Securities Act in reliance on an exemption therefrom and (ii) each of the shares of CHK Common Stock comprising the Stock Purchase Price will, upon its acquisition by such Seller, be characterized as “restricted securities” under state and federal securities Laws and may not be sold, transferred, offered for sale, pledged, hypothecated, or otherwise disposed of without registration under the Securities Act and any applicable foreign and state securities Laws, except under an exemption from such registration under the Securities Act and such Laws.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY AND THE ASSETS
Section 6.1 Generally.
(a) Any representation or warranty qualified to the “knowledge of R2KLP” or “to R2KLP’s knowledge” or with any similar knowledge qualification is limited to matters within the Actual Knowledge of the individuals listed in Schedule 6.1. As used herein, the term “Actual Knowledge” means information personally known by such individual, without a duty of inquiry or investigation.
(b) Subject to the foregoing provisions of this Section 6.1 and the exceptions and matters specifically set forth on the Schedules attached to this Agreement, R2KLP represents and warrants to Purchasers the matters set forth in Section 6.2 through Section 6.35 on the Execution Date and the Closing Date (except for the representations and warranties that refer to a specified date, which will be deemed made as of such date).
Section 6.2 Existence and Qualification. The Company is a limited liability company duly formed, validly existing and in good standing under the Laws of the state of Texas, and is duly qualified to do business in all jurisdictions in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary.
Section 6.3 Power. The Company has all requisite organizational power to own and lease its properties, including the Assets, and to carry on its business as is now 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 the Company.
Section 6.4 No Conflicts. Except as set forth on Schedule 6.4 and subject to compliance with the HSR Act, the execution, delivery, and performance of this Agreement and the other Transaction Documents by R2KLP, and the transactions contemplated hereby and thereby, will not (a) violate any provision of the Company Organizational Documents, (b) result in a material default (with or without due notice or lapse of time or both) or, except for Permitted Encumbrances, 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 the Company is a party or that affects the Company Interests or the Assets, (c) violate any judgment, order, writ, injunction, ruling, or decree in any material respect applicable to the Company as a party in interest, or (d) violate any Laws in any material respect applicable to the Company or the Assets.
Section 6.5 Capitalization.
(a) Schedule 6.5 sets forth a true and complete list that accurately reflects all of the issued and outstanding Interests of the Company, and the record and beneficial owners thereof.
(b) Except for the Company Interests set forth on Schedule 6.5, the Company has not issued or agreed to issue any: (i) Interests; (ii) option, warrant, subscription, call or option, or any right or privilege capable of becoming an agreement or option, for the purchase, subscription, allotment or issue of any Interests of the Company; (iii) stock appreciation right, phantom stock, interest in the ownership or earnings of the Company or other equity equivalent or equity-based award or right; or (iv) bond, debenture or other Indebtedness having the right to vote or convertible or exchangeable for Interests having the right to vote.
(c) Without limiting the generality of the foregoing, none of the Company Interests are subject to any voting trust, member or partnership agreement or voting agreement or other agreement, right, instrument or understanding with respect to any purchase, sale, issuance, transfer, repurchase, redemption or voting of any Company Interests, other than as set forth on Schedule 6.5.
(d) The Company Interests are duly authorized, validly issued, fully paid and nonassessable, and were not issued in violation of any preemptive rights, rights of first refusal, right of first offer, purchase option, call option, or other similar rights of any Person.
(e) True, correct, and complete copies of the Company Organizational Documents have been made available to Purchasers and reflect all material amendments and modifications made thereto at any time prior to the Execution Date.
Section 6.6 Subsidiaries. The Company does not own, either directly or indirectly, any Interests in any Person.
Section 6.7 Litigation. Except as set forth on Schedule 6.7, there are no actions, suits, proceedings, or causes of action pending before any Governmental Body or arbitrator, or to R2KLP’s knowledge, threatened in writing, with respect to the Assets or the Company or otherwise directly related to the Assets or the Company’s ownership of the Assets.
Section 6.8 Taxes and Assessments.
(a) All material Taxes that have become due and payable by or with respect to the Company have been timely paid.
(b) All Tax Returns that are required to be filed by the Company have been timely filed with the appropriate Governmental Body, and all such Tax Returns are true, correct and complete in all material respects.
(c) (i) No Tax action, suit, Governmental Body proceeding, or audit is now in progress or pending with respect to the Company, and (ii) neither R2KLP nor the Company has received written notice of any pending claim against the Company from any applicable Governmental Body for assessment of Taxes.
(d) All material Taxes that the Company has been required to collect or withhold in connection with the business of the Company have been duly collected or withheld and have been timely and duly paid to the proper Governmental Body.
(e) No statute of limitations in respect of Taxes of the Company has been waived, to the extent such waiver remains outstanding.
(f) There are no Encumbrances for Taxes upon any Asset of the Company, other than liens for Taxes not yet due and payable or Taxes that are being contested in good faith by appropriate actions.
(g) The Company has not engaged in any “listed transaction” within the meaning of Treasury Regulation Section 1.6011-4(b)(2).
(h) The Company is, and has at all times since its formation been, classified as a partnership for U.S. federal income tax purposes.
(i) No claim has been made in writing by a Governmental Body in a jurisdiction where Tax Returns of the Company or the Assets are not filed, that the Company is or may be subject to taxation by, or required to file any Tax Return in, that jurisdiction.
(j) [Reserved.]
(k) To the extent applicable, the Company has not (i) failed to comply in any material respect with any applicable requirements under Section 2302 of the CARES Act (or any similar provision of state or local law); (ii) failed to comply in any material respect with any applicable legal requirements under Sections 7001 through 7005 of the Families First Coronavirus Response Act and Section 2301 of the CARES Act (or any similar provision of state or local law); (iii) deferred any payroll tax obligations (including those imposed by Sections
3101(a) and 3201 of the Code) pursuant to IRS Notice 2020-65 or IRS Notice 2021-11; or (iv) deferred the payment of any material Taxes under any state or local law enacted in response to the COVID-19 pandemic (to the extent such deferred Taxes have not been paid as of the Effective Time).
(l) The Company is not a party to or bound by any Tax allocation, sharing or indemnity agreements or arrangements (excluding, for the avoidance of doubt, any commercial agreements or contracts that are not primarily related to Taxes). The Company does not have any liability for the Taxes of any Person under Treasury Regulations Section 1.1502-6 (or any corresponding provisions of state, local or foreign Tax law), or as a transferee or successor, or by contract or otherwise.
(m) 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 under Subchapter K of Chapter 1 of Subtitle A of the Code (excluding, for the avoidance of doubt, the Company, which is classified as a partnership for U.S. federal income tax purposes).
This Section 6.8 and Section 6.22 shall be the exclusive representations and warranties of R2KLP with respect to Tax matters, and no other representations and warranties are made in this Agreement by Sellers with respect to such matters.
Section 6.9 Capital Commitments. Except as set forth on Schedule 6.9, as of the Execution Date, there were no outstanding AFEs or other capital commitments to Third Parties that were binding on the Assets or the Company and could reasonably be expected to require expenditures by the Company after the Execution Date in excess of $50,000, net to the interests of the Company.
Section 6.10 Compliance with Laws. The Company is in compliance with all applicable Laws in all material respects. To R2KLP’s knowledge, the Assets operated by Third Parties (other than Assets operated by the Purchaser Group) are being operated in compliance with, all applicable Laws in all material respects. This Section 6.10 does not include any matters with respect to Environmental Laws, which are exclusively addressed in Article 4 and Section 6.16, or Tax matters, which are exclusively addressed in Section 6.8 and Section 6.22.
Section 6.11 Material Contracts.
(a) Schedule 6.11 sets forth all Contracts as of the Execution Date of the type described below, in each case, (x) to which the Company is a party (or is a successor or assign of a party) and (y) which will be binding on the Company or the Assets after the Closing (collectively, the “Material Contracts”):
(i) any Contract that can reasonably be expected to result in aggregate payments by the Company of more than $50,000, net to the Company’s interest, during the current or any subsequent calendar year (in each case based solely on the terms thereof and current volumes, without regard to any expected increase in volumes or revenues), except for (A) any Contract that terminates or can be terminated by the Company on not greater than 60 days’ notice, and (B) customary joint operating agreements entered into in the ordinary course of business;
(ii) any Contract that can reasonably be expected to result in aggregate revenues to the Company of more than $50,000, net to the Company’s interest, during the current or any subsequent calendar year (in each case, based solely on the terms thereof and current volumes, without regard to any expected increase in volumes or revenues), except for (A) any Contract that terminates or can be terminated by the Company on not greater than 60 days’ notice, and (B) customary joint operating agreements entered into in the ordinary course of business;
(iii) any Hydrocarbon purchase and sale, storage, marketing, transportation, processing, gathering, treatment, separation, compression, or similar Contract, except for any Contract that terminates or can be terminated by the Company on not greater than 60 days’ notice;
(iv) any Contract that is an indenture, mortgage, loan, credit agreement, sale-leaseback, guaranty of any obligation, bond, letter of credit or similar Contract;
(v) any Contract that constitutes a lease under which the Company is the lessor or the lessee of real or personal property which lease involves an annual base rental of more than $50,000, except for any Contract that terminates or can be terminated by the Company on not greater than 60 days’ notice;
(vi) any farmout or farmin agreement, participation agreement, partnership agreement, joint venture agreement, exploration agreement, development agreement, joint operating agreement (other than customary joint operating agreements entered into in the ordinary course of business), unit agreement (other than customary unit agreements entered into in the ordinary course of business), or similar Contract;
(vii) any Contract that (A) contains or constitutes an existing area of mutual interest agreement or (B) includes non-competition restrictions or other similar restrictions on doing business;
(viii) any Contract of the Company 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;
(ix) any Contract between the Company and any Seller or Affiliate of such Seller that will not be terminated prior to Closing;
(x) any Contract that contains calls upon or options to purchase production, or is a dedication of production or otherwise requires production to be transported processed or sold in a particular fashion or requires the payment of deficiency payments if specified production volume levels are not achieved;
(xi) any Contract that would obligate Purchasers to drill additional wells or conduct other material development operations after the Closing;
(xii) any Contract that provides for the maintenance of credit support by Sellers or the Company not otherwise set forth on Schedule 1.1 or Schedule 6.20;
(xiii) any Contract that is a seismic or other geophysical acquisition agreement;
(xiv) any Contract relating to the pending acquisition (direct or indirect) by the Company of any material properties or any operating business or the capital stock of any other Person; and
(xv) any Contract that would give rise to the payment of a fee, penalty or similar obligation upon the closing of the transactions contemplated hereby.
(b) As of the Execution Date, the Material Contracts are in full force and effect as to the Company and, to R2KLP’s knowledge, each counterparty (excluding any Material Contract that terminates as a result of expiration of its existing term). Except as set forth on Schedule 6.11, there exists no default in any material respect under any Material Contract by the Company or, to R2KLP’s knowledge, by any other Person that is a party to such Material Contract and no event has occurred that with notice or lapse of time or both would constitute any material default under any such Material Contract by the Company or, to R2KLP’s knowledge, any other Person who is a party to such Material Contract. Prior to the execution of this Agreement, R2KLP has made available to Purchasers complete copies of each Material Contract and all material amendments thereto.
Section 6.12 Payments for Production and Imbalances. Except as set forth on Schedule 6.12, (a) the Company is not obligated by virtue of any take-or-pay payment, advance payment, or other similar payment (other than (i) royalties, overriding royalties, and similar arrangements reflected in the Net Revenue Interest figures set forth on Exhibit A-1 or Exhibit A-2 (as applicable); (ii) rights of any lessor to take free gas under the terms of the relevant Lease for its use on the lands covered thereby; (iii) gas balancing arrangements; and (iv) non-consent provisions in the Contracts) to deliver Hydrocarbons, or proceeds from the sale thereof, attributable to the Properties at some future time without receiving payment therefor at or after the time of delivery, and (b) there are not any Imbalances attributable to the Properties.
Section 6.13 Consents and Preferential Purchase Rights. Except as set forth on Schedule 6.13, and subject to compliance with the HSR Act, none of the Assets, or any portion thereof, is subject to any Preferential Right or Specified Consent Requirement that may be applicable to the transactions contemplated by this Agreement, except consents that are customarily obtained after Closing (including Customary Post-Closing Consents).
Section 6.14 Non-Consent Operations. Except as set forth on Schedule 6.14 or otherwise reflected on Exhibit A-1 or Exhibit A-2, as applicable, as of the Execution Date, no operations are being conducted or have been conducted on the Properties with respect to which the Company has elected to be a non-consenting party under the applicable operating agreement and with respect to which all of the Company’s rights have not yet reverted to it.
Section 6.15 Plugging and Abandonment. Except as set forth on Schedule 6.15, to the knowledge of R2KLP: (a) the Company has not received any written notices or demands from Governmental Bodies or other Third Parties to plug or abandon any Wells,
(b) there are no Wells that the operator thereof is currently obligated by applicable Law to plug and abandon that have not been plugged and abandoned in accordance in all material respects with applicable Law, (c) the Wells that are neither in use for purposes of production or injection, nor temporarily suspended or temporarily abandoned in accordance with applicable Law, have been plugged and abandoned to the extent required by, and in accordance in all material respects with, applicable Law.
Section 6.16 Environmental Matters. Except as set forth on Schedule 6.16, as of the Execution Date, (a) to the knowledge of R2KLP, with regard to Properties operated by Third Parties, the Properties and the operation thereof are and during the three year time period prior to the Execution Date have been in compliance with applicable Environmental Laws, including any environmental Permits, in all material respects, (b) neither the Company, and to R2KLP’s knowledge, nor any Third Party operator, has received any written notice of material violation of any Environmental Laws relating to the Assets where such violation has not been previously cured or otherwise resolved to the satisfaction of the relevant Governmental Body, (c) with respect to the three year time period prior to the Execution Date, R2KLP has provided Purchasers with copies of all material reports and correspondence addressing the environmental condition of the Assets that are in R2KLP’s or its Affiliates’ possession or control, and (d) with respect to the Properties, the Company has not entered into, or is subject to, any agreements, consents, orders, decrees, judgments, license or permit conditions, or other directives of any Governmental Body that are in existence as of the Execution Date, that are based on any Environmental Laws and that relate to the future use of any of the Properties and that require any change in the present condition of any of the Properties. Notwithstanding any provision in this Agreement to the contrary, this Section 6.16 shall be the exclusive representations and warranties of R2KLP with respect to Environmental Laws, Environmental Liabilities, and other environmental matters, and no other representations or warranties are made in this Agreement by Sellers with respect to such matters.
Section 6.17 Suspense Funds; Royalties; Expenses. Except as set forth on Schedule 6.17, as of the Execution Date, the Company does not hold any Third Party funds in suspense with respect to production of Hydrocarbons from any of the Assets (collectively, “Suspense Funds”) other than amounts less than the statutory minimum amount that the Company is permitted to accumulate prior to payment. To R2KLP’s knowledge, except for Suspense Funds held by Third Party operators, all royalties, overriding royalties, and other burdens upon, measured by, or payable out of production and other interest owners’ revenues or proceeds attributable to sales of Hydrocarbons produced from or attributable to the Assets in accordance with applicable Leases and Laws, in each case, due by the Company have been properly and timely paid. Subject to the foregoing, to R2KLP’s knowledge, no material expenses (including bills for labor, materials and supplies used or furnished for use in connection with the Assets) are owed and delinquent in payment by the Company that relate to the ownership of the Assets.
Section 6.18 [Reserved.]
Section 6.19 Bankruptcy. There are no bankruptcy, insolvency, reorganization, receivership, or similar proceedings pending against, being contemplated by, or, to R2KLP’s knowledge, threatened against the Company.
Section 6.20 Credit Support. Schedule 6.20 contains a true and complete list of all surety bonds, letters of credit, guarantees, and other forms of credit support currently maintained, posted, or otherwise provided by the Company with respect to the Assets.
Section 6.21 Bank Accounts. Schedule 6.21 sets forth a true, complete, and correct list of (a) all bank accounts or safe deposit boxes under the control or for the benefit of the Company (including the names of the financial institutions maintaining each such account, and the purpose for which such account is established), (b) the names of all persons authorized to draw on or have access to such accounts and safe deposit boxes, and (c) all outstanding powers of attorney or similar authorizations granted by or with respect to the Company.
Section 6.22 Employee Benefit Matters. The Company does not maintain or operate any Benefit Plans. The Company has not maintained, established, sponsored, participated in, or contributed to, or had any obligation or liability to, any (a) plan which is an “employee pension benefit plan,” within the meaning of Section 3(2) of ERISA, that is subject to Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code, (b) “funded welfare plan” within the meaning of Section 419 of the Code, (c) “multiple employer welfare benefit arrangement” as described in Section 3(40)(A) of ERISA, or (d) “multiemployer plan,” as defined in Section 3(37) of ERISA. The Company has not incurred, nor does it expect to incur, any liability under Title IV of ERISA or Section 412 of the Code.
Section 6.23 Employment and Labor Matters.
(a) There are no employees of the Company or contingent workers or contractors who primarily provide services either to the Company or in connection with the Assets.
(b) The Company is not a party to any labor or collective bargaining contract and, to the knowledge of R2KLP, there have been no activities by any labor union to organize any employees of the Company since January 1, 2020. There are no civil, criminal or administrative claims, actions, cases, grievances, investigations, audits, suits, arbitrations, mediations, causes of action or other proceedings by or before any Governmental Body or any arbitrator or, to R2KLP’s knowledge, threatened in writing, concerning labor, employment or pay matters with respect to the Company, any of its employees or any contingent workers or contractors. The Company has not made any commitments or representations to any Person regarding (i) potential employment by Purchasers or any Affiliate of Purchasers, or (ii) any terms and conditions of such potential employment by Purchasers or any Affiliate thereof.
(c) Since January 1, 2020, to R2KLP’s knowledge, there has not been any proceeding relating to, or any act or allegation of or relating to, sex-based discrimination, sexual harassment or sexual misconduct, or breach of any sex-based discrimination, sexual harassment or sexual misconduct policy of the Company, in each case involving the Company or its employees, nor has there been, to the knowledge of R2KLP, any settlement or similar out-of-court or pre-litigation arrangement relating to any such matters, nor to the knowledge of R2KLP has any such proceeding been threatened.
Section 6.24 Insurance. Schedule 6.24 sets forth a true and complete list of all material insurance policies in force with respect to the Company or under which the Assets are insured, copies of which have been made available to Purchasers.
As of the Execution Date, all of such policies are in full force and effect and there is no material claim pending under any such policies as to which coverage has been denied by the insurer other than customary indications as to reservation of rights by insurers and the Company has not received written notice of cancellation of any such insurance policies.
Section 6.25 [Reserved.]
Section 6.26 Books and Records. All books and records of the Company are being maintained and, to the knowledge of R2KLP, have been maintained by the Company in accordance with all applicable Law in all material respects and in the ordinary course of business consistent with past practice. The minute books of the Company contain true, complete and accurate records of all meetings and accurately reflect all other actions taken by the (a) members or other equity holders and (b) board of managers, officers, or similar governing body and all committees of the Company.
Section 6.27 Special Warranty. Subject to the Permitted Encumbrances, as of the Title Claim Date and the Closing Date, the Company holds Defensible Title to the Leases and Wells from and against the claims of any and all Persons claiming or to claim the same or any part thereof, in each case, by, through and/or under the Company or its Affiliates, but not otherwise.
Section 6.28 Oil and Gas Properties. No Seller, nor any Affiliate of a Seller (other than the Company), owns any interest in the Properties.
Section 6.29 Permits. Any material Permit required for the ownership of the Assets is in full force and effect and has been duly and validly issued. There are no outstanding violations in any material respect of any of the material Permits required of the ownership of the Assets.
Section 6.30 Sufficiency of Assets. To R2KLP’s knowledge, as of the Execution Date, (a) the Properties are, in all material respects, in an operable state of repair adequate to maintain normal operations consistent with past practices, ordinary wear and tear excepted and (b) the Properties constitute and include, in all material respects, all of the assets necessary for the conduct of the Company’s business, as currently conducted, with respect to the ownership of the Properties.
Section 6.31 Wells To R2KLP’s knowledge, no Well (other than Wells operated by the Purchaser Group), is subject to material penalties on allowable production because of any overproduction.
Section 6.32 Leases. Except as reflected on Schedule 6.7, (a) there is no material default under any of the Leases, (b) the Company has not received written notice from a lessor of any requirements or demands to drill additional wells on any of the Leases, which requirements or demands have not been resolved in writing, and (c) no party to any Lease or any successor to the interest of such party has filed or threatened to file any action to terminate, cancel, rescind or procure judicial reformation of any Lease.
Section 6.33 Condemnation; Casualty Loss. As of the Execution Date, there is no actual or, to R2KLP’s knowledge, threatened in writing, taking (whether permanent, temporary, whole, or partial) of any material part of the Properties by reason of condemnation or the threat of condemnation.
As of the Execution Date, there has been no Casualty Loss since the Effective Time with respect to any Property with damages estimated to exceed $1,000,000 net to the interest of the Company.
Section 6.34 Specified Matters. There are no Damages incurred by, suffered by or owing by the Company caused by, arising out of, or resulting from the following matters, to the extent attributable to the ownership of any of the Properties:
(a) except with respect to any Casualty Losses, any Third Party injury or death, or damage of Third Party properties (excluding any such property damage that is related to or caused by any Environmental Defect or properly charged or chargeable to the joint account by the operator under the applicable operating or unit agreement) occurring on or with respect to the ownership of any Properties prior to the Closing Date;
(b) any material civil fines or penalties or criminal sanctions imposed on the Company, to the extent resulting from any pre-Closing violation of Law (including any Environmental Law);
(c) any transportation or disposal of Hazardous Substances (other than Hydrocarbons) from any Property to a site that is not a Property prior to Closing that would be in material violation of applicable Environmental Law or that would arise out of a material liability under applicable Environmental Law; or
(d) any of the Excluded Assets.
Section 6.35 Absence of Certain Developments. Except as expressly contemplated by this Agreement, since December 31, 2020 and until the Execution Date, there has not occurred any event, change, occurrence, or circumstance that, individually or in the aggregate with any other events, changes, occurrences, or circumstances, has had a Material Adverse Effect.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
Section 7.1 Generally. Each Purchaser (on behalf of itself only) represents and warrants to Sellers the matters set forth in Section 7.2 through Section 7.14 on the Execution Date and the Closing Date (except for representations and warranties that refer to a specified date, which will be deemed made as of such date). CHK Parent represents and warrants to Sellers on the matters set forth in Section 7.15 through Section 7.19 on the Execution Date and the Closing Date (except for representations and warranties that refer to a specified date, which will be deemed made as of such date).
Section 7.2 Existence and Qualification. Such Purchaser is validly existing and in good standing under the Laws of the state of its formation and is duly qualified to do business in all jurisdictions in which the Assets are located and has, or as of the Closing will have, complied with all necessary requirements of Governmental Bodies required for such Purchaser’s ownership and operation of the Company Interests and the Assets, as applicable.
Section 7.3 Power. Such Purchaser has the requisite power to enter into and perform this Agreement and each other 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.
Section 7.4 Authorization and Enforceability. The execution, delivery, and performance of this Agreement, all documents required to be executed and delivered by such Purchaser at Closing and all other Transaction Documents to which such Purchaser 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, corporate, or partnership action on the part of such Purchaser. This Agreement has been duly executed and delivered by such Purchaser (and all documents required hereunder to be executed and delivered by such Purchaser at Closing and all other Transaction Documents will be duly executed and delivered by such Purchaser) and this Agreement constitutes, and at the Closing such documents to be executed and delivered by such Purchaser at Closing will constitute, the valid and binding obligations of such Purchaser, 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 7.5 No Conflicts. Subject to compliance with the HSR Act, the execution, delivery, and performance of this Agreement and the other Transaction Documents by such Purchaser, and the transactions contemplated hereby and thereby, will not (a) violate any provision of the certificate of incorporation, bylaws, agreement of limited partnership, or other Organizational Documents of such Purchaser, (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 of the terms, conditions, or provisions of any note, bond, mortgage, indenture, license, or other financing instrument to which such Purchaser is a party, (c) violate any judgment, order, ruling, or regulation applicable to such Purchaser as a party in interest, or (d) violate any Laws applicable to such Purchaser or any of its assets.
Section 7.6 Liability for Brokers’ Fees. Sellers shall not directly or indirectly have any responsibility, liability, or expense, as a result of undertakings or agreements of such Purchaser or any of 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 7.7 Litigation. There are no actions, suits, or proceedings pending, or to such Purchaser’s knowledge, threatened in writing, before any Governmental Body or arbitrator against such Purchaser that are reasonably likely to materially impair such Purchaser’s ability to perform its obligations under this Agreement or any document required to be executed and delivered by such Purchaser at Closing. As used in this Section 7.7, “such Purchaser’s knowledge” is limited to information personally known by one or more of the individuals listed in Schedule 7.7 without a duty of inquiry or investigation.
Section 7.8 Financing. Such Purchaser will have as of Closing sufficient cash, available lines of credit, or other sources of immediately available funds (in Dollars) to enable it to pay the Closing Cash Payment to Sellers, the Defect Escrow Amount, if any, and the Post-Closing Escrow Amount, if any, at the Closing.
Section 7.9 Contracts. The execution, delivery, and performance of this Agreement by such Purchaser, and the transactions contemplated by this Agreement, will not result in a material default (with due notice or lapse of time or both) under any of the terms, conditions, or provisions of any contract to which such Purchaser is a party.
Section 7.10 Securities Law Compliance. Such Purchaser is an “accredited investor,” as such term is defined in Regulation D of the Securities Act of 1933, as amended, (the “Securities Act”) and is acquiring the Company Interests for its own account for use in its trade or business, and not with a view toward or for sale associated with any distribution thereof, nor with any present intention of making a distribution thereof within the meaning of the Securities Act and applicable state securities Laws. Such Purchaser has such knowledge and experience in business and financial matters so that such Purchaser is capable of evaluating the merits and risks of an investment in the Company Interests being acquired hereunder. Such Purchaser agrees that the Company Interests may not be sold, transferred, offered for sale, pledged, hypothecated, or otherwise disposed of without registration under the Securities Act and any applicable foreign and state securities Laws, except under an exemption from such registration under the Securities Act and such Laws.
Section 7.11 Opportunity to Verify Information. As of the Closing Date, subject to Sellers’ compliance with the terms of this Agreement, such Purchaser and its Representatives have (a) been permitted full and complete access to all materials relating to the Company Interests and the Assets, (b) been afforded the opportunity to ask all questions of Sellers (or one or more Persons acting on Sellers’ behalf) concerning the Company Interests and the Assets, (c) been afforded the opportunity to investigate the condition, including the subsurface condition, of the Assets, and (d) had the opportunity to take such other actions and make such other independent investigations as such Purchaser deems necessary to evaluate the Company Interests and the Assets and understand the merits and risks of an investment therein and to verify the truth, accuracy, and completeness of the materials, documents, and other information provided or made available to such Purchaser (whether by Sellers or otherwise). SUCH PURCHASER ACKNOWLEDGES AND AGREES THAT SELLERS HAVE NOT MADE ANY REPRESENTATIONS OR WARRANTIES, EXPRESS, STATUTORY, OR IMPLIED, WRITTEN OR ORAL, AS TO THE ACCURACY OR COMPLETENESS OF ANY MATERIALS, DOCUMENTS, OR OTHER INFORMATION PROVIDED OR MADE AVAILABLE TO SUCH PURCHASER (WHETHER OR NOT BY SELLERS) (INCLUDING ANY MATERIALS, DOCUMENTS, OR OTHER INFORMATION PROVIDED PURSUANT TO SECTION 8.1). SUCH PURCHASER HEREBY WAIVES ANY CLAIMS ARISING OUT OF ANY MATERIALS, DOCUMENTS, OR OTHER INFORMATION PROVIDED OR MADE AVAILABLE TO SUCH PURCHASER (WHETHER OR NOT BY SELLERS) (INCLUDING ANY MATERIALS, DOCUMENTS, OR OTHER INFORMATION PROVIDED PURSUANT TO SECTION 8.1), WHETHER UNDER THIS AGREEMENT, AT COMMON LAW, BY STATUTE, OR OTHERWISE.
Section 7.12 Independent Evaluation.
(a) SUCH PURCHASER IS KNOWLEDGEABLE OF THE OIL AND GAS BUSINESS AND OF THE USUAL AND CUSTOMARY PRACTICES OF OIL AND GAS PRODUCERS, INCLUDING THOSE IN THE AREAS WHERE THE ASSETS ARE LOCATED.
(b) SUCH PURCHASER IS A PARTY CAPABLE OF MAKING SUCH INVESTIGATION, INSPECTION, REVIEW, AND EVALUATION OF THE COMPANY INTERESTS AND THE ASSETS AS A PRUDENT PURCHASER WOULD DEEM APPROPRIATE UNDER THE CIRCUMSTANCES, INCLUDING WITH RESPECT TO ALL MATTERS RELATING TO THE COMPANY INTERESTS AND THE ASSETS AND THEIR VALUE, OPERATION, AND SUITABILITY.
(c) IN MAKING THE DECISION TO ENTER INTO THIS AGREEMENT AND CONSUMMATE THE TRANSACTIONS CONTEMPLATED HEREBY, SUCH PURCHASER HAS RELIED SOLELY ON THE BASIS OF ITS OWN INDEPENDENT DUE DILIGENCE INVESTIGATION OF THE COMPANY INTERESTS AND THE ASSETS AND THE TERMS AND CONDITIONS OF THIS AGREEMENT, AND SUCH PURCHASER HAS NOT RELIED ON ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT, EXPRESS, STATUTORY, OR IMPLIED, ORAL OR WRITTEN, OR ANY OTHER STATEMENT, ORAL OR WRITTEN, OTHER THAN THE REPRESENTATIONS AND WARRANTIES OF SELLERS CONTAINED IN ARTICLE 5, THE REPRESENTATIONS AND WARRANTIES OF R2KLP CONTAINED IN ARTICLE 6 AND CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), AND THEN ONLY TO THE EXTENT REPRESENTED AND WARRANTED (OR CONFIRMED) THEREIN.
(d) WITHOUT LIMITING THE FOREGOING, SUCH PURCHASER EXPRESSLY ACKNOWLEDGES THE PROVISIONS SET FORTH IN SECTION 8.18, SECTION 14.17, AND SECTION 14.18.
(e) SUCH PURCHASER AGREES, TO THE FULLEST EXTENT PERMITTED BY LAW, THAT THE SELLER GROUP SHALL NOT HAVE ANY LIABILITY OR RESPONSIBILITY WHATSOEVER TO THE PURCHASER GROUP, OR THEIR RESPECTIVE EQUITY HOLDERS, FINANCING SOURCES, INVESTORS OR CONTROLLING PERSONS ON ANY BASIS (INCLUDING IN CONTRACT OR TORT, UNDER FEDERAL OR STATE SECURITIES LAWS OR OTHERWISE) RESULTING FROM THE FURNISHING TO THE PURCHASER GROUP OR ANY FINANCING SOURCES OR INVESTORS (OR ANY USE BY THE PURCHASER GROUP OR ANY FINANCING SOURCES OR INVESTORS OF) ANY DUE DILIGENCE INFORMATION (INCLUDING, FOR THE AVOIDANCE OF DOUBT, ANY INFORMATION MADE AVAILABLE TO SUCH PURCHASER PURSUANT TO SECTION 8.1 OR OTHERWISE BY OR ON BEHALF OF SELLERS OR THEIR REPRESENTATIVES).
(f) SUCH PURCHASER UNDERSTANDS AND ACKNOWLEDGES THAT NO FEDERAL, STATE OR FOREIGN AGENCY HAS PASSED UPON THE MERITS OF AN INVESTMENT IN (OR WITH RESPECT TO) THE COMPANY INTERESTS OR THE ASSETS, OR MADE ANY FINDING OR DETERMINATION CONCERNING (i) THE FAIRNESS OR ADVISABILITY OF SUCH AN INVESTMENT OR (ii) THE ACCURACY OR ADEQUACY OF THE DISCLOSURES AND INFORMATION MADE TO SUCH PURCHASER UNDER THIS AGREEMENT.
Section 7.13 Consents, Approvals or Waivers. Subject to compliance with the HSR Act, such Purchaser’s execution, delivery, and performance of this Agreement (and any document required to be executed and delivered by such Purchaser at Closing) is not and will not be subject to any consent, approval, or waiver from any Governmental Body or other Third Party, except consents and approvals of assignments by Governmental Bodies that are customarily obtained after Closing.
Section 7.14 Bankruptcy. There are no bankruptcy, insolvency, reorganization, or receivership proceedings pending against, being contemplated by, or threatened against such Purchaser or any of its Affiliates.
Section 7.15 Capitalization.
(a) As of the close of business on January 24, 2022 (the “Measurement Date”), the authorized capital of CHK Parent consisted solely of (i) 118,207,814 shares of CHK Common Stock, of which 118,207,814 shares of CHK Common Stock were issued and 118,207,814 shares of CHK Common Stock were outstanding.
(b) All of the issued and outstanding shares of CHK Common Stock have been duly authorized and validly issued in accordance with the Organizational Documents of CHK Parent are fully paid and non-assessable, and were not issued in violation of any preemptive rights, rights of first refusal, or other similar rights of any Person. The CHK Common Stock to be issued pursuant to this Agreement, when issued, will be validly issued, fully paid and nonassessable and not subject to preemptive rights, will have the rights, preferences and privileges specified in the Organizational Documents of CHK Parent and will, in the hands of Sellers and their Affiliates, be free of any Encumbrance, other than restrictions on transfer pursuant to applicable securities Laws.
(c) There are no preemptive rights and, except as disclosed in the SEC Documents or issuable pursuant to CHK Parent’s long term incentive plans, other outstanding rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, agreements, arrangements, calls, subscription agreements, commitments or rights of any kind that obligate CHK Parent to issue or sell any equity interests of CHK Parent or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any equity interests in CHK Parent, and, except as disclosed in the SEC Documents and those issuable pursuant to CHK Parent’s long term incentive plans, no securities or obligations evidencing such rights are authorized, issued or outstanding.
(d) CHK Parent does not have any outstanding bonds, debentures, notes, or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the stockholders of CHK Parent on any matter.
(e) As of the close of business on the Measurement Date, CHK Parent is the indirect owner, holder of record and beneficial owner of all of the Interests of CHK Purchaser, free and clear of all encumbrances other than those arising pursuant to or described in (i) the Organizational Documents of the corresponding Purchaser, (ii) applicable securities Laws or (iii) this Agreement.
(f) CHK Parent is not now, and immediately after the issuance and sale of the CHK Common Stock comprising the Stock Purchase Price will not be, required to register as an “investment company” or a company “controlled by” an entity required to register as an “investment company” within the meaning of the Investment Company Act of 1940.
Section 7.16 SEC Documents; Financial Statements; No Liabilities.
(a) CHK Parent has timely filed or furnished with the SEC all reports, schedules, forms, statements, and other documents (including exhibits and other information incorporated therein) required to be filed or furnished by it since January 1, 2020 under the Securities Act or the Exchange Act (all such documents, together with all exhibits and schedules to the foregoing materials and all information incorporated therein by reference, the “SEC Documents”). The SEC Documents, including any audited or unaudited financial statements and any notes thereto or schedules included therein (the “Financial Statements”), at the time filed or furnished (except to the extent corrected by a subsequently filed or furnished SEC Document filed or furnished prior to the Execution Date) (i) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein (in the light of the circumstances under which they were made) not misleading, (ii) complied in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as applicable, (iii) in the case of the Financial Statements, complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, (iv) in the case of the Financial Statements, were prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Rule 10-01 of Regulation S-X) and subject, in the case of unaudited interim financial statements, to normal and recurring year-end audit adjustments, (v) in the case of the Financial Statements, fairly present in all material respects the consolidated financial position of CHK Parent and its Subsidiaries as of the dates thereof and their respective consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal and recurring year-end audit adjustments), and (vi) in the case of the Financial Statements have been prepared in a manner consistent with the books and records of CHK Parent and its Subsidiaries. Since January 1, 2020, CHK Parent has not made any material change in the accounting practices or policies applied in the preparation of its financial statements, except as required by GAAP, SEC rule or policy or applicable law. The books and records of CHK Parent and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP (to the extent applicable) and any other applicable legal and accounting requirements and reflect only actual transactions.
(b) There are no liabilities of or with respect to the Purchasers that would be required by GAAP to be reserved, reflected, or otherwise disclosed on a consolidated balance sheet of CHK Parent other than (i) liabilities accrued, reserved, reflected, or otherwise disclosed in the consolidated balance sheet of CHK Parent and its Subsidiaries as of December 31, 2020 (including the notes thereto) included in the Financial Statements, (ii) liabilities incurred in the
ordinary course of business consistent with past practice since December 31, 2020, (iii) liabilities under this Agreement and the other Transaction Documents or incurred in connection with the transactions contemplated by this Agreement and the other Transaction Documents or (iv) liabilities that, individually or in the aggregate, would not reasonably be expected to have a Purchaser Material Adverse Effect.
Section 7.17 Internal Controls; Nasdaq Listing Matters.
(a) CHK Parent has established and maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Such disclosure controls and procedures are reasonably designed to ensure that material information required to be disclosed by CHK Parent in the reports it files or submits to the SEC under the Exchange Act is made known to CHK Parent’s chief executive officer and its chief financial officer by others within those entities to allow timely decisions regarding required disclosures as required under the Exchange Act. The chief executive officer and chief financial officer of CHK Parent have evaluated the effectiveness of CHK Parent’s disclosure controls and procedures and, to the extent required by applicable Law, presented in any applicable filed SEC Document that is a report on Form 10-K or Form 10-Q, or any amendment thereto, his or her conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by such report or amendment based on such evaluation.
(b) CHK Parent has established and maintains a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that is effective in providing reasonable assurance regarding the reliability of CHK Parent’s financial reporting and the preparation of the Financial Statements for external purposes in accordance with GAAP. CHK Parent has disclosed, based on its most recent evaluation of CHK Parent’s internal control over financial reporting prior to the date hereof, to CHK Parent’s auditors and audit committee (i) any significant deficiencies and material weaknesses in the design or operation of CHK Parent’s internal control over financial reporting which would reasonably be expected to adversely affect CHK Parent’s ability to record, process, summarize and report financial information and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in CHK Parent’s internal control over financial reporting.
(c) Since December 31, 2020, (i) neither CHK Parent nor any of its subsidiaries nor, to the knowledge of CHK Parent, any director, officer, employee, auditor, accountant or representative of CHK Parent or any of its Subsidiaries has received or otherwise had or obtained knowledge of any material complaint, allegation, assertion or claim, whether written or oral, regarding the accounting or auditing practices, procedures, methodologies or methods of CHK Parent or any of its subsidiaries or their respective internal accounting controls, including any material complaint, allegation, assertion or claim that CHK Parent or any of its Subsidiaries has engaged in questionable accounting or auditing practices and (ii) no attorney representing CHK Parent or any of its subsidiaries, whether or not employed by CHK Parent or any of its subsidiaries, has reported evidence of a material violation of securities Laws, breach of fiduciary duty or similar violation by CHK Parent or any of its subsidiaries or any of their respective officers, directors, employees or agents to the board of directors of CHK Parent or any committee thereof or to any director or officer of CHK Parent or any of its subsidiaries.
(d) As of the Execution Date, there are no outstanding or unresolved comments in the comment letters received from the SEC staff with respect to the filed SEC Documents. Except as set forth in Schedule 7.17(c), to the knowledge of CHK Parent, none of the filed SEC Documents is subject to ongoing review or outstanding SEC comment or investigation.
(e) Neither CHK Parent nor any of its subsidiaries is a party to, or has any commitment to become a party to, any joint venture, off balance sheet partnership or any similar contract (including any contract or arrangement relating to any transaction or relationship between or among CHK Parent and any of its Subsidiaries, on the one hand, and any unconsolidated affiliate, including any structured finance, special purpose or limited purpose entity or Person, on the other hand, or any “off balance sheet arrangements” (as defined in Item 303(a) of Regulation S-K under the Exchange Act)), where the result, purpose or intended effect of such contract is to avoid disclosure of any material transaction involving, or material liabilities of, CHK Parent or any of its subsidiaries in CHK Parent’s or such subsidiary’s published financial statements or other filed SEC Documents.
(f) CHK Parent is in compliance in all material respects with (i) the provisions of the Sarbanes-Oxley Act and (ii) the rules and regulations of the Nasdaq, in each case, that are applicable to CHK Parent.
(g) The CHK Common Stock is registered under Section 12(b) of the Exchange Act and listed on the Nasdaq, and CHK Parent has not received any notice of deregistration or delisting from the SEC or Nasdaq, as applicable. No judgment, order, ruling, decree, injunction, or award of any securities commission or similar securities regulatory authority or any other Governmental Body, or of the Nasdaq, preventing or suspending trading in any securities of CHK Parent has been issued, and no proceedings for such purpose are, to CHK Parent’s knowledge, pending, contemplated or threatened. CHK Parent has taken no action that is designed to terminate the registration of the CHK Common Stock under the Exchange Act.
Section 7.18 Form S-3. As of the Execution Date, CHK Parent is eligible to register the resale of the CHK Common Stock comprising the Stock Purchase Price by the Sellers under Form S-3 promulgated under the Securities Act.
Section 7.19 No Stockholder Approval. The transactions contemplated hereby do not require any vote of the stockholders of CHK Parent under applicable Law, the rules and regulations of the Nasdaq (or other national securities exchange on which the CHK Common Stock is then listed) or the Organizational Documents of CHK Parent.
ARTICLE 8
COVENANTS OF THE PARTIES
Section 8.1 Access.
(a) Between the Execution Date and the Closing Date (or the earlier termination of this Agreement), R2KLP will, and will cause its Affiliates (including the Company) to (i) give Purchasers and their Representatives reasonable access, during normal business hours, to the Assets (subject to obtaining any required consents of Third Parties, including any Third Party operators of the Assets), and access to and the right to copy, at Purchasers’ sole cost, risk, and
expense, the Records (or originals thereof) in Sellers’ or the Company’s possession and (ii) use Commercially Reasonable Efforts to secure for Purchasers and their Representatives access to the Properties (to the extent requested by Purchasers) from applicable Third Party operators for the purpose of conducting a reasonable due diligence review of the Assets, but only to the extent that R2KLP or the Company may do so without violating any obligations to any Third Party. R2KLP shall also make available to Purchasers and their Representatives, upon reasonable prior written notice during normal business hours, R2KLP’s personnel knowledgeable with respect to the Assets in order that Purchasers may make such diligence investigation as Purchasers reasonably consider necessary or appropriate. To the extent permitted by the Third Party operator (if applicable), Purchasers will be entitled to conduct a Phase I Environmental Site Assessment of the Assets and may conduct visual inspections and record reviews relating to the Assets, including their condition and compliance with Environmental Laws. However, Purchasers (and their Representatives) shall not operate any equipment or conduct any invasive testing, sampling, or other similar activity of soil, groundwater, or other materials (including any testing or sampling for Hazardous Substances, Hydrocarbons, or NORM) on or with respect to the Assets prior to Closing as part of its Phase I Environmental Site Assessment. If a Phase I Environmental Site Assessment identifies in good faith any “Recognized Environmental Conditions,” as such conditions are defined or described under the current ASTM International Standard Practice Designation E1527-13, then Purchasers may request R2KLP’s consent (which consent may be withheld in R2KLP’s sole discretion) to conduct additional environmental property assessments on the affected Assets, including the collection and analysis of environmental samples (collectively, the “Phase II Environmental Site Assessment”). The Phase II Environmental Site Assessment procedures and plan concerning any additional investigation shall be submitted to R2KLP in a written workplan, and shall be reasonably based on the recognized environmental concerns identified by the Phase I Environmental Site Assessment. If R2KLP denies such a request by Purchasers to undertake such a Phase II Environmental Site Assessment on any Assets, Purchasers shall have the right to exclude such Assets from the transactions contemplated by this Agreement, in which event R2KLP shall cause the Company to convey such Assets to a Seller (or Sellers’ designee) and the Unadjusted Purchase Price shall be reduced by the Allocated Value of such excluded Assets (or, solely with respect to any Asset that does not have an Allocated Value, by an amount equal to the Allocated Value of related or associated Assets to the extent applicable or relating to, used in connection with, servicing or burdening the subject Asset) pursuant to Section 3.3(b). Purchasers shall abide by the safety rules, regulations, and operating policies provided to Purchasers in writing(including the execution and delivery of any documentation or paperwork, e.g., boarding agreements or liability releases, required by Third Party operators with respect to Purchasers’ access to any of the Assets) of any applicable Third Party operator while conducting its due diligence evaluation of the Assets. Any conclusions made from any examination done by Purchasers shall result from Purchasers’ own independent review and judgment.
(b) The access granted to Purchasers by R2KLP under this Section 8.1 shall be limited to R2KLP’s normal business hours, and Purchasers’ investigation shall be conducted in a manner that minimizes interference with the operation of the Assets. Purchasers shall coordinate its access rights with R2KLP (and with applicable Third Party operators) to reasonably minimize any inconvenience to or interruption of the conduct of business by Sellers and the Company. Sellers shall have the right to accompany Purchasers (and any Representatives of Purchasers) in connection with any physical inspection of the Assets.
(c) Purchasers acknowledge that, pursuant to its right of access to the Assets, Purchasers will become privy to confidential and other information of Sellers and their Affiliates and that such confidential information (which includes Purchasers’ conclusions with respect to its evaluations) shall be held confidential by Purchasers in accordance with the terms of the Confidentiality Agreement and Section 8.3(b) and any applicable privacy Laws regarding personal information.
(d) In connection with the rights of access, examination, and inspection granted to Purchasers under this Section 8.1, (i) EACH PURCHASER (ON BEHALF OF ITSELF AND ITS AFFILIATES, INCLUDING, FROM AND AFTER CLOSING, THE COMPANY) WAIVES AND RELEASES ALL CLAIMS AGAINST THE SELLER GROUP ARISING IN ANY WAY THEREFROM OR IN ANY WAY CONNECTED THEREWITH AND (ii) PURCHASERS HEREBY AGREE TO INDEMNIFY, DEFEND, AND HOLD HARMLESS EACH MEMBER OF THE SELLER GROUP AND THIRD PARTY OPERATORS FROM AND AGAINST ANY AND ALL DAMAGES, INCLUDING THOSE ATTRIBUTABLE TO PERSONAL INJURY, DEATH, OR PHYSICAL PROPERTY DAMAGE, OR VIOLATION OF THE SELLER GROUP’S OR ANY THIRD PARTY OPERATOR’S RULES, REGULATIONS OR OPERATING POLICIES, IN EACH CASE PROVIDED IN WRITING TO PURCHASERS PRIOR TO PURCHASERS’ ACCESS TO THE PROPERTIES,, ARISING OUT OF, RESULTING FROM, OR RELATING TO ANY FIELD VISIT OR OTHER DUE DILIGENCE ACTIVITY CONDUCTED BY PURCHASERS WITH RESPECT TO THE ASSETS, 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 THE SELLER GROUP OR THIRD PARTY OPERATORS, EXCEPTING ONLY LIABILITIES TO THE EXTENT ACTUALLY RESULTING FROM (A) THE GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR FRAUD OF ANY MEMBER OF THE SELLER GROUP OR THIRD PARTY OPERATOR, OR (B) FROM MATTERS DISCOVERED OR UNCOVERED BY PURCHASERS AND THEIR REPRESENTATIVES IN THE COURSE OF SUCH DUE DILIGENCE INVESTIGATION TO THE EXTENT SUCH DISCOVERIES ARE OF PRE-EXISTING CONDITIONS (INCLUDING ANY ENVIRONMENTAL DEFECTS) NOT CAUSED OR EXACERBATED (WHICH TERM SHALL SPECIFICALLY EXCLUDE THE DISCOVERY OF SUCH CONDITIONS) BY PURCHASERS OR THEIR REPRESENTATIVES.
Section 8.2 [Reserved].
Section 8.3 Public Announcements; Confidentiality.
(a) No Party (or any of its Affiliates) shall make any press release or other public announcement 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”). The Public Announcement Restrictions shall not restrict disclosures to the extent (i) necessary for a Party to perform this Agreement (including disclosures to Governmental Bodies or Third Parties holding Preferential Rights, 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, (iii) made to Representatives, or (iv) that such Party has given the other Party a reasonable opportunity to review such disclosure prior to its release and no objection is raised. In the case of the disclosures described under subsections (i) and (ii) of this Section 8.3(a), each Party shall use its reasonable 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 (i) relating to the existence of this Agreement, the contents hereof, or the transactions contemplated hereby, or (ii) that is or was (at any point) subject to restrictions on disclosure pursuant to the terms and conditions of the Confidentiality Agreement (including, for the avoidance of doubt, any information made available to Purchasers pursuant to Section 8.1 or otherwise by or on behalf of Sellers or their Representatives prior to Closing) strictly confidential, except (A) for disclosures to Representatives of the Parties (in which event, the disclosing Party will be responsible for making sure that the Representatives keep such information and data confidential), (B) as required to perform this Agreement, (C) to the extent expressly contemplated by this Agreement (including in connection with the resolution of disputes hereunder), (D) for disclosures that are 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, (E) for disclosures to Governmental Bodies as required by Law, or (F) as to any information or data that is or becomes available to the public other than through the act or omission of such Party or its Representatives in violation of this Section 8.3(b); provided that, prior to making any disclosures permitted under subsection (A) above, the Party disclosing such information shall obtain an undertaking of confidentiality from the Person receiving such information.
(c) To the extent that the foregoing provisions of this Section 8.3 conflict with the provisions of the Confidentiality Agreement, the provisions of this Section 8.3 shall prevail and control to the extent of such conflict. If Closing should occur, the Confidentiality Agreement shall terminate as of the Closing, except as to (i) such portion of the Assets that are not conveyed to Purchasers (either directly or indirectly through the acquisition of the Company Interests) pursuant to the provisions of this Agreement, and (ii) any assets or properties of Sellers that are not “Assets” under this Agreement (including the Excluded Assets).
Section 8.4 Operation of Business. Except (i) for the operations set forth in Schedule 6.9, (ii) for the matters set forth on Schedule 8.4, (iii) for the matters described in Section 8.14 or set forth on Schedule 8.14, (iv) for operations, activities, or payments required pursuant to any applicable Law (including any Public Health Measures), (v) as required in the event of an emergency to protect life, property, or the environment, (vi) as expressly required by the terms of this Agreement, or (vii) as otherwise approved in writing by Purchasers (which approval shall not be unreasonably withheld, conditioned, or delayed), from the Execution Date until the Closing Date (or the earlier termination of this Agreement), R2KLP shall, and shall cause the Company to:
(a) conduct its business related to the Assets (i) in the ordinary course consistent with R2KLP’s and the Company’s recent practices, subject to interruptions resulting from force majeure, mechanical breakdown, or scheduled maintenance, (ii) as would a reasonable and prudent owner, and (iii) in accordance with all applicable Laws;
(b) not propose, elect to participate in or non-consent to any operation reasonably anticipated by the Company to require future capital expenditures by the owner of the Assets in excess of $50,000, net to the interest of the Company;
(c) except for expenditures required by a Material Contract, not make any capital expenditure or other expenditure which, individually, is in excess of $50,000;
(d) pay promptly when due all royalties, overriding royalties and similar burdens on production, Taxes, Property Costs and other payments that become due and payable in connection with the Assets; provided that, for the avoidance of doubt, that to the extent such Taxes are allocated to Purchasers pursuant to Section 13.2, such payment shall be on behalf of Purchasers, and promptly following the Closing Date, Purchasers shall pay to Sellers any such Taxes, but only to the extent that such amounts have not already been accounted for under Section 3.3;
(e) not voluntarily terminate, materially amend, execute, or extend any Material Contracts or enter into any contract that, if entered into on or prior to the Execution Date, would have constituted a Material Contract hereunder;
(f) maintain its existing insurance coverage on the Assets presently furnished by nonaffiliated Third Parties in the amounts and of the types presently in force;
(g) maintain all material Permits, approvals, bonds, and guaranties affecting the Assets, and make all filings that Sellers or the Company are required to make under applicable Law with respect to the Assets;
(h) not transfer, farmout, sell, hypothecate, encumber, mortgage, pledge or dispose of any Properties or Equipment except for sales and dispositions of Equipment or Hydrocarbons made in the ordinary course of business consistent with past practices;
(i) provide Purchasers with prompt written notice of any claim or investigation by any Third Party (including Governmental Bodies) made against the Company after the Company receives written notice thereof that materially affects, or could reasonably be likely to materially affect, the Company Interests or the Assets;
(j) provide Purchasers with prompt written notice of (i) any material Casualty Loss and (ii) any emergency with respect to the Assets and any related emergency operations;
(k) not waive, release, assign, settle, or compromise any claim of Damages attributable to the Assets or the Company, except for any settlement that (i) requires payment of less than $50,000 by the Company, and (ii) would not impose any material obligations or restrictions on the Assets or the business or operations of the Company, in each case, after the Closing;
(l) maintain the books, accounts and Records of the Company and Records relating to the Assets in the ordinary course of business consistent with past practice and in compliance with all applicable Laws and contractual obligations;
(m) not amend or otherwise change the Company Organizational Documents;
(n) not issue, sell, pledge, transfer, dispose of, or otherwise subject to any Encumbrance any Company Interests, or any options, warrants, convertible securities or other rights of any kind to acquire any such shares, or any other Interest in the Company;
(o) not declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property) in respect of, any Interests in the Company;
(p) not reclassify, combine, split, subdivide or redeem, or purchase or otherwise acquire, directly or indirectly, any Interests the Company, or make any other change with respect to the Company’s capital structure;
(q) not acquire any corporation, partnership, limited liability company, other business organization, or division thereof, or enter into any joint venture, strategic alliance, exclusive dealing, noncompetition, or similar contract or arrangement;
(r) not acquire any material amount of assets as to which the aggregate amount of the consideration paid or transferred by the Company in connection with all such acquisitions would not exceed $50,000;
(s) [Reserved.]
(t) not (i) hire any employees or any contingent workers or contractors or (ii) enter into, extend the term of, or otherwise amend any employment or consulting arrangement with any Person who performs or shall perform services in connection with the Assets;
(u) not enter into, amend or terminate any collective bargaining agreement, labor union contract, works council agreement or other contract with any union or similar organization;
(v) 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 the Company’s corporate structure;
(w) not make any change in any method of accounting or accounting practice or policy, except as required by GAAP;
(x) not make any settlement of or compromise any material Tax liability, make, adopt or change any material Tax election or Tax method of accounting; surrender any right to claim a material refund of Taxes; consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment; and
(y) not enter into an agreement with respect to or otherwise commit to do any of the foregoing.
Requests for approval of any action restricted by this Section 8.4 shall be delivered to either of the following individuals by electronic correspondence (at the email addresses set forth below), each of whom shall have full authority to grant or deny such requests for approval on behalf of Purchasers (such approval not to be unreasonably withheld, conditioned or delayed):
| | | | | |
| Derek Dixon | Benjamin E. Russ |
| Email: derek.dixon@chk.com | Email: ben.russ@chk.com |
Purchasers’ approval of any action restricted by this Section 8.4 shall be considered granted within 10 days after R2KLP’s notice to Purchasers requesting such consent unless Purchasers notify R2KLP to the contrary during that period. In the event of an emergency, R2KLP (or the Company) may take such action as a prudent owner or operator would take and shall notify Purchasers of such action promptly thereafter. In cases in which neither Sellers nor their Affiliate is the operator of the affected Assets, to the extent that the actions described in this Section 8.4 may only be taken by (or are the primary responsibility of) the operator of such Assets, the provisions of this Section 8.4 shall be construed to require only that R2KLP use, or cause the Company 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 8.5 Change of Name. Within 90 days after the end of the term of the Transition Services Agreement, Purchasers shall (a) eliminate the name “Radler,” “Tug Hill” and any variants thereof, from the Assets and shall have no right to use any logos, trademarks, or trade names belonging to Sellers or any of their Affiliates and (b) shall take all necessary company action (including filing all necessary documentation with applicable jurisdictions) to cause the name of the Company to be changed to a name that does not include “Radler,” “Tug Hill” or any variants thereof.
Section 8.6 Replacement of Bonds, Letters of Credit, and Guaranties.
(a) The Parties understand that none of the bonds, letters of credit, and guaranties, if any, posted by Sellers or their Affiliates (other than the Company) with Governmental Bodies or Third Parties relating to the Company or the Assets will be transferred to Purchasers. On or prior to Closing, Purchasers shall obtain, or cause to be obtained in the name of Purchasers, replacements for such bonds, letters of credit and guaranties with Third Parties to the extent set forth on Schedule 6.20 and with Governmental Bodies, to the extent such replacements are necessary to permit the cancellation of the bonds, letters of credit, and guaranties posted by Sellers or their Affiliates (other than the Company) or to consummate the transactions contemplated by this Agreement. From and after Closing, to the extent Purchasers have not obtained, or caused to be obtained in the name of Purchasers, replacements for any such bonds, letters of credit, and guaranties with Third Parties to the extent set forth on Schedule 6.20 or with Governmental Bodies, Purchasers shall indemnify the Seller Group against all Damages and liabilities incurred by the Seller Group under any such bond, letters or credit, or guaranties, as applicable, for which Purchasers have not obtained replacements, or caused replacements to be obtained in the name of Purchasers, to the extent such Damages and liabilities arise after Closing and relate to Purchasers’ ownership of the Company Interests or the Assets after Closing.
(b) To the extent required by a counterparty under any Specified Midstream Contract, on or prior to Closing, Purchasers shall, and if applicable, shall cause their Affiliates to, provide such bonds, letters of credit, guarantees, credit support and any other assurances as to financial capability, resources and creditworthiness in order for such counterparty to release Sellers and their Affiliates (other than the Company) (if applicable) from all obligations under such Specified Midstream Contract.
Section 8.7 Notification of Breaches. Between the Execution Date and the Closing Date:
(a) Without limitation of Purchasers’ rights to indemnity under this Agreement or the R&W Insurance Policy, Purchasers shall notify Sellers promptly after Purchasers obtain actual knowledge that any representation or warranty of any Seller contained in this Agreement is untrue in any material respect or will be untrue in any material respect as of the Closing Date or that any covenant or agreement to be performed or observed by Sellers prior to or on the Closing Date has not been so performed or observed in any material respect.
(b) Without limitation of Sellers’ rights to indemnity under this Agreement, Sellers shall notify Purchasers promptly after Sellers obtain actual knowledge that any representation or warranty of any Purchaser contained in this Agreement is untrue in any material respect or will be untrue in any material respect as of the Closing Date or that any covenant or agreement to be performed or observed by Purchasers prior to or on the Closing Date has not been so performed or observed in any material respect.
(c) If any of Purchasers’ or Sellers’ representations or warranties is untrue or shall become untrue in any material respect between the Execution Date and the Closing Date, or if any of Purchasers’ or Sellers’ covenants or agreements to be performed or observed prior to or on the Closing Date shall not have been so performed or observed in any material respect, but if such breach of representation, warranty, covenant, or agreement shall (if curable) be cured by the Closing (or, if the Closing does not occur, by the Scheduled Closing Date), then such breach shall be considered not to have occurred for all purposes of this Agreement.
Section 8.8 Amendment to Schedules. As of the Closing Date, all Schedules to this Agreement, as applicable, shall be deemed amended and supplemented by Sellers to include reference to any matter that results in an adjustment to the Adjusted Purchase Price pursuant to Section 3.3 as a result of the removal under the terms of this Agreement of any of the Assets. Until two (2) Business Days prior to the Scheduled Closing Date, (a) Sellers shall have the right to supplement their Schedules relating to the representations and warranties set forth in Article 5, and (b) R2KLP shall have the right to supplement its Schedules relating to the representations and warranties set forth in Article 6, in each case, with respect to any matters occurring subsequent to the Execution Date. However, all such supplements shall be disregarded for purposes of determining whether the condition to Purchasers’ obligation to close the transaction pursuant to Section 9.2(a) has been satisfied. If Sellers have supplemented their Schedules pursuant to this Section 8.8, and, based upon the matters relating to such supplements, Purchasers’ obligation to close the transaction pursuant to Section 9.2(a) has not been satisfied and Sellers provide Purchasers notice that such obligation to close has not been satisfied but Purchasers nevertheless elect to close the transactions contemplated hereunder, then, from and after the Closing Date, the matters that caused such obligation to close the transaction not to be satisfied shall be waived for all purposes, and Purchasers shall not be entitled to make a claim with respect thereto pursuant to the terms of this Agreement.
Section 8.9 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. From and after Closing, if the Parties identify an asset owned at Closing by R2KLP that is not an Excluded Asset, then, at Purchasers’ request, the Parties shall execute and deliver such further assignments or conveyances to transfer such asset from R2KLP to the Company.
Section 8.10 [Reserved.]
Section 8.11 R&W Insurance Policy. The R&W Insurance Policy, to the extent obtained by Purchasers, shall (a) include terms to the effect that the R&W Insurer waives its rights to bring any claim against any member of the Seller Group by way of subrogation, claims for contribution or otherwise, other than with respect to a claim for Fraud, and (b) name the Seller Group as express third-party beneficiaries of such waiver. Purchasers agree to not make any amendment, variation or waiver of the R&W Insurance Policy (or do anything that has a similar effect) that would be adverse to Sellers without Sellers’ prior written consent or do anything that causes any right under the R&W Insurance Policy not to have full force and effect that would be adverse to Sellers without Sellers’ prior written consent. Notwithstanding anything to the contrary in this Agreement, for the avoidance of doubt, Purchasers acknowledge and agree that (i) obtaining of the R&W Insurance Policy is not a condition to the Closing and (ii) in the event that Purchasers do not obtain the R&W Insurance Policy (irrespective of the reason therefor), Purchasers shall remain obligated, subject only to the satisfaction or waiver of the conditions set forth in Section 9.2 of this Agreement, to consummate the transactions contemplated by this Agreement.
Section 8.12 Directors and Officers.
(a) Purchasers agree that all rights to indemnification, exculpation or advancement now existing in favor of any present or former directors, officers, employees, partners, members and agents of the Company, as provided in the Company Organizational Documents, whether asserted or claimed prior to, at or after the Closing (including, for the avoidance of doubt, in connection with (i) the transactions contemplated by this Agreement and (ii) actions to enforce this provision or any other indemnification, exculpation or advancement right of any of the foregoing), shall survive the Closing and shall continue in full force and effect for a period of not less than six years and that the Company will perform and discharge the obligations to provide such indemnity, exculpation and advancement after the Closing; provided, however, that all rights to indemnification, exculpation and advancement in respect of any action, suit or proceeding arising out of or relating to matters existing or occurring at or prior to the Closing Date and asserted or made within such six-year period shall continue until the final disposition of such action, suit or proceeding. From and after the Closing, Purchasers shall not, and shall cause each of its Subsidiaries and Affiliates (including the Company) not to, amend, repeal or otherwise modify the indemnification provisions of their Organizational Documents as in effect at the Closing in any manner that would adversely affect the rights thereunder of any present or former directors, officers, employees, partners, members and agents of the Company.
(b) Each Purchaser hereby covenants, for itself and its Affiliates, successors and assigns, that it and they shall not institute any action, suit or proceeding in any court or before any administrative agency or before any other tribunal against any present or former directors, officers, employees, partners, members or agents of the Company, in their capacity as such, with respect to the execution of their duties up to the termination of their appointment, including in connection with, arising out of, resulting from or in any way related to the transactions contemplated hereby with respect to any liabilities, actions or causes of action, judgments, claims or demands of any nature or description (consequential, compensatory, punitive or otherwise), excluding however, in each case, instances of Fraud.
(c) In the event any Purchaser or the Company or any of their respective successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity in such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any Person, then and in either such case, Purchasers shall make proper provision so that the successors and assigns of such Purchaser or the Company, as the case may be, shall assume the obligations set forth in this Section 8.12.
(d) The provisions of this Section 8.12 shall survive the consummation of the Closing and continue for the periods specified herein. This Section 8.12 is intended to benefit the directors, officers, employees, partners, members and agents of the Company and any other Person or entity (and their respective heirs, successors and assigns) referenced in this Section 8.12 or indemnified hereunder, each of whom may enforce the provisions of this Section 8.12 (whether or not parties to this Agreement). Each of the Persons referenced in the immediately preceding sentence are intended to be third party beneficiaries of this Section 8.12.
Section 8.13 Cash Distributions. Pursuant to Section 2.4, the Parties acknowledge and agree that, notwithstanding any other provision of this Agreement, Sellers shall have the right, prior to Closing, to cause the Company to transfer to Sellers or any Affiliate of Sellers any cash and cash equivalents of the Company on hand or on deposit in any bank or brokerage account of the Company.
Section 8.14 Excluded Assets. Prior to the Closing Date, Sellers shall cause the Company to convey (whether by assignment, distribution, disbursement, dividend, or otherwise) all of its right, title, and interest in and to, and Sellers (or Sellers’ designee) shall assume all obligations and liabilities relating to, the Excluded Assets (including any Asset excluded from this transaction pursuant to Article 4 or Section 8.1) and the items set forth on Schedule 8.14 to Sellers or Sellers’ designee.
Section 8.15 [Reserved.]
Section 8.16 Certain Nasdaq Matters. CHK Parent shall use its reasonable best efforts to cause the shares of CHK Common Stock comprising the Stock Purchase Price to be approved for listing on the Nasdaq, subject to official notice of issuance, prior to the Closing.
Section 8.17 Financing and SEC Filing Assistance.
(a) Prior to the Closing and during the term of the Transition Services Agreement, Sellers shall, and shall cause the Company (prior to Closing) and their respective Representatives to, use Commercially Reasonable Efforts to provide to Purchasers, at Purchasers’ sole cost and expense, such reasonable and customary cooperation in connection with
any financing by Purchasers or any of its Affiliates in connection with the transactions contemplated by this Agreement, in each case as may be reasonably requested by Purchasers or their Representatives. Without limiting the generality of the foregoing, the Sellers shall, and shall cause the Company and their respective Representatives to, upon reasonable request, (i) furnish the report of the Company’s auditor on the three most recently available audited consolidated financial statements of the Company, and the report of the Company’s reserve engineer, and use its Commercially Reasonable Efforts to obtain the consent of such auditor and reserve engineer to the use of such reports, including in documents filed with the SEC under the Securities Act, in accordance with normal custom and practice and use Commercially Reasonable Efforts to cause such auditor and reserve engineer to provide customary comfort letters to the arrangers, underwriters, initial purchasers or placement agents, as applicable, in connection with any such financing; (ii) furnish any additional financial statements, schedules, business or other financial data, including reserve data, relating to the Company as may be reasonably necessary to consummate any such financing; it being understood that CHK Parent shall be responsible for the preparation of any pro forma financial information or pro forma financial statements required pursuant to the Securities Act or as may be customary in connection with any such financing; (iii) provide direct contact between (x) senior management and advisors, including auditors, of the Company and (y) the proposed arrangers, lenders, underwriters, initial purchasers or placement agents, as applicable, and/or CHK Parent’s auditors, as applicable, in connection with any such financing, at reasonable times and upon reasonable advance notice; (iv) make available the employees and advisors of the Company to provide reasonable assistance with CHK Parent’s or its Affiliate’s preparation of business projections, financing documents and offer materials; (v) obtain the cooperation and assistance of counsel to the Company in providing customary legal opinions and other services; (vi) assist in the preparation of (but not entering into or executing) documents, opinions and certificates, and other agreements (including indentures or supplemental indentures) and take other actions that are or may be customary in connection with any such financing or necessary or desirable to permit CHK Parent or its Affiliates to fulfill conditions or obligations under the financing documents, provided that such agreements shall be conditioned upon, and shall not take effect until, the Effective Time; (vii) assist in the preparation of one or more confidential information memoranda, prospectuses, offering memoranda and other marketing and syndication materials reasonably requested by CHK Parent; (viii) permit CHK Parent or its Affiliates’ reasonable use of the Company’s logos for syndication and underwriting, as applicable, in connection with any such financing (subject to advance review of and consultation with respect to such use), (ix) participate in a reasonable number of meetings, drafting sessions, due diligence sessions and presentations with arrangers and prospective lenders and investors, as applicable (including the participation in such meetings of the Company’s senior management), in each case at times and locations to be mutually agreed, and (x) use Commercially Reasonable Efforts to assist in procuring any necessary rating agency ratings or approvals.
(b) Prior to the Closing and during the term of the Transition Services Agreement, Sellers shall, and shall cause the Company (prior to Closing) and their respective Representatives to, use Commercially Reasonable Efforts to provide Purchasers, at Purchasers’ sole cost and expense, reasonable and customary cooperation in connection with the obligations of Purchasers or any of their Affiliates under 17 C.F.R. § 210.3-05 in connection with the transactions contemplated by this Agreement, in each case as may be reasonably requested by Purchasers or their Representatives.
(c) All of the information provided by Sellers, the Company and their respective Representatives pursuant to Section 8.17(a) is given without any representation or warranty, express or implied, and none of the Seller Group shall have any liability or responsibility with respect thereto. Notwithstanding anything to the contrary contained in this Section 8.17, nothing in this Section 8.17 shall require any such cooperation to the extent that it would (i) require any of Sellers, the Company or any of their respective Representatives, as applicable, to agree to pay any commitment or other similar fees, or incur any liability or give any indemnities or otherwise commit to take any similar action, (ii) require Sellers, the Company or any of their respective Representatives to provide any information that is not reasonably available to Sellers, the Company or such Representative, (iii) require Sellers, the Company or any of their respective Representatives to take any action that will conflict with or violate such Persons’ Organizational Documents, as applicable, or any applicable Laws or result in a violation or breach of, or default under, any Contract with a non-Affiliate to which such Person, as applicable, is a party, result in any officer or director of any such Person incurring any personal liability with respect to any matters relating to the financings by Purchasers or any of their Affiliates, or (iv) unreasonably interfere with the operations of the Sellers or any of the Company. Purchasers shall promptly upon request by any Seller reimburse Sellers for all reasonable and documented out-of-pocket costs and expenses incurred by Sellers in complying with this Section 8.17.
(d) Purchasers shall indemnify, defend, and hold harmless the Seller Group from and against all Damages incurred by, suffered by, or asserted against, such Persons, caused by, arising out of, or resulting from the provision to or use by Purchasers or any of their Affiliates, agents or representatives of information provided pursuant to this Section 8.17 to the fullest extent permitted by applicable Law; EVEN IF SUCH DAMAGES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT, OR CONCURRENT), STRICT LIABILITY, OR OTHER LEGAL FAULT OF THE SELLER GROUP, BUT EXCLUDING HOWEVER, IN EACH SUCH CASE, DAMAGES TO THE EXTENT ACTUALLY CAUSED BY THE FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY MEMBER OF THE SELLER GROUP.
Section 8.18 Certain Disclaimers.
(a) EXCEPT AS AND TO THE EXTENT EXPRESSLY REPRESENTED OTHERWISE BY SELLERS IN ARTICLE 5 AND R2KLP IN ARTICLE 6 OR CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b) AND WITHOUT LIMITING PURCHASERS’ RIGHTS UNDER THE R&W INSURANCE POLICY, SELLERS DO NOT MAKE, SELLERS EXPRESSLY DISCLAIM, AND PURCHASERS WAIVE, REPRESENT, AND WARRANT THAT PURCHASERS HAVE NOT RELIED UPON, ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT, 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, WARRANTY, OR OTHER
STATEMENT, ORAL OR WRITTEN, AS TO (i) TITLE TO ANY OF THE COMPANY 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, OR RESERVE INFORMATION (OR ANY ANALYSIS OR INTERPRETATION THEREOF) RELATING TO THE COMPANY INTERESTS OR 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 COMPANY INTERESTS OR THE ASSETS OR FUTURE REVENUES GENERATED BY THE COMPANY INTERESTS 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, MATERIALS, OR INFORMATION (INCLUDING AS TO THE ACCURACY, COMPLETENESS, OR CONTENTS OF THE RECORDS) THAT MAY HAVE BEEN MADE AVAILABLE OR COMMUNICATED TO THE PURCHASER GROUP OR ANY FINANCING SOURCES OR INVESTORS IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY DISCUSSION OR PRESENTATION RELATING THERETO (INCLUDING ANY ACCOUNTING MATERIALS, LEASE OPERATING STATEMENTS, OR OTHER ITEMS PROVIDED IN CONNECTION WITH SECTION 8.1); AND SELLERS FURTHER DISCLAIM, AND PURCHASERS WAIVE, ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT, 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 OTHERWISE BY SELLERS IN ARTICLE 5 AND R2KLP IN ARTICLE 6 OR CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), THE COMPANY INTERESTS AND THE ASSETS ARE BEING TRANSFERRED “AS IS, WHERE IS,” WITH ALL FAULTS AND DEFECTS, AND THAT PURCHASERS HAVE MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS PURCHASERS DEEM APPROPRIATE. PURCHASERS SPECIFICALLY DISCLAIM ANY OBLIGATION OR DUTY BY SELLERS OR ANY MEMBER OF THE SELLER GROUP TO MAKE ANY DISCLOSURES OF FACT NOT REQUIRED TO BE DISCLOSED PURSUANT TO THE EXPRESS REPRESENTATIONS AND WARRANTIES SET FORTH HEREIN AND PURCHASERS EXPRESSLY ACKNOWLEDGE AND COVENANT THAT PURCHASERS DO NOT HAVE, WILL NOT HAVE, AND WILL NOT ASSERT ANY CLAIM, DAMAGES, OR EQUITABLE REMEDIES WHATSOEVER AGAINST ANY MEMBER OF THE SELLER GROUP EXCEPT FOR CLAIMS, DAMAGES, AND EQUITABLE REMEDIES AGAINST SELLERS FOR BREACH OF AN EXPRESS REPRESENTATION, WARRANTY, OR COVENANT OF A SELLER UNDER THIS AGREEMENT. PURCHASERS ACKNOWLEDGE AND AGREE THAT NONE OF THE SELLER GROUP SHALL HAVE ANY RESPONSIBILITY FOR FAILING OR OMITTING TO DISCLOSE ANY CONDITION, AGREEMENT, DOCUMENT, DATA, INFORMATION OR OTHER MATERIALS RELATING TO THE COMPANY INTERESTS OR THE ASSETS THAT IS NOT EXPRESSLY ADDRESSED BY THIS AGREEMENT.
(b) EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN ARTICLE 4 OR IN R2KLP’S REPRESENTATION AND WARRANTY SET FORTH IN SECTION 6.16, SELLERS SHALL NOT HAVE ANY LIABILITY IN CONNECTION WITH AND HAVE NOT AND WILL NOT MAKE (AND HEREBY DISCLAIM) ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT REGARDING ANY MATTER OR CIRCUMSTANCE RELATING TO ENVIRONMENTAL LAWS, ENVIRONMENTAL DEFECTS, 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 NOTHING IN THIS AGREEMENT OR OTHERWISE SHALL BE CONSTRUED AS SUCH A REPRESENTATION, WARRANTY, OR OTHER STATEMENT, AND PURCHASERS SHALL BE DEEMED TO BE TAKING THE ASSETS “AS IS, WHERE IS” FOR PURPOSES OF THEIR ENVIRONMENTAL CONDITION. PURCHASERS SHALL HAVE INSPECTED, OR WAIVED (AND UPON CLOSING SHALL BE DEEMED TO HAVE WAIVED) THEIR 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, OTHER MAN-MADE FIBERS, AND NORM. PURCHASERS ARE RELYING SOLELY UPON THE TERMS OF THIS AGREEMENT, EACH OTHER TRANSACTION DOCUMENT, AND THEIR OWN INSPECTION OF THE COMPANY INTERESTS AND THE ASSETS. AS OF CLOSING, PURCHASERS HAVE MADE ALL SUCH REVIEWS AND INSPECTIONS OF THE COMPANY INTERESTS AND THE ASSETS AND THE RECORDS AS PURCHASERS HAVE DEEMED NECESSARY OR APPROPRIATE TO CONSUMMATE THE TRANSACTION.
(c) PURCHASERS ACKNOWLEDGE THAT THEY SHALL ASSUME ALL RISK OF LOSS WITH RESPECT TO (i) CHANGES IN COMMODITY OR PRODUCT PRICES AND ANY OTHER MARKET FACTORS OR CONDITIONS (INCLUDING ANY PRICING DIFFERENTIALS) FROM AND AFTER THE EFFECTIVE TIME; (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 THE EXECUTION DATE; AND (iii) DEPRECIATION OF ANY ASSETS THAT CONSTITUTE PERSONAL PROPERTY THROUGH ORDINARY WEAR AND TEAR.
(d) SELLERS AND PURCHASERS AGREE THAT, TO THE EXTENT REQUIRED BY APPLICABLE LAW TO BE EFFECTIVE OR ENFORCEABLE, THE DISCLAIMERS OF CERTAIN REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE 5, ARTICLE 6, AND THE REST OF THIS AGREEMENT ARE “CONSPICUOUS” DISCLAIMERS FOR THE PURPOSE OF ANY APPLICABLE LAW.
Section 8.19 Company Financials. As soon as practicable after Closing, Sellers shall cause to be prepared and delivered to Purchasers (a) an audited statement of revenues and direct operating expenses for the Company as of December 31, 2020, and (b) an unaudited statement of revenues and direct operating expenses for the Company for the nine-month period ended September 30, 2021 (collectively, the “Company Financial Statements”). The Company Financial Statements shall be prepared in accordance with GAAP consistently applied by the Company and present fairly in all material respects the financial position, results of operations and cash flows of the Company as at the dates and for the periods indicated therein.
ARTICLE 9
CONDITIONS TO CLOSING
Section 9.1 Sellers’ Conditions to Closing. The obligations of Sellers to consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by Sellers) on or prior to Closing of each of the following conditions precedent:
(a) Representations. (i) Each Purchaser’s non-Fundamental Representations set forth in Article 7 shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date (except for the representations and warranties that refer to a specified date, which need only be true and correct on and as of such specified date), and (ii) each Purchaser’s Fundamental Representations set forth in set forth in Article 7 shall be true and correct in all but de minimis respects as of the Closing Date as though made on and as of the Closing Date (other than representations and warranties that refer to a specified date, which need only be true and correct on and as of such specified date);
(b) Performance. Purchasers shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by Purchasers 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 (i) have been issued by any Governmental Body having jurisdiction over any Party and (ii) remain in force;
(d) Governmental Consents; HSR Act. (i) All material consents and approvals of any Governmental Body (including those required by the HSR Act) required for the transactions contemplated in this Agreement, except consents and approvals by Governmental Bodies 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) any HSR Act waiting period (and any extension thereof) applicable to the transactions contemplated under the terms of this Agreement, and any extensions to such waiting periods, shall have expired or shall have been terminated;
(e) Impairments. The sum of (without duplication of any amounts) (i) the aggregate amount of all Title Defects Amounts determined under Section 4.2 with respect to Title Defects (including Environmental Defects) less the sum of all Title Benefit Amounts determined under Section 4.3 with respect to Title Benefits, plus
(ii) the aggregate sum of all Allocated Values of the Assets excluded from the transactions contemplated herein pursuant to Section 4.6, plus (iii) the aggregated amount of Casualty Losses, does not equal or exceed 15% of the aggregate Unadjusted Purchase Prices under this Agreement and the THM MIPA;
(f) Deliveries. Purchasers shall deliver (or be ready, willing, and able to deliver at Closing) to Sellers duly executed counterparts of the documents and certificates to be delivered by Purchaser under Section 10.3; and
(g) Nasdaq Listing Approval. The shares of CHK Common Stock issuable as the Stock Purchase Price shall have been authorized for listing on the Nasdaq, subject to official notice of issuance.
Section 9.2 Purchasers’ Conditions to Closing. The obligations of Purchasers to consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by Purchasers) on or prior to Closing of each of the following conditions precedent:
(a) Representations. (i) Each Seller’s non-Fundamental Representations set forth in Article 5 and R2KLP’s non-Fundamental Representations set forth in Article 6, in each case, shall be true and correct as of the Closing Date (without regard to materiality, Material Adverse Effect or similar qualifiers) as though made on and as of the Closing Date (other than 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 such breaches, if any, as would not, individually or in the aggregate, have a Material Adverse Effect, and (ii) each Seller’s Fundamental Representations set forth in Article 5 and R2KLP’s Fundamental Representations set forth in Article 6, in each case, shall be true and correct in all but de minimis respects as of the Closing Date as though made on and as of the Closing Date (other than representations and warranties that refer to a specified date, which need only be true and correct on and as of such specified date);
(b) Performance. Each Seller shall have performed and observed, in all material respects, all covenants (other than the covenants set forth in Section 8.17) and agreements to be performed or observed by such Seller 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 (i) have been issued by any Governmental Body having jurisdiction over any Party and (ii) remain in force;
(d) Governmental Consents; HSR Act. (i) All material consents and approvals of any Governmental Body required for the transactions contemplated in this Agreement, except consents and approvals by Governmental Bodies that are customarily obtained after closing (including Customary Post-Closing Consents), shall have been granted, or the necessary waiting period shall have expired, or early termination of the waiting period shall have been granted, and (ii) any HSR Act waiting period (and any extension thereof) applicable to the transactions contemplated under the terms of this Agreement, and any extensions to such waiting periods, shall have expired or shall have been terminated;
(e) Impairments. The sum of (without duplication of any amounts) (i) the aggregate amount of all Title Defects Amounts determined under Section 4.2 with respect to Title Defects (including Environmental Defects) less the sum of all Title Benefit Amounts determined under Section 4.3 with respect to Title Benefits, plus (ii) the aggregate sum of all Allocated Values of the Assets excluded from the transactions contemplated herein pursuant to Section 4.6, plus (iii) the aggregated amount of Casualty Losses, does not equal or exceed 15% of the aggregate Unadjusted Purchase Prices under this Agreement and the THM MIPA;
(f) Related Transactions. All conditions precedent to the closing of the transactions pursuant to the THM MIPA and the PIPA shall have been satisfied and/or waived (as applicable) by the parties thereto, and the transactions thereunder shall be capable of being closed and completed concurrently with the Closing hereunder; provided that if such conditions precedent are not satisfied or the transactions thereunder are not capable of being closed and completed concurrently with the Closing, in each case solely as a result of Purchasers material breach of either the THM MIPA or PIPA, then this condition precedent shall be deemed waived by Purchasers for all purposes hereunder; and
(g) Deliveries. Sellers shall deliver (or be ready, willing, and able to deliver at Closing) to Purchasers duly executed counterparts of the documents and certificates to be delivered by Sellers under Section 10.2.
ARTICLE 10
CLOSING
Section 10.1 Time and Place of Closing. Consummation of the purchase and sale transaction as contemplated by this Agreement (the “Closing”), shall, unless otherwise agreed to in writing by Purchasers and Sellers, take place at the offices of Gibson, Dunn & Crutcher LLP, counsel to Sellers, located at 811 Main Street, Suite 3000, Houston, Texas 77002, at 10:00 a.m., Central Time, on March 9, 2022 (“Scheduled Closing Date”), or if all conditions in Article 9 to be satisfied prior to Closing have not yet been satisfied or waived on the Scheduled Closing Date, within five Business Days of such conditions having 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), subject to the rights of the Parties under Article 11. The date on which the Closing occurs is herein referred to as the “Closing Date.”
Section 10.2 Obligations of Sellers at Closing. At the Closing, upon the terms and subject to the conditions of this Agreement, and subject to the simultaneous performance by Purchasers of their obligations pursuant to Section 10.3, Sellers shall deliver or cause to be delivered to Purchasers the following:
(a) Counterparts of the Assignment Agreement transferring the Company Interests to Purchasers, duly executed by Sellers;
(b) A certificate duly executed by an authorized officer of each Seller, dated as of Closing, certifying on behalf of such Seller (and not on behalf of the other Sellers) that the conditions applicable to such Seller set forth in Section 9.2(a) and Section 9.2(b) have been fulfilled;
(c) A valid and duly executed Internal Revenue Service Form W-9 (or applicable successor form) from each Seller (or, if such Seller is disregarded for U.S. federal income tax purposes, its regarded owner);
(d) Where approvals are received by Sellers pursuant to a filing or application under Section 8.2, copies of those approvals;
(e) Duly executed counterparts of the Registration Rights Agreement, executed by Sellers or Sellers’ designees whom Seller designates as a party thereto as identified in writing to Purchasers at least two Business Days prior to the Closing Date;
(f) Duly executed counterparts of joint written instructions in compliance with the Escrow Agreement, instructing the Escrow Agent to disburse the Deposit to Sellers;
(g) Resignations of each individual who serves as an officer, manager, or director of the Company in his or her capacity as such, effective as of the Closing Date;
(h) If applicable, (i) releases and terminations of any mortgages, deeds of trust, assignments of production, financing statements, fixture filings, liens, and other recorded encumbrances, in each case, burdening the Assets and securing borrowed monies or other substantially similar indebtedness incurred by Sellers or any of their Affiliates (including the Company), including under any debt or other similar instrument that is burdening the Assets, and (ii) authorizations to file UCC-3 termination statements releases in all applicable jurisdictions to evidence the release of all such liens on the Assets securing due and payable obligations, including under any debt or other similar instrument; and
(i) All other instruments, documents, and other items reasonably necessary to effectuate the terms of this Agreement, as may be reasonably requested by Purchasers.
Section 10.3 Obligations of Purchasers at Closing. At the Closing, upon the terms and subject to the conditions of this Agreement, and subject to the simultaneous performance by Sellers of their obligations pursuant to Section 10.2, Purchasers shall deliver or cause to be delivered to Sellers the following:
(a) A wire transfer of the Closing Cash Payment to the account(s) designated by Sellers in immediately available funds, and a wire transfer of the Defect Escrow Amount (if applicable) and a wire transfer of the Post-Closing Escrow Amount (if applicable) to the Escrow Agent in immediately available funds;
(b) The number of shares of CHK Common Stock comprising the Stock Purchase Price to Sellers (and/or, if applicable, to those Seller designees to whom Seller designates to receive all or a portion of the shares of CHK Common Stock identified in writing to Purchasers at least two Business Days prior to the Closing Date), free and clear of all encumbrances and restrictions other than restrictions set forth in the Registration Rights Agreement or otherwise imposed by applicable securities Laws;
(c) Duly executed counterparts of the Registration Rights Agreement executed by CHK Parent;
(d) Counterparts of the Assignment Agreement, duly executed by Purchasers;
(e) A certificate by an authorized officer of each Purchaser, dated as of Closing, certifying on behalf of such Purchaser (and not on behalf of the other Purchaser) that the conditions applicable to such Purchaser set forth in Section 9.1(a) and Section 9.1(b) have been fulfilled;
(f) Where approvals are received by Purchasers pursuant to a filing or application under Section 8.2, copies of those approvals;
(g) Duly executed counterparts of joint written instructions in compliance with the Escrow Agreement, instructing the Escrow Agent to disburse the Deposit to Sellers;
(h) Evidence of replacement bonds, guaranties, and letters of credit pursuant to Section 8.6; and
(i) All other instruments, documents, and other items reasonably necessary to effectuate the terms of this Agreement, as may be reasonably requested by Sellers.
Section 10.4 Closing Cash Payment and Post-Closing Purchase Price Adjustments.
(a) Not later than five Business Days prior to the Scheduled Closing Date (or, if the Closing will not occur on the Scheduled Closing Date, three Business Days prior to the Closing Date), Sellers shall prepare in good faith and deliver to Purchasers, in accordance with customary industry accounting practices and based upon the best information then available to Sellers, a preliminary settlement statement (i) estimating the initial Adjusted Purchase Price (including an estimate of the Base Cash Purchase Price) after giving effect to all adjustments to the Unadjusted Purchase Price set forth in Section 3.3, the Defect Escrow Amount and the Post-Closing Escrow Amount, (ii) setting forth the calculations for each adjustment, (iii) enclosing reasonable documentation available to support any credit, charge, receipt, or other item included in such statement and (iv) setting forth Sellers’ account for the wire transfer of funds. Within two Business Days after Purchasers’ receipt of the preliminary settlement statement, Purchasers shall deliver to Sellers a written report containing all changes that Purchasers propose in good faith to be made to the preliminary settlement statement together with the explanation therefor. The Parties shall in good faith attempt to agree in writing on the preliminary settlement statement as soon as possible after Sellers’ receipt of Purchasers’ written report. The estimate of the initial Base Cash Purchase Price component of the Adjusted Purchase Price set forth in the preliminary settlement statement as agreed upon in writing by the Parties, less the Deposit less the Defect Escrow Amount (if applicable) and less the Post-Closing Escrow Amount shall constitute the Dollar amount to be paid by Purchasers to Sellers at the Closing (the “Closing Cash Payment”); provided that if the Parties do not agree in writing upon any or all of the adjustments set forth in the preliminary settlement statement, then the amount of such adjustment(s) used to adjust the Unadjusted Purchase Price at the Closing and to calculate the Closing Cash Payment shall be that amount set forth in the draft preliminary settlement statement delivered by Sellers to Purchasers pursuant to this Section 10.4(a). Final adjustments to the Unadjusted Purchase Price will be made pursuant to Section 10.4(c).
(b) At Closing, Purchasers shall deposit or cause to be deposited with the Escrow Agent in a separate account established pursuant to the terms and conditions of the Escrow Agreement an amount in cash equal to $1,000,000 to be held solely for purposes of securing the adjustments provided in Section 10.4(c) (such amount, the “Post-Closing Escrow Amount”).
(c) Sellers shall prepare in good faith and deliver to Purchasers a statement setting forth the final calculation of the Adjusted Purchase Price (including a final calculation of the Base Cash Purchase Price) and showing the calculation of each adjustment, based, to the extent possible, on actual credits, charges, receipts and other items before and after the Effective Time no later than the later of (i) the 120th day following the Closing Date and (ii) the date on which the Parties or the Title Arbitrator, as applicable, finally determines all Title Defect Amounts and Title Benefit Amounts under Section 4.4. Sellers shall, at Purchasers’ request, supply reasonable documentation available to support any credit, charge, receipt, or other item included in such statement. Purchasers shall deliver to Sellers a written report containing any changes that Purchasers propose be made to Sellers’ statement no later than the 60th day following Purchasers’ receipt thereof. The Parties shall undertake to agree on the final statement of the Adjusted Purchase Price no later than 210 days after the Closing Date. However, if the date on which the Parties or the Title Arbitrator, as applicable, finally determines all Title Defect Amounts and Title Benefit Amounts under Section 4.4 is later than the 120th day following the Closing Date, such 210-day period shall be extended the same number of days that such final determination occurs beyond the 120th day following the Closing Date. In the event that the Parties cannot reach agreement within such period of time, any Party may refer the remaining matters in dispute to the Houston office of KPMG US, LLP, or such other independent nationally recognized accounting firm mutually agreed upon by the Parties, 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 that such rules do not conflict with the terms of this Section 10.4(c). Neither Party may have any ex parte communications with the accounting firm concerning the accounting firm’s determination of the disputed matters. The accounting firm shall agree in writing to keep strictly confidential the specifics and existence of any matters submitted as well as all proprietary records of the Parties, if any, reviewed by the accounting firm in the process of resolving such disputes. The accounting firm’s determination shall be made within 30 days after submission of the matters in dispute and shall be final and binding on both Parties, without right of appeal. In determining the proper amount of any adjustment to the Unadjusted Purchase Price, the accounting firm shall not increase the Unadjusted Purchase Price more than the increase proposed by Sellers nor decrease the Unadjusted Purchase Price more than the decrease proposed by Purchasers, as applicable. The accounting firm shall act for the limited purpose of determining the specific disputed matters submitted by the Parties and may not award damages or penalties to the Parties with respect to any matter. Any decision rendered by the accounting firm pursuant hereto shall be final, conclusive and binding on Sellers and Purchasers and, absent fraud or manifest error, and enforceable against any of the Parties in any court of competent jurisdiction. The Parties shall each bear its own legal fees and other costs of presenting its case. Sellers, on the one hand, shall bear one-half and Purchasers, on the other hand, shall bear one-half of the costs and expenses of the accounting firm.
(d) Within ten days after the earlier of (x) the expiration of Purchasers’ 60-day review period described in Section 10.4(c) without delivery of any written report or (y) the date on which the Parties finally determine the Adjusted Purchase Price or the accounting firm finally determines the disputed matters, as applicable:
(i) if the Base Cash Purchase Price component of the Adjusted Purchase Price (after deducting the Deposit, Defect Escrow Amount (if any), and the Post-Closing Escrow Amount) exceeds the Closing Cash Payment, then:
(A) Purchasers shall pay to Sellers the amount by which the Base Cash Purchase Price component of the Adjusted Purchase Price (after deducting the Deposit, Defect Escrow Amount (if any), and the Post-Closing Escrow Amount) exceeds the Closing Cash Payment; and
(B) the Parties shall jointly instruct the Escrow Agent to distribute the entirety of the Post-Closing Escrow Amount to Sellers; or
(ii) if the Closing Cash Payment exceeds the Base Cash Purchase Price component of the Adjusted Purchase Price (after deducting the Deposit, Defect Escrow Amount (if any), and the Post-Closing Escrow Amount) (such excess amount, the “Adjustment Excess”), then:
(A) the Parties shall instruct the Escrow Agent to distribute to Purchasers from the Post-Closing Escrow Amount an amount equal to the lesser of (1) the Adjustment Excess and (2) the Post-Closing Escrow Amount;
(B) if the Adjustment Excess is less than the Post-Closing Escrow Amount, then the Parties shall instruct the Escrow Agent to distribute to Sellers from the Post-Closing Escrow Amount an amount equal to the Post-Closing Escrow Amount less the Adjustment Excess; and
(iii) if the Post-Closing Escrow Amount is less than the Adjustment Excess, Sellers shall pay to Purchasers an amount equal to the Adjustment Excess less the Post-Closing Escrow Amount.
(e) Purchasers shall, and shall cause the Company to, assist Sellers in the preparation of the final statement of the Adjusted Purchase Price under Section 10.4(c) by furnishing invoices, receipts, reasonable access to personnel, and such other assistance as may be reasonably requested by Sellers to facilitate such process post-Closing.
(f) All payments made or to be made under this Agreement to Sellers shall be made by electronic transfer of immediately available funds to the account(s) designated by Sellers in writing. All payments made or to be made under this Agreement to Purchasers shall be made by electronic transfer of immediately available funds to the account(s) designated by Purchasers in writing to Sellers.
ARTICLE 11
TERMINATION
Section 11.1 Termination. This Agreement and the transactions contemplated herein may be terminated at any time prior to Closing (by written notice from the terminating Party to the other Parties):
(a) by the mutual prior written consent of the Parties;
(b) by any Party if the Closing does not occur on the Scheduled Closing Date as a result of the closing conditions described in Section 9.1(e) and Section 9.2(e) not being satisfied as of such date;
(c) by any Party if Closing has not occurred on or before 30 days after the Scheduled Closing Date (the “Outside Date”); provided, however, with respect to the HSR filing under the PIPA, 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 9.1 and Section 9.2 have been satisfied or waived (except for (i) the condition in Section 9.2(f) if such condition is not satisfied solely because 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 or (ii) any such conditions that by their nature may only be satisfied at or in connection with the occurrence of Closing, so long as the Parties are able to satisfy such conditions), then the Outside Date will automatically be extended to the date that is 90 days after the Execution Date;
(d) by Sellers, at Sellers’ option, if any of the conditions set forth in Section 9.1(a) or Section 9.1(b) have not been satisfied on or at any time after the Scheduled Closing Date (or, with respect to those conditions that can only be satisfied at the Closing, are not capable of being satisfied on or at any time after the Scheduled Closing Date), and, at such time, but for the material breach of Purchasers that causes any of the conditions set forth in Section 9.1(a) or Section 9.1(b) to be unsatisfied, Sellers are ready, willing and able to proceed to Closing; provided, however, that in the case of a breach that is capable of being cured, Purchasers shall have a period of ten Business Days following written notice from Sellers to Purchasers specifying the reason such condition is unsatisfied (including any breach by Purchasers of this Agreement) to cure such breach prior to the end of such ten Business Day period; provided, further, if (i) Purchasers’ conditions to Closing have been satisfied or waived in full and (ii) all of Sellers’ conditions to Closing have been satisfied or waived (other than Section 9.1(f)), then the refusal or willful or negligent delay by Purchasers to timely close the contemplated transactions shall constitute a failure of Sellers’ conditions to Closing (including Section 9.1(f)) and be a material breach of Purchasers’ obligations under this Agreement; or
(e) by Purchasers, at Purchasers’ option, if any of the conditions set forth in Section 9.2(a) or Section 9.2(b) have not been satisfied on or at any time after the Scheduled Closing Date (or, with respect to those conditions that can only be satisfied at the Closing, are not capable of being satisfied on or at any time after the Scheduled Closing Date), and, at such time, but for the material breach of Sellers that causes any of the conditions set forth in Section 9.2(a) or Section 9.2(b) to be unsatisfied, Purchasers are ready, willing and able to proceed to
Closing; provided, however, that in the case of a breach that is capable of being cured, Sellers shall have a period of ten Business Days following written notice from Purchasers to Sellers specifying the reason such condition is unsatisfied (including any breach by Sellers of this Agreement) to cure such breach prior to the end of such ten Business Day period; provided, further, if (i) Sellers’ conditions to Closing have been satisfied or waived in full and (ii) all of Purchasers’ conditions to Closing have been satisfied or waived (other than Section 9.2(g)), then the refusal or willful or negligent delay by Sellers to timely close the contemplated transactions shall constitute a failure of Purchasers’ conditions to Closing (including Section 9.2(g)) and be a material breach of Sellers’ obligations under this Agreement;
provided, however, that no Party shall be entitled to terminate this Agreement under Section 11.1(c), Section 11.1(d) or Section 11.1(e) if the Closing has failed to occur because such Party failed to perform or observe in any material respect its covenants or agreements hereunder or is otherwise in material breach under this Agreement.
Section 11.2 Effect of Termination.
(a) If this Agreement is terminated pursuant to Section 11.1, this Agreement shall become void and of no further force or effect (except for the provisions of Section 5.7, Section 7.6, Section 8.1(d), Section 8.3, Section 8.17, Article 11, Article 14 (other than Section 14.14) and Appendix A, which shall continue in full force and effect) and, without prejudice to their rights under Section 11.2(c) (if applicable), Sellers shall be free immediately to enjoy all rights of ownership of the Assets and to sell, transfer, encumber, or otherwise dispose of the Assets or the Company Interests to any Person without any restriction under this Agreement.
(b) If this Agreement is terminated or may be terminated pursuant to Section 11.1(e), then Purchasers shall promptly elect in writing, as the sole and exclusive remedy of the Purchaser Group against any member of the Seller Group for the failure to consummate the transactions contemplated hereunder at Closing, to either (A) exercise its right to specific performance of this Agreement pursuant to Section 14.16, or (B) terminate this Agreement and receive the entirety of the Deposit for the sole account and use of Purchasers (and the Parties shall promptly provide joint written instructions to the Escrow Agent to deliver the Deposit to Purchasers), and Purchasers shall be entitled to seek additional damages from, or pursue other remedies against, R2KLP with respect to any breach by Sellers of their obligations under this Agreement.
(c) If this Agreement is terminated pursuant to Section 11.1(d), then Sellers shall be entitled, as the sole and exclusive remedy of the Seller Group against any member of the Purchaser Group for the failure to consummate the transactions contemplated hereunder at Closing, to either (i) exercise their right to specific performance of this Agreement pursuant to Section 14.16 or (ii) terminate this Agreement and receive the entirety of the Deposit as liquidated damages (and the Parties shall promptly provide joint written instructions to the Escrow Agent to deliver the Deposit to Sellers) for the sole account and use of Sellers. IT IS EXPRESSLY STIPULATED BY THE PARTIES THAT THE ACTUAL AMOUNT OF DAMAGES RESULTING FROM SUCH TERMINATION WOULD BE DIFFICULT IF NOT IMPOSSIBLE TO DETERMINE ACCURATELY BECAUSE OF THE UNIQUE NATURE OF THIS AGREEMENT, THE UNIQUE NATURE OF THE COMPANY INTERESTS AND
ASSETS, THE UNCERTAINTIES OF APPLICABLE COMMODITY MARKETS AND DIFFERENCES OF OPINION WITH RESPECT TO SUCH MATTERS, AND THAT THE LIQUIDATED DAMAGES PROVIDED FOR HEREIN ARE A REASONABLE ESTIMATE BY THE PARTIES OF SUCH DAMAGES UNDER THE CIRCUMSTANCES AND DO NOT CONSTITUTE A PENALTY.
(d) If this Agreement is terminated under Section 11.1 under circumstances other than those described in Section 11.2(b) or Section 11.2(c), the Parties shall promptly provide joint written instructions to the Escrow Agent to deliver the Deposit to Purchasers, free of any claims by Sellers or any other Person with respect thereto.
(e) 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 11.
ARTICLE 12
INDEMNIFICATION
Section 12.1 Indemnification.
(a) From and after Closing, subject to Purchasers’ right to indemnity pursuant to Section 12.1(b), Purchasers shall indemnify, defend, and hold harmless the Seller Group from and against all Damages incurred by, suffered by, or asserted against such Persons:
(i) caused by, arising out of, or resulting from Purchasers’ breach of any covenant or agreement made by Purchasers contained in this Agreement that by its terms applies or is to be performed in whole or in part after Closing; or
(ii) caused by, arising out of, or resulting from the commitments, contractual arrangements, business, operations, or activities of the Company, or the ownership of the Company Interests (or ownership or operation of the Assets, including, for purposes of certainty, Environmental Liabilities under CERCLA) regardless of whether such Damages arose prior to, at, or after the Effective Time;
EVEN IF SUCH DAMAGES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT, OR CONCURRENT), STRICT LIABILITY, OR OTHER LEGAL FAULT OF THE SELLER GROUP, BUT EXCLUDING HOWEVER, IN EACH SUCH CASE, DAMAGES TO THE EXTENT ACTUALLY CAUSED BY THE FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY MEMBER OF THE SELLER GROUP.
(b) From and after Closing, subject to the limitations set forth in Section 12.3, Sellers jointly and severally shall indemnify, defend, and hold harmless the Purchaser Group from and against all Damages incurred by, suffered by, or asserted against such Persons caused by, arising out of, or resulting from any Seller’s breach of any covenant or agreement made by such Seller contained in this Agreement that by its terms applies or is to be performed in whole or in part after Closing;
EVEN IF SUCH DAMAGES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT, OR CONCURRENT), STRICT LIABILITY, OR OTHER LEGAL FAULT OF THE PURCHASER GROUP, BUT EXCLUDING HOWEVER, IN EACH SUCH CASE, DAMAGES TO THE EXTENT ACTUALLY CAUSED BY THE FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY MEMBER OF THE PURCHASER GROUP.
(c) From and after Closing, subject to the limitations set forth in Section 12.3, R2KLP shall indemnify, defend, and hold harmless the Purchaser Group from and against all Damages incurred by, suffered by, or asserted against such Persons caused by, arising out of, or resulting from the Excluded Assets.
(d) Notwithstanding anything to the contrary contained in this Agreement, subject to, and without limitation of Section 8.1(d), Section 8.17(d), Article 11, Section 14.16 and Purchasers’ rights under the R&W Insurance Policy, from and after the Closing, this Section 12.1 contains the Parties’ exclusive remedies against each other with respect to the transactions contemplated hereby (except with respect to Fraud), including any breaches of the representations, warranties, covenants, and agreements of the Parties in this Agreement or any of the other Transaction Documents. Except for the remedies contained in this Section 12.1, Section 8.1(d), Section 8.17, Article 11, and Section 14.16, and without limitation of Purchasers’ rights under the R&W Insurance Policy, EACH SELLER (ON BEHALF OF ITSELF AND ON BEHALF OF THE SELLER GROUP) AND EACH PURCHASER (ON BEHALF OF ITSELF AND ON BEHALF OF THE PURCHASER GROUP) EACH KNOWINGLY, WILLINGLY, IRREVOCABLY, EXPRESSLY, AND TO THE FULLEST EXTENT PERMITTED UNDER APPLICABLE LAW, 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, THE TRANSACTION DOCUMENTS, AND ANY TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY; (ii) SELLERS’ OWNERSHIP OR USE OF THE COMPANY INTERESTS; (iii) THE BUSINESS OR OPERATIONS OF THE COMPANY; (iv) COMPANY’S OWNERSHIP, MANAGEMENT OR USE OF THE ASSETS, OR (v) 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 SELLERS, THE COMPANY, AND ANY PERSONS WHO ARE AFFILIATES OF SELLERS, AND RIGHTS UNDER INSURANCE MAINTAINED BY SELLERS, THE COMPANY, OR ANY PERSON WHO IS AN AFFILIATE OF SELLERS, 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; PROVIDED, HOWEVER, THAT THE FOREGOING PROVISIONS OF THIS SECTION 12.1(D) SHALL NOT LIMIT ANY PARTY’S RIGHTS TO PURSUE CLAIMS FOR FRAUD.
(e) The indemnity of each Party provided in this Section 12.1 shall be for the benefit of and extend to each Person included in the Seller Group and the Purchaser Group, as applicable. Any claim for indemnity under this Section 12.1 by any Third Party must be brought and administered by a Party to this Agreement. No Indemnified Person (including any Person within the Seller Group and the Purchaser Group) other than the Parties shall have any rights against Sellers or Purchasers under the terms of this Section 12.1 except as may be exercised on its behalf by Purchasers or Sellers, as applicable, pursuant to this Section 12.1(e). The Parties may elect to exercise or not exercise indemnification rights under this Section 12.1 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 12.1.
Section 12.2 Indemnification Actions. All claims for indemnification under Section 12.1 shall be asserted and resolved as follows:
(a) For purposes hereof, (i) the term “Indemnifying Person” when used in connection with particular Damages shall mean the Person or Persons having an obligation to indemnify another Person or Persons with respect to such Damages pursuant to this Article 12 and (ii) the term “Indemnified Person” when used in connection with particular Damages shall mean the Person or Persons having the right to be indemnified with respect to such Damages by another Person or Persons pursuant to this Article 12.
(b) To make a claim for indemnification under Section 12.1, an Indemnified Person shall notify the Indemnifying Person of its claim under this Section 12.2, 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 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 12.2 shall not relieve the Indemnifying Person of its obligations under Section 12.1 except 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 prejudices the Indemnifying Person’s ability to defend against the Third Person Claim. In the event that the claim for indemnification is based upon an inaccuracy or breach of a covenant or agreement, the Claim Notice shall specify the covenant or agreement that was inaccurate or breached.
(c) In the case of a claim for indemnification 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 this Article 12. 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 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.
(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. The Indemnifying Person shall have full control of such defense and proceedings, including any compromise or settlement thereof. 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 controlled by the Indemnifying Person pursuant to this Section 12.2(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) or (ii) may materially and adversely affect the Indemnified Person (other than as a result of money damages covered by the indemnity).
(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 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 at any time prior to settlement or final determination thereof. If the Indemnifying Person has not yet admitted its obligation to provide indemnification 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 10 days following receipt of such notice to (i) admit in writing its obligation to provide indemnification with respect to the Third Person Claim and if its obligation is so admitted, either (A) consent to the proposed settlement or (B) reject, in its reasonable judgment, the proposed settlement or (ii) deny its obligation to provide indemnification. Any failure by the Indemnifying Person to respond to such notice shall be deemed an election under clause (ii) immediately above.
(f) In the case of a claim for indemnification 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, (ii) admit its obligation to provide indemnification with respect to such Damages, or (iii) dispute the claim for such indemnification. If the Indemnifying Person does not notify the Indemnified Person within such 30-day period that it has cured the Damages or that it disputes the claim for such indemnification, the Indemnifying Person shall be deemed to have disputed such claim for indemnification. If the Indemnifying Person does not admit or otherwise does deny its liability against a claim for indemnification not based upon a Third Person Claim within the 30-day time period set forth in this Section 12.2(f), then the Indemnified Person shall diligently and in good faith pursue its rights and remedies under this Agreement with respect to such claim for indemnification.
Section 12.3 Limitations on Actions.
(a) The representations and warranties of Sellers in Article 5 and of R2KLP in Article 6 shall, without limiting Purchasers’ rights under the R&W Insurance Policy, terminate as of the Closing Date. The representations and warranties of Purchasers in Article 7 shall terminate as of the Closing Date. Each of the respective covenants and performance obligations of Sellers and Purchasers set forth in this Agreement that are to be complied with or performed by Sellers or Purchasers, as applicable, at or prior to the Closing shall terminate as of the Closing Date. All other respective covenants and performance obligations of Sellers and Purchasers set forth in this Agreement that by their terms require performance after the Closing and the corresponding indemnity obligations hereunder shall survive the Closing and remain in full force and effect until fully satisfied and/or performed in accordance with the terms hereof. Notwithstanding anything to the contrary in this Section 12.3, the acknowledgements, disclaimers, and other terms, as applicable, in, Section 7.11, Section 7.12, Section 8.18, Section 14.17, Section 14.18, and Section 14.20 shall survive the Closing indefinitely. The provisions of Article 13 shall survive Closing until 30 days after the expiration of the applicable statute of limitations closes the taxable year to which the subject Taxes relate.
(b) Without limiting the generality of this Section 12.3 from and after the Closing, no action, suit, claim, investigation or proceeding will be brought, encouraged, supported, or maintained by, or on behalf of, Purchasers against any member of the Seller Group, and no recourse will be sought or granted against any member of the Seller Group, by virtue of, or based upon, any alleged misrepresentation or inaccuracy in, or breach of, any of the representations, warranties, covenants, or agreements of Sellers set forth or contained in this Agreement or any other document contemplated hereby or any certificate, instrument, agreement, or other document delivered hereunder (other than, and solely with respect to, any of the covenants in this Agreement that survive the Closing), the subject matter of this Agreement, or any other document contemplated hereby, the transactions contemplated by this Agreement, the business, ownership, management or use of the Assets, the business or operations of the Company, the ownership of the Company Interests, or any actions or omissions at, or prior to, the Closing. Without limiting the generality of this Section 12.3, from and after the Closing, Purchasers will not be entitled to rescind this Agreement or, subject to Article 11, treat this Agreement as terminated by reason of any breach of this Agreement, and Purchasers knowingly, willingly, irrevocably, and expressly waive any and all rights of rescission it may have in respect of any such matter.
(c) The indemnities in Section 12.1(a)(i) and Section 12.1(b) shall terminate as of the termination date of each covenant or agreement that is subject to indemnification thereunder, except in each case as to matters for which a specific written claim for indemnity has been delivered to the Indemnifying Person on or before such termination date. The indemnities in Section 12.1(a)(ii) and Section 12.1(c) shall continue without time limit.
(d) The foregoing provisions of this Section 12.3 shall not limit any Party’s rights to pursue claims for Fraud.
(e) The amount of any Damages for which an Indemnified Person is entitled to indemnity under this Article 12 shall be reduced by the amount of insurance proceeds realized 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).
(f) In no event shall any Indemnified Person be entitled to duplicate compensation with respect to the same Damage, liability, loss, cost, expense, claim, award, or judgment under more than one provision of this Agreement and the Transaction Documents.
(g) Each Indemnified Person shall take all reasonable steps to mitigate all Damages or other liabilities, losses, costs, and expenses after becoming actually aware of any event that could reasonably be expected to give rise to any Damages or other liabilities, losses, costs, or expenses that are indemnifiable or recoverable under this Agreement.
(h)
(i) Effective as of immediately prior to the Closing, Sellers hereby fully and unconditionally release, acquit and forever discharge the Company from any and all manner of actions, causes of actions, claims obligations, demands, damages, costs, expenses, compensation or other relief, whether known or unknown, whether in law or equity, of any kind, Sellers now have or have ever had against the Company, arising out of or relating to Sellers’ ownership of the Company Interests. The foregoing notwithstanding, the release and discharge provided for herein shall not release (A) the Company of its obligations or liabilities, if any, pursuant to this Agreement, (B) the Company of any indemnification and/or exculpation obligations of such Person to Sellers as a manager of such Person, in any Seller’s capacity as such, pursuant to such Person’s Organizational Documents or applicable Law or (C) be deemed to constitute a waiver of the availability of insurance to cover claims.
(ii) Effective as of the Closing, the Purchasers, for themselves and on behalf of the Company and their respective equity holders, successors and assigns, hereby fully and unconditionally releases, acquits, and forever discharges (A) Sellers and (B) all directors, managers, officers, employees, members, partners and agents of the Company holding such position at any time prior to the Closing from any and all manner of actions, causes of actions, claims, obligations, demands, damages, costs, expenses, compensation or other relief, whether known or unknown, whether in law or equity, of any kind, which the Company now has or has ever had against such Persons, arising out of or relating to (x) in respect of Sellers, Sellers’ ownership of the Company Interests and (y) in respect of such directors, managers, officers, employees, members, partners and agents, acts and omissions on behalf of the Company or the relationship with the Company in each case, other than with respect to their respective obligations and liabilities, if any, under this Agreement or the Transaction Documents or for claims of Fraud.
ARTICLE 13
TAX MATTERS
Section 13.1 Tax Filings. Sellers shall prepare (or shall cause to be prepared) and shall file (or caused to be filed) all Flow-Through Returns of the Company for any taxable period ending on or before the Closing Date, including, for the avoidance of doubt, the Company’s final U.S. federal information return on IRS Form 1065 for the period ending on the Closing Date.
Sellers shall be responsible for filing (or causing to be filed) with the applicable Governmental Bodies the Tax Returns of the Company required to be filed on or before the Closing Date, and Sellers shall be responsible for paying (or causing to be paid) the Taxes reflected on such Tax Returns as due and owing (provided that to the extent such Taxes are allocated to Purchasers pursuant to Section 13.2, such payment shall be on behalf of Purchasers, and no later than five days following Sellers’ delivery of evidence of the payment thereof, Purchasers shall pay to Sellers any such Taxes, but only to the extent that such amounts have not already been accounted for under Section 3.3). Purchasers shall be responsible for the filing with the appropriate taxing authorities the Tax Returns of the Company (other than Flow-Through Returns) for all taxable periods beginning prior to the Closing Date that are required to be filed after the Closing Date and paying the Taxes reflected on such Tax Returns as due and owing and shall do so consistently with past practice unless otherwise required by applicable Law (provided, that to the extent such Taxes are allocated to Sellers pursuant to Section 13.2, such payment shall be on behalf of Sellers, and, no later than five days following Purchasers’ delivery to Sellers of evidence of the payment thereof, Sellers shall pay to Purchasers any such Taxes, but only to the extent that such amounts have not already been accounted for under Section 3.3; provided, however, that in the event that Sellers are required by applicable Tax Law to file a Tax Return with respect to Taxes of the Company after the Closing Date which includes all or a portion of a Tax period for which Purchasers are liable for such Taxes, no later than five days following Sellers’ request therefor and delivery to Purchasers of evidence of the payment thereof, Purchasers shall pay to Sellers all such Taxes allocable to Purchasers pursuant to Section 13.2, but only to the extent that such amounts have not already been accounted for under Section 3.3, in each case, whether such Taxes arise out of the filing of an original return or a subsequent audit or assessment of Taxes). Sellers shall be entitled to all Tax credits and Tax refunds that relate to any such Taxes allocable to any Tax period, or portion thereof, (a) with respect to non-Income Taxes, ending before the Effective Time or (b) with respect to Income Taxes, ending at the end of the Closing Date, as applicable, and Purchasers shall promptly pay to Sellers an amount equal to the value of any such Tax credit or Tax refund received by Purchasers or the Company after the Closing Date, net of any reasonable Third Party costs and expenses incurred by Purchasers in obtaining such credit or refund. Sellers shall repay to Purchasers the amount of any Tax credit or Tax refund paid to Sellers pursuant to this Section 13.1 (plus any applicable penalties, interest or other charges imposed by the relevant Governmental Body and paid by Purchasers) in the event that Purchasers or any of their Affiliates are required to repay such credit or refund (including any applicable penalties, interest, or other charges imposed by the relevant Governmental Body) to such Governmental Body.
Section 13.2 Allocation of Taxes. For purposes of Section 3.3, Section 8.4(d), Section 13.1, and Section 13.4, in each case, notwithstanding that such Asset Taxes are payable by the Company (and not Sellers or Purchasers directly), (a) Asset Taxes that are ad valorem, property or other Asset Taxes imposed on a periodic basis that are assessed against the Assets with respect to a Tax period (or portion thereof) beginning at or after the Effective Time, but excluding any such Taxes that are based on the severance or production of Hydrocarbons or the Pennsylvania Impact Fee, shall be allocated entirely to Purchasers, and such Asset Taxes assessed against the Assets with respect to a Tax period (or portion thereof) ending prior to the Effective Time, shall be allocated entirely to Sellers, (b) Asset Taxes that are imposed on the severance or production of Hydrocarbons (including the Pennsylvania Impact Fee) shall be allocated between the Parties
based on the number of units or value of production actually produced, as applicable, before, and at or after, the Effective Time, as applicable and (c) Asset Taxes based upon sales or receipts or resulting from specific transactions such as the sale or other transfer of property, shall be allocated to the period (i.e., prior to the Effective Time or following the Effective Time) in which the transaction giving rise to such Asset Taxes occurred (i.e., prior to the Effective Time or following the Effective Time). For purposes of sub-clause (b) of the immediately preceding sentence, the Pennsylvania Impact Fee shall be allocated between the Parties based on the period to which the underlying production relates, not the year in which the payment of the fee is due. For purposes of sub-clause (b) of the initial sentence of this Section 13.2, Sellers shall be allocated any Pennsylvania Impact Fee resulting from production periods prior to the Effective Time and Purchasers shall be allocated any Pennsylvania Impact Fee resulting from production periods after the Effective Time. For example, the year one Pennsylvania Impact Fee for a well spud in the 2021 calendar year and for which the fee is due in 2022 shall be allocated entirely to Sellers and the fee associated with the same well’s year two production, occurring in the 2022 calendar year and payable in the 2023 calendar year, shall be allocated entirely to Purchasers. For purposes of Section 3.3, Section 13.1, and Section 13.4, in the case of Income Taxes imposed on the Company, the amount of such Taxes allocated to Sellers shall be determined by closing the books of the Company as of the end of the Closing Date notwithstanding that such Taxes are payable by the Company (and not Sellers or Purchasers directly).
Section 13.3 Characterization of Certain Payments. The Parties agree that any payments made pursuant to this Article 13, Article 12, Section 2.2, or Section 10.4 shall be treated for all Tax purposes as an adjustment to the Unadjusted Purchase Price unless otherwise required by Law.
Section 13.4 Amended Tax Returns; Tax Elections. In each case to the extent doing so would cause Sellers or any of their Affiliates to be liable for any Taxes (including amounts for which Sellers are liable under this Agreement), Purchasers will not, without the prior written consent of Sellers (such consent not to be unreasonably withheld, conditioned or delayed) cause or permit any of their Affiliates to (a) file or amend or otherwise modify any Tax Return that relates in whole or in part to any Tax period, or portion thereof, for which Sellers are allocated responsibility for payment pursuant to Section 13.2 (other than to file Tax Returns in the ordinary course of business in accordance with Section 13.1), (b) make or change any election for, or that has retroactive effect to, any Tax period, or portion thereof, for which Sellers are allocated responsibility for payment pursuant to Section 13.2, (c) enter into any voluntary disclosure Tax program, agreement or arrangement with any Tax authority with respect to any Taxes attributable to any Tax period, or portion thereof, for which Sellers are allocated responsibility for payment pursuant to Section 13.2, or (d) extend or waive the statute of limitations with respect to any Tax period, or portion thereof, for which Sellers are allocated responsibility for payment pursuant to Section 13.2.
Section 13.5 Cooperation. Purchasers and Sellers shall cooperate fully, as and to the extent reasonably requested by the other Party, in connection with (a) the filing of any Tax Returns pursuant to this Article 13 and (b) any Tax examination, audit, litigation or similar proceeding. Such cooperation shall include the retention and (upon the other Party’s request) the provision of such records and information which are reasonably relevant to any such Tax Return or examination, audit, litigation, or similar proceeding.
Section 13.6 Tax Audits. After the Closing Date, if Purchasers or any of their Affiliates receives notice of any audit, demand, claim, proposed adjustment, assessment, examination or other administrative or court proceeding with respect to the Company (a) that concerns Income Taxes (including, for the avoidance of doubt, any Taxes related to a Flow-Through Return) with respect to any Pre-Closing Tax Period (an “Income Tax Contest”) or (b) for all other Taxes, with respect to a Pre-Effective Time Tax Period (a “Non-Income Tax Contest” and, together with an Income Tax Contest, a “Tax Contest”), Purchasers shall notify Sellers as soon as practicable and in any event within ten days of receipt of such notice. Sellers shall have the right to control any such Tax Contest, provided that Purchasers shall have the right to participate, at Purchasers’ sole cost and expense, in the conduct of any Tax Contest involving a Straddle Period. If Sellers elect not to control such Tax Contest, Purchasers shall control, at their sole cost and expense, such Tax Contest and Sellers shall have the right to participate in such Tax Contest; provided, however, that, under such circumstances, Purchasers shall have no obligation to defend the Tax Contest or mitigate liabilities of Sellers with respect to such Tax Contest. Notwithstanding the foregoing, the controlling Party shall keep the other Party reasonably informed of the progress of such Tax Contest, and shall not settle any such Tax Contest that would reasonably be expected to have an adverse Tax impact on the other Party without the prior written consent of the other Party (which shall not be unreasonably withheld, conditioned or delayed). Notwithstanding anything in this Agreement to the contrary, the Parties shall cause there to be made or otherwise cooperate in the making, to the maximum extent provided by applicable Law, of one or more elections under Section 6226 of the Code (or any corresponding provision of state, local or non-U.S. Law) relating to any Pre-Closing Tax Period.
Section 13.7 Tax Treatment. The Parties agree that the transactions contemplated by this Agreement will be treated for U.S. federal income Tax purposes as (a) a sale of membership interests of the Company by the Sellers, which shall, for the avoidance of doubt, cause the Company’s taxable year as a partnership to close as of the end of the Closing Date for U.S. federal income tax purposes, and (b) an acquisition of the assets of the Company (other than the Excluded Assets), as described in Revenue Ruling 99-6, situation 2. No Party or any Affiliate thereof shall take a position inconsistent with the preceding sentence for any purpose unless otherwise required pursuant to a “determination” within the meaning of Section 1313(a) of the Code or corresponding provision of applicable U.S. state or local Law.
Section 13.8 Transaction Tax Deductions. Any Transaction Tax Deductions, to the fullest extent permitted by applicable Law (including electing the application of Revenue Procedure 2011-29 to deduct 70% of any “success-based fees” within the meaning of Treasury Regulations Section 1.263(a)-5(f)), shall be reported in a taxable period of the Company ending on or prior to the Closing Date (the benefit of which, for the avoidance of doubt, shall accrue to Sellers). In the event a Transaction Tax Deduction cannot be fully reported in such a period but can be taken into account on a Tax Return for a Straddle Period, any item of deduction attributable to a Transaction Tax Deduction shall be treated (to the fullest extent permitted by applicable Law) as deductible in the pre-Closing portion of the Straddle Period (and the Purchasers shall take such actions as are permitted under applicable Law that are required to cause those deductions to be reported in the pre-Closing portion of the Straddle Period).
ARTICLE 14
MISCELLANEOUS
Section 14.1 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. Each 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 14.2 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 if sent during normal business hours of the recipient or on the next day if sent after normal business hours of the recipient with receipt acknowledged, with the receiving Party affirmatively obligated to promptly acknowledge receipt. Such notices and other communications must be sent to the following addresses or email addresses:
If to Sellers:
Radler 2000 Limited Partnership
1320 S. University Drive, Suite 500
Fort Worth, TX 76107
Attn: Evan Radler
Email: eradler@tug-hillop.com
With a copy to (which shall not constitute notice):
Gibson, Dunn & Crutcher LLP
811 Main Street, Suite 3000
Houston, Texas 77002
Attn: Michael P. Darden; Jeffrey A. Chapman
Email: mpdarden@gibsondunn.com; jchapman@gibsondunn.com
and
Akin Gump Strauss Hauer & Feld LLP
2300 N. Field Street, Suite 1800
Dallas, Texas 75201
Attn: Wesley P. Williams; Cole Bredthauer
Email: WilliamsW@akingump.com; CBredthauer@akingump.com
If to Purchasers:
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Attn: Derek Dixon
Telephone: (405) 935-4020
Email: derek.dixon@chk.com
With a copy to (which shall not constitute notice):
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Attention: Benjamin E. Russ
Telephone: (405) 935-6462
Email: ben.russ@chk.com
Any 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 14.3 Tax, Recording Fees, Similar Taxes & Fees. Purchasers, on the one hand, and Sellers, on the other hand, shall each bear and pay 50% of any Transfer Taxes and similar Taxes and fees incurred and imposed upon, or with respect to, the transactions contemplated hereby. If such transactions are exempt from any such Taxes or fees upon the filing of an appropriate certificate or other evidence of exemption, Purchasers or Sellers, as applicable, will timely furnish to the other Party such certificate or evidence. Except as otherwise provided herein, all costs and expenses (including legal and financial advisory fees and expenses) incurred in connection with, or in anticipation of, this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses. For the avoidance of doubt, all fees, costs and expenses of the R&W Insurance Policy shall be paid by Purchasers, and Sellers will not have any liability with respect thereto.
Section 14.4 Governing Law; Jurisdiction.
(a) THIS AGREEMENT, THE LEGAL RELATIONS BETWEEN THE PARTIES, AND ALL CLAIMS OR CAUSES OF ACTION (WHETHER IN TORT, CONTRACT, OR STATUTE) THAT MAY BE BASED UPON, ARISE OUT OF, OR RELATE TO THIS AGREEMENT, OR THE NEGOTIATION, EXECUTION OR PERFORMANCE OF THIS AGREEMENT, SHALL BE GOVERNED BY, CONSTRUED, AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (INCLUDING ITS STATUTES OF LIMITATIONS) WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION; PROVIDED, HOWEVER, THAT ANY MATTER RELATED TO TITLE TO ANY REAL PROPERTY INCLUDED IN THE ASSETS SHALL BE GOVERNED BY THE LAWS OF THE STATE WHERE SUCH ASSETS ARE LOCATED.
(b) THE PARTIES HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA LOCATED IN DALLAS COUNTY, TEXAS (OR, IF REQUIREMENTS FOR FEDERAL JURISDICTION ARE NOT MET, STATE COURTS LOCATED IN DALLAS 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 (EXCEPT TO THE EXTENT A DISPUTE, CONTROVERSY, OR CLAIM ARISING OUT OF, IN RELATION TO, OR IN
CONNECTION WITH THE RESOLUTION OF ANY DISPUTED TITLE DEFECTS OR ENVIRONMENTAL DEFECTS, OR TITLE BENEFITS PURSUANT TO SECTION 4.4, OR THE DETERMINATION OF PURCHASE PRICE ADJUSTMENTS PURSUANT TO SECTION 10.4(C) IS REFERRED TO AN EXPERT PURSUANT TO THOSE SECTIONS), 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 ADDRESS SET OUT IN SECTION 14.2 OF THIS AGREEMENT 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 IN RESPECT OF ANY ACTION, SUIT, OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
(d) EACH PARTY, FOR ITSELF OR ANY OF ITS ASSETS, HEREBY WAIVES ANY IMMUNITY TO THE FULLEST EXTENT PERMITTED BY THE LAWS OF ANY APPLICABLE JURISDICTION. THIS WAIVER INCLUDES IMMUNITY FROM: (i) JURISDICTION; (ii) SERVICE OF PROCESS; (iii) ANY LITIGATION, EXPERT DETERMINATION, MEDIATION, OR ARBITRATION PROCEEDING COMMENCED UNDER THIS AGREEMENT; (iv) ANY JUDICIAL, ADMINISTRATIVE, OR OTHER PROCEEDINGS THAT ARE PART OF, OR IN AID OF, THE LITIGATION, EXPERT DETERMINATION, MEDIATION, OR ARBITRATION COMMENCED UNDER THIS AGREEMENT; AND (v) ANY EFFORT TO CONFIRM, ENFORCE, OR EXECUTE ANY DECISION, SETTLEMENT, AWARD, JUDGMENT, SERVICE OF PROCESS, EXECUTION ORDER, OR ATTACHMENT (INCLUDING PRE-JUDGMENT ATTACHMENT) THAT RESULTS FROM LITIGATION, EXPERT DETERMINATION, MEDIATION, ARBITRATION, OR ANY JUDICIAL OR ADMINISTRATIVE PROCEEDINGS COMMENCED UNDER THIS AGREEMENT. FOR THE PURPOSES OF THIS WAIVER, PURCHASERS ACKNOWLEDGES THAT THEIR RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT ARE OF A COMMERCIAL AND NOT A GOVERNMENTAL NATURE.
Section 14.5 Waivers. Any failure by any 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 14.6 Assignment. Neither Sellers nor Purchasers shall assign all or any part of this Agreement, and shall not assign or delegate any of its rights or duties hereunder, without the prior written consent of the other Party (which consent may be withheld in such other Party’s sole discretion) and any assignment or delegation made without such consent 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 assigns.
Section 14.7 Entire Agreement. This Agreement (including, for purposes of certainty, the Appendix, Exhibits, and Schedules attached hereto), the documents to be executed hereunder, the Confidentiality Agreement, and the Escrow Agreement 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 14.8 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 14.9 No Third Party Beneficiaries. Nothing in this Agreement shall entitle any Person other than Purchasers and Sellers to any claims, cause of action, remedy, or right of any kind, except the rights expressly provided in Section 8.1(d), Section 8.12, Section 8.17, Section 12.1(e), and Section 14.18 to the Persons described therein.
Section 14.10 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 arm’s-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.
Section 14.11 Limitation on Damages. NOTWITHSTANDING ANYTHING TO THE CONTRARY, EXCEPT IN CONNECTION WITH ANY DAMAGES INCURRED BY THIRD PARTIES FOR WHICH INDEMNIFICATION IS SOUGHT UNDER THE TERMS OF THIS AGREEMENT, NONE OF PURCHASERS, SELLERS, OR ANY OF THEIR RESPECTIVE AFFILIATES 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 PURCHASER AND EACH SELLER, FOR ITSELF AND ON BEHALF OF ITS RESPECTIVE AFFILIATES, HEREBY EXPRESSLY WAIVES ANY RIGHT TO CONSEQUENTIAL, SPECIAL, INDIRECT, PUNITIVE, OR EXEMPLARY DAMAGES IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 14.12 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 14.13 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 (including any payment required hereunder) is not a Business Day (or if the period during which any notice is required or permitted to be given or any action taken expires on a date that 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 or permitted to be given or action taken) shall be the next day that is a Business Day.
Section 14.14 Delivery of Records. Sellers, at Purchasers’ cost and expense, shall deliver the Records to Purchasers within 30 days following Closing. Sellers may retain copies of the Records.
Section 14.15 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 14.16 Specific Performance. The Parties agree that if any of the provisions of this Agreement were not performed 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 Parties shall be entitled to specific performance of the terms hereof and immediate injunctive relief, in addition to any other remedy available at Law or in equity. Each of the Parties hereby further waives (a) any defense in any action for specific performance that a remedy at Law would be adequate and (b) any requirement under any Law to post security as a prerequisite to obtaining equitable relief.
Section 14.17 Reliance on Own Judgment; Disclaimer of Reliance. THE PARTIES AGREE THAT THE TERMS OF THIS AGREEMENT ARE NEGOTIATED TERMS AND NOT BOILERPLATE. PRIOR TO SIGNING THIS AGREEMENT, ALL TERMS WERE OPEN FOR NEGOTIATION. THE PARTIES ACKNOWLEDGE THAT THEY WERE EACH REPRESENTED BY COUNSEL AND RELIED UPON SUCH COUNSEL TO ADVISE THEM IN CONNECTION WITH THE NEGOTIATION AND DRAFTING OF THIS AGREEMENT.
THE PARTIES ACKNOWLEDGE AND AGREE THAT THEY ARE EACH SOPHISTICATED AND KNOWLEDGEABLE IN BUSINESS MATTERS AND HAVE DEALT WITH EACH OTHER AT ARM’S LENGTH IN NEGOTIATING THIS AGREEMENT. BY SIGNING BELOW, EACH PARTY REPRESENTS THAT IT HAS CAREFULLY REVIEWED THIS AGREEMENT, UNDERSTANDS ITS TERMS, HAS SOUGHT AND OBTAINED INDEPENDENT LEGAL ADVICE WITH RESPECT TO THE NEGOTIATION AND PREPARATION OF THIS AGREEMENT, HAS RELIED WHOLLY UPON ITS OWN JUDGMENT, KNOWLEDGE, AND INVESTIGATION, AND THE ADVICE OF ITS RESPECTIVE COUNSEL, AND THAT IT HAS NOT RELIED UPON OR BEEN INFLUENCED TO ANY EXTENT IN MAKING OR ENTERING INTO THIS AGREEMENT BY ANY REPRESENTATIONS OR STATEMENTS MADE BY ANY OTHER PARTY, OR BY ANYONE ACTING ON BEHALF OF ANY OTHER PARTY, EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN THIS AGREEMENT OR CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), OR IN ANY OTHER TRANSACTION DOCUMENT. THE PARTIES ALSO ACKNOWLEDGE AND AGREE THAT THE OTHER PARTY HAS NO DUTY TO MAKE ANY DISCLOSURES TO ANY OTHER PERSON IN CONNECTION WITH MAKING OR ENTERING INTO THIS AGREEMENT. THE PARTIES EXPRESSLY DISCLAIM RELIANCE ON ANY REPRESENTATION OR STATEMENT NOT MADE IN THIS AGREEMENT IN DECIDING TO ENTER INTO THIS AGREEMENT OR CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), OR IN ANY OTHER TRANSACTION DOCUMENT. IT IS UNDERSTOOD AND AGREED THAT, IN ENTERING INTO THIS AGREEMENT, EACH OF THE PARTIES EXPRESSLY ASSUMES THE RISK THAT A FACT NOW BELIEVED TO BE TRUE MAY HEREAFTER BE FOUND TO BE OTHER THAN TRUE, OR FOUND TO BE DIFFERENT IN MATERIAL OR IMMATERIAL RESPECTS FROM THAT WHICH IS NOW BELIEVED, AND THE PARTIES FURTHER UNDERSTAND AND AGREE THAT THIS AGREEMENT SHALL BE AND WILL REMAIN EFFECTIVE WITHOUT REGARD FOR ANY DIFFERENCES IN FACT, OR DIFFERENCES IN THE PERCEPTION OF FACTS, THAT MAY HEREAFTER BE FOUND. THE PARTIES WAIVE AND DISCLAIM ANY RIGHT OR ABILITY TO SEEK TO REVOKE, RESCIND, VACATE, OR OTHERWISE AVOID THE OPERATION AND EFFECT OF THIS AGREEMENT ON THE BASIS OF AN ALLEGED FRAUDULENT INDUCEMENT, MISREPRESENTATION, OR MATERIAL OMISSION, OR ON THE BASIS OF A MUTUAL OR UNILATERAL MISTAKE OF FACT OR LAW, OR NEWLY DISCOVERED INFORMATION.
Section 14.18 Limitation on Recourse. THE PARTIES ACKNOWLEDGE AND AGREE THAT NO PAST, PRESENT, OR FUTURE DIRECTOR, MANAGER, OFFICER, EMPLOYEE, INCORPORATOR, MEMBER, PARTNER, STOCKHOLDER, AGENT, ATTORNEY, REPRESENTATIVE, AFFILIATE, OR FINANCING SOURCE AND THEIR RESPECTIVE PAST, PRESENT, OR FUTURE DIRECTORS, MANAGERS, OFFICERS, EMPLOYEES, INCORPORATORS, MEMBERS, PARTNERS, STOCKHOLDERS, AGENTS, ATTORNEYS, REPRESENTATIVES, AFFILIATES (OTHER THAN ANY OF THE PARTIES), OR FINANCING SOURCES OF ANY OF THE PARTIES (EACH, A “NON-
RECOURSE PERSON” FOR PURPOSES OF THIS PROVISION), IN SUCH CAPACITY, SHALL HAVE ANY LIABILITY OR RESPONSIBILITY (IN CONTRACT, TORT, OR OTHERWISE) FOR ANY AND ALL SUITS, LEGAL OR ADMINISTRATIVE PROCEEDINGS, CLAIMS, DEMANDS, DAMAGES, LOSSES, COSTS, LIABILITIES, INTEREST, OR CAUSES OF ACTION WHATSOEVER, AT LAW OR IN EQUITY, KNOWN OR UNKNOWN, WHICH ARE ARISING FROM, BASED UPON, RELATED TO, OR ASSOCIATED WITH THE NEGOTIATION, PERFORMANCE, AND CONSUMMATION OF THIS AGREEMENT OR THE TRANSACTION CONTEMPLATED HEREUNDER. THIS AGREEMENT MAY ONLY BE ENFORCED AGAINST, AND ANY DISPUTE, CONTROVERSY, MATTER, OR CLAIM ARISING FROM, BASED UPON, RELATED TO, OR ASSOCIATED WITH THIS AGREEMENT, OR THE NEGOTIATION, PERFORMANCE, OR CONSUMMATION OF THIS AGREEMENT, MAY ONLY BE BROUGHT AGAINST THE ENTITIES THAT ARE EXPRESSLY NAMED AS PARTIES, AND THEN ONLY WITH RESPECT TO THE SPECIFIC OBLIGATIONS SET FORTH HEREIN WITH RESPECT TO SUCH PARTY. EACH NON-RECOURSE PERSON IS EXPRESSLY INTENDED AS A THIRD PARTY BENEFICIARY OF THIS SECTION 14.18 AND, NOTWITHSTANDING ANYTHING TO THE CONTRARY, SHALL HAVE THE RIGHT TO ENFORCE THIS PROVISION.
Section 14.19 Schedules. Neither the Schedules, any disclosure made in or by virtue of the Schedules, nor the inclusion of any matter or information on a Schedule, (a) constitutes or implies any representation, warranty, or covenant by Sellers not expressly set out in this Agreement, (b) has the effect of, or may be construed as, adding to, broadening, deleting from, or revising the scope of any of the representations, warranties, or covenants of Sellers in this Agreement, (c) is not an admission of liability under any applicable Law and does not mean that such information is required to be disclosed by this Agreement, that such information is material, or that such information does, or may, have a Material Adverse Effect, and (d) shall not be deemed an indication that such matter necessarily would, or may, breach a representation, warranty, or covenant absent its inclusion on such Schedule; rather, the Schedules, any disclosure made in or by virtue of the Schedules, and the inclusion of any matter or information on a Schedule are intended only to qualify the representations, warranties, and covenants in this Agreement and to set forth other information as may be required by this Agreement. Matters reflected in the Schedules are not limited to matters required by this Agreement to be reflected in the Schedules, and may be set forth on a Schedule for information purposes only. Neither the specification of any Dollar amount, item, or matter in any representation, warranty, or covenant contained in this Agreement, nor the inclusion of any specific item or matter in any Schedule, is intended to imply that such amount, or a higher or lower amount, or the item or matter so included, or any other item or matter, is or is not material or in the ordinary course of business, and no Person shall use the setting forth of any such amount or the inclusion of any such item or matter in any dispute or controversy between the Parties as to whether any obligation, item, or matter described or not described therein or included or not included in the Schedules is or is not material or in the ordinary course of business for purposes of this Agreement. The information set forth on the Schedules shall not be used as a basis for interpreting the terms “material,” “materially,” “materiality,” “Material Adverse Effect,” or any similar qualification in this Agreement. The disclosure of any matter in any Schedule shall be deemed to be a disclosure under any other Schedule to the extent that the relevance of such matter to such other Schedule is readily apparent on its face. Headings have been inserted in the Schedules for reference only and do not amend the descriptions of the disclosed items set forth in this Agreement.
Section 14.20 Attorney-Client Privilege; Continued Representation. Purchasers agree, on their own behalf and on behalf of their respective directors, officers, managers, employees, and Affiliates, that, following the Closing, Gibson, Dunn & Crutcher LLP and Akin Gump Strauss Hauer & Feld LLP may each serve as counsel to Sellers or any of their Affiliates in connection with any matters related to this Agreement and the transactions contemplated hereunder, including any litigation, claim or obligation arising out of or relating to this Agreement or the transactions contemplated hereunder notwithstanding any representation by Gibson, Dunn & Crutcher LLP or Akin Gump Strauss Hauer & Feld LLP prior to the Closing Date of the Company. Each Purchaser, on behalf of itself and the Company, hereby (a) waives any claim they have or may have that either Gibson, Dunn & Crutcher LLP or Akin Gump Strauss Hauer & Feld LLP has a conflict of interest or is otherwise prohibited from engaging in such representation and (b) agrees that, in the event that a dispute arises after the Closing between Purchasers and Sellers or any of their respective Affiliates, Gibson, Dunn & Crutcher LLP and/or Akin Gump Strauss Hauer & Feld LLP may represent Sellers or any of their Affiliates in such dispute even though the interests of such Person(s) may be directly adverse to Purchasers or the Company and even though Gibson, Dunn & Crutcher LLP and/or Akin Gump Strauss Hauer & Feld LLP may have represented the Company in a matter substantially related to such dispute. Purchasers and the Company also further agree that, as to all communications prior to Closing among Gibson, Dunn & Crutcher LLP or Akin Gump Strauss Hauer & Feld LLP and the Company, Sellers, or any of their respective Affiliates and representatives that primarily relate to the negotiation of transactions contemplated hereunder, the attorney-client privilege, and the expectation of client confidence belongs to Sellers and may be controlled by Sellers and shall not pass to or be claimed by Purchasers or the members of the Company. Notwithstanding the foregoing, in the event that a dispute arises between Purchasers, the Company, and a Third Party other than a Party after the Closing, the Company may assert the attorney-client privilege to prevent disclosure of confidential communications by Gibson, Dunn & Crutcher LLP or Akin Gump Strauss Hauer & Feld LLP to such Third Party; provided, however, that the Company may not waive such privilege without the prior written consent of Sellers (not to be unreasonably withheld, conditioned, or delayed).
Section 14.21 Party Representatives.
(a) For purposes of this Agreement, Sellers, without any further action, shall be deemed to have appointed, and do hereby appoint, R2KLP as their representative (in such capacity, the “Seller Representative”), as the attorney-in-fact for and on behalf of Sellers (both individually and collectively), with respect to the exercise of any decision, right, consent, election, or other action that any Seller is required or permitted to make or take under the terms of this Agreement (the “Seller Delegated Matters”), and Purchasers may rely on the decisions of Seller Representative with respect to all Seller Delegated Matters. For the avoidance of doubt, notwithstanding anything to the contrary contained herein, Sellers will be treated as a single party for purposes of any notice, election, exercise of a right, consent or similar action to be made by Sellers under this Agreement. The Parties further acknowledge that Purchasers shall have no responsibility to determine the portion of the Closing Cash Payment to be paid to Sellers and shall be entitled to rely on the preliminary settlement statement and the final settlement statement, as well as instructions by the Seller Representative, as to the portion of the Closing Cash Payment payable to each Seller. Sellers shall be jointly and severally liable for any Damages of any Seller or Sellers under this Agreement or any Transaction Document; provided, however that in no event shall Sellers be liable in any respect for any Damages of the Chief Parties under the PIPA.
(b) For purposes of this Agreement, Purchasers, without any further action, shall be deemed to have appointed, and do hereby appoint, CHK Parent as their representative (in such capacity, the “Purchaser Representative”), as the attorney-in-fact for and on behalf of Purchasers (both individually and collectively), with respect to the exercise of any decision, right, consent, election, or other action that any Purchaser is required or permitted to make or take under the terms of this Agreement (the “Purchaser Delegated Matters”), and Sellers may rely on the decisions of Purchaser Representative with respect to all Purchaser Delegated Matters. For the avoidance of doubt, notwithstanding anything to the contrary contained herein, Purchasers will be treated as a single party for purposes of any notice, election, exercise of a right, consent or similar action to be made by Purchasers under this Agreement.
Section 14.22 Purchaser Group Consent. To the extent the consent or approval of any member of the Purchaser Group is required in connection with the transfer or assignment of any contracts, agreements or instruments described on Schedule 6.11 from a Seller to the Company, Purchasers (on their own behalf and on behalf of each member of the Purchaser Group) hereby unconditionally and irrevocably grant such consent or approval.
[Signature Pages Follow]
IN WITNESS WHEREOF, this Agreement has been signed by each of the Parties on the Execution Date.
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| RADLER 2000 LIMITED PARTNERSHIP |
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| By: | Tug Hill, Inc., its general partner |
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| By: | /s/ Michael Radler |
| Name: | Michael Radler |
| Title: | President |
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| TUG HILL, INC. |
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| By: | /s/ Michael Radler |
| Name: | Michael Radler |
| Title: | President |
Signature Page to Membership Interest Purchase Agreement
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| PURCHASERS: |
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| CHESAPEAKE ENERGY CORPORATION |
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| By: | /s/ Domenic J. Dell'Osso, Jr. |
| Name: | Domenic J. Dell'Osso, Jr. |
| Title: | President and Chief Executive Officer |
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| CHESAPEAKE APPALACHIA, L.L.C. |
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| By: | /s/ Domenic J. Dell'Osso, Jr. |
| Name: | Domenic J. Dell'Osso, Jr. |
| Title: | President and Chief Executive Officer |
Signature Page to Membership Interest Purchase Agreement
APPENDIX A
ATTACHED TO AND MADE A PART OF THAT
CERTAIN MEMBERSHIP INTEREST PURCHASE AGREEMENT, DATED AS OF THE EXECUTION DATE, BY AND AMONG SELLERS AND PURCHASERS
DEFINITIONS
“Actual Knowledge” has the meaning set forth in Section 5.1(a).
“Adjusted Purchase Price” has the meaning set forth in Section 3.3.
“Adjustment Excess” has the meaning set forth in Section 10.4(d)(ii).
“AFEs” means authorization for expenditures issued pursuant to a Contract.
“Affiliate” means, with respect to any Person, any Person that directly or indirectly Controls, is Controlled by, or is under common Control with such Person. Notwithstanding anything to the contrary herein, (a) prior to Closing, the Company shall be deemed to be an Affiliate of Sellers, and not Purchasers, and (b) from and after the Closing, the Company shall be deemed to be an Affiliate of Purchasers, and not Sellers.
“Agreement” has the meaning set forth in the Preamble of this Agreement.
“Allocated Value” has the meaning set forth in Section 3.4.
“Arbitration Decision” has the meaning set forth in Section 4.4(e).
“Asset Taxes” means ad valorem, property, excise, severance, production, Pennsylvania Impact Fee, sales, use, or similar Taxes based upon the operation or ownership of the Assets or the production of Hydrocarbons therefrom or the receipt of proceeds therefrom; but excluding, for the avoidance of doubt, Income Taxes and Transfer Taxes.
“Assets” means, excluding the Excluded Assets, all of the assets and properties owned or leased by the Company, including all of the Company’s right, title, and interest in and to the following:
(a) the oil, gas, and mineral leases, subleases, and other leaseholds, royalties, overriding royalties, net profits interests, carried interests, farmout rights, and mineral fee interests described on Exhibit A-1, whether producing or non-producing, together with all leasehold estates created thereby, in each case, subject to the terms, conditions, covenants, and obligations set forth in such leases (collectively, the “Leases”), together with all pooled, communitized, or unitized acreage or rights that includes or constitutes all or part of any Leases (the “Units”), and all tenements, hereditaments, and appurtenances belonging to the Leases and Units;
(b) all oil, gas, water, disposal, injection, monitoring, and other wells located on the Leases or Units, whether producing, shut-in, completed, or temporarily or permanently plugged and abandoned, including the oil and gas wells described on Exhibit A-2 (collectively, the “Wells” and together with the Units and the Leases, the “Properties”); and all tangible personal property, supplies, inventory, equipment, fixtures, and improvements, in each case, to the extent they are primarily owned or held for use in connection with the operation, production, treating, gathering, storing, transportation, or marketing of Hydrocarbons from the Wells (the “Equipment”);
(c) all contracts, agreements, and instruments (including any amendments thereto) that are binding on the Properties or relate to the ownership or operation of the Properties to the extent the foregoing primarily cover or are attributable to the Properties or the production of Hydrocarbons from the Properties, including operating agreements, unitization, pooling and communitization agreements, declarations and orders, area of mutual interest agreements, joint venture agreements, farmin and farmout agreements, bottom-hole agreements, participation agreements, exchange agreements, balancing agreements, Hydrocarbon gathering and transportation agreements, agreements for the sale and purchase of Hydrocarbons, and processing agreements; provided, however, the foregoing shall not include (i) any contracts, agreements, or instruments to the extent they relate to any of the Excluded Assets and (ii) the Leases, the Surface Interests, the Permits, and other instruments creating or evidencing an interest in the ownership of the Assets (subject to such exclusions, the “Contracts”); and
(d) all surface fee interests, easements, licenses, servitudes, rights-of-way, surface leases, and other surface rights appurtenant to, and used or held for use primarily in connection with, the Properties, including those surface interests set forth on Exhibit A-3, and all improvements, fixtures, structures, facilities and appurtenances (including any field offices or yards) located thereon or relating thereto (the “Surface Interests”).
“Assignment Agreement” means the assignment of the Company Interest from Sellers to Purchasers substantially in the form attached hereto as Exhibit B.
“Base Cash Purchase Price” has the meaning set forth in Section 3.1(a).
“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 that the Company sponsors, maintains or contributes to for the benefit of its employees or former employees.
“Business Day” means each calendar day except Saturdays, Sundays, and federal holidays.
“Casualty Loss” has the meaning set forth in Section 4.7.
“Central Time” means the central time zone of the United States of America.
“CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq., as amended.
“CHK Common Stock” means the common stock, par value $0.01 per share, of CHK Parent.
“CHK Parent” has the meaning set forth in the Preamble of this Agreement.
“CHK Purchaser” has the meaning set forth in the Preamble of this Agreement.
“Claim Notice” has the meaning set forth in Section 12.2(b).
“Closing” has the meaning set forth in Section 10.1.
“Closing Cash Payment” has the meaning set forth in Section 10.4(a).
“Closing Date” has the meaning set forth in Section 10.1.
“Code” means the United States Internal Revenue Code of 1986, as amended.
“Commercially Reasonable Efforts” means reasonable efforts of a Party under existing circumstances; provided, however, that such efforts shall not include the incurring of any liability or obligation or the payment of any money (unless the other Party has agreed in writing to pay such costs).
“Company” has the meaning set forth in the Recitals of this Agreement.
“Company Common Interest” has the meaning set forth in the Recitals of this Agreement.
“Company Financial Statements” has the meaning set forth in Section 8.19.
“Company Interests” has the meaning set forth in the Recitals of this Agreement.
“Company Organizational Documents” has the meaning set forth in Section 5.6(a).
“Company Preferred Interests” has the meaning set forth in the Recitals of this Agreement.
“Confidentiality Agreement” means that certain Confidentiality Agreement dated October 20, 2021 among Chief Oil & Gas LLC, Chief Exploration & Development LLC, Tug Hill Marcellus, LLC, Radler 2000, LP and Chesapeake Energy Corporation.
“Contracts” has the meaning set forth in the definition of “Assets”.
“Control” means the ability to direct the management and policies of a Person through ownership of voting shares or other equity rights, pursuant to a written agreement, or otherwise. The terms “Controls” and “Controlled by” and other derivatives shall be construed accordingly.
“COVID-19” means SARS-CoV-2 or COVID-19, and any variants or evolutions thereof or related or associated epidemics, pandemics or disease outbreaks.
“Cure Period” has the meaning set forth in Section 4.2(b)(i).
“Customary Post-Closing Consents” means the consents and approvals from Governmental Bodies with respect to the transactions contemplated hereunder that are customarily obtained after the consummation of similar transactions.
“Cut-off Date” means the day that is one year after Closing.
“Damages” means the amount of any actual liability, loss, cost, expense, claim, award, or judgment incurred or suffered by any Person, whether attributable to personal injury or death, property damage, contract claims (including contractual indemnity claims), torts, statutory or common law claims or otherwise, including reasonable fees and expenses of attorneys, consultants, accountants, or other agents and experts reasonably incident to matters indemnified against, and the reasonable costs of investigation and monitoring of such matters, and the reasonable costs of enforcement of the indemnity; provided, however, that the term “Damages” shall not include (i) lost profits or other consequential damages suffered by the Party claiming indemnification, or any punitive damages(except as otherwise provided herein), and (ii) any liability, loss, cost, expense, claim, award, or judgment to the extent directly resulting from or to the extent increased by the actions or omissions of any Indemnified Person after the Closing Date.
“Deemed Defect Amount” has the meaning set forth in Section 4.2(b)(ii).
“Defect Escrow Amount” has the meaning set forth in Section 4.2(b)(iii).
“Defensible Title” means that title of the Company with respect to each Lease and Well (as applicable) that is deducible of record or created or caused by a joint operating agreement, a pooling agreement, a unitization agreement, a farmout agreement, or any similar agreement, and that, except for and subject to the Permitted Encumbrances:
(i) with respect only to the Target Formation of each Lease or Well, as applicable, entitles the Company to receive Hydrocarbons within, produced, saved, and marketed from the Target Formation of such Lease or Well, as applicable, throughout the duration of the productive life of such Lease or Well, of not less than the Net Revenue Interest shown on Exhibit A-1 or Exhibit A-2 (as applicable) for such Lease or Well, except for (a) decreases in connection with those operations in which the Company may be a nonconsenting co-owner (if and to the extent permitted by this Agreement), (b) decreases resulting from the establishment or amendment of pools or units from and after the Effective Time (if and to the extent permitted by this Agreement), (c) decreases required to allow other working interest owners to make up past underproduction or pipelines to make up past under-deliveries, and (d) as otherwise expressly shown on Exhibit A-1 or Exhibit A-2 (as applicable);
(ii) with respect only to the Target Formation of each Well, obligates the Company to bear a percentage of the costs and expenses for the ownership, operation, maintenance, and development of, and operations relating to, such Well not greater than the working interest shown in Exhibit A-2 for such Well without increase throughout the productive life of such Well, except for (a) increases that are accompanied by at least a proportionate increase in the Company’s Net Revenue Interest with respect to the Target Formation of the affected Well, (b) increases resulting from contribution requirements with respect to defaults by co-owners under the applicable operating agreement, and (c) as otherwise expressly shown on Exhibit A-2;
(iii) with respect only to the Target Formation of each Lease, entitles the Company to the Net Mineral Acres for such Lease as set forth on Exhibit A-1 throughout the productive life thereof, except for increases due to (a) increased working interests that are accompanied by at least a proportionate increase in the Company’s Net Revenue Interest with respect to the Target Formation of the affected Lease, (b) increased working interests resulting from contribution requirements with respect to defaults by co-owners under the applicable operating agreement, and (c) increased working interests resulting from matters otherwise expressly shown on Exhibit A-1; and
(iv) is free and clear of liens or similar encumbrances.
“Deposit” has the meaning set forth in Section 3.1(b).
“Dispute Notice” has the meaning set forth in Section 4.2(b)(ii).
“Disputed Defect” has the meaning set forth in Section 4.2(b)(ii).
“Disputed Title Matters” has the meaning set forth in Section 4.4(a).
“Disputing Party” has the meaning set forth in Section 4.4(a).
“DOJ” means the Department of Justice.
“Dollars” means U.S. Dollars.
“Effective Time” has the meaning set forth in Section 2.2(a).
“Encumbrance” means any charge, claim, license, limitation, condition, equitable interest, mortgage, lien, pledge, security interest, or similar encumbrance, right of first refusal and/or right 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 Defect” means (i) a condition that is the subject of any written notice from a Governmental Body asserting or alleging a violation of an Environmental Law attributable to the use, ownership or operation of the Assets, (ii) a condition on or affecting an Asset that violates or causes an Asset (or the Company with respect to an Asset) not to be in compliance with any Environmental Law, or (iii) a condition on or otherwise affecting or arising from any Asset with respect to which investigation, reporting, monitoring, remedial, response, or corrective action is required under Environmental Law; provided, however, that the following shall not be considered Environmental Defects for any purpose of this Agreement: (a) any matter listed on Schedule 6.16 as of the Execution Date, and (b) any matter to the extent affecting an Asset that is operated by Purchasers or any of their Affiliates as of the Execution Date to the extent Purchasers had knowledge of such matter prior to the Title Claim Date.
“Environmental Defect Deductible” has the meaning set forth in Section 4.5(b).
“Environmental Defect Threshold” has the meaning set forth in Section 4.5(b).
“Environmental Laws” means, as the same have been amended to the Execution Date, 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. § 1471 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.; and the Safe Drinking Water Act, 42 U.S.C. §§ 300f through 300j; and all similar Laws as of the Execution Date of any Governmental Body having jurisdiction over the property in question addressing pollution or protection of the environment, natural resources or threatened, endangered or otherwise protected species, including those Laws relating to the storage, handling and use of Hazardous Substances and those Laws relating to the generation, processing, treatment, storage, handling, use, transportation, disposal or other management thereof, and all regulations implementing the foregoing that are applicable to the ownership, operation and maintenance of the Assets.
“Environmental Liabilities” means any and all environmental response costs (including costs of remediation), damages, natural resource damages, settlements, consulting fees, expenses, penalties, fines, orphan share, prejudgment and post-judgment interest, court costs, attorneys’ fees, and other liabilities incurred or imposed (i) pursuant to any order, notice of responsibility (including requirements embodied in Environmental Laws), injunction, judgment, or similar act (including settlements) by any Governmental Body or court of competent jurisdiction to the extent arising out of any violation of, or remedial obligation under, any Environmental Laws that are attributable to the ownership or operation of the Assets or (ii) pursuant to any claim or cause of action by a Governmental Body or other Person for personal injury, property damage, damage to natural resources, remediation, or response costs to the extent arising out of any violation of, or any remediation obligation under, any Environmental Laws that are attributable to the ownership or operation of the Assets.
“Equipment” has the meaning set forth in the definition of “Assets.”
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
“Escrow Account” means the escrow account established and maintained pursuant to the Escrow Agreement.
“Escrow Agent” means JPMorgan Chase Bank, N.A.
“Escrow Agreement” means the escrow agreement, dated as of the Execution Date, executed by Sellers, Purchasers, and the Escrow Agent, in respect of the receipt, holding, and distribution, as the case may be, of the Deposit.
“Excluded Assets” means: (a) the Excluded Records; (b) except for Imbalances, all trade credits, accounts receivable, and other proceeds, income, or revenues attributable to the Assets with respect to any period of time prior to the Effective Time; (c) to the extent they do not relate to matters for which Purchasers are providing indemnification hereunder, all claims, audit rights, and causes of action of Sellers or their Affiliates arising under or with respect to any Contract that are attributable to the period of time prior to the Effective Time (including claims for adjustments or refunds);
(d) all claims, rights, and interests of Sellers or their Affiliates (i) under any policy or agreement of insurance or indemnity agreement, (ii) under any bond or security instrument or (iii) to any insurance or condemnation proceeds or awards arising, in each case, from acts, omission or events, or damage to or destruction of property prior to the Effective Time or matters for which Sellers are otherwise required to provide indemnification to Purchasers hereunder; (e) any Tax refunds or Tax carry-forward amounts attributable to (i) the Assets or the Company (A) prior to the Effective Time (with respect to non-Income Taxes) or (B) prior to the Closing Date (with respect to Income Taxes) or (ii) to Sellers’ businesses generally; (f) all of Sellers’ and their Affiliates’ software licenses, proprietary computer software, patents, trade secrets, copyrights, names, trademarks, logos, and other intellectual property; (g) all data and Contracts that cannot be disclosed to Purchasers as a result of confidentiality arrangements under agreements with Third Parties (provided that Sellers use Commercially Reasonable Efforts to obtain a waiver of any such confidentiality restriction); (h) any of the Assets excluded from the transactions contemplated hereunder pursuant to Section 4.6, Section 8.1, Section 8.14, or otherwise excluded under this Agreement; (i) all seismic, geological, geophysical and similar licenses held by a member of the Company Group, (j) all right, title, and interest to the properties (including personal property) or other assets (including contractual rights) set forth on Exhibit A-4, which properties and assets, for the avoidance of doubt, will be assigned to Sellers pursuant to Section 8.14; and (k) any contract evidencing any indebtedness of any Seller or the Company.
“Excluded Defect” has the meaning set forth in the definition of “Title Defect”.
“Excluded Records” means (i) all corporate, financial, income, and franchise Tax and legal records of Sellers that relate to Sellers’ businesses generally (whether or not relating to the Assets), (ii) any records to the extent disclosure or transfer is restricted by any Third Party license agreement, other Third Party agreement, or applicable Law (provided that Sellers use Commercially Reasonable Efforts to obtain a waiver of any such restriction), (iii) Sellers’ and their Affiliates’ (other than the Company) computer software, (iv) all legal records and legal files of Sellers and all other work product of and attorney-client communications with any of Sellers’ legal counsel (other than copies of (a) title opinions, (b) Contracts, and (c) records and files with respect to any previous litigation matters), (v) personnel records, (vi) records relating to the sale of the Assets, including bids received from and records of negotiations with Third Parties, and (vii) any records with respect to the other Excluded Assets.
“Execution Date” has the meaning set forth in Preamble of this Agreement.
“Final Disputed Title Matters” has the meaning set forth in Section 4.4(b).
“Financial Statements” has the meaning set forth in Section 7.16(a).
“Flow-Through Return” means a Tax Return reporting income of the Company that is allocable to and reportable as income of the direct or indirect beneficial owner(s) of the Company under applicable Law.
“Fraud” means an actual, intentional, and willful misrepresentation by a Party with respect to the making of any representation or warranty set forth in Article 5, Article 6, or Article 7 of this Agreement, as applicable; provided, that (a) the Party making such representation or warranty had actual knowledge that the applicable representation or warranty, as may be qualified in this Agreement, was false at the time it was made, (b) the representation or warranty was made with the intention that the other Party rely thereon to its detriment, (c) the representation or warranty was relied upon by the other Party to such other Party’s detriment, and (d) “Fraud” does not include constructive fraud or other claims based upon constructive knowledge, negligent misrepresentation, recklessness, or other similar theories.
“FTC” means the Federal Trade Commission.
“Fundamental Representations” means (a) with respect to each Seller, the representations and warranties of such Seller in Section 5.2, Section 5.3, Section 5.4, Section 5.5(a), Section 5.6(a), Section 5.7 and Section 5.9, (b) with respect to R2KLP, the representations and warranties of R2KLP in Section 6.2, Section 6.3, Section 6.4(a), Section 6.5(a), Section 6.6, and Section 6.19 and (c) with respect to each Purchaser, the representations and warranties of such Purchaser in Section 7.2, Section 7.3, Section 7.4, Section 7.5, Section 7.6, and Section 7.10.
“GAAP” means U.S. generally accepted accounting principles as in effect on the Execution Date.
“Governmental Body” 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, tribal, or other government or political subdivision thereof, or any quasi-governmental or private body exercising any administrative, executive, judicial, legislative, police, regulatory, taxing, importing, tribal, or other governmental or quasi-governmental authority.
“Hazardous Substances” means any pollutants, contaminants, toxic or hazardous or radioactive 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 (but excluding any Hydrocarbons and NORM).
“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.
“Imbalances” means any imbalance at the wellhead between the amount of Hydrocarbons produced from any of the Wells and allocated to the interests of the Company therein and the shares of production from the relevant Well to which the Company 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 the Company and the Hydrocarbons actually delivered on behalf of the Company at that point.
“Income Tax Contest” has the meaning set forth in Section 13.6.
“Income Taxes” means any income, franchise, capital gains and similar Taxes.
“Indebtedness” of any Person means, without duplication, (a) the principal of and accrued and unpaid interest, prepayment premiums or penalties, and fees and expenses in respect of indebtedness of such Person for borrowed money; (b) all obligations (contingent or otherwise) of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable incurred in the ordinary and usual course of business of normal day-to-day operations of the business consistent with past practice); (c) all capitalized lease obligations; (d) all obligations of the type referred to in clauses (a) through (c) of any Persons the payment of which such Person is responsible or liable, directly or indirectly, as obligor, guarantor, surety or otherwise; and (e) all obligations of the type referred to in clauses (a) through (d) of other Persons secured by any lien on any property or asset of such Person (whether or not such obligation is assumed by such Person).
“Indemnified Person” has the meaning set forth in Section 12.2(a).
“Indemnifying Person” has the meaning set forth in Section 12.2(a).
“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.
“Laws” means all Permits, statutes, rules, regulations, ordinances, orders, and codes of Governmental Bodies.
“Leases” has the meaning set forth in the definition of “Assets.”
“Marcellus Formation” means the interval from the stratigraphic equivalent of the top of the Marcellus Shale at 6,905 ft MD through to the stratigraphic equivalent of the top of the Onondaga Limestone at 7,305 ft MD, as such intervals are generally shown in the Bishop Unit 7 wellbore (API: 37115213110000) located in Susquehanna County; Auburn Township, Pennsylvania.
“Material Adverse Effect” means any event, occurrence, change, circumstance, development, state of facts, effect, or condition that, individually or in the aggregate, (a) has been, or would be reasonably likely to be, materially adverse to (I) the Sellers, any of the Company Interests or the Assets, in each case, taken as a whole and as currently owned and operated, or (II) for the Purchasers, the business, liabilities, financial condition, or results of operations of CHK Parent or (b) materially and adversely affects the ability of the applicable Party to timely 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 or prospective change in applicable Laws or accounting standards or the
interpretation or enforcement thereof; (ii) any change in economic, political, or business conditions or financial, credit, debt, or securities market conditions generally, including changes in interest rates, exchange rates, commodity prices, electricity prices, or fuel costs; (iii) any legal, regulatory, or other change generally affecting the industries, industry sectors, or geographic sectors (A) for the Sellers, of the Assets, or (B) for the Purchasers, of the CHK Parent, in each case, including any change in the prices of oil, natural gas, or other Hydrocarbon products 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 regulators); (v) any change resulting or arising from political, geopolitical, social, or regulatory conditions, including any outbreak, continuation, or escalation of any military conflict, declared or undeclared war, armed hostilities, civil unrest, public demonstrations, or acts of foreign or domestic terrorism or sabotage (including any cyber-attack or hacking), or the escalation of any of the foregoing; (vi) any epidemic, pandemic, or outbreak of disease (including, for the avoidance of doubt, COVID-19), or the escalation of any of the foregoing; (vii) any natural or manmade disasters or calamities, weather conditions including hurricanes, floods, tornados, tsunamis, earthquakes, and wild fires, or other force majeure events, or the escalation of any of the foregoing; (viii) any change resulting or arising from the taking of, or failure to take, any action by Sellers, the Company, or any of their respective Affiliates, required or otherwise expressly contemplated by this Agreement or consented to or requested by Purchasers; or (ix) any change resulting or arising from the taking of, or failure to take, any action by Purchasers, the Purchaser Group, or any of their respective Affiliates, required or otherwise expressly contemplated by this Agreement or consented to or requested by Sellers. For the avoidance of doubt, a Material Adverse Effect shall not be measured against any forward-looking statements, financial projections, or forecasts applicable to the Assets.
“Material Contracts” has the meaning set forth in Section 6.11(a).
“Measurement Date” has the meaning set forth in Section 7.15(a).
“Net Mineral Acres” means, as computed separately with respect to each Lease, (i) the number of gross acres in the land covered by such Lease, multiplied by (ii) the lessor’s undivided mineral interest in the Hydrocarbons in the Target Formation in such lands covered by such Lease, multiplied by (iii) the Company’s working interest in such Lease; provided, however, if items (i) and (ii) of this definition vary as to different areas within any tracts or parcels burdened by such Lease, a separate calculation shall be performed with respect to each such area.
“Net Revenue Interest” means, with respect to each Lease or Well (limited, however to the Target Formation with respect to each Lease and Well), the interest in and to all Hydrocarbons produced and saved or sold from or allocated to the Target Formation of such Lease or Well, in each case, after giving effect to all royalties, overriding royalties, net profits interests, or other similar burdens on or measured by production of Hydrocarbons.
“Non-Income Tax Contest” has the meaning set forth in Section 13.6.
“Non-Recourse Person” has the meaning set forth in Section 14.18.
“NORM” means naturally occurring radioactive material.
“Organizational Documents” means (a) with respect to any Person that is a corporation, its articles or certificate of incorporation or memorandum and articles of association, as the case may be, and bylaws, (b) with respect to any Person that is a partnership, its certificate of partnership and partnership agreement, (c) with respect to any Person that is a limited liability company, its certificate of formation and limited liability company or operating agreement, (d) with respect to any Person that is a trust or other entity, its declaration or agreement of trust or other constituent document, (e) in each case of the preceding clauses, all other similar documents, instruments, or certificates executed, adopted, or filed in connection with the creation, formation, or organization of any such Person, including any amendments thereto, and (f) with respect to any other Person, its comparable organizational documents.
“Outside Date” has the meaning set forth in Section 11.1(c).
“Party” and “Parties” have the meanings set forth in the Preamble of this Agreement.
“Pennsylvania Impact Fee” means the Pennsylvania unconventional gas well fee provided for in Pa. Cons. Stat. Ann. § 2302.
“Permits” means any permits, approvals or authorizations by, or filings with, Governmental Bodies.
“Permitted Encumbrances” means any or all of the following:
(i) royalties and any overriding royalties, net profits interests, production payments, reversionary interests, and other similar burdens on the production of Hydrocarbons to the extent that the net cumulative effect of such burdens does not (a) reduce the Company’s Net Revenue Interest with respect to the Target Formation for any Lease or Well below that shown in Exhibit A-1 or Exhibit A-2 (as applicable) for such Lease or Wells, (b) increase the Company’s Net Mineral Acres (due to an increased working interest) with respect to the Target Formation in any Lease or working interest in any Lease or Well above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) without, in each case, a proportionate increase in the Net Revenue Interest of the Company with respect to the Target Formation or (c) decrease the Company’s Net Mineral Acres with respect to the Target Formation in any Lease below that shown in Exhibit A-1;
(ii) 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, to the extent that the net cumulative effect of such instruments does not (a) reduce the Company’s Net Revenue Interest with respect to the Target Formation for any Lease or Well below that shown in Exhibit A-1 or Exhibit A-2 (as applicable) (b) increase the Company’s Net Mineral Acres (due to an increased working interest) with respect to the Target Formation in any Lease or working interest in any Lease or Well above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) without, in each case, a proportionate increase in the Net Revenue Interest of the Company with respect to the Target Formation or (c) decrease the Company’s Net Mineral Acres with respect to the Target Formation in any Lease below that shown in Exhibit A-1;
(iii) Preferential Rights, Third Party consents to assignment or similar transfer restrictions; provided that, with respect to Preferential Rights and Specified Consent Requirements, the Sellers shall have complied with the provisions of Section 4.6;
(iv) liens for Taxes or assessments not yet delinquent or, if delinquent, being contested in good faith by appropriate actions;
(v) any (a) inchoate liens or charges constituting or securing the payment of expenses incurred incidental to maintenance, development, production, or operation of the Leases and Wells or for the purpose of developing, producing, or processing Hydrocarbons therefrom or therein, and (b) 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 (including any amounts being withheld as provided by Law), or if delinquent, being contested in good faith by appropriate actions;
(vi) all rights to consent by, required notices to, filings with, or other actions by Governmental Bodies in connection with the transactions contemplated hereby, if they are not required or customarily obtained in the region where the Assets are located prior to sale or conveyance, including Customary Post-Closing Consents;
(vii) 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;
(viii) easements, rights-of-way, restrictions, covenants, servitudes, Permits, surface leases, rights in respect of surface operations, and other encumbrances or rights that do not prevent or adversely affect operations as currently conducted on the Properties;
(ix) calls on production under existing Contracts;
(x) gas balancing and other production balancing obligations, and obligations to balance or furnish make-up Hydrocarbons under Hydrocarbon sales, gathering, processing, or transportation contracts;
(xi) all rights reserved to or vested in any Governmental Bodies (a) 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 Body or under any right, franchise, grant, license, or Permit issued or afforded by any Governmental Body, or (b) to terminate any right, franchise, grant, license, or Permit issued or afforded by such Governmental Body;
(xii) any lien, charge, or other encumbrance on or affecting the Assets that is discharged by Sellers or the Company at or prior to Closing;
(xiii) any lien or trust arising under worker’s compensation, unemployment insurance, pension or employment Laws, or regulations;
(xiv) the terms and conditions of the Leases (including any free gas arrangements under the Leases), including any depth limitations or similar limitations that may be set forth therein, to the extent that the net cumulative effect of such terms and conditions does not (a) reduce the Company’s Net Revenue Interest with respect to the Target Formation for any Lease or Well below that shown in Exhibit A-1 or Exhibit A-2 (as applicable) for such Lease or Well, (b) increase the Company’s Net Mineral Acres (due to an increased working interest) with respect to the Target Formation in any Lease or working interest in any Lease or Well above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) without, in each case, a proportionate increase in the Net Revenue Interest of the Company with respect to the Target Formation or (c) decrease the Company’s Net Mineral Acres with respect to the Target Formation in any Lease below that shown in Exhibit A-1;
(xv) the terms and conditions of the Contracts to the extent that the net cumulative effect of such instruments does not (a) reduce the Company’s Net Revenue Interest with respect to the Target Formation for any Lease or Well below that shown in Exhibit A-1 or Exhibit A-2 (as applicable) for such Lease or Well, (b) increase the Company’s Net Mineral Acres (due to an increased working interest) with respect to the Target Formation in any Lease or working interest in any Lease or Well above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) without, in each case, a proportionate increase in the Net Revenue Interest of the Company with respect to the Target Formation or (c) decrease the Company’s Net Mineral Acres with respect to the Target Formation in any Lease below that shown in Exhibit A-1;
(xvi) any matters shown on Schedule 3.4, Exhibit A-1, Exhibit A-2, Schedule 5.8, and Schedule 6.7, as applicable;
(xvii) any lien, mortgage, security interest, pledge, charge, or similar encumbrance resulting from Sellers’ or the Company’s conduct of business in compliance with this Agreement;
(xviii) the terms and conditions of the following agreements and contracts: (a) that certain Amended and Restated Participation Agreement dated May 2, 2019 between The Quillin-Morgan Trust, Robert Quillin & Vanessa Morgan, Trustees, The Robbs Family Trust, Edward E. Robbs & Belinda Robbs, Co-Trustees; The Schnerk Revocable Trust, George C. Schnerk, Trustee, Source Oil & Gas, LLC, Giana Resources, LLC, Denpeer Energy, LP, XYR Oil and Gas, LLC, Reach Petroleum, LLC, Unconventionals Natural Gas, LLC, Chief Exploration & Development LLC, Radler 2000 Limited Partnership, Tug Hill Marcellus, LLC, and Enerplus Resources (USA) Corporation, as amended by that certain First Amendment of Amended and Restated Participation Agreement dated October 13, 2020, (b) that certain Side Letter Agreement related to Amended and Restated Participation Agreement dated May 2, 2019 between The Quillin-Morgan Trust, Robert Quillin & Vanessa Morgan, Trustees, The Robbs Family Trust, Edward E. Robbs & Belinda Robbs, Co-Trustees; The Schnerk Revocable Trust, George C. Schnerk, Trustee, Source Oil & Gas, LLC, Giana Resources, LLC, Denpeer Energy, LP, XYR Oil and Gas, LLC, Reach Petroleum, LLC, Unconventionals Natural Gas, LLC, Chief Exploration & Development LLC, Radler 2000 Limited Partnership, Tug Hill Marcellus, LLC, and Enerplus Resources (USA) Corporation, (c) that certain Participation Agreement between Seaspin Pty Ltd, as trustee of the Aphrodite Trust, Craig Ian Burton, as trustee of the CI Burton Family Trust, and eCorp Resource Partners I, LP, dated February 2006, as amended by that certain Amendment to Participation Agreement dated November 20, 2006, and (d) that certain Agreement related to Participation Agreement between Seaspin Pty Ltd, as trustee of the Aphrodite Trust, Craig Ian Burton, as trustee of the CI Burton Family Trust, and eCorp Resource Partners I, LP, dated March 15, 2008;
(xix) any Excluded Defects; and
(xx) any (a) lien, mortgage, security interest, pledge, charge or similar encumbrance in favor of, or held by, any member of the Purchaser Group, and (b) consent to assignment or similar transfer restriction in favor of, or held by, any member of the Purchaser Group.
“Person” means any individual, firm, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization, Governmental Body, or any other entity.
“Phase I Environmental Site Assessment” means an environmental site assessment performed pursuant to the American Society for Testing and Materials ASTM-1527-13, or any similar environmental assessment.
“Phase II Environmental Site Assessment” has the meaning set forth in Section 8.1(a).
“PIPA” means that certain Partnership Interest Purchase Agreement entered on the Execution Date by and among the Jan & Trevor Rees-Jones Revocable Trust, Rees –Jones Family Holdings, LP, Chief E&D Participants, LP, and Chief E&D (GP) LLC, as sellers (“Chief Parties”), and Purchasers, as purchasers, in relation to the sale and purchase of all interests in Chief E&D Holdings LP, Chief Exploration and Development LLC and Chief Oil & Gas LLC.
“Post-Closing Escrow Amount” has the meaning set forth in Section 10.4(b).
“Pre-Closing Tax Period” means any taxable period ending on or before the Closing Date and the portion of any Straddle Period up to and including the Closing Date.
“Pre-Effective Time Tax Period” means any taxable period ending before the Effective Time.
“Preferential Rights” has the meaning set forth in Section 4.6(a).
“Properties” has the meaning set forth in the definition of “Assets”.
“Property Costs” means (i) all operating and production expenses (including costs of insurance, rentals, shut-in payments and royalty payments; title examination and curative actions; and gathering, processing, and transportation costs in respect of Hydrocarbons produced from the Properties) and capital expenditures (including bonuses, broker fees, lease acquisition costs, lease renewal costs, and lease extension costs (in each case, other than costs to correct, cure, and remedy any Title Defect), costs of drilling and completing wells, and costs of acquiring equipment) incurred in the ownership or operation of the Assets in the ordinary course of business and, where applicable, in accordance with the relevant operating or unit agreement or pooling order, if any, and (ii) Third Party overhead costs charged to the Assets under the applicable operating agreement;
provided, however, “Property Costs” shall not include obligations and liabilities attributable to (a) personal injury or death, property damage, torts, breach of Contract claims, or violation of Law, (b) obligations related to the abandonment or plugging of wells, dismantling or decommissioning facilities, or closing pits and restoring the surface around such wells, facilities or pits, (c) the remediation of any Environmental Liabilities, including obligations to remediate any contamination of groundwater, surface water, soil, sediments, or personalty under applicable Environmental Laws, (d) the costs to correct, cure, and remedy any Title Defect or any Casualty Loss, (e) obligations to pay royalties, overriding royalties, net profits interests, or other similar burdens paid to Third Parties on or measured by production of Hydrocarbons relating to the Assets, including those held in suspense, (f) obligations with respect to any Imbalances associated with the Assets, (g) claims for indemnification or reimbursement from Third Parties with respect to costs of the types described in the preceding clauses (a) through (f), (h) Asset Taxes, Income Taxes or Transfer Taxes, and (i) any and all general and administrative expenses (including corporate G&A) of the Company or Sellers.
“Public Announcement Restrictions” has the meaning set forth in Section 8.3(a).
“Public Health Measures” means any closures, “shelter-in-place,” “stay at home,” workforce reduction, social distancing, shut down, closure, curfew or other restrictions or any other Laws, orders, directives, guidelines or recommendations issued by any Governmental Body, the Centers for Disease Control and Prevention, the World Health Organization or any industry group in connection with COVID-19 or any other epidemic, pandemic or outbreak of disease, or in connection with or in response to any other public health conditions.
“Purchase Price Allocation Schedule” has the meaning set forth in Section 3.2.
“Purchaser” and “Purchasers” have the meaning set forth in the Preamble of this Agreement.
“Purchaser Delegated Matters” has the meaning set forth in Section 14.21(b).
“Purchaser Group” means Purchasers, their current and former Affiliates, and each of their respective officers, directors, employees, agents, advisors, and other Representatives.
“Purchaser Material Adverse Effect” means a Material Adverse Effect with respect to the Purchasers, taken as a whole.
“Purchaser Representative” has the meaning set forth in Section 14.21(b).
“R&W Insurance Policy” means that certain buyer-side representations and warranties insurance policy described in Section 8.11 in the name and for the benefit of Purchasers, their Affiliates, and their respective officers, directors, employees, and agents.
“R&W Insurer” means the insurer providing the R&W Insurance Policy.
“R2KLP” has the meaning set forth in the Preamble of this Agreement.
“Records” means the books, records, and files of the Company, to the extent in the possession or control of Sellers or their Affiliates, whether written or electronically stored, relating to the Assets, including: (i) land and title records (including abstracts of title, title opinions, and title curative documents); (ii) Contract files; (iii) operations, environmental, production, and accounting records; and
(iv) production, facility, and well records and data; provided, however, that the term “Records” shall not include any of the foregoing items that are Excluded Records and any information that cannot, without unreasonable effort or expense that Purchasers do not agree to undertake or pay, as applicable, be separated from any files, records, maps, information, and data related to the Excluded Assets.
“Registration Rights Agreement” means the Registration Rights Agreement in the form attached hereto as Exhibit C to be executed and delivered at Closing by CHK Parent and the Sellers (and those Sellers’ designees whom Seller designates as a party thereto as identified in writing to Purchaser at least two Business Days prior to the Closing Date).
“Remediation” means with respect to an Environmental Defect, the implementation and completion of any remedial, removal, response, or other corrective actions, including monitoring, to the extent but only to the extent required under Environmental Laws to correct or remove such Environmental Defect.
“Remedy Deadline” has the meaning set forth in Section 4.2(b)(iv).
“Remedy Notice” has the meaning set forth in Section 4.2(b)(ii).
“Representatives” means (i) any prospective purchaser of a Party or an interest in a Party; (ii) partners, employees, officers, directors, members, equity owners, and counsel of a Party or any of its Affiliates or of any of the parties listed in subsection (i) above; (iii) any consultant or agent retained by a Party or the parties listed in subsection (i) or (ii) above; and (iv) any bank, other financial institution, or entity funding, or proposing to fund, such Party’s operations in connection with the Assets, including any consultant retained by such bank, other financial institution, or entity.
“Scheduled Closing Date” has the meaning set forth in Section 10.1.
“SEC Documents” has the meaning set forth in Section 7.16(a).
“Securities Act” has the meaning set forth in Section 7.10.
“Seller” and “Sellers” have the meaning set forth in the Preamble of this Agreement.
“Seller Delegated Matters” has the meaning set forth in Section 14.21(a)
“Seller Group” means Sellers, their current and former Affiliates (except, from and after the Closing, the Company), and each of their respective officers, directors, employees, agents, advisors, and other Representatives.
“Seller Representative” has the meaning set forth in Section 14.21(a)
“Specified Consent Requirement” means a requirement to obtain a lessor’s or other Person’s prior consent to assignment or transfer of an interest in a Company Interest or an Asset that (i) is triggered by the transactions contemplated by this Agreement and (ii) expressly provides that (a) any purported assignment or transfer in the absence of such consent first having been obtained is void, invalid, or unenforceable against such Person,
(b) the Person holding the right may terminate the applicable Lease, Permit, Contract, or other instrument creating Sellers’ or the Company’s rights in the affected Company Interest or Property, or (c) the Person holding the right may impose additional conditions on the proposed assignee or transferee that involve the payment of money, the posting of collateral security, or the performance of other obligations by the assignee or transferee that would not be required in the absence of the transactions contemplated by this Agreement.
“Specified Midstream Contracts” means the Contracts set forth on Schedule 1.1.
“Stock Purchase Price” has the meaning set forth in Section 3.1(a).
“Straddle Period” means any Tax period beginning on or prior to and ending after the Closing Date.
“Subsidiary” means, with respect to any Person, any other Person of which at least 50% of the outstanding voting securities or other voting equity interests are owned, directly or indirectly, by such first Person.
“Surface Interests” has the meaning set forth in the definition of “Assets.”
“Suspense Funds” has the meaning set forth in Section 6.17.
“Target Formation” means (a) with respect to each Well, the currently producing formation of such Well, and (b) with respect to each Lease, to the extent not allocated to a Well, the Marcellus Formation.
“Tax Contest” has the meaning set forth in Section 13.6.
“Tax Return” means any return (including any information 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 Body with respect to any Tax.
“Taxes” means all federal, state, local, and foreign income, profits, franchise, sales, use, ad valorem, property, severance, production, excise, stamp, documentary, real property transfer or gain, gross receipts, goods and services, registration, capital, transfer, or withholding taxes or other assessments, duties, fees, or charges imposed by any Governmental Body, including any interest, penalties, or additional amounts that may be imposed with respect thereto.
“THI” has the meaning set forth in the Recitals of this Agreement.
“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 12.2(b).
“THM MIPA” means that certain Membership Interest Purchase Agreement entered on the Execution Date by and among Sellers and Purchasers in relation to the sale and purchase of all membership interests in Tug Hill Marcellus, LLC.
“Title Arbitration Notice” has the meaning set forth in Section 4.4(b).
“Title Arbitrator” has the meaning set forth in Section 4.4(c).
“Title Benefit” means any right, circumstance, or condition that operates to (i) increase the Net Revenue Interest of the Company in the Target Formation of any Lease or Well as set forth on Exhibit A-1 or Exhibit A-2 (as applicable) above that shown on Exhibit A-1 or Exhibit A-2 (as applicable) with respect to such Lease or Well without a greater than proportionate increase in the Company’s working interest above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) for the applicable Lease or Well, or (ii) in the case of any Lease, increase the Net Mineral Acres for such Lease in the Target Formation as set forth in Exhibit A-1 above that shown on Exhibit A-1 as a result of an increase in (a) the number of gross acres in the lands covered by such Lease or (b) the undivided percentage interest in oil, gas, and other minerals covered by the Lease in such lands.
“Title Benefit Amount” has the meaning set forth in Section 4.3(b).
“Title Benefit Notice” has the meaning set forth in Section 4.3(a).
“Title Benefit Property” has the meaning set forth in Section 4.3(a).
“Title Claim Date” has the meaning set forth in Section 4.2(a).
“Title Defect” means (i) an Environmental Defect or (ii) any lien, charge, encumbrance, obligation, defect, or other similar matter that causes the Company not to have Defensible Title in and to the Leases and the Wells, as applicable, as of the Title Claim Date or the Closing Date; provided, however, that the following shall not be considered Title Defects for any purpose of this Agreement (each an “Excluded Defect”):
(a) defects in the chain of title consisting of the failure to recite marital status in a document or omissions of successions of heirship or estate proceedings, unless Purchasers provide affirmative evidence that such failure or omission could reasonably be expected to result in another Person’s superior claim of title to the relevant Asset;
(b) defects arising out of lack of survey, unless a survey is expressly required by applicable Laws;
(c) defects based on a gap in the Company’s chain of title in the federal records as to federal Leases, the state’s records as to state Leases, or in the county records as to other Leases, unless, in the case of any of the foregoing, such gap is affirmatively shown to exist in the county records by an abstract of title, title opinion, or landman’s title chain or runsheet, which documents shall be included in a Title Defect Notice;
(d) defects as a consequence of cessation of production, insufficient production, or failure to conduct operations on any of the Properties held by production, or lands pooled, communitized, or unitized therewith, except to the extent the cessation of production, insufficient production, or failure to conduct operations could reasonably be expected to give rise to a right to terminate the Lease in question, evidence of which shall be included in a Title Defect Notice;
(e) defects based (i) solely on the lack of information in Sellers’ or the Company’s files, or (ii) solely on information in Sellers’ or the Company’s files, in each case, unless Purchasers provide evidence that such lack of information could reasonably result in another Person’s superior claim of title to the relevant Property;
(f) defects based solely on references to a document because such document is not in Sellers’ or the Company’s files;
(g) defects based on Tax assessment, Tax payment or similar records (or the absence of such activities or records);
(h) defects arising out of (i) lack of corporate or other entity authorization or (ii) failure to demonstrate of record proper authority for execution by a Person on behalf of a corporation, limited liability company, partnership, trust, or other entity, in each case, unless such lack of authorization or failure to demonstrate of record proper authority results in a Third Party’s actual and superior claim of title to the relevant property;
(i) defects that have been cured by the passage of time or such other means that would render such defect invalid according to applicable Law, or as to which the applicable Laws of limitations or prescription would bar any attack or claim;
(j) defects, encumbrances, or loss of title affecting ownership interests in formations other than the relevant Target Formation;
(k) defects based upon the failure to record any federal, state, or Indian Leases (or assignments thereof), in any applicable county records;
(l) defects that affect only which person has the right to receive royalty (or similar) payments (rather than the amount or the proper payment of such royalty payment);
(m) defects arising from prior oil and gas leases in the chain of title that are not surrendered of record, unless Purchasers affirmatively demonstrate that such prior oil and gas leases had not expired prior to the creation of the Asset in question;
(n) defects or irregularities arising out of the lack of recorded powers of attorney from any Person to execute and deliver documents on their behalf, unless affirmative evidence exists (and is provided) that the action was not authorized and results in a Person’s assertion of superior title;
(o) defects or irregularities resulting from the failure to record releases of liens, mortgages, security interests, pledges, charges, or similar encumbrances that have expired by their own terms;
(p) defects based on or arising out of the failure of the Company or any Third Party to enter into, be party to, or be bound by, pooling provisions, a pooling agreement, declaration or order, production sharing agreement, production allocation agreement, production handling agreement, or other similar agreement with respect to any horizontal Well that crosses more than one Lease or tract, to the extent that (i) such Well has been permitted by the applicable Governmental Body or (ii) the allocation of Hydrocarbons produced from such Well among such Leases or tracts is based upon the length of the “as drilled” horizontal wellbore open for production, take points, the total length of the horizontal wellbore, or other methodology that is intended to reasonably attribute to each such Lease or tract its share of such production; or
(q) defects arising from any Encumbrance created by a mineral owner, which has not been subordinated to the lessee’s interest.
“Title Defect Amount” has the meaning set forth in Section 4.2(d).
“Title Defect Deductible” has the meaning set forth in Section 4.5(b).
“Title Defect Notice” has the meaning set forth in Section 4.2(a).
“Title Defect Property” has the meaning set forth in Section 4.2(a).
“Title Defect Threshold” has the meaning set forth in Section 4.5(b).
“Transaction Documents” means this Agreement and any other documents executed in connection with this Agreement.
“Transaction Tax Deductions” means the Tax deductions related to or arising by reason of, without duplication, (i) the payment of Indebtedness contemplated by this Agreement (including any deferred financing costs) and (ii) any other amounts paid by (or treated for U.S. federal income Tax purposes as paid by) the Company at or prior to the Closing or otherwise economically borne by any of the Sellers that would not have been paid in the absence of the transactions contemplated by this Agreement.
“Transfer Taxes” means all transfer, documentary, sales, use, stamp, stamp duty, registration, recording, deed recording fee, value added, mortgage, license, lease, leasehold interest, filing, gross receipts, excise, stock, and conveyance taxes and other such Taxes and fees (including any penalties and interest, but excluding any Income Taxes) incurred in connection with the transactions contemplated by this Agreement and the documents to be delivered hereunder (or under any Transaction Document).
“Transition Services Agreement” means that certain Transition Services Agreement to be entered into pursuant to the PIPA between Rees-Jones Holdings LLC and Purchasers.
“Unadjusted Purchase Price” has the meaning set forth in Section 3.1(a).
“Units” has the meaning set forth in the definition of “Assets”.
“Wells” has the meaning set forth in the definition of “Assets”.
MEMBERSHIP INTEREST PURCHASE AGREEMENT
BY AND AMONG
RADLER 2000 LIMITED PARTNERSHIP, AND
TUG HILL, INC.,
TOGETHER, AS SELLERS,
AND
CHESAPEAKE ENERGY CORPORATION
AND
CHESAPEAKE APPALACHIA, L.L.C.,
TOGETHER, AS PURCHASERS
___________________________________
DATED AS OF JANUARY 24, 2022
__________________________________
| | | | | |
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 Costs and Revenues | 3 |
Section 2.3 Procedures | 4 |
Section 2.4 Cash Free, Indebtedness Free | 5 |
ARTICLE 3 PURCHASE PRICE | 5 |
Section 3.1 Purchase Price | 5 |
Section 3.2 Allocation of Purchase Price | 6 |
Section 3.3 Adjustments to Purchase Price | 7 |
Section 3.4 Allocated Values | 9 |
Section 3.5 Escrow Agreement | 9 |
Section 3.6 Withholding | 9 |
ARTICLE 4 TITLE AND ENVIRONMENTAL MATTERS | 10 |
Section 4.1 Sellers’ Title | 10 |
Section 4.2 Title Defects | 10 |
Section 4.3 Title Benefits | 16 |
Section 4.4 Title Disputes | 17 |
Section 4.5 Limitations on Applicability | 19 |
Section 4.6 Consents to Assignment and Preferential Rights to Purchase | 21 |
Section 4.7 Casualty or Condemnation Loss | 23 |
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLERS | 23 |
Section 5.1 Generally | 23 |
Section 5.2 Existence and Qualification | 23 |
Section 5.3 Power | 23 |
Section 5.4 Authorization and Enforceability | 23 |
Section 5.5 No Conflicts | 24 |
Section 5.6 Capitalization | 24 |
Section 5.7 Liability for Brokers’ Fees | 24 |
Section 5.8 Litigation | 24 |
Section 5.9 Bankruptcy | 25 |
Section 5.10 Investment Intent | 25 |
TABLE OF CONTENTS
(Cont.)
| | | | | |
ARTICLE 6 REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY AND THE ASSETS | 25 |
Section 6.1 Generally | 25 |
Section 6.2 Existence and Qualification | 25 |
Section 6.3 Power | 26 |
Section 6.4 No Conflicts | 26 |
Section 6.5 Capitalization | 26 |
Section 6.6 Subsidiaries | 26 |
Section 6.7 Litigation | 27 |
Section 6.8 Taxes and Assessments | 27 |
Section 6.9 Capital Commitments | 28 |
Section 6.10 Compliance with Laws | 28 |
Section 6.11 Material Contracts | 28 |
Section 6.12 Payments for Production and Imbalances | 30 |
Section 6.13 Consents and Preferential Purchase Rights | 30 |
Section 6.14 Non-Consent Operations | 30 |
Section 6.15 Plugging and Abandonment | 30 |
Section 6.16 Environmental Matters | 31 |
Section 6.17 Suspense Funds; Royalties; Expenses | 31 |
Section 6.18 [Reserved.] | 31 |
Section 6.19 Bankruptcy | 31 |
Section 6.20 Credit Support | 31 |
Section 6.21 Bank Accounts | 32 |
Section 6.22 Employee Benefit Matters | 32 |
Section 6.23 Employment and Labor Matters | 32 |
Section 6.24 Insurance | 32 |
Section 6.25 [Reserved.] | 33 |
Section 6.26 Books and Records | 33 |
Section 6.27 Special Warranty | 33 |
Section 6.28 Oil and Gas Properties | 33 |
Section 6.29 Permits | 33 |
Section 6.30 Sufficiency of Assets | 33 |
Section 6.31 Wells | 33 |
Section 6.32 Leases | 33 |
Section 6.33 Condemnation; Casualty Loss | 33 |
Section 6.34 Specified Matters | 34 |
Section 6.35 Absence of Certain Developments | 34 |
ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF PURCHASERS | 34 |
Section 7.1 Generally | 34 |
Section 7.2 Existence and Qualification | 34 |
Section 7.3 Power | 34 |
TABLE OF CONTENTS
(Cont.)
| | | | | |
Section 7.4 Authorization and Enforceability | 35 |
Section 7.5 No Conflicts | 35 |
Section 7.6 Liability for Brokers’ Fees | 35 |
Section 7.7 Litigation | 35 |
Section 7.8 Financing | 35 |
Section 7.9 Contracts | 36 |
Section 7.10 Securities Law Compliance | 36 |
Section 7.11 Opportunity to Verify Information | 36 |
Section 7.12 Independent Evaluation | 36 |
Section 7.13 Consents, Approvals or Waivers | 38 |
Section 7.14 Bankruptcy | 38 |
Section 7.15 Capitalization | 38 |
Section 7.16 SEC Documents; Financial Statements; No Liabilities | 39 |
Section 7.17 Internal Controls; Nasdaq Listing Matters | 40 |
Section 7.18 Form S-3 | 41 |
Section 7.19 No Stockholder Approval | 41 |
ARTICLE 8 COVENANTS OF THE PARTIES | 41 |
Section 8.1 Access | 41 |
Section 8.2 [Reserved] | 43 |
Section 8.3 Public Announcements; Confidentiality | 43 |
Section 8.4 Operation of Business | 44 |
Section 8.5 Change of Name | 47 |
Section 8.6 Replacement of Bonds, Letters of Credit, and Guaranties | 47 |
Section 8.7 Notification of Breaches | 48 |
Section 8.8 Amendment to Schedules | 48 |
Section 8.9 Further Assurances | 49 |
Section 8.10 [Reserved.] | 49 |
Section 8.11 R&W Insurance Policy | 49 |
Section 8.12 Directors and Officers | 49 |
Section 8.13 Cash Distributions | 50 |
Section 8.14 Excluded Assets | 50 |
Section 8.15 [Reserved.] | 50 |
Section 8.16 Certain Nasdaq Matters | 50 |
Section 8.17 Financing and SEC Filing Assistance | 50 |
Section 8.18 Certain Disclaimers | 52 |
Section 8.19 Company Financials | 55 |
Section 8.20 Hedges | 55 |
ARTICLE 9 CONDITIONS TO CLOSING | 55 |
Section 9.1 Sellers’ Conditions to Closing | 55 |
Section 9.2 Purchasers’ Conditions to Closing | 56 |
TABLE OF CONTENTS
(Cont.)
| | | | | |
ARTICLE 10 CLOSING | 57 |
Section 10.1 Time and Place of Closing | 57 |
Section 10.2 Obligations of Sellers at Closing | 58 |
Section 10.3 Obligations of Purchasers at Closing | 58 |
Section 10.4 Closing Cash Payment and Post-Closing Purchase Price Adjustments | 59 |
ARTICLE 11 TERMINATION | 62 |
Section 11.1 Termination | 62 |
Section 11.2 Effect of Termination | 63 |
ARTICLE 12 INDEMNIFICATION | 64 |
Section 12.1 Indemnification | 64 |
Section 12.2 Indemnification Actions | 66 |
Section 12.3 Limitations on Actions | 68 |
ARTICLE 13 TAX MATTERS | 70 |
Section 13.1 Tax Filings | 70 |
Section 13.2 Allocation of Taxes | 71 |
Section 13.3 Characterization of Certain Payments | 71 |
Section 13.4 Amended Tax Returns; Tax Elections | 71 |
Section 13.5 Cooperation | 72 |
Section 13.6 Tax Audits | 72 |
Section 13.7 Tax Treatment | 72 |
Section 13.8 Transaction Tax Deductions | 72 |
ARTICLE 14 MISCELLANEOUS | 73 |
Section 14.1 Counterparts | 73 |
Section 14.2 Notice | 73 |
Section 14.3 Tax, Recording Fees, Similar Taxes & Fees | 74 |
Section 14.4 Governing Law; Jurisdiction | 74 |
Section 14.5 Waivers | 76 |
Section 14.6 Assignment | 76 |
Section 14.7 Entire Agreement | 76 |
Section 14.8 Amendment | 76 |
Section 14.9 No Third Party Beneficiaries | 76 |
Section 14.10 Construction | 76 |
Section 14.11 Limitation on Damages | 77 |
Section 14.12 Conspicuous | 77 |
Section 14.13 Time of Essence | 77 |
Section 14.14 Delivery of Records | 77 |
Section 14.15 Severability | 77 |
Section 14.16 Specific Performance | 78 |
Section 14.17 Reliance on Own Judgment; Disclaimer of Reliance | 78 |
Section 14.18 Limitation on Recourse | 79 |
Section 14.19 Schedules | 79 |
TABLE OF CONTENTS
(Cont.)
| | | | | |
Section 14.20 Attorney-Client Privilege; Continued Representation | 80 |
Section 14.21 Party Representatives | 80 |
Section 14.22 Purchaser Group Consent | 81 |
TABLE OF CONTENTS
(Cont.)
| | | | | | | | |
Appendices, Exhibits, and Schedules: |
| | |
Appendix A | - | Definitions |
| | |
Exhibit A-1 | - | Leases |
Exhibit A-2 | - | Wells |
Exhibit A-3 | - | Surface Interests |
Exhibit A-4 | - | Certain Excluded Assets |
Exhibit B | - | Form of Assignment Agreement |
Exhibit C | - | Form of Registration Rights Agreement |
| | |
Schedule 1.1 | - | Specified Midstream Contracts |
Schedule 3.4 | - | Allocated Values |
Schedule 5.1 | - | Knowledge Individuals (Sellers) |
Schedule 5.5 | - | No Conflict (Sellers) |
Schedule 5.8 | - | Litigation (Sellers) |
Schedule 6.1 | - | Knowledge Individuals (Company) |
Schedule 6.4 | - | No Conflict (Company) |
Schedule 6.5 | - | Capitalization |
Schedule 6.7 | - | Litigation (Company) |
Schedule 6.9 | - | Capital Commitments |
Schedule 6.11 | - | Material Contracts |
Schedule 6.12 | - | Payments for Production and Imbalances |
Schedule 6.13 | - | Consents and Preferential Rights to Purchase |
Schedule 6.14 | - | Non-Consent Operations |
Schedule 6.15 | - | Plugging and Abandonment |
Schedule 6.16 | - | Environmental Matters |
Schedule 6.17 | - | Suspense Funds |
Schedule 6.20 | - | Credit Support |
Schedule 6.21 | - | Bank Accounts |
Schedule 6.24 | - | Insurance |
Schedule 7.7 | - | Knowledge Individuals (Purchasers) |
Schedule 7.17(c) | - | SEC Review |
Schedule 8.4 | - | Operations |
Schedule 8.14 | - | Assets to be Transferred |
Schedule 8.20 | - | Hedges |
MEMBERSHIP INTEREST PURCHASE AGREEMENT
This Membership Interest Purchase Agreement (this “Agreement”) is dated as of January 24, 2022 (the “Execution Date”), by and among, on the one part, Radler 2000 Limited Partnership, a Texas limited partnership (“R2KLP”) and Tug Hill Inc., a Nevada corporation (“THI” and together with R2KLP, the “Sellers” and each, a “Seller”), and, on the other part, Chesapeake Energy Corporation, an Oklahoma corporation (“CHK Parent”) and Chesapeake Appalachia, L.L.C., an Oklahoma limited liability company and a wholly-owned subsidiary of CHK Parent (“CHK Purchaser” and together with CHK Parent, the “Purchasers” and each a “Purchaser”). Sellers and Purchasers are sometimes referred to herein individually as a “Party” and, collectively, as the “Parties.”
RECITALS
A. THI owns the preferred membership Interests (the “Company Preferred Interests”) of Tug Hill Marcellus, LLC, a Texas limited liability company (the “Company”).
B. R2KLP owns the common membership Interests (the “Company Common Interests”) of the Company.
C. The Company Preferred Interests and the Company Common Interests collectively represent 100% of the issued and outstanding Interests in the Company (the “Company Interests”).
D. The Parties desire that, at the Closing, (i) R2KLP shall sell and transfer to CHK Purchaser, and CHK Purchaser shall purchase from R2KLP, the Company Common Interests, and (ii) THI shall sell and transfer to CHK Purchaser, and CHK Purchaser shall purchase from THI, the Company Preferred Interests, in each case, in the manner and upon the terms and conditions hereafter set forth.
AGREEMENT
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 by Sellers. 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 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 ends 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, (a) (i) R2KLP agrees to sell, transfer, and convey the Company Common Interests to CHK Purchaser, free and clear of any Encumbrances (other than restrictions generally arising under the Company Organizational Documents, this Agreement, and applicable securities Laws) and (ii) CHK Purchaser agrees to purchase, accept, and pay for the Company Common Interests, and (b) (i) THI agrees to sell, transfer, and convey the Company Preferred Interests to CHK Purchaser, free and clear of any Encumbrances (other than restrictions generally arising under the Company Organizational Documents, this Agreement, and applicable securities Laws) and (ii) CHK Purchaser agrees to purchase, accept, and pay for the Company Preferred Interests.
Section 2.2 Effective Time; Proration of Costs and Revenues.
(a) Subject to the other terms and conditions of this Agreement, the Company Interests shall be transferred from Sellers to Purchasers at the Closing, but certain financial benefits and burdens of the Assets shall be transferred effective as of 12:01 a.m., Central Time, on January 1, 2022 (the “Effective Time”), as described below; provided that, for the avoidance of doubt, the Closing shall be treated for income Tax purposes as the time when the Company Interests are transferred from Sellers to Purchasers.
(b) Purchasers shall be entitled to all production of Hydrocarbons from or attributable to the Properties at and after the Effective Time (and all products and proceeds attributable thereto), and to all other income, proceeds, revenue, receipts, and credits earned with respect to the Assets at and after the Effective Time (provided that, notwithstanding the preceding, Sellers and their Affiliates shall be entitled to all proceeds of cash calls and billings and other funds received for the account of Third Parties with respect to any of the Assets operated by Sellers or their Affiliates for all periods prior to the Closing Date, but only to the extent that such proceeds and funds are used by Sellers (or their Affiliate) to pay for expenditures on behalf of such Third Parties in Sellers’ (or their Affiliate’s) role as operator of the Assets prior to the Closing Date), and shall be responsible for (and entitled to any refunds with respect to) all Property Costs incurred at and after the Effective Time.
(c) Sellers shall be entitled to all production of Hydrocarbons from or attributable to the Properties prior to the Effective Time (and all products and proceeds attributable thereto), and to all other income, proceeds, revenue, receipts, and credits earned with respect to the Assets (other than Tax refunds and Tax credits, which are addressed in Section 13.1) prior to the Effective Time, and to proceeds from cash calls and billings and other funds received for the account of Third Parties for all periods prior to the Closing Date, as described in Section 2.2(b), but only to the extent that such proceeds and funds are used by Sellers (or their Affiliate) to pay for expenditures on behalf of such Third Parties in Sellers’ (or their Affiliate’s) role as operator of the Assets prior to the Closing Date, and shall be responsible for (and entitled to any refunds with respect to) all Property Costs incurred prior to the Effective Time.
(d) Should Purchasers or the Company receive after Closing any income, proceeds, revenue, or other amounts to which Sellers are entitled under Section 2.2(c), Purchasers shall, and shall cause the Company to, fully disclose, account for, and promptly remit the same to Sellers. If, after Closing, Sellers receive any income, proceeds, revenue, or other amounts with respect to the Assets to which Sellers are not entitled pursuant to Section 2.2(c), Sellers shall fully disclose, account for, and promptly remit the same to Purchasers (or their designee).
(e) Should Purchasers or the Company pay after Closing any Property Costs for which Sellers are responsible under Section 2.2(c), Sellers shall reimburse Purchasers (or their designee) promptly after receipt of an invoice with respect to such Property Costs, accompanied by copies of the relevant vendor or other invoice and proof of payment. Should Sellers pay after Closing any Property Costs for which Sellers are not responsible under Section 2.2(c), Purchasers shall, or shall cause the Company to, reimburse Sellers promptly after receipt of an invoice with respect to such Property Costs, accompanied by copies of the relevant vendor or other invoice and proof of payment.
(f) Except to the extent such amounts are, or are attributable to, the Excluded Assets, Sellers 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 one year anniversary of the Closing Date, except as to amounts for which Purchasers have delivered an invoice of such Property Costs to Sellers pursuant to Section 2.2(e) on or before such date.
(g) Rights-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 at and after the Effective Time. In each case, Purchasers (on behalf of the Company) shall be responsible for the portion allocated to the period at and after the Effective Time and Sellers shall be responsible for the portion allocated to the period before the Effective Time.
Section 2.3 Procedures.
(a) For purposes of allocating production (and proceeds 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 LACT meters or similar meters at the initial 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 delivery point sales meters (or other custody transfer meters, whichever is closest to the Well) on the pipelines through which they are transported. Such allocations (along with the adjustments made pursuant to Section 3.3) shall be based on data and information provided by the Third Party operators (if applicable) of the Assets and all other relevant data and information reasonably available to the Parties; provided that, if any such data or information has not been provided by a Third Party operator as of the relevant time, then Sellers shall make a good faith estimate of such allocations or adjustments, as applicable, based on the best data and information available to Sellers at such time. The terms “earned” and “incurred” shall be interpreted in accordance with generally accepted accounting principles and Council of Petroleum Accountants Society standards, and expenditures that are incurred pursuant to an operating agreement, unit agreement, or similar agreement shall be deemed incurred when expended by the operator of the applicable Property, in accordance with such operator’s then-current practice.
(b) After Closing, each Party shall be entitled to participate in all joint interest audits and other audits of (i) Property Costs for which such Party is entirely or in part responsible under the terms of Section 2.2 or (ii) Hydrocarbons from or attributable to the Properties (and all products and proceeds attributable thereto) or other income, proceeds, revenue, receipts, and credits earned with respect to the Assets, in each case, to which such Party is entirely or in part entitled under the terms of Section 2.2, provided that (A) Purchasers shall, or shall cause the Company to, handle all joint interest audits and other audits of Property Costs covering the period for which Sellers are in part responsible with Purchasers under Section 2.2 (and Purchasers (on
behalf of the Company) shall be solely responsible for Purchasers’ and the Company’s out-of-pocket costs and expenses incurred in connection with such audits), (B) Sellers shall handle all joint interest audits and other audits of Hydrocarbons from or attributable to the Properties (and all products and proceeds attributable thereto) or other income, proceeds, revenue, receipts, and credits earned with respect to the Assets, in each case, to which Sellers are entirely or in part entitled under Section 2.2 (and each Seller shall be solely responsible for such Seller’s respective out-of-pocket costs and expenses incurred in connection with such audits), and (C) a Party shall not agree to any adjustments to previously assessed costs for which the other Party is liable, or any compromise of any audit claims to which such other Party would be entitled, without the prior written consent of the other Party, not to be unreasonably withheld, conditioned, or delayed. Purchasers shall, or shall cause the Company to, provide Sellers with a copy of all applicable audit reports and written audit agreements received by Purchasers or their Affiliates and relating to periods for which Sellers are wholly or partially responsible or with respect to any Excluded Assets.
Section 2.4 Cash Free, Indebtedness Free. At the Closing, the Company will not hold any cash or be responsible for any obligations to repay any Indebtedness. Accordingly, on or prior to the Closing, Sellers will (a) cause the Company to distribute to Sellers (or their designee) all cash (irrespective of whether such cash is attributable to Hydrocarbons produced, or events occurring, at or after the Effective Time) held by the Company and (b) repay outstanding Indebtedness of the Company and all of the Company’s accounts payable and other similar liabilities attributable to periods ending prior to the Effective Time. Each Seller represents (with respect to itself only) that such Seller is authorized to perform the actions described in the preceding sentence. Purchasers hereby acknowledge that Sellers shall take such actions prior to Closing and hereby agree and consent to Sellers taking such actions prior to Closing. Notwithstanding anything to the contrary herein, the Parties acknowledge and agree that the provisions of this Section 2.4 will not prejudice any Party’s rights under Section 3.3 or otherwise modify the adjustment mechanisms set forth therein.
ARTICLE 3
PURCHASE PRICE
Section 3.1 Purchase Price.
(a) The total purchase price for the Company Interests shall be $81,751,880 (the “Unadjusted Purchase Price”), comprised of (i) cash in the amount of $61,699,532 (the “Base Cash Purchase Price”) and (ii) 291,289 shares of CHK Common Stock (such shares of CHK Common Stock the “Stock Purchase Price”), as adjusted and paid, as applicable, pursuant to and in accordance with Section 3.3 and Section 10.4. Notwithstanding the foregoing, if, at any time on or after the date hereof and prior to the Closing, (x) CHK Parent makes, pays, or effects (or any record date is established with respect thereto) (A) any dividend on the CHK Common Stock payable in CHK Common Stock, (B) any subdivision or split of CHK Common Stock, (C) any combination or reclassification of CHK Common Stock into a smaller number of shares of CHK Common Stock, or (D) any issuance of any securities by reclassification of CHK Common Stock (including any reclassification in connection with a merger, consolidation or business combination in which CHK Parent is the surviving person) or (y) any merger, consolidation, combination, or other transaction is consummated pursuant to which CHK
Common Stock is converted into the right to receive cash or other securities, then the number of shares of CHK Common Stock to be issued to the Sellers (or their designees) as the Stock Purchase Price pursuant to this Agreement shall be proportionately adjusted, including, for the avoidance of doubt, in the cases of clauses (x)(D) and (y) to provide for the receipt by Sellers, in lieu of any CHK Common Stock, the same number or amount of cash and/or securities as is received in exchange for each share of CHK Common Stock in connection with any such transaction described in clauses (x)(D) and (y) hereof. An adjustment made pursuant to the foregoing sentence shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision, split, merger, combination, reclassification or other transaction.
(b) Within one Business Day after the Execution Date, Purchasers shall deliver into the Escrow Account an amount equal to $3,800,000 (together with all interest accrued thereon, the “Deposit”) to be held by the Escrow Agent pursuant to the terms of this Agreement and the Escrow Agreement. If the Closing occurs, the Deposit shall be taken into account in the determination of the Closing Cash Payment pursuant to Section 10.4(a). However, if the Closing does not occur, the Deposit shall be distributed in accordance with Section 11.2.
Section 3.2 Allocation of Purchase Price. The Parties agree that the Adjusted Purchase Price and any liabilities associated with the Assets of the Company (to the extent properly taken into account as consideration under the Code) shall be allocated among the Assets of the Company for U.S. federal and applicable state and local income Tax purposes in accordance with an allocation schedule, an initial draft of which shall be prepared by R2KLP and delivered to Purchasers for their review and comment within 30 days following the final determination of the Adjusted Purchase Price (as revised and finally determined under this Section 3.2, the “Purchase Price Allocation Schedule”). Purchasers shall have 15 days to review the draft Purchase Price Allocation Schedule delivered by R2KLP. If no comments are delivered by Purchasers to R2KLP within such review period, then the draft Purchase Price Allocation Schedule originally delivered by R2KLP shall become final. If Purchasers provide any comments within their 15-day review period, then the Parties shall use good faith efforts to resolve any such comments, provided that if they are unable to mutually agree on the final Purchase Price Allocation Schedule within thirty days of receipt of Purchasers’ comments, the Parties shall resolve any such disputes in accordance with the procedures set forth in Section 10.4(c). Subject to any differences required as a result of the agreed Tax treatment described in Section 13.7, the Parties shall use the final Purchase Price Allocation Schedule in reporting this transaction to the applicable taxing authorities, and no Party shall file any Tax Return or otherwise take any position for Tax purposes that is inconsistent with the Purchase Price Allocation Schedule unless otherwise required by applicable Law; provided, however, that neither Sellers nor Purchasers shall be unreasonably impeded in their ability and discretion to negotiate, compromise and/or settle any Tax audit, claim or similar proceedings in connection with the Purchase Price Allocation Schedule; provided further, that if the Adjusted Purchase Price (as determined for applicable Tax purposes) is adjusted subsequent to the initial finalization of the Purchase Price Allocation Schedule (e.g., as a result of indemnification payments), then R2KLP shall be entitled to prepare a revised draft Purchase Price Allocation Schedule, and such revised draft will be delivered to Purchasers and finalized in accordance with the procedures described in this Section 3.2, and upon finalization shall become the Purchase Price Allocation Schedule. Each Party shall promptly notify the other in writing upon receipt of notice of any pending or threatened Tax audit or assessment challenging the agreed Purchase Price Allocation Schedule.
Section 3.3 Adjustments to Purchase Price. All adjustments to the Unadjusted 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 as consistently applied by Sellers, (y) without duplication (in this Agreement or otherwise), and (z) with respect to matters (A) in the case of Section 3.3(b)(iii), for which notice is given on or before the Title Claim Date, and (B) in all of the other cases set forth in Section 3.3(a) and Section 3.3(b), identified on or before the Cut-off Date. Each adjustment to the Unadjusted Purchase Price described in Section 3.3(a) and Section 3.3(b) shall be allocated among the Assets in accordance with Section 3.4. Without limiting the foregoing, the Unadjusted Purchase Price shall be adjusted as follows, with the result of such adjustments to such Unadjusted Purchase Price herein the “Adjusted Purchase Price”:
(a) The Unadjusted Purchase Price shall be adjusted upward by the following amounts (without duplication):
(i) an amount equal to all Property Costs attributable to the ownership or operation of the Assets that are incurred at and after the Effective Time but paid by Sellers (or the Company prior to Closing) (as is consistent with Section 2.2(b) and Section 2.2(c)), but excluding any amounts previously reimbursed to Sellers pursuant to Section 2.2(e);
(ii) an amount equal to, to the extent that such amounts have been received by Purchasers (or the Company after Closing) and not remitted, distributed, or paid to Sellers, (A) all proceeds from the production of Hydrocarbons from or attributable to the Properties prior to the Effective Time (including, to the extent that Sellers (or their Affiliate) are actually paid such amounts on behalf of such Third Parties in Sellers’ (or their Affiliate’s) role as operator of the Assets, proceeds from cash calls and billings and other funds received for the account of Third Parties with respect to any of the Assets operated by Sellers (or their Affiliate) for all periods prior to the date on which Sellers’ (or their Affiliate’s) resignation as operator becomes effective), (B) all other income, proceeds, receipts, and credits earned with respect to the Assets prior to the Effective Time, and (C) any other amounts to which Sellers are entitled pursuant to Section 2.2(c);
(iii) the amount of all prepaid expenses (including prepaid bonuses, rentals, cash calls, and advances to Third Party operators for expenses not yet incurred; and scheduled payments) paid by Sellers (or by the Company prior to Closing) with respect to the ownership or operation of the Assets after the Effective Time;
(iv) to the extent that the Company is under-produced or over-delivered as of the Effective Time as shown with respect to the net Imbalances set forth in Schedule 6.12, as complete and final settlement of all such Imbalances, the amount of the Imbalances multiplied by a price of $1.00 per MMBtu;
(v) the amount of all Asset Taxes and Income Taxes allocated to Purchasers pursuant to Section 13.2 but paid or otherwise economically borne by Sellers or the Company prior to Closing (excluding, for the avoidance of doubt, any Asset Taxes
that were withheld or deducted from the gross amount paid or payable to Sellers in connection with a transaction to which Section 3.3(b)(ii) applies, and therefore were taken into account in determining the “proceeds received” by Sellers for purposes of applying Section 3.3(b)(ii));
(vi) for the period of time from the Effective Time until Closing, a monthly overhead charge of $280,000 per month, prorated for any partial months, as the sole charge under this Agreement in respect of Sellers’, the Company’s and their respective Affiliates’ general and administrative expenses (including corporate G&A) with respect to the ownership and operation of the Company Interests and the Assets; and
(vii) any other amount provided for elsewhere in this Agreement or otherwise agreed upon in writing by the Parties as an upward adjustment to the Unadjusted Purchase Price.
(b) The Unadjusted Purchase Price shall be adjusted downward by the following amounts (without duplication):
(i) an amount equal to all Property Costs attributable to the ownership or operation of the Assets that are incurred prior to the Effective Time but paid by Purchasers (or by the Company after Closing) (as is consistent with Section 2.2(b) and Section 2.2(c)), but excluding any amounts previously reimbursed to Purchasers (or the Company) pursuant to Section 2.2(e);
(ii) an amount equal to, to the extent that such amounts have been received by Sellers and not remitted or paid to Purchasers, (A) all proceeds from the production of Hydrocarbons from or attributable to the Properties at and after the Effective Time (excluding, to the extent that Sellers (or their Affiliate) are actually paid such amounts on behalf of such Third Parties in Sellers’ (or their Affiliate’s) role as operator of the Assets, all proceeds of cash calls and billings and other funds received for the account of Third Parties with respect to any of the Assets operated by Sellers (or their Affiliate) for all periods prior to the date on which Sellers’ (or their Affiliate’s) resignation as operator of such Assets becomes effective), (B) all other income, proceeds, receipts, and credits earned with respect to the Assets at and after the Effective Time, and (C) any other amounts to which Purchasers are entitled pursuant to Section 2.2(b);
(iii) any reductions to the Unadjusted Purchase Price to be made in accordance with Section 4.2 (which shall include, for purposes of certainty, an amount equal to the Allocated Value of any Assets excluded from this transaction pursuant to Section 4.2(c)), reduced by any amounts for Title Benefits determined pursuant to Section 4.3;
(iv) an amount equal to the Allocated Value of any Assets excluded from this transaction pursuant to Section 4.6 or Section 8.1;
(v) to the extent the Company is over-produced or under-delivered as of the Effective Time as shown with respect to the net Imbalances set forth in Schedule 6.12, as complete and final settlement of all such Imbalances, the amount of the Imbalances multiplied by a price of $1.00 per MMBtu;
(vi) [Reserved.]
(vii) the amount of all Asset Taxes allocated to Sellers pursuant to Section 13.2 but paid or otherwise economically borne by Purchasers or the Company after Closing (excluding, for the avoidance of doubt, any Asset Taxes that were withheld or deducted from the gross amount paid or payable to Purchasers in connection with a transaction to which Section 3.3(a)(ii) applies, and therefore were taken into account in determining the “proceeds received” by Purchasers for purposes of applying Section 3.3(a)(ii)); and
(viii) any other amount provided for elsewhere in this Agreement or otherwise agreed upon in writing by the Parties as a downward adjustment to the Unadjusted Purchase Price.
(c) Notwithstanding anything to the contrary herein, all adjustments to the Unadjusted Purchase Price made pursuant to this Section 3.3 shall be made to the Base Cash Purchase Price.
Section 3.4 Allocated Values. The “Allocated Values” for the Assets (which are provided for, and allocated among, each of the Leases and Wells) are set forth on Schedule 3.4. Each adjustment shall be allocated to the particular Assets to which such adjustment relates to the extent, and in the proportion which, such adjustment relates to such Assets and to the extent that it is, in the commercially reasonable discretion of Sellers, possible to do so. Any adjustment not allocated to a specific Asset or Assets pursuant to the immediately preceding sentence shall be allocated among the various Assets in proportion to the Unadjusted Purchase Price allocated to each Asset on Schedule 3.4. Sellers have accepted such Allocated Values for purposes of this Agreement and the transactions contemplated hereby, but make no representation or warranty as to the accuracy of such values.
Section 3.5 Escrow Agreement. Simultaneously with the execution of this Agreement, Sellers and Purchasers have executed, and have obtained execution by the Escrow Agent of, the Escrow Agreement.
Section 3.6 Withholding. The Parties acknowledge and agree that they do not anticipate any deduction or withholding from the consideration otherwise payable to any Person under this Agreement. Notwithstanding the foregoing, Purchasers shall (a) be entitled to deduct and withhold from the consideration otherwise payable to any Person pursuant to this Agreement such amounts as may be required to be deducted and withheld with respect to the making of such payment under any provision of applicable Law (including the Code), and (b) pay any amounts so deducted and withheld to the proper Governmental Body in a timely manner. Any amount deducted or withheld pursuant to this Section 3.6 and paid over to the relevant Governmental Body shall be treated as having been paid to such Person in respect of which such deduction or withholding was made. In the event Purchasers determine that any consideration otherwise payable to any Person pursuant to this Agreement would be subject to withholding under applicable Law, Purchasers shall promptly notify Sellers of such determination, but in no event less than five days prior to the Closing Date. Purchasers shall reasonably cooperate with Sellers in seeking to reduce or eliminate any such deduction or withholding.
ARTICLE 4
TITLE AND ENVIRONMENTAL MATTERS
Section 4.1 Sellers’ Title.
(a) EXCEPT FOR THE SPECIAL WARRANTY BY R2KLP SET FORTH IN SECTION 6.27 AND WITHOUT LIMITING PURCHASERS’ RIGHTS AND REMEDIES (1) UNDER SECTION 9.2 OR SECTION 11.1, (2) UNDER THE R&W INSURANCE POLICY, OR (3) FOR TITLE DEFECTS SET FORTH IN THIS ARTICLE 4, SELLERS DO NOT MAKE, SELLERS EXPRESSLY DISCLAIM, AND PURCHASERS WAIVE, ANY WARRANTY OR REPRESENTATION, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, WITH RESPECT TO THE COMPANY’S TITLE TO, OR ANY OTHER PERSON’S TITLE TO, OR ANY DEFICIENCY IN TITLE TO, ANY OF THE ASSETS OR THE DESCRIPTION THEREOF (INCLUDING ANY LISTINGS OF NET MINERAL ACRES, PERCENTAGE WORKING INTEREST, OR PERCENTAGE NET REVENUE INTEREST FOR ANY ASSET). PURCHASERS HEREBY ACKNOWLEDGE AND AGREE THAT, SUBJECT TO THE FOREGOING EXCEPTIONS AND THE PROVISIONS OF SECTION 4.5, PURCHASERS’ SOLE REMEDY FOR ANY DEFECT OF TITLE OR ANY OTHER TITLE MATTER, INCLUDING ANY TITLE DEFECT, WITH RESPECT TO ANY OF THE ASSETS, (I) ON OR BEFORE THE TITLE CLAIM DATE, SHALL BE AS SET FORTH IN SECTION 4.2 AND (II) FROM AND AFTER THE TITLE CLAIM DATE (WITHOUT DUPLICATION), SHALL BE PURSUANT TO THE SPECIAL WARRANTY BY R2KLP SET FORTH IN SECTION 6.27. EXCEPT FOR THE SPECIAL WARRANTY BY R2KLP SET FORTH IN SECTION 6.27 AND WITHOUT LIMITING PURCHASERS’ RIGHTS AND REMEDIES (1) UNDER SECTION 9.2 OR SECTION 11.1, (2) UNDER THE R&W INSURANCE POLICY AND (3) FOR TITLE DEFECTS SET FORTH IN THIS ARTICLE 4, PURCHASERS HEREBY WAIVE ANY RIGHT TO ASSERT ANY TITLE DEFECT OR OTHER TITLE MATTER, OR TO OTHERWISE RECEIVE ANY ADJUSTMENT TO THE UNADJUSTED PURCHASE PRICE IN RESPECT OF, ANY TITLE DEFECT OR OTHER TITLE MATTER.
(b) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, PURCHASERS ACKNOWLEDGE AND AGREE THAT PURCHASERS SHALL NOT BE ENTITLED TO PROTECTION UNDER (NOR HAVE THE RIGHT TO MAKE A CLAIM AGAINST) THE SPECIAL WARRANTY BY R2KLP SET FORTH IN SECTION 6.27 FOR ANY TITLE DEFECT ASSERTED (OR ANY MATTER RAISED IN A PRELIMINARY TITLE DEFECT NOTICE) UNDER THIS ARTICLE 4 PRIOR TO THE TITLE DEFECT CLAIM DATE.
Section 4.2 Title Defects.
(a) To assert a claim of a Title Defect, Purchasers must deliver a claim notice to Sellers (a “Title Defect Notice”) promptly after the discovery thereof, but in no event later than 5:00 p.m., Central Time, on February 28, 2022 (such cut-off date, the “Title Claim Date”).
To give Sellers an opportunity to commence reviewing and curing alleged Title Defects asserted by Purchasers, Purchasers shall use reasonable efforts to give Sellers, on or before the end of each calendar week prior to the Title Claim Date, written notice of all alleged Title Defects discovered by Purchasers or Purchasers’ Representatives during such calendar week, which notice may be preliminary in nature and supplemented prior to the Title Claim Date; provided that the failure to give such notice shall not preclude Purchasers from asserting a Title Defect on or before the Title Claim Date. To be effective, each Title Defect Notice shall be in writing and include (i) a description of the alleged Title Defect that is reasonably sufficient for Sellers to determine the basis of the alleged Title Defect, (ii) the Asset adversely affected by the Title Defect (a “Title Defect Property”), (iii) the Allocated Value of each Title Defect Property, (iv) all documents upon which Purchasers rely for their assertion of a Title Defect, including, at a minimum, supporting documents reasonably necessary for Sellers (as well as any title attorney or examiner hired by Sellers) to verify the existence of the alleged Title Defect (if, and to the extent, such documents are in Purchasers’ or their Representatives’ possession), and (v) for a Title Defect (other than an Environmental Defect) the amount by which Purchasers reasonably believe the Allocated Value of each Title Defect Property is reduced by the alleged Title Defect and the computations and information upon which Purchasers’ belief is based, including any analysis by any title attorney or examiner hired by Purchasers and, for Title Defects that are Environmental Defects, Purchasers’ computation of the Title Defect Amount (in accordance with Section 4.2(d)(v)) along with a description in reasonable detail of the Remediation proposed for the alleged Environmental Defect and identification of all material assumptions used by Purchasers in calculating such Title Defect Amount, including the standards Purchasers assert must be met to comply with applicable Environmental Laws. Notwithstanding anything herein to the contrary (except for the special warranty by R2KLP set forth in Section 6.27), Purchasers forever waive, and Sellers shall have no liability for, Title Defects not asserted by a Title Defect Notice meeting all of the requirements set forth in the preceding sentence by the Title Claim Date.
(b)
(i) Sellers shall have the right, but not the obligation, to attempt, at their sole cost, to cure or remove (A) at any time prior to the Closing, any Title Defects that are Environmental Defects and (B) on or before the date that is 90 days after the Closing Date (the “Cure Period”), any Title Defects (other than Environmental Defects), in each case of (A) and (B) above for which Sellers have received a Title Defect Notice from Purchasers prior to the Title Claim Date. From and after Closing, with respect to Title Defects (other than Environmental Defects), Purchasers shall take all actions reasonably requested by Sellers to assist them with the cure or removal of any such Title Defects; provided, however, that such actions shall not require Purchasers to incur any costs or spend any money with respect to such assistance.
(ii) At the Closing and except with respect to Title Defects for Title Defect Properties excluded from the Closing or assigned or distributed to Sellers pursuant to Section 4.2(c), the Unadjusted Purchase Price shall be reduced by an amount equal to the Title Defect Amount for any Title Defect that is not cured prior to the Closing; provided, however, that with respect to (A) any Title Defect (other than an Environmental Defect) for which Sellers have provided notice to Purchasers at least two days prior to the
Scheduled Closing Date that Sellers intend to attempt to cure such Title Defect during the Cure Period (a “Remedy Notice”) or (B) any Title Defect for which Sellers dispute the existence of such Title Defect, the proper and adequate cure therefore, or the Title Defect Amount attributable to a Title Defect (a “Disputed Defect” and such notice, a “Dispute Notice”), then (1) the Unadjusted Purchase Price shall not be reduced at the Closing by the Title Defect Amount for such Title Defect, (2) Purchasers’ good faith estimate of the Title Defect Amount for such Title Defect (the “Deemed Defect Amount”) shall not be paid to Sellers at the Closing and shall be deposited with the Escrow Agent in accordance with Section 4.2(b)(iii) and (3) the Unadjusted Purchase Price shall be deemed to be reduced for purposes of Section 9.1(e) and Section 9.2(e) based on the Deemed Defect Amount for each Title Defect.
(iii) At Closing, Purchasers shall deposit with the Escrow Agent an amount in cash equal to the aggregate Deemed Defect Amounts for any Title Defects with respect to which a Remedy Notice or Dispute Notice is provided to Purchasers by Sellers in accordance with Section 4.2(b)(ii) (such amount, the “Defect Escrow Amount”), and such Defect Escrow Amount or portions thereof shall be distributed in accordance with this Section 4.2(b)(iii). If (A) before the end of the Cure Period, Sellers and Purchasers agree that such Title Defect has been cured, or (B) Sellers and Purchasers cannot agree, and it is determined by the Title Arbitrator that such Title Defect is fully cured, then within five Business Days after the expiration of the Cure Period (in the case of clause (A)) or the determination of the Title Arbitrator (in the case of clause (B)), the Parties shall jointly direct the Escrow Agent to release the Deemed Defect Amount escrowed for such Title Defect pursuant to this Section 4.2(b)(iii) to Sellers; provided, however, that, if such Title Defect has only been partially cured, the Unadjusted Purchase Price shall be adjusted downward based on the Title Defect Amount for such Title Defect as partially cured, the Parties shall jointly direct the Escrow Agent to release to Purchasers the portion of the Deemed Defect Amount escrowed for such Title Defect pursuant to this Section 4.2(b)(iii) that is equal to such adjustment (or the entirety of such amount if the Title Defect Amount equals or exceeds the amount so escrowed), the Parties shall jointly direct the Escrow Agent to release to Sellers the remaining amount escrowed for such Title Defect pursuant to this Section 4.2(b)(iii), if any, and such adjustment and releases shall be reflected in the calculations, and any further reconciliation, if necessary, shall be completed under Section 10.4(c). If (1) upon the end of the Cure Period, Sellers and Purchasers agree that such Title Defect has not been cured, or (2) Sellers and Purchasers cannot agree, and it is determined by the Title Arbitrator that such Title Defect is not cured, then, within five Business Days after the expiration of the Cure Period (in the case of clause (1)) or the determination of the Title Arbitrator (in the case of clause (2)), the Parties shall jointly direct the Escrow Agent to release the Deemed Defect Amount escrowed for such Title Defect pursuant to this Section 4.2(b)(iii) to Purchasers, the Unadjusted Purchase Price shall be adjusted downward by the Title Defect Amount for such Title Defect and such adjustment and releases shall be reflected in the calculations, and any further reconciliation, if necessary, shall be completed, under Section 10.4(c). Within five Business Days after the Title Arbitrator has made a determination with respect to any Title Defect or Title Defect Amount, the Parties shall jointly direct the Escrow Agent to disburse the amount as determined by the Title Arbitrator to the Party determined by the Title Arbitrator to be entitled thereto, but only to the extent direction has not been otherwise provided to the
Escrow Agent above in this Section 4.2(b)(iii) with respect to such Title Defect or Title Defect Amount, the Unadjusted Purchase Price shall be adjusted downward in accordance with such determination, if applicable, and such adjustment shall be reflected in the calculations, and any further reconciliation, if necessary, shall be completed, under Section 10.4(c). Any interest earned on the Defect Escrow Amount shall be released to the Party receiving such Defect Escrow Amount.
(iv) If any Title Defect with respect to which Sellers provided a Remedy Notice to Purchasers is not cured or resolved within the Cure Period, Sellers shall remedy such Title Defect pursuant to Section 4.2(c) no later than one Business Day after the expiration of the Cure Period (the “Remedy Deadline”); provided, however, that any downward adjustments to the Unadjusted Purchase Price made pursuant to Section 4.2(c) shall occur at the times set forth in Section 4.2(b)(iii) and shall be reflected in the calculations under Section 10.4; and provided further, that if there are any Disputed Defects that have not been cured, waived, or otherwise resolved by the Parties prior to the Remedy Deadline, such Disputed Defect(s) (and any remedies relating thereto) shall be finally and exclusively resolved in accordance with the provisions of Section 4.4. An election by Sellers to attempt to cure a Title Defect shall be without prejudice to their rights under Section 4.4 and shall not constitute an admission against interest or a waiver of Sellers right to dispute the existence, nature, or value of, or cost to cure, the alleged Title Defect.
(c) In the event that any Title Defect is not waived by Purchasers or, subject to Section 4.2(b), not cured or resolved within the Cure Period, (i) with respect to any such Title Defect that is not an Environmental Defect, Sellers shall, subject to the Title Defect Threshold and the Title Defect Deductible, make a downward adjustment to the Unadjusted Purchase Price equal to the Title Defect Amount as being the value of such Title Defect, or (ii) with respect to any such Title Defect that is an Environmental Defect, Sellers shall, at their sole election and subject to the Environmental Defect Threshold and the Environmental Defect Deductible, elect to at Closing (A) make a downward adjustment to the Unadjusted Purchase Price equal to the Title Defect Amount as being the value of such Title Defect, or (B) if and only if the Title Defect Amount alleged by Purchasers equals or exceeds 100% of the Allocated Value of the Title Defect Property, cause the Company to assign or distribute to a Seller (or Sellers’ designee) the entirety of the Title Defect Property that is adversely affected by such Environmental Defect (along with any related Assets), in which event, the Unadjusted Purchase Price shall be adjusted downward by an amount equal to the Allocated Value of such Title Defect Property, and such Title Defect Property shall no longer be included within the definition of Assets for any purpose under this Agreement and shall be included within the definition of Excluded Assets for all purposes of this Agreement.
(d) The “Title Defect Amount” resulting from a Title Defect shall be the amount by which the Allocated Value of the Title Defect Property adversely affected by such Title Defect is reduced as a result of the existence of such Title Defect and shall be determined in accordance with the following methodology, terms, and conditions; provided the Title Defect Amount for a Title Defect that is an Environmental Defect shall be determined without regard to the Allocated Value of the Title Defect Property:
(i) if Purchasers and Sellers agree on the Title Defect Amount, that amount shall be the Title Defect Amount;
(ii) if the Title Defect is a lien, encumbrance, or other charge that is undisputed and liquidated in amount, then the Title Defect Amount shall be the amount necessary to be paid to remove the Title Defect from the Company’s interest in the affected Title Defect Property;
(iii) if the Title Defect reflects a discrepancy (with a proportionate decrease in the working interest for the affected Title Defect Property) between (A) the Net Revenue Interest for the affected Title Defect Property and (B) the Net Revenue Interest stated in Exhibit A-1 or Exhibit A-2 (as applicable) for such Title Defect Property, then the Title Defect Amount shall be the product of the Allocated Value of such Title Defect Property multiplied by a fraction, the numerator of which is the amount of the Net Revenue Interest decrease and the denominator of which is the Net Revenue Interest stated in Exhibit A-1 or Exhibit A-2 (as applicable);
(iv) if the Title Defect reflects a discrepancy (based solely on gross acreage in the lands covered by the affected Lease or the undivided percentage interest in oil, gas, and other minerals covered by the affected Lease) between (A) the Net Mineral Acres for the affected Lease and (B) the Net Mineral Acres stated in Exhibit A-1 for the affected Lease, the Title Defect Amount shall be the product of the Allocated Value of such Title Defect Property multiplied by a fraction, the numerator of which is the Net Mineral Acre decrease for such Title Defect Property and the denominator of which is the Net Mineral Acres of such Title Defect Property stated in Exhibit A-1;
(v) if the Title Defect is an Environmental Defect, the Title Defect Amount shall be equal to the estimated costs and expenses of the most cost-effective Remediation of the Environmental Defect (as of the Closing Date) allowed under applicable Environmental Laws without interference with or restrictions on the continued operation of the affected Asset for exploration for, development of and production of Hydrocarbons;
(vi) if the Title Defect represents an obligation, encumbrance, burden, or charge upon or other defect in title to the Title Defect Property of a type not described in subsections (ii), (iii), (iv), or (v) above, the Title Defect Amount shall be determined by taking into account the Allocated Value of the Title Defect Property, the portion of the Title Defect Property adversely affected by the Title Defect, the legal effect of the Title Defect, the potential economic effect of the Title Defect over the life of the Title Defect Property, the values placed upon the Title Defect by Purchasers and Sellers, and such other factors as are necessary to make a proper evaluation;
(vii) the Title Defect Amount with respect to a Title Defect shall be determined without duplication of any costs or losses included in any other Title Defect Amount hereunder, or for which Purchasers otherwise receive credit in the calculation of the Adjusted Purchase Price; and
(viii) notwithstanding anything to the contrary in this Article 4, the aggregate Title Defect Amounts attributable to the effects of all Title Defects upon any Title Defect Property shall not exceed the Allocated Value of such Title Defect Property, other than Title Defects that are Environmental Defects or are of the type described in Section 4.2(d)(ii).
(e) It is understood and agreed that Environmental Defects shall constitute Title Defects for purposes of this Agreement (as is provided in the definition of the term “Title Defects” set forth in Appendix A) and, as such, will be handled in accordance with, and in all instances will be subject to, the provisions of this Section 4.2 and the other applicable provisions of this Article 4 (including the Environmental Defect Threshold and Environmental Defect Deductible set forth in Section 4.5). As such, without limiting the disclaimers and acknowledgements set forth in Article 8:
(i) SUBJECT TO, AND WITHOUT LIMITATION OF, R2KLP’S REPRESENTATION SET FORTH IN SECTION 6.16 AND CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), PURCHASERS’ RIGHTS UNDER THE R&W INSURANCE POLICY RELATED TO SUCH REPRESENTATION AND PURCHASERS’ RIGHTS UNDER SECTION 10.3 OR SECTION 11.1, EACH PURCHASER (ON BEHALF OF ITSELF AND ITS AFFILIATES, INCLUDING, FROM AND AFTER CLOSING, THE COMPANY) HEREBY WAIVES AND RELEASES ANY REMEDIES OR CLAIMS (WHETHER KNOWN OR UNKNOWN, FIXED OR CONTINGENT, LIQUIDATED OR UNLIQUIDATED, AND WHETHER ARISING AT LAW OR IN EQUITY) THAT IT MAY HAVE AGAINST SELLERS, THEIR AFFILIATES, OR ANY OTHER MEMBER OF THE SELLER GROUP UNDER APPLICABLE LAWS WITH RESPECT TO ENVIRONMENTAL DEFECTS (INCLUDING ANY CLAIMS ARISING UNDER CERCLA OR OTHER ENVIRONMENTAL LAWS) OR OTHER ENVIRONMENTAL MATTERS, EXCEPT SOLELY FOR THOSE REMEDIES SET FORTH IN THIS ARTICLE 4.
(ii) PURCHASERS ACKNOWLEDGE THAT THE ASSETS HAVE BEEN USED FOR EXPLORATION, DEVELOPMENT, PRODUCTION, GATHERING, AND TRANSPORTATION OF OIL AND GAS AND THERE MAY BE PETROLEUM, PRODUCED WATER, WASTES, SCALE, NORM, HAZARDOUS SUBSTANCES, OR OTHER SUBSTANCES OR MATERIALS LOCATED IN, ON, OR UNDER THE ASSETS OR ASSOCIATED WITH THE ASSETS. EQUIPMENT AND SITES INCLUDED IN THE ASSETS MAY CONTAIN ASBESTOS, NORM, OR OTHER HAZARDOUS SUBSTANCES. NORM MAY AFFIX OR ATTACH ITSELF TO THE INSIDE OF WELLS, PIPELINES, MATERIALS, AND EQUIPMENT AS SCALE, OR IN OTHER FORMS. THE WELLS, MATERIALS, AND EQUIPMENT LOCATED ON THE ASSETS OR INCLUDED IN THE ASSETS MAY CONTAIN NORM AND OTHER WASTES OR HAZARDOUS SUBSTANCES. NORM CONTAINING MATERIAL OR OTHER WASTES OR HAZARDOUS SUBSTANCES MAY HAVE COME IN CONTACT WITH VARIOUS ENVIRONMENTAL MEDIA, INCLUDING WATER, SOILS, OR SEDIMENT. SPECIAL PROCEDURES MAY BE REQUIRED FOR THE ASSESSMENT, REMEDIATION, REMOVAL, TRANSPORTATION, OR DISPOSAL OF ENVIRONMENTAL MEDIA, WASTES, ASBESTOS, NORM, AND OTHER HAZARDOUS SUBSTANCES FROM THE ASSETS.
(iii) SUBJECT TO, AND WITHOUT LIMITATION OF, R2KLP’S REPRESENTATION SET FORTH IN SECTION 6.16 AND CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b) AND WITHOUT LIMITING PURCHASERS’ RIGHTS UNDER THE R&W INSURANCE POLICY, NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT OR ANY OTHER AGREEMENT OR INSTRUMENT DELIVERED HEREUNDER, SELLERS DO NOT MAKE, SELLERS EXPRESSLY DISCLAIM, AND EACH PURCHASER (ON BEHALF OF ITSELF AND ITS AFFILIATES, INCLUDING, FROM AND AFTER CLOSING, THE COMPANY) WAIVES ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT, EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT TO THE PRESENCE OR ABSENCE OF ASBESTOS, NORM, OR OTHER WASTES OR HAZARDOUS SUBSTANCES IN OR ON THE ASSETS IN QUANTITIES TYPICAL FOR OILFIELD OPERATIONS IN THE AREAS WHERE THE ASSETS ARE LOCATED.
Section 4.3 Title Benefits.
(a) Sellers have the right, but not the obligation, to deliver to Purchasers on or before the Title Claim Date with respect to each Title Benefit discovered by Sellers a notice (a “Title Benefit Notice”) in writing and including (i) a description of the Title Benefit reasonably sufficient to determine the basis of the alleged Title Benefit, (ii) the Lease or Well affected by such Title Benefit (a “Title Benefit Property”), (iii) the Allocated Value of each Title Benefit Property, (iv) all documents upon which Sellers rely for the assertion of a Title Benefit, including, at a minimum, supporting documents reasonably necessary for Purchasers (as well as any title attorney or examiner hired by Purchasers) to verify the existence of the alleged Title Benefit, and (v) the amount by which Sellers reasonably believe the Allocated Value of each Title Benefit Property is increased by such Title Benefit and the computations and information upon which Sellers’ belief is based on or before the Title Claim Date with respect to each Title Benefit discovered by Sellers. Sellers forever waive Title Benefits not asserted by a Title Benefit Notice meeting all the requirements set forth in the preceding sentence by the Title Claim Date. Purchasers shall, promptly upon discovery, furnish Sellers with written notice of any Title Benefit discovered by Purchasers or their Representatives while conducting Purchasers’ due diligence with respect to the Properties prior to the Title Claim Date.
(b) With respect to each Title Benefit Property affected by Title Benefits reported under Section 4.3(a), the Title Defect Amounts for Title Defects (other than Environmental Defects) shall be decreased by an amount (the “Title Benefit Amount”) equal to the increase in the Allocated Value for such Title Benefit Property, as determined pursuant to Section 4.3(c). For the avoidance of doubt, the application of any Title Benefit Amounts shall be applicable only as an offset to Title Defect Amounts attributable to Title Defects that are not Environmental Defects.
(c) The Title Benefit Amount resulting from a Title Benefit shall be the amount by which the Allocated Value of the Title Benefit Property affected by such Title Benefit is increased as a result of the existence of such Title Benefit and shall be determined in accordance with the following methodology, terms, and conditions:
(i) if Purchasers and Sellers agree on the Title Benefit Amount, that amount shall be the Title Benefit Amount;
(ii) if the Title Benefit reflects a difference (with a proportional increase in the working interest for the affected Title Defect Property) between (A) the Net Revenue Interest for the affected Title Benefit Property and (B) the Net Revenue Interest stated in Exhibit A-1 or Exhibit A-2 (as applicable) for such Title Benefit Property, then the Title Benefit Amount shall be the product of the Allocated Value of such Title Benefit Property multiplied by a fraction, the numerator of which is the amount of the Net Revenue Interest increase and the denominator of which is the Net Revenue Interest stated in Exhibit A-1 or Exhibit A-2 (as applicable);
(iii) if the Title Benefit reflects a difference between (A) the Net Mineral Acres for the affected Lease and (B) the Net Mineral Acres stated in Exhibit A-1 for such Lease, the Title Benefit Amount shall be the product of the Allocated Value of such Title Benefit Property multiplied by a fraction, the numerator of which is the Net Mineral Acres increase for such Title Benefit Property and the denominator of which is the Net Mineral Acres of such Title Benefit Property stated in Exhibit A-1; and
(iv) if the Title Benefit represents a benefit in the ownership or title to the Title Benefit Property of a type not described in subsections (ii) or (iii) above, the Title Benefit Amount shall be determined by taking into account the Allocated Value of the Title Benefit Property, the portion of the Title Benefit Property benefitted by the Title Benefit, the legal effect of the Title Benefit, the potential economic effect of the Title Benefit over the life of the Title Benefit Property, the values placed upon the Title Benefit by Purchasers and Sellers, and such other factors as are necessary to make a proper evaluation.
(d) If the Parties cannot reach an agreement on alleged Title Benefits and Title Benefit Amounts prior to Closing, the provisions of Section 4.4 shall apply.
Section 4.4 Title Disputes.
(a) The Parties shall attempt to agree on all Title Defects, Title Benefits, Title Defect Amounts, and Title Benefit Amounts, respectively, prior to Closing. If the Parties are unable to agree on Title Defects, Title Benefits, Title Defect Amounts, and Title Benefit Amounts, respectively, by the scheduled Closing, then all Deemed Defect Amounts shall be paid into escrow in accordance with Section 4.2(b)(iii). If, on or before the Remedy Deadline, the Parties are unable to agree on an alleged Title Defect/Title Benefit (including, in the case of Title Defects, the adequate cure therefor) or Title Defect Amount/Title Benefit Amount (the “Disputed Title Matters”), such dispute(s), and only such dispute(s), shall be exclusively and finally resolved in accordance with the following provisions of this Section 4.4. By not later than the fifth Business Day following the Remedy Deadline, Sellers shall provide to Purchasers in the case of Title Defects/Title Defect Amounts, and Purchasers shall provide to Sellers in the case of Title Benefit/Title Benefit Amounts, a written notice that such Party is disputing the Disputed Title Matters, together with all supporting documentation for such dispute (with such
Party providing the notice being referred to herein as the “Disputing Party”). By not later than 10 Business Days after the other Party’s receipt of the Disputing Party’s written notice, such other Party shall provide to the Disputing Party a written response setting forth the other Party’s position with respect to the Disputed Title Matters together with all supporting documentation.
(b) By not later than 10 Business Days after the Disputing Party’s receipt of the other Party’s written response to the Disputing Party’s written description of the Disputed Title Matters, either Party may initiate a non-administered arbitration of any such dispute(s) conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, to the extent that such rules do not conflict with the terms of this Section 4.4, by written notice (the “Title Arbitration Notice”) to such other Party of any Disputed Title Matters not otherwise mutually resolved or waived that are to be resolved by arbitration (“Final Disputed Title Matters”). Purchasers, with respect to Title Benefits, and Sellers, with respect to Title Defects, shall be deemed to have conclusively waived any dispute or disagreement with respect to unresolved Title Defects or Title Benefits which such Party fails to submit for resolution as provided in this Section 4.4(b) and the Title Defect Amount or Title Benefit Amount, as applicable, set forth in the Title Defect Notice or Title Benefit Notice, respectively, shall be deemed accepted by the Parties.
(c) The arbitration shall be held before a one-member arbitration panel (the “Title Arbitrator”), determined as follows: the Title Arbitrator shall be an attorney with at least 10 years’ experience (i) in the case of Title Defects other than Environmental Defects, examining oil and gas titles in the geographic area where the Assets subject to such dispute are located, and (ii) in the case of Environmental Defects, as an environmental attorney practicing in the geographic area where the Assets subject to such dispute are located; provided, however, that the Title Arbitrator shall not have performed professional services for any Party or any of its Affiliates during the previous five years. Within two Business Days following a Party’s receipt of the Title Arbitration Notice, Sellers and Purchasers shall each exchange lists of three acceptable, qualified arbitrators. Within two Business Days following the exchange of lists of acceptable arbitrators, the Parties shall select by mutual agreement the Title Arbitrator from their original lists of three acceptable arbitrators. If no such agreement is reached within seven Business Days following the delivery of Title Arbitration Notice, each Party shall appoint one arbitrator from their original list and the two appointed arbitrators shall, within two Business Days following their appointment, select an arbitrator from the original lists provided by the Parties to serve as the Title Arbitrator.
(d) Within three Business Days following the selection of the Title Arbitrator, the Parties shall submit one copy to the Title Arbitrator of (i) this Agreement, with specific reference to this Section 4.4 and the other applicable provisions of this Article 4, (ii) the Title Defect Notice or Title Benefit Notice, as applicable, (iii) the Disputing Party’s written notice of the Final Disputed Title Matters, together with the supporting documents that were provided to the other Party, (iv) the other Party’s written response to the Disputing Party’s written description of the Final Disputed Title Matters, together with the supporting documents that were provided to the Disputing Party, and (v) the Title Arbitration Notice. The Title Arbitrator shall resolve the Final Disputed Title Matters based only on the foregoing submissions. Neither Purchasers nor Sellers shall have the right to submit additional documentation to the Title Arbitrator nor to demand discovery on the other Party.
(e) The Title Arbitrator shall make its determination by written decision within 30 days following receipt of the Title Arbitration Notice by Purchasers or Sellers, as applicable (the “Arbitration Decision”). The Arbitration Decision shall be final and binding upon the Parties, without right of appeal. In making its determination, the Title Arbitrator shall be bound by the provisions of this Article 4. The Title Arbitrator may consult with and engage disinterested Third Parties to advise the Title Arbitrator, but shall disclose to the Parties the identities of such consultants and shall only use such Third Parties to the extent necessary to resolve the Final Disputed Title Matters. Any such consultant shall not have worked as an employee or consultant for any Party or its Affiliates during the five-year period preceding the arbitration nor have any financial interest in the dispute.
(f) The Title Arbitrator shall act as an expert for the limited purpose of determining the specific Disputed Title Matter and shall not be empowered to award damages, interest, or penalties to any Party with respect to any matter.
(g) Each Party shall each bear its own legal fees and other costs of preparing and presenting its case. The fees, costs, and expenses of the Title Arbitrator pursuant to this Section 4.4 shall be borne by Sellers, on the one hand, and the Purchasers, on the other hand, based upon the percentage which the aggregate portion of the contested amount not awarded to each party bears to the aggregate amount actually contested by such Party. For example, if Purchasers claim the Title Defect Amount is $1,000 greater than the amount determined by Sellers, and Sellers contest only $500 of the amount claimed by Purchasers, and if the Title Arbitrator ultimately resolved the dispute by awarding the Sellers $300 of the $500 contested, then the costs and expenses of the Title Arbitrator will be allocated 60% (i.e., 300 ÷ 500) to Purchasers and 40% (i.e., 200 ÷ 500) to Sellers.
(h) The Parties shall implement the Arbitration Decision as follows: (i) in the case of alleged Title Defects determined to be Title Defects, Sellers shall remedy, at their sole election, such Title Defects pursuant to Section 4.2(c) within 10 Business Days following Sellers’ receipt of the Arbitration Decision (with any amounts owed, as a result of such election, to be made and accounted for at the times set forth in Section 4.2(b)(iii) and such remedy and amounts shall be reflected in the calculation, and any further reconciliation, if necessary, shall be completed, under Section 10.4(c)), and (ii) in the case of disputed Title Benefits and Title Benefit Amounts or Title Defect Amounts, any amounts determined to be owed by any Party shall be accounted for at the times set forth in Section 4.2(b)(iii) and such amounts shall be reflected in the calculation, and any further reconciliation, if necessary, shall be completed, under Section 10.4(c). Any alleged Title Defect or Title Benefit determined not to be a Title Defect or Title Benefit (as applicable) under the Arbitration Decision shall be final and binding as not being a Title Defect or Title Benefit, as applicable.
Section 4.5 Limitations on Applicability.
(a) The right of Purchasers or Sellers to assert a Title Defect or Title Benefit, respectively, under this Article 4 shall terminate on the Title Claim Date, except that until the alleged Title Defect, Title Benefit, Title Defect Amount, or Title Benefit Amount, as applicable, is resolved in accordance with this Agreement, there shall be no termination of Purchasers’ or Sellers’ rights under this Article 4 with respect to any alleged Title Defect, Title Benefit, Title
Defect Amount, or Title Benefit Amount properly reported in accordance with Section 4.4 on or before the Title Claim Date. Without limiting the foregoing, if a Title Defect under this Article 4 results from any matter that could also result in the breach of (i) any representation or warranty of Sellers as set forth in Article 5 or (ii) any representation or warranty of R2KLP as set forth in Article 6, and Purchaser asserted such matter as a Title Defect (or raised such matter in any preliminary notice of any Title Defects) in accordance with this Article 4 prior to the Title Claim Date, Purchasers shall only be entitled to assert such matter as a Title Defect to the extent permitted by this Article 4 and, for the avoidance of doubt, shall be precluded from also asserting such matter as the basis of the breach of any such representation or warranty.
(b) Notwithstanding anything to the contrary in this Agreement, in no event shall there be any adjustments to the Unadjusted Purchase Price or other remedies available in respect of (i) Title Defects that are not Environmental Defects under this Article 4 (A) for any Title Defect Amount with respect to an individual Title Defect Property, if such amount does not exceed $7,000 with respect to any Title Defect that is not an Environmental Defect (“Title Defect Threshold”), and (B) unless the amount of all such Title Defect Amounts (provided that each such Title Defect Amount exceeds the Title Defect Threshold) in the aggregate (excluding any Title Defect Amounts with respect to Title Defects cured in accordance with this Article 4) exceeds 1.85% of the Unadjusted Purchase Price (the “Title Defect Deductible”), after which point, subject to the Title Defect Threshold and Section 4.3(b), Purchasers shall be entitled to adjustments to the Unadjusted Purchase Price only with respect to Title Defect Amounts in excess of such Title Defect Deductible and only to the extent that Title Defect Amounts exceed the Title Defect Deductible, or (ii) Title Defects that are Environmental Defects under this Article 4 (A) for any Title Defect Amount with respect to an individual Title Defect Property, if such amount does not exceed $27,000 with respect to any Title Defect that is an Environmental Defect (“Environmental Defect Threshold” ), provided that if the same Environmental Defect affects the same Title Defect Property under the R2KPA MIPA, then such Title Defect Amounts may be aggregated only for purposes of determining if they exceed the Environmental Defect Threshold, and (B) unless the amount of all such Title Defect Amounts (provided that each such Title Defect Amount exceeds the Environmental Defect Threshold) in the aggregate (excluding any Title Defect Amounts with respect to Title Defects cured in accordance with this Article 4) exceeds 1.75% of the aggregate Unadjusted Purchase Prices under this Agreement and the R2KPA MIPA (the “Environmental Defect Deductible”), after which point, subject to the Environmental Defect Threshold and Section 4.3(b), Purchasers shall be entitled to adjustments to the Unadjusted Purchase Price only with respect to Title Defect Amounts in excess of the Environmental Defect Deductible and only to the extent that Title Defect Amounts exceed the Environmental Defect Deductible, provided that any Title Defect Amount adjustments to the Unadjusted Purchase Price resulting from the same Environmental Defect affecting the same Title Defect Property under this Agreement and the R2KPA MIPA shall be allocated 20% to this Agreement and 80% to the R2KPA MIPA.
(c) Notwithstanding anything herein to the contrary, neither the Title Defect Threshold nor the Title Defect Deductible shall apply to (or otherwise limit) Title Defects that are not Environmental Defects to the extent such Title Defects would constitute a breach of the representation in Section 6.27 if a Third Party were to make a claim with respect to the circumstances constituting such Title Defect, and the Unadjusted Purchase Price shall be adjusted by the full Title Defect Amount for any such Title Defect.
(d) Without prejudice to any of the other dates by which performance or the exercise of rights is due hereunder, or the Parties’ rights or obligations in respect thereof, the Parties hereby acknowledge that, as set forth more fully in Section 14.13, time is of the essence in performing their obligations and exercising their rights under this Article 4, and, as such, subject to Section 1.2, each and every date and time by which such performance or exercise is due shall be the firm and final date and time.
Section 4.6 Consents to Assignment and Preferential Rights to Purchase.
(a) No later than two Business Days after the Execution Date, Sellers shall (or shall cause the Company to) prepare and send (i) notices to the holders of any required consents to the transactions contemplated hereunder (including the Specified Consent Requirements that are set forth on Schedule 6.13) requesting such consents and (ii) notices to the holders of any applicable preferential rights to purchase, options, puts or calls, rights of first refusal or similar rights (in each case excluding hedges) triggered by the transactions contemplated hereunder that are set forth on Schedule 6.13 (“Preferential Rights”) in compliance with the terms of such rights and requesting waivers of such rights. Sellers shall use Commercially Reasonable Efforts to cause such consents and waivers of Preferential Rights (or the exercise thereof) to be obtained and delivered prior to Closing, provided that Sellers and the Company shall not be required to make payments or undertake obligations to or for the benefit of the holders of such rights in order to obtain the required consents and waivers. Purchasers shall, and after the Closing shall cause the Company to, cooperate with Sellers in seeking to obtain such consents and waivers of Preferential Rights and, to the extent required to obtain the consent of any counterparty to a Specified Midstream Contract set forth on Schedule 6.13, on or prior to Closing, Purchasers shall (and if applicable, shall cause their Affiliates (including, after the Closing, the Company) to) provide any bonds, letters of credit, guarantees, credit support and any other assurances as to financial capability, resources, and creditworthiness required in order for such counterparty to provide its consent to the transactions contemplated by this Agreement. Any Preferential Right must be exercised subject to all terms and conditions set forth in this Agreement, including the successful Closing of this Agreement pursuant to Article 10. The consideration payable under this Agreement for any particular Asset for purposes of Preferential Right notices shall be the Allocated Value for such Asset, subject to adjustment pursuant to Section 3.3. If, prior to the Closing Date, any Party discovers any required consents or Preferential Rights for which notices have not been delivered pursuant to the first sentence of this Section 4.6(a), then (x) the Party making such discovery shall provide the other Party with written notification of such consents or Preferential Rights, as applicable, (y) Sellers, following delivery or receipt of such written notification, will promptly send (or cause the Company to send) notices to the holders of the required consents requesting such consents and notices to the holders of Preferential Rights in compliance with the terms of such rights and requesting waivers of such rights, and (z) the terms and conditions of this Section 4.6 shall apply to the Assets subject to such consents or Preferential Rights, as applicable.
(b) In no event shall there be included in the transactions contemplated hereunder any Company Interests or Asset for which a Specified Consent Requirement has not been satisfied, and, notwithstanding anything to the contrary in this Agreement, Sellers shall have the right to (or to cause the Company to) convey such Company Interests or Assets to any member of the Seller Group prior to or simultaneously with the Closing in accordance with this
Section 4.6. In cases in which the Asset subject to a Specified Consent Requirement is a Contract and Purchasers obtain ownership of the Property or Properties to which the Contract relates (either directly or through the acquisition of the Company Interests), but the Contract is withheld from the transactions contemplated hereunder due to the unwaived Specified Consent Requirement, (i) Sellers shall continue after Closing to use Commercially Reasonable Efforts to satisfy the Specified Consent Requirement so that such Contract can be transferred to a Purchaser (or their designee) upon receipt of the Specified Consent Requirement, (ii) the Contract shall be held by Sellers for the benefit of Purchasers until the Specified Consent Requirement is satisfied or the Contract has terminated, and (iii) Purchasers shall pay all amounts due thereunder, perform all obligations thereunder and indemnify Sellers against any Damages incurred or suffered by Sellers as a consequence of remaining a party to such Contract until the Specified Consent Requirement is satisfied or the Contract has terminated. In cases in which the Asset subject to such a Specified Consent Requirement is a Property and such consent is not satisfied by Closing, the affected Property and the Assets related to that Property shall be withheld from the transactions contemplated hereby, shall be Excluded Assets hereunder, and the Unadjusted Purchase Price shall be reduced by the Allocated Value of the Property and related Assets. If an unsatisfied Specified Consent Requirement with respect to which an adjustment to the Unadjusted Purchase Price is made under Section 3.3 is subsequently satisfied prior to the date of delivery of the final settlement statement under Section 10.4(c), a separate closing shall be held within five Business Days thereof at which (A) Sellers shall convey the affected Property and related Assets to a Purchaser (or Purchasers’ designee) in accordance with this Agreement and (B) Purchasers shall pay an amount equal to the Allocated Value of such Property and related Assets, adjusted in accordance with Section 3.3, to Sellers, and following which such Property shall no longer be an Excluded Asset but shall be an Asset hereunder. If such consent requirement is not satisfied by the date of delivery of the final settlement statement under Section 10.4(c), Sellers shall have no further obligation to sell and convey such Property and related Assets and Purchasers shall have no further obligation to purchase, accept, and pay for such Property, and the affected Property and related Assets shall be deemed to be deleted from the applicable Exhibits and Schedules to this Agreement for all purposes.
(c) If any Preferential Right is exercised prior to Closing, Sellers shall have the right to cause the Company to convey the affected Assets to the exercising party prior to or simultaneously with the Closing on the terms and conditions set out in the applicable Preferential Right provision and the Unadjusted Purchase Price shall be decreased by the Allocated Value for the affected Assets, and such affected Assets shall be deemed to be deleted from the applicable Exhibits and Schedules to this Agreement and shall thereafter constitute Excluded Assets for all purposes. Sellers shall retain the consideration paid by the Third Party and shall have no further obligation with respect to such affected Assets under this Agreement. Should (i) a Third Party fail to exercise or waive its Preferential Right to purchase as to any portion of the Assets prior to Closing, and (A) the time for exercise or waiver has not yet expired by Closing or (B) the validity of the exercise is being contested by Sellers or Purchasers, or (ii) a Third Party exercise its Preferential Right to purchase as to any portion of the Assets prior to the Closing, but such Assets are not conveyed prior to or simultaneously with the Closing, then, in each case, there shall be no adjustment to the Unadjusted Purchase Price on account thereof and, if Closing occurs, Purchasers shall cause the Company to comply with the terms and provisions set out in the applicable Preferential Right provision and shall be entitled to the consideration paid by such Third Party.
Section 4.7 Casualty or Condemnation Loss. If, after the Execution Date, but prior to the Closing Date, any portion of the Assets is damaged, destroyed, or made unavailable or unusable for the intended purpose by fire or other casualty or is taken in condemnation or under right of eminent domain (each a “Casualty Loss”), subject to Section 9.2(e), Sellers shall promptly notify Purchasers in writing thereof and Purchasers shall nevertheless be required to close. Furthermore, at or prior to Closing, Sellers shall elect in writing to either (a) restore the Assets affected by such Casualty Loss to substantially their condition as of the Execution Date as promptly as practicable following the Closing or (b) adjust the Unadjusted Purchase Price downward by the amount of the reasonable estimated losses to the Assets as a result of such Casualty Losses. In either event, Sellers shall retain all sums paid by Third Parties by reason of such Casualty Losses and all rights in and to any insurance claims, unpaid awards and other rights, in each case, against Third Parties arising out of such Casualty Losses. Further, in the event clause (a) above is applicable, Purchasers agree to reasonably cooperate (and to cause the Company to reasonably cooperate), in each case at no cost to Purchasers or the Company, as applicable, with Sellers, including by giving Sellers reasonable access to the affected Assets to the extent necessary or convenient to facilitate Sellers’ efforts to restore such affected Assets.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLERS
Section 5.1 Generally.
(a) Any representation or warranty in this Article 5 qualified to the “knowledge of such Seller” or “to such Seller’s knowledge” or with any similar knowledge qualification is limited to matters within the Actual Knowledge of the individuals listed in Schedule 5.1. As used herein, the term “Actual Knowledge” means information personally known by such individual, without a duty of inquiry or investigation.
(b) Subject to the foregoing provisions of this Section 5.1 and the matters specifically set forth on the Schedules attached to this Agreement, each Seller represents and warrants to Purchasers the matters set forth in Section 5.2 through Section 5.10 on the Execution Date and the Closing Date (except for the representations and warranties that refer to a specified date, which will be deemed made as of such date).
Section 5.2 Existence and Qualification. Such Seller is duly formed, validly existing and in good standing under the Laws of the state of its formation and is duly qualified to do business in all jurisdictions in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary.
Section 5.3 Power. Such Seller has the requisite organizational power to enter into and perform this Agreement and each Transaction Document to which such Seller is or will be a party and to consummate the transactions contemplated by this Agreement and such other Transaction Documents.
Section 5.4 Authorization and Enforceability. The execution, delivery, and performance of this Agreement, all documents required to be executed and delivered by such Seller at Closing and all other Transaction Documents to which such 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 corporate, limited partnership, or limited liability company action, as applicable, on the part of such Seller.
This Agreement has been duly executed and delivered by such Seller (and all documents required hereunder to be executed and delivered by such Seller at Closing and all other Transaction Documents will be duly executed and delivered by such Seller) and this Agreement constitutes, and at the Closing such other documents to be executed and delivered by such Seller at Closing will constitute, the valid and binding obligations of such 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).
Section 5.5 No Conflicts. Except as set forth on Schedule 5.5, and subject to compliance with the HSR Act, the execution, delivery, and performance of this Agreement and the other Transaction Documents by such Seller, and the transactions contemplated hereby and thereby, will not (a) violate any provision of the Organizational Documents of such Seller, (b) result in a material default (with or without due notice or lapse of time or both) or, except for Permitted Encumbrances, 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 such Seller is a party, (c) violate any judgment, order, writ, injunction, ruling, or decree in any material respect applicable to such Seller as a party in interest, or (d) violate any Laws in any material respect applicable to such Seller.
Section 5.6 Capitalization.
(a) Such Seller is the direct owner, holder of record and beneficial owner of its respective portion of the Company Interests as set forth on Schedule 6.5, free and clear of all Encumbrances other than those arising pursuant to or described in (i) the Organizational Documents of the Company (the “Company Organizational Documents”), or (ii) applicable securities Laws.
(b) At the Closing, the delivery by such Seller to Purchasers of the Assignment Agreement will vest Purchasers with good and valid title to such Seller’s respective portion of the Company Interests free and clear of all Encumbrances, other than restrictions generally arising under the Company Organizational Documents and applicable securities Laws.
Section 5.7 Liability for Brokers’ Fees. Purchasers shall not directly or indirectly have any responsibility, liability, or expense, as a result of undertakings or agreements of such Seller or any of 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 5.8 Litigation. Except as set forth on Schedule 5.8, there are no actions, suits, proceedings, or causes of action pending before any Governmental Body or arbitrator, or to such Seller’s knowledge, threatened in writing, with respect to such Seller seeking to obtain material Damages in connection with, or to prevent the consummation of the transactions contemplated by this Agreement or any other Transaction Document, or which is reasonably likely to materially impair or delay such Seller’s ability to perform its obligations under this Agreement or any other Transaction Document.
Section 5.9 Bankruptcy. There are no bankruptcy, insolvency, reorganization, receivership, or similar proceedings pending against, being contemplated by, or, to such Seller’s knowledge, threatened against such Seller.
Section 5.10 Investment Intent. Such Seller (a) is an experienced and knowledgeable investor, (b) is able to bear the economic risks of an acquisition and ownership of the CHK Common Stock comprising the Stock Purchase Price, (c) has such knowledge and experience in business and financial matters so that such Seller is capable of evaluating (and has evaluated) the merits and risks of an investment in the CHK Common Stock being acquired hereunder, (d) is an “accredited investor,” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act, (e) is acquiring the shares of CHK Common Stock comprising the Stock Purchase Price for its own account and not with a view toward or for sale associated with any distribution thereof, nor with any present intention of making a distribution thereof in violation of the Securities Act and applicable state securities Laws, and (f) acknowledges and understands that (i) the shares of CHK Common Stock comprising the Stock Purchase Price have not been registered under the Securities Act in reliance on an exemption therefrom and (ii) each of the shares of CHK Common Stock comprising the Stock Purchase Price will, upon its acquisition by such Seller, be characterized as “restricted securities” under state and federal securities Laws and may not be sold, transferred, offered for sale, pledged, hypothecated, or otherwise disposed of without registration under the Securities Act and any applicable foreign and state securities Laws, except under an exemption from such registration under the Securities Act and such Laws.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY AND THE ASSETS
Section 6.1 Generally.
(a) Any representation or warranty qualified to the “knowledge of R2KLP” or “to R2KLP’s knowledge” or with any similar knowledge qualification is limited to matters within the Actual Knowledge of the individuals listed in Schedule 6.1. As used herein, the term “Actual Knowledge” means information personally known by such individual, without a duty of inquiry or investigation.
(b) Subject to the foregoing provisions of this Section 6.1 and the exceptions and matters specifically set forth on the Schedules attached to this Agreement, R2KLP represents and warrants to Purchasers the matters set forth in Section 6.2 through Section 6.35 on the Execution Date and the Closing Date (except for the representations and warranties that refer to a specified date, which will be deemed made as of such date).
Section 6.2 Existence and Qualification. The Company is a limited liability company duly formed, validly existing and in good standing under the Laws of the state of Texas, and is duly qualified to do business in all jurisdictions in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary.
Section 6.3 Power. The Company has all requisite organizational power to own and lease its properties, including the Assets, and to carry on its business as is now 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 the Company.
Section 6.4 No Conflicts. Except as set forth on Schedule 6.4 and subject to compliance with the HSR Act, the execution, delivery, and performance of this Agreement and the other Transaction Documents by R2KLP, and the transactions contemplated hereby and thereby, will not (a) violate any provision of the Company Organizational Documents, (b) result in a material default (with or without due notice or lapse of time or both) or, except for Permitted Encumbrances, 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 the Company is a party or that affects the Company Interests or the Assets, (c) violate any judgment, order, writ, injunction, ruling, or decree in any material respect applicable to the Company as a party in interest, or (d) violate any Laws in any material respect applicable to the Company or the Assets.
Section 6.5 Capitalization.
(a) Schedule 6.5 sets forth a true and complete list that accurately reflects all of the issued and outstanding Interests of the Company, and the record and beneficial owners thereof.
(b) Except for the Company Interests set forth on Schedule 6.5, the Company has not issued or agreed to issue any: (i) Interests; (ii) option, warrant, subscription, call or option, or any right or privilege capable of becoming an agreement or option, for the purchase, subscription, allotment or issue of any Interests of the Company; (iii) stock appreciation right, phantom stock, interest in the ownership or earnings of the Company or other equity equivalent or equity-based award or right; or (iv) bond, debenture or other Indebtedness having the right to vote or convertible or exchangeable for Interests having the right to vote.
(c) Without limiting the generality of the foregoing, none of the Company Interests are subject to any voting trust, member or partnership agreement or voting agreement or other agreement, right, instrument or understanding with respect to any purchase, sale, issuance, transfer, repurchase, redemption or voting of any Company Interests, other than as set forth on Schedule 6.5.
(d) The Company Interests are duly authorized, validly issued, fully paid and nonassessable, and were not issued in violation of any preemptive rights, rights of first refusal, right of first offer, purchase option, call option, or other similar rights of any Person.
(e) True, correct, and complete copies of the Company Organizational Documents have been made available to Purchasers and reflect all material amendments and modifications made thereto at any time prior to the Execution Date.
Section 6.6 Subsidiaries. The Company does not own, either directly or indirectly, any Interests in any Person.
Section 6.7 Litigation. Except as set forth on Schedule 6.7, there are no actions, suits, proceedings, or causes of action pending before any Governmental Body or arbitrator, or to R2KLP’s knowledge, threatened in writing, with respect to the Assets or the Company or otherwise directly related to the Assets or the Company’s ownership of the Assets.
Section 6.8 Taxes and Assessments.
(a) All material Taxes that have become due and payable by or with respect to the Company have been timely paid.
(b) All Tax Returns that are required to be filed by the Company have been timely filed with the appropriate Governmental Body, and all such Tax Returns are true, correct and complete in all material respects.
(c) (i) No Tax action, suit, Governmental Body proceeding, or audit is now in progress or pending with respect to the Company, and (ii) neither R2KLP nor the Company has received written notice of any pending claim against the Company from any applicable Governmental Body for assessment of Taxes.
(d) All material Taxes that the Company has been required to collect or withhold in connection with the business of the Company have been duly collected or withheld and have been timely and duly paid to the proper Governmental Body.
(e) No statute of limitations in respect of Taxes of the Company has been waived, to the extent such waiver remains outstanding.
(f) There are no Encumbrances for Taxes upon any Asset of the Company, other than liens for Taxes not yet due and payable or Taxes that are being contested in good faith by appropriate actions.
(g) The Company has not engaged in any “listed transaction” within the meaning of Treasury Regulation Section 1.6011-4(b)(2).
(h) The Company is, and has at all times since its formation been, classified as a partnership for U.S. federal income tax purposes.
(i) No claim has been made in writing by a Governmental Body in a jurisdiction where Tax Returns of the Company or the Assets are not filed, that the Company is or may be subject to taxation by, or required to file any Tax Return in, that jurisdiction.
(j) [Reserved.]
(k) To the extent applicable, the Company has not (i) failed to comply in any material respect with any applicable requirements under Section 2302 of the CARES Act (or any similar provision of state or local law); (ii) failed to comply in any material respect with any applicable legal requirements under Sections 7001 through 7005 of the Families First Coronavirus Response Act and Section 2301 of the CARES Act (or any similar provision of state or local law);
(iii) deferred any payroll tax obligations (including those imposed by Sections 3101(a) and 3201 of the Code) pursuant to IRS Notice 2020-65 or IRS Notice 2021-11; or (iv) deferred the payment of any material Taxes under any state or local law enacted in response to the COVID-19 pandemic (to the extent such deferred Taxes have not been paid as of the Effective Time).
(l) The Company is not a party to or bound by any Tax allocation, sharing or indemnity agreements or arrangements (excluding, for the avoidance of doubt, any commercial agreements or contracts that are not primarily related to Taxes). The Company does not have any liability for the Taxes of any Person under Treasury Regulations Section 1.1502-6 (or any corresponding provisions of state, local or foreign Tax law), or as a transferee or successor, or by contract or otherwise.
(m) 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 under Subchapter K of Chapter 1 of Subtitle A of the Code (excluding, for the avoidance of doubt, the Company, which is classified as a partnership for U.S. federal income tax purposes).
This Section 6.8 and Section 6.22 shall be the exclusive representations and warranties of R2KLP with respect to Tax matters, and no other representations and warranties are made in this Agreement by Sellers with respect to such matters.
Section 6.9 Capital Commitments. Except as set forth on Schedule 6.9, as of the Execution Date, there were no outstanding AFEs or other capital commitments to Third Parties that were binding on the Assets or the Company and could reasonably be expected to require expenditures by the Company after the Execution Date in excess of $10,000, net to the interests of the Company.
Section 6.10 Compliance with Laws. The Company is in compliance with all applicable Laws in all material respects. To R2KLP’s knowledge, the Assets operated by Third Parties (other than Assets operated by the Purchaser Group) are being operated in compliance with, all applicable Laws in all material respects. This Section 6.10 does not include any matters with respect to Environmental Laws, which are exclusively addressed in Article 4 and Section 6.16, or Tax matters, which are exclusively addressed in Section 6.8 and Section 6.22.
Section 6.11 Material Contracts.
(a) Schedule 6.11 sets forth all Contracts as of the Execution Date of the type described below, in each case, (x) to which the Company is a party (or is a successor or assign of a party) and (y) which will be binding on the Company or the Assets after the Closing (collectively, the “Material Contracts”):
(i) any Contract that can reasonably be expected to result in aggregate payments by the Company of more than $10,000, net to the Company’s interest, during the current or any subsequent calendar year (in each case based solely on the terms thereof and current volumes, without regard to any expected increase in volumes or revenues), except for (A) any Contract that terminates or can be terminated by the Company on not greater than 60 days’ notice, and (B) customary joint operating agreements entered into in the ordinary course of business;
(ii) any Contract that can reasonably be expected to result in aggregate revenues to the Company of more than $10,000, net to the Company’s interest, during the current or any subsequent calendar year (in each case, based solely on the terms thereof and current volumes, without regard to any expected increase in volumes or revenues), except for (A) any Contract that terminates or can be terminated by the Company on not greater than 60 days’ notice, and (B) customary joint operating agreements entered into in the ordinary course of business;
(iii) any Hydrocarbon purchase and sale, storage, marketing, transportation, processing, gathering, treatment, separation, compression, or similar Contract, except for any Contract that terminates or can be terminated by the Company on not greater than 60 days’ notice;
(iv) any Contract that is an indenture, mortgage, loan, credit agreement, sale-leaseback, guaranty of any obligation, bond, letter of credit or similar Contract;
(v) any Contract that constitutes a lease under which the Company is the lessor or the lessee of real or personal property which lease involves an annual base rental of more than $10,000, except for any Contract that terminates or can be terminated by the Company on not greater than 60 days’ notice;
(vi) any farmout or farmin agreement, participation agreement, partnership agreement, joint venture agreement, exploration agreement, development agreement, joint operating agreement (other than customary joint operating agreements entered into in the ordinary course of business), unit agreement (other than customary unit agreements entered into in the ordinary course of business), or similar Contract;
(vii) any Contract that (A) contains or constitutes an existing area of mutual interest agreement or (B) includes non-competition restrictions or other similar restrictions on doing business;
(viii) any Contract of the Company 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;
(ix) any Contract between the Company and any Seller or Affiliate of such Seller that will not be terminated prior to Closing;
(x) any Contract that contains calls upon or options to purchase production, or is a dedication of production or otherwise requires production to be transported processed or sold in a particular fashion or requires the payment of deficiency payments if specified production volume levels are not achieved;
(xi) any Contract that would obligate Purchasers to drill additional wells or conduct other material development operations after the Closing;
(xii) any Contract that provides for the maintenance of credit support by Sellers or the Company not otherwise set forth on Schedule 1.1 or Schedule 6.20;
(xiii) any Contract that is a seismic or other geophysical acquisition agreement;
(xiv) any Contract relating to the pending acquisition (direct or indirect) by the Company of any material properties or any operating business or the capital stock of any other Person; and
(xv) any Contract that would give rise to the payment of a fee, penalty or similar obligation upon the closing of the transactions contemplated hereby.
(b) As of the Execution Date, the Material Contracts are in full force and effect as to the Company and, to R2KLP’s knowledge, each counterparty (excluding any Material Contract that terminates as a result of expiration of its existing term). Except as set forth on Schedule 6.11, there exists no default in any material respect under any Material Contract by the Company or, to R2KLP’s knowledge, by any other Person that is a party to such Material Contract and no event has occurred that with notice or lapse of time or both would constitute any material default under any such Material Contract by the Company or, to R2KLP’s knowledge, any other Person who is a party to such Material Contract. Prior to the execution of this Agreement, R2KLP has made available to Purchasers complete copies of each Material Contract and all material amendments thereto.
Section 6.12 Payments for Production and Imbalances. Except as set forth on Schedule 6.12, (a) the Company is not obligated by virtue of any take-or-pay payment, advance payment, or other similar payment (other than (i) royalties, overriding royalties, and similar arrangements reflected in the Net Revenue Interest figures set forth on Exhibit A-1 or Exhibit A-2 (as applicable); (ii) rights of any lessor to take free gas under the terms of the relevant Lease for its use on the lands covered thereby; (iii) gas balancing arrangements; and (iv) non-consent provisions in the Contracts) to deliver Hydrocarbons, or proceeds from the sale thereof, attributable to the Properties at some future time without receiving payment therefor at or after the time of delivery, and (b) there are not any Imbalances attributable to the Properties.
Section 6.13 Consents and Preferential Purchase Rights. Except as set forth on Schedule 6.13, and subject to compliance with the HSR Act, none of the Assets, or any portion thereof, is subject to any Preferential Right or Specified Consent Requirement that may be applicable to the transactions contemplated by this Agreement, except consents that are customarily obtained after Closing (including Customary Post-Closing Consents).
Section 6.14 Non-Consent Operations. Except as set forth on Schedule 6.14 or otherwise reflected on Exhibit A-1 or Exhibit A-2, as applicable, as of the Execution Date, no operations are being conducted or have been conducted on the Properties with respect to which the Company has elected to be a non-consenting party under the applicable operating agreement and with respect to which all of the Company’s rights have not yet reverted to it.
Section 6.15 Plugging and Abandonment. Except as set forth on Schedule 6.15, to the knowledge of R2KLP: (a) the Company has not received any written notices or demands from Governmental Bodies or other Third Parties to plug or abandon any Wells,
(b) there are no Wells that the operator thereof is currently obligated by applicable Law to plug and abandon that have not been plugged and abandoned in accordance in all material respects with applicable Law, (c) the Wells that are neither in use for purposes of production or injection, nor temporarily suspended or temporarily abandoned in accordance with applicable Law, have been plugged and abandoned to the extent required by, and in accordance in all material respects with, applicable Law.
Section 6.16 Environmental Matters. Except as set forth on Schedule 6.16, as of the Execution Date, (a) to the knowledge of R2KLP, with regard to Properties operated by Third Parties, the Properties and the operation thereof are and during the three year time period prior to the Execution Date have been in compliance with applicable Environmental Laws, including any environmental Permits, in all material respects, (b) neither the Company, and to R2KLP’s knowledge, nor any Third Party operator, has received any written notice of material violation of any Environmental Laws relating to the Assets where such violation has not been previously cured or otherwise resolved to the satisfaction of the relevant Governmental Body, (c) with respect to the three year time period prior to the Execution Date, R2KLP has provided Purchasers with copies of all material reports and correspondence addressing the environmental condition of the Assets that are in R2KLP’s or its Affiliates’ possession or control, and (d) with respect to the Properties, the Company has not entered into, or is subject to, any agreements, consents, orders, decrees, judgments, license or permit conditions, or other directives of any Governmental Body that are in existence as of the Execution Date, that are based on any Environmental Laws and that relate to the future use of any of the Properties and that require any change in the present condition of any of the Properties. Notwithstanding any provision in this Agreement to the contrary, this Section 6.16 shall be the exclusive representations and warranties of R2KLP with respect to Environmental Laws, Environmental Liabilities, and other environmental matters, and no other representations or warranties are made in this Agreement by Sellers with respect to such matters.
Section 6.17 Suspense Funds; Royalties; Expenses. Except as set forth on Schedule 6.17, as of the Execution Date, the Company does not hold any Third Party funds in suspense with respect to production of Hydrocarbons from any of the Assets (collectively, “Suspense Funds”) other than amounts less than the statutory minimum amount that the Company is permitted to accumulate prior to payment. To R2KLP’s knowledge, except for Suspense Funds held by Third Party operators, all royalties, overriding royalties, and other burdens upon, measured by, or payable out of production and other interest owners’ revenues or proceeds attributable to sales of Hydrocarbons produced from or attributable to the Assets in accordance with applicable Leases and Laws, in each case, due by the Company have been properly and timely paid. Subject to the foregoing, to R2KLP’s knowledge, no material expenses (including bills for labor, materials and supplies used or furnished for use in connection with the Assets) are owed and delinquent in payment by the Company that relate to the ownership of the Assets.
Section 6.18 [Reserved.]
Section 6.19 Bankruptcy. There are no bankruptcy, insolvency, reorganization, receivership, or similar proceedings pending against, being contemplated by, or, to R2KLP’s knowledge, threatened against the Company.
Section 6.20 Credit Support. Schedule 6.20 contains a true and complete list of all surety bonds, letters of credit, guarantees, and other forms of credit support currently maintained, posted, or otherwise provided by the Company with respect to the Assets.
Section 6.21 Bank Accounts. Schedule 6.21 sets forth a true, complete, and correct list of (a) all bank accounts or safe deposit boxes under the control or for the benefit of the Company (including the names of the financial institutions maintaining each such account, and the purpose for which such account is established), (b) the names of all persons authorized to draw on or have access to such accounts and safe deposit boxes, and (c) all outstanding powers of attorney or similar authorizations granted by or with respect to the Company.
Section 6.22 Employee Benefit Matters. The Company does not maintain or operate any Benefit Plans. The Company has not maintained, established, sponsored, participated in, or contributed to, or had any obligation or liability to, any (a) plan which is an “employee pension benefit plan,” within the meaning of Section 3(2) of ERISA, that is subject to Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code, (b) “funded welfare plan” within the meaning of Section 419 of the Code, (c) “multiple employer welfare benefit arrangement” as described in Section 3(40)(A) of ERISA, or (d) “multiemployer plan,” as defined in Section 3(37) of ERISA. The Company has not incurred, nor does it expect to incur, any liability under Title IV of ERISA or Section 412 of the Code.
Section 6.23 Employment and Labor Matters.
(a) There are no employees of the Company or contingent workers or contractors who primarily provide services either to the Company or in connection with the Assets.
(b) The Company is not a party to any labor or collective bargaining contract and, to the knowledge of R2KLP, there have been no activities by any labor union to organize any employees of the Company since January 1, 2020. There are no civil, criminal or administrative claims, actions, cases, grievances, investigations, audits, suits, arbitrations, mediations, causes of action or other proceedings by or before any Governmental Body or any arbitrator or, to R2KLP’s knowledge, threatened in writing, concerning labor, employment or pay matters with respect to the Company, any of its employees or any contingent workers or contractors. The Company has not made any commitments or representations to any Person regarding (i) potential employment by Purchasers or any Affiliate of Purchasers, or (ii) any terms and conditions of such potential employment by Purchasers or any Affiliate thereof.
(c) Since January 1, 2020, to R2KLP’s knowledge, there has not been any proceeding relating to, or any act or allegation of or relating to, sex-based discrimination, sexual harassment or sexual misconduct, or breach of any sex-based discrimination, sexual harassment or sexual misconduct policy of the Company, in each case involving the Company or its employees, nor has there been, to the knowledge of R2KLP, any settlement or similar out-of-court or pre-litigation arrangement relating to any such matters, nor to the knowledge of R2KLP has any such proceeding been threatened.
Section 6.24 Insurance. Schedule 6.24 sets forth a true and complete list of all material insurance policies in force with respect to the Company or under which the Assets are insured, copies of which have been made available to Purchasers.
As of the Execution Date, all of such policies are in full force and effect and there is no material claim pending under any such policies as to which coverage has been denied by the insurer other than customary indications as to reservation of rights by insurers and the Company has not received written notice of cancellation of any such insurance policies.
Section 6.25 [Reserved.]
Section 6.26 Books and Records. All books and records of the Company are being maintained and, to the knowledge of R2KLP, have been maintained by the Company in accordance with all applicable Law in all material respects and in the ordinary course of business consistent with past practice. The minute books of the Company contain true, complete and accurate records of all meetings and accurately reflect all other actions taken by the (a) members or other equity holders and (b) board of managers, officers, or similar governing body and all committees of the Company.
Section 6.27 Special Warranty. Subject to the Permitted Encumbrances, as of the Title Claim Date and the Closing Date, the Company holds Defensible Title to the Leases and Wells from and against the claims of any and all Persons claiming or to claim the same or any part thereof, in each case, by, through and/or under the Company or its Affiliates, but not otherwise.
Section 6.28 Oil and Gas Properties. No Seller, nor any Affiliate of a Seller (other than the Company), owns any interest in the Properties.
Section 6.29 Permits. Any material Permit required for the ownership of the Assets is in full force and effect and has been duly and validly issued. There are no outstanding violations in any material respect of any of the material Permits required of the ownership of the Assets.
Section 6.30 Sufficiency of Assets. To R2KLP’s knowledge, as of the Execution Date, (a) the Properties are, in all material respects, in an operable state of repair adequate to maintain normal operations consistent with past practices, ordinary wear and tear excepted and (b) the Properties constitute and include, in all material respects, all of the assets necessary for the conduct of the Company’s business, as currently conducted, with respect to the ownership of the Properties.
Section 6.31 Wells. To R2KLP’s knowledge, no Well (other than Wells operated by the Purchaser Group), is subject to material penalties on allowable production because of any overproduction.
Section 6.32 Leases. Except as reflected on Schedule 6.7, (a) there is no material default under any of the Leases, (b) the Company has not received written notice from a lessor of any requirements or demands to drill additional wells on any of the Leases, which requirements or demands have not been resolved in writing, and (c) no party to any Lease or any successor to the interest of such party has filed or threatened to file any action to terminate, cancel, rescind or procure judicial reformation of any Lease.
Section 6.33 Condemnation; Casualty Loss. As of the Execution Date, there is no actual or, to R2KLP’s knowledge, threatened in writing, taking (whether permanent, temporary, whole, or partial) of any material part of the Properties by reason of condemnation or the threat of condemnation.
As of the Execution Date, there has been no Casualty Loss since the Effective Time with respect to any Property with damages estimated to exceed $1,000,000 net to the interest of the Company.
Section 6.34 Specified Matters. There are no Damages incurred by, suffered by or owing by the Company caused by, arising out of, or resulting from the following matters, to the extent attributable to the ownership of any of the Properties:
(a) except with respect to any Casualty Losses, any Third Party injury or death, or damage of Third Party properties (excluding any such property damage that is related to or caused by any Environmental Defect or properly charged or chargeable to the joint account by the operator under the applicable operating or unit agreement) occurring on or with respect to the ownership of any Properties prior to the Closing Date;
(b) any material civil fines or penalties or criminal sanctions imposed on the Company, to the extent resulting from any pre-Closing violation of Law (including any Environmental Law);
(c) any transportation or disposal of Hazardous Substances (other than Hydrocarbons) from any Property to a site that is not a Property prior to Closing that would be in material violation of applicable Environmental Law or that would arise out of a material liability under applicable Environmental Law; or
(d) any of the Excluded Assets.
Section 6.35 Absence of Certain Developments. Except as expressly contemplated by this Agreement, since December 31, 2020 and until the Execution Date, there has not occurred any event, change, occurrence, or circumstance that, individually or in the aggregate with any other events, changes, occurrences, or circumstances, has had a Material Adverse Effect.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
Section 7.1 Generally. Each Purchaser (on behalf of itself only) represents and warrants to Sellers the matters set forth in Section 7.2 through Section 7.14 on the Execution Date and the Closing Date (except for representations and warranties that refer to a specified date, which will be deemed made as of such date). CHK Parent represents and warrants to Sellers on the matters set forth in Section 7.15 through Section 7.19 on the Execution Date and the Closing Date (except for representations and warranties that refer to a specified date, which will be deemed made as of such date).
Section 7.2 Existence and Qualification. Such Purchaser is validly existing and in good standing under the Laws of the state of its formation and is duly qualified to do business in all jurisdictions in which the Assets are located and has, or as of the Closing will have, complied with all necessary requirements of Governmental Bodies required for such Purchaser’s ownership and operation of the Company Interests and the Assets, as applicable.
Section 7.3 Power. Such Purchaser has the requisite power to enter into and perform this Agreement and each other 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.
Section 7.4 Authorization and Enforceability. The execution, delivery, and performance of this Agreement, all documents required to be executed and delivered by such Purchaser at Closing and all other Transaction Documents to which such Purchaser 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, corporate, or partnership action on the part of such Purchaser. This Agreement has been duly executed and delivered by such Purchaser (and all documents required hereunder to be executed and delivered by such Purchaser at Closing and all other Transaction Documents will be duly executed and delivered by such Purchaser) and this Agreement constitutes, and at the Closing such documents to be executed and delivered by such Purchaser at Closing will constitute, the valid and binding obligations of such Purchaser, 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 7.5 No Conflicts. Subject to compliance with the HSR Act, the execution, delivery, and performance of this Agreement and the other Transaction Documents by such Purchaser, and the transactions contemplated hereby and thereby, will not (a) violate any provision of the certificate of incorporation, bylaws, agreement of limited partnership, or other Organizational Documents of such Purchaser, (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 of the terms, conditions, or provisions of any note, bond, mortgage, indenture, license, or other financing instrument to which such Purchaser is a party, (c) violate any judgment, order, ruling, or regulation applicable to such Purchaser as a party in interest, or (d) violate any Laws applicable to such Purchaser or any of its assets.
Section 7.6 Liability for Brokers’ Fees. Sellers shall not directly or indirectly have any responsibility, liability, or expense, as a result of undertakings or agreements of such Purchaser or any of 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 7.7 Litigation. There are no actions, suits, or proceedings pending, or to such Purchaser’s knowledge, threatened in writing, before any Governmental Body or arbitrator against such Purchaser that are reasonably likely to materially impair such Purchaser’s ability to perform its obligations under this Agreement or any document required to be executed and delivered by such Purchaser at Closing. As used in this Section 7.7, “such Purchaser’s knowledge” is limited to information personally known by one or more of the individuals listed in Schedule 7.7 without a duty of inquiry or investigation.
Section 7.8 Financing. Such Purchaser will have as of Closing sufficient cash, available lines of credit, or other sources of immediately available funds (in Dollars) to enable it to pay the Closing Cash Payment to Sellers, the Defect Escrow Amount, if any, and the Post-Closing Escrow Amount, if any, at the Closing.
Section 7.9 Contracts. The execution, delivery, and performance of this Agreement by such Purchaser, and the transactions contemplated by this Agreement, will not result in a material default (with due notice or lapse of time or both) under any of the terms, conditions, or provisions of any contract to which such Purchaser is a party.
Section 7.10 Securities Law Compliance. Such Purchaser is an “accredited investor,” as such term is defined in Regulation D of the Securities Act of 1933, as amended, (the “Securities Act”) and is acquiring the Company Interests for its own account for use in its trade or business, and not with a view toward or for sale associated with any distribution thereof, nor with any present intention of making a distribution thereof within the meaning of the Securities Act and applicable state securities Laws. Such Purchaser has such knowledge and experience in business and financial matters so that such Purchaser is capable of evaluating the merits and risks of an investment in the Company Interests being acquired hereunder. Such Purchaser agrees that the Company Interests may not be sold, transferred, offered for sale, pledged, hypothecated, or otherwise disposed of without registration under the Securities Act and any applicable foreign and state securities Laws, except under an exemption from such registration under the Securities Act and such Laws.
Section 7.11 Opportunity to Verify Information. As of the Closing Date, subject to Sellers’ compliance with the terms of this Agreement, such Purchaser and its Representatives have (a) been permitted full and complete access to all materials relating to the Company Interests and the Assets, (b) been afforded the opportunity to ask all questions of Sellers (or one or more Persons acting on Sellers’ behalf) concerning the Company Interests and the Assets, (c) been afforded the opportunity to investigate the condition, including the subsurface condition, of the Assets, and (d) had the opportunity to take such other actions and make such other independent investigations as such Purchaser deems necessary to evaluate the Company Interests and the Assets and understand the merits and risks of an investment therein and to verify the truth, accuracy, and completeness of the materials, documents, and other information provided or made available to such Purchaser (whether by Sellers or otherwise). SUCH PURCHASER ACKNOWLEDGES AND AGREES THAT SELLERS HAVE NOT MADE ANY REPRESENTATIONS OR WARRANTIES, EXPRESS, STATUTORY, OR IMPLIED, WRITTEN OR ORAL, AS TO THE ACCURACY OR COMPLETENESS OF ANY MATERIALS, DOCUMENTS, OR OTHER INFORMATION PROVIDED OR MADE AVAILABLE TO SUCH PURCHASER (WHETHER OR NOT BY SELLERS) (INCLUDING ANY MATERIALS, DOCUMENTS, OR OTHER INFORMATION PROVIDED PURSUANT TO SECTION 8.1). SUCH PURCHASER HEREBY WAIVES ANY CLAIMS ARISING OUT OF ANY MATERIALS, DOCUMENTS, OR OTHER INFORMATION PROVIDED OR MADE AVAILABLE TO SUCH PURCHASER (WHETHER OR NOT BY SELLERS) (INCLUDING ANY MATERIALS, DOCUMENTS, OR OTHER INFORMATION PROVIDED PURSUANT TO SECTION 8.1), WHETHER UNDER THIS AGREEMENT, AT COMMON LAW, BY STATUTE, OR OTHERWISE.
Section 7.12 Independent Evaluation.
(a) SUCH PURCHASER IS KNOWLEDGEABLE OF THE OIL AND GAS BUSINESS AND OF THE USUAL AND CUSTOMARY PRACTICES OF OIL AND GAS PRODUCERS, INCLUDING THOSE IN THE AREAS WHERE THE ASSETS ARE LOCATED.
(b) SUCH PURCHASER IS A PARTY CAPABLE OF MAKING SUCH INVESTIGATION, INSPECTION, REVIEW, AND EVALUATION OF THE COMPANY INTERESTS AND THE ASSETS AS A PRUDENT PURCHASER WOULD DEEM APPROPRIATE UNDER THE CIRCUMSTANCES, INCLUDING WITH RESPECT TO ALL MATTERS RELATING TO THE COMPANY INTERESTS AND THE ASSETS AND THEIR VALUE, OPERATION, AND SUITABILITY.
(c) IN MAKING THE DECISION TO ENTER INTO THIS AGREEMENT AND CONSUMMATE THE TRANSACTIONS CONTEMPLATED HEREBY, SUCH PURCHASER HAS RELIED SOLELY ON THE BASIS OF ITS OWN INDEPENDENT DUE DILIGENCE INVESTIGATION OF THE COMPANY INTERESTS AND THE ASSETS AND THE TERMS AND CONDITIONS OF THIS AGREEMENT, AND SUCH PURCHASER HAS NOT RELIED ON ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT, EXPRESS, STATUTORY, OR IMPLIED, ORAL OR WRITTEN, OR ANY OTHER STATEMENT, ORAL OR WRITTEN, OTHER THAN THE REPRESENTATIONS AND WARRANTIES OF SELLERS CONTAINED IN ARTICLE 5, THE REPRESENTATIONS AND WARRANTIES OF R2KLP CONTAINED IN ARTICLE 6 AND CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), AND THEN ONLY TO THE EXTENT REPRESENTED AND WARRANTED (OR CONFIRMED) THEREIN.
(d) WITHOUT LIMITING THE FOREGOING, SUCH PURCHASER EXPRESSLY ACKNOWLEDGES THE PROVISIONS SET FORTH IN SECTION 8.18, SECTION 14.17, AND SECTION 14.18.
(e) SUCH PURCHASER AGREES, TO THE FULLEST EXTENT PERMITTED BY LAW, THAT THE SELLER GROUP SHALL NOT HAVE ANY LIABILITY OR RESPONSIBILITY WHATSOEVER TO THE PURCHASER GROUP, OR THEIR RESPECTIVE EQUITY HOLDERS, FINANCING SOURCES, INVESTORS OR CONTROLLING PERSONS ON ANY BASIS (INCLUDING IN CONTRACT OR TORT, UNDER FEDERAL OR STATE SECURITIES LAWS OR OTHERWISE) RESULTING FROM THE FURNISHING TO THE PURCHASER GROUP OR ANY FINANCING SOURCES OR INVESTORS (OR ANY USE BY THE PURCHASER GROUP OR ANY FINANCING SOURCES OR INVESTORS OF) ANY DUE DILIGENCE INFORMATION (INCLUDING, FOR THE AVOIDANCE OF DOUBT, ANY INFORMATION MADE AVAILABLE TO SUCH PURCHASER PURSUANT TO SECTION 8.1 OR OTHERWISE BY OR ON BEHALF OF SELLERS OR THEIR REPRESENTATIVES).
(f) SUCH PURCHASER UNDERSTANDS AND ACKNOWLEDGES THAT NO FEDERAL, STATE OR FOREIGN AGENCY HAS PASSED UPON THE MERITS OF AN INVESTMENT IN (OR WITH RESPECT TO) THE COMPANY INTERESTS OR THE ASSETS, OR MADE ANY FINDING OR DETERMINATION CONCERNING (i) THE FAIRNESS OR ADVISABILITY OF SUCH AN INVESTMENT OR
(ii) THE ACCURACY OR ADEQUACY OF THE DISCLOSURES AND INFORMATION MADE TO SUCH PURCHASER UNDER THIS AGREEMENT.
Section 7.13 Consents, Approvals or Waivers. Subject to compliance with the HSR Act, such Purchaser’s execution, delivery, and performance of this Agreement (and any document required to be executed and delivered by such Purchaser at Closing) is not and will not be subject to any consent, approval, or waiver from any Governmental Body or other Third Party, except consents and approvals of assignments by Governmental Bodies that are customarily obtained after Closing.
Section 7.14 Bankruptcy. There are no bankruptcy, insolvency, reorganization, or receivership proceedings pending against, being contemplated by, or threatened against such Purchaser or any of its Affiliates.
Section 7.15 Capitalization.
(a) As of the close of business on January 24, 2022 (the “Measurement Date”), the authorized capital of CHK Parent consisted solely of (i) 118,207,814 shares of CHK Common Stock, of which 118,207,814 shares of CHK Common Stock were issued and 118,207,814 shares of CHK Common Stock were outstanding.
(b) All of the issued and outstanding shares of CHK Common Stock have been duly authorized and validly issued in accordance with the Organizational Documents of CHK Parent are fully paid and non-assessable, and were not issued in violation of any preemptive rights, rights of first refusal, or other similar rights of any Person. The CHK Common Stock to be issued pursuant to this Agreement, when issued, will be validly issued, fully paid and nonassessable and not subject to preemptive rights, will have the rights, preferences and privileges specified in the Organizational Documents of CHK Parent and will, in the hands of Sellers and their Affiliates, be free of any Encumbrance, other than restrictions on transfer pursuant to applicable securities Laws.
(c) There are no preemptive rights and, except as disclosed in the SEC Documents or issuable pursuant to CHK Parent’s long term incentive plans, other outstanding rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, agreements, arrangements, calls, subscription agreements, commitments or rights of any kind that obligate CHK Parent to issue or sell any equity interests of CHK Parent or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any equity interests in CHK Parent, and, except as disclosed in the SEC Documents and those issuable pursuant to CHK Parent’s long term incentive plans, no securities or obligations evidencing such rights are authorized, issued or outstanding.
(d) CHK Parent does not have any outstanding bonds, debentures, notes, or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the stockholders of CHK Parent on any matter.
(e) As of the close of business on the Measurement Date, CHK Parent is the indirect owner, holder of record and beneficial owner of all of the Interests of CHK Purchaser free and clear of all encumbrances other than those arising pursuant to or described in (i) the Organizational Documents of the corresponding Purchaser, (ii) applicable securities Laws or (iii) this Agreement.
(f) CHK Parent is not now, and immediately after the issuance and sale of the CHK Common Stock comprising the Stock Purchase Price will not be, required to register as an “investment company” or a company “controlled by” an entity required to register as an “investment company” within the meaning of the Investment Company Act of 1940.
Section 7.16 SEC Documents; Financial Statements; No Liabilities.
(a) CHK Parent has timely filed or furnished with the SEC all reports, schedules, forms, statements, and other documents (including exhibits and other information incorporated therein) required to be filed or furnished by it since January 1, 2020 under the Securities Act or the Exchange Act (all such documents, together with all exhibits and schedules to the foregoing materials and all information incorporated therein by reference, the “SEC Documents”). The SEC Documents, including any audited or unaudited financial statements and any notes thereto or schedules included therein (the “Financial Statements”), at the time filed or furnished (except to the extent corrected by a subsequently filed or furnished SEC Document filed or furnished prior to the Execution Date) (i) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein (in the light of the circumstances under which they were made) not misleading, (ii) complied in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as applicable, (iii) in the case of the Financial Statements, complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, (iv) in the case of the Financial Statements, were prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Rule 10-01 of Regulation S-X) and subject, in the case of unaudited interim financial statements, to normal and recurring year-end audit adjustments, (v) in the case of the Financial Statements, fairly present in all material respects the consolidated financial position of CHK Parent and its Subsidiaries as of the dates thereof and their respective consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal and recurring year-end audit adjustments), and (vi) in the case of the Financial Statements have been prepared in a manner consistent with the books and records of CHK Parent and its Subsidiaries. Since January 1, 2020, CHK Parent has not made any material change in the accounting practices or policies applied in the preparation of its financial statements, except as required by GAAP, SEC rule or policy or applicable law. The books and records of CHK Parent and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP (to the extent applicable) and any other applicable legal and accounting requirements and reflect only actual transactions.
(b) There are no liabilities of or with respect to the Purchasers that would be required by GAAP to be reserved, reflected, or otherwise disclosed on a consolidated balance sheet of CHK Parent other than (i) liabilities accrued, reserved, reflected, or otherwise disclosed in the consolidated balance sheet of CHK Parent and its Subsidiaries as of December 31, 2020 (including the notes thereto) included in the Financial Statements, (ii) liabilities incurred in the
ordinary course of business consistent with past practice since December 31, 2020, (iii) liabilities under this Agreement and the other Transaction Documents or incurred in connection with the transactions contemplated by this Agreement and the other Transaction Documents or (iv) liabilities that, individually or in the aggregate, would not reasonably be expected to have a Purchaser Material Adverse Effect.
Section 7.17 Internal Controls; Nasdaq Listing Matters.
(a) CHK Parent has established and maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Such disclosure controls and procedures are reasonably designed to ensure that material information required to be disclosed by CHK Parent in the reports it files or submits to the SEC under the Exchange Act is made known to CHK Parent’s chief executive officer and its chief financial officer by others within those entities to allow timely decisions regarding required disclosures as required under the Exchange Act. The chief executive officer and chief financial officer of CHK Parent have evaluated the effectiveness of CHK Parent’s disclosure controls and procedures and, to the extent required by applicable Law, presented in any applicable filed SEC Document that is a report on Form 10-K or Form 10-Q, or any amendment thereto, his or her conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by such report or amendment based on such evaluation.
(b) CHK Parent has established and maintains a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that is effective in providing reasonable assurance regarding the reliability of CHK Parent’s financial reporting and the preparation of the Financial Statements for external purposes in accordance with GAAP. CHK Parent has disclosed, based on its most recent evaluation of CHK Parent’s internal control over financial reporting prior to the date hereof, to CHK Parent’s auditors and audit committee (i) any significant deficiencies and material weaknesses in the design or operation of CHK Parent’s internal control over financial reporting which would reasonably be expected to adversely affect CHK Parent’s ability to record, process, summarize and report financial information and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in CHK Parent’s internal control over financial reporting.
(c) Since December 31, 2020, (i) neither CHK Parent nor any of its subsidiaries nor, to the knowledge of CHK Parent, any director, officer, employee, auditor, accountant or representative of CHK Parent or any of its Subsidiaries has received or otherwise had or obtained knowledge of any material complaint, allegation, assertion or claim, whether written or oral, regarding the accounting or auditing practices, procedures, methodologies or methods of CHK Parent or any of its subsidiaries or their respective internal accounting controls, including any material complaint, allegation, assertion or claim that CHK Parent or any of its Subsidiaries has engaged in questionable accounting or auditing practices and (ii) no attorney representing CHK Parent or any of its subsidiaries, whether or not employed by CHK Parent or any of its subsidiaries, has reported evidence of a material violation of securities Laws, breach of fiduciary duty or similar violation by CHK Parent or any of its subsidiaries or any of their respective officers, directors, employees or agents to the board of directors of CHK Parent or any committee thereof or to any director or officer of CHK Parent or any of its subsidiaries.
(d) As of the Execution Date, there are no outstanding or unresolved comments in the comment letters received from the SEC staff with respect to the filed SEC Documents. Except as set forth in Schedule 7.17(c), to the knowledge of CHK Parent, none of the filed SEC Documents is subject to ongoing review or outstanding SEC comment or investigation.
(e) Neither CHK Parent nor any of its subsidiaries is a party to, or has any commitment to become a party to, any joint venture, off balance sheet partnership or any similar contract (including any contract or arrangement relating to any transaction or relationship between or among CHK Parent and any of its Subsidiaries, on the one hand, and any unconsolidated affiliate, including any structured finance, special purpose or limited purpose entity or Person, on the other hand, or any “off balance sheet arrangements” (as defined in Item 303(a) of Regulation S-K under the Exchange Act)), where the result, purpose or intended effect of such contract is to avoid disclosure of any material transaction involving, or material liabilities of, CHK Parent or any of its subsidiaries in CHK Parent’s or such subsidiary’s published financial statements or other filed SEC Documents.
(f) CHK Parent is in compliance in all material respects with (i) the provisions of the Sarbanes-Oxley Act and (ii) the rules and regulations of the Nasdaq, in each case, that are applicable to CHK Parent.
(g) The CHK Common Stock is registered under Section 12(b) of the Exchange Act and listed on the Nasdaq, and CHK Parent has not received any notice of deregistration or delisting from the SEC or Nasdaq, as applicable. No judgment, order, ruling, decree, injunction, or award of any securities commission or similar securities regulatory authority or any other Governmental Body, or of the Nasdaq, preventing or suspending trading in any securities of CHK Parent has been issued, and no proceedings for such purpose are, to CHK Parent’s knowledge, pending, contemplated or threatened. CHK Parent has taken no action that is designed to terminate the registration of the CHK Common Stock under the Exchange Act.
Section 7.18 Form S-3. As of the Execution Date, CHK Parent is eligible to register the resale of the CHK Common Stock comprising the Stock Purchase Price by the Sellers under Form S-3 promulgated under the Securities Act.
Section 7.19 No Stockholder Approval. The transactions contemplated hereby do not require any vote of the stockholders of CHK Parent under applicable Law, the rules and regulations of the Nasdaq (or other national securities exchange on which the CHK Common Stock is then listed) or the Organizational Documents of CHK Parent.
ARTICLE 8
COVENANTS OF THE PARTIES
Section 8.1 Access.
(a) Between the Execution Date and the Closing Date (or the earlier termination of this Agreement), R2KLP will, and will cause its Affiliates (including the Company) to (i) give Purchasers and their Representatives reasonable access, during normal business hours, to the Assets (subject to obtaining any required consents of Third Parties, including any Third Party operators of the Assets), and access to and the right to copy, at Purchasers’ sole cost, risk, and expense, the Records (or originals thereof) in Sellers’ or the Company’s possession and
(ii) use Commercially Reasonable Efforts to secure for Purchasers and their Representatives access to the Properties (to the extent requested by Purchasers) from applicable Third Party operators for the purpose of conducting a reasonable due diligence review of the Assets, but only to the extent that R2KLP or the Company may do so without violating any obligations to any Third Party. R2KLP shall also make available to Purchasers and their Representatives, upon reasonable prior written notice during normal business hours, R2KLP’s personnel knowledgeable with respect to the Assets in order that Purchasers may make such diligence investigation as Purchasers reasonably consider necessary or appropriate. To the extent permitted by the Third Party operator (if applicable), Purchasers will be entitled to conduct a Phase I Environmental Site Assessment of the Assets and may conduct visual inspections and record reviews relating to the Assets, including their condition and compliance with Environmental Laws. However, Purchasers (and their Representatives) shall not operate any equipment or conduct any invasive testing, sampling, or other similar activity of soil, groundwater, or other materials (including any testing or sampling for Hazardous Substances, Hydrocarbons, or NORM) on or with respect to the Assets prior to Closing as part of its Phase I Environmental Site Assessment. If a Phase I Environmental Site Assessment identifies in good faith any “Recognized Environmental Conditions,” as such conditions are defined or described under the current ASTM International Standard Practice Designation E1527-13, then Purchasers may request R2KLP’s consent (which consent may be withheld in R2KLP’s sole discretion) to conduct additional environmental property assessments on the affected Assets, including the collection and analysis of environmental samples (collectively, the “Phase II Environmental Site Assessment”). The Phase II Environmental Site Assessment procedures and plan concerning any additional investigation shall be submitted to R2KLP in a written workplan, and shall be reasonably based on the recognized environmental concerns identified by the Phase I Environmental Site Assessment. If R2KLP denies such a request by Purchasers to undertake such a Phase II Environmental Site Assessment on any Assets, Purchasers shall have the right to exclude such Assets from the transactions contemplated by this Agreement, in which event R2KLP shall cause the Company to convey such Assets to a Seller (or Sellers’ designee) and the Unadjusted Purchase Price shall be reduced by the Allocated Value of such excluded Assets (or, solely with respect to any Asset that does not have an Allocated Value, by an amount equal to the Allocated Value of related or associated Assets to the extent applicable or relating to, used in connection with, servicing or burdening the subject Asset) pursuant to Section 3.3(b). Purchasers shall abide by the safety rules, regulations, and operating policies provided to Purchasers in writing(including the execution and delivery of any documentation or paperwork, e.g., boarding agreements or liability releases, required by Third Party operators with respect to Purchasers’ access to any of the Assets) of any applicable Third Party operator while conducting its due diligence evaluation of the Assets. Any conclusions made from any examination done by Purchasers shall result from Purchasers’ own independent review and judgment.
(b) The access granted to Purchasers by R2KLP under this Section 8.1 shall be limited to R2KLP’s normal business hours, and Purchasers’ investigation shall be conducted in a manner that minimizes interference with the operation of the Assets. Purchasers shall coordinate its access rights with R2KLP (and with applicable Third Party operators) to reasonably minimize any inconvenience to or interruption of the conduct of business by Sellers and the Company. Sellers shall have the right to accompany Purchasers (and any Representatives of Purchasers) in connection with any physical inspection of the Assets.
(c) Purchasers acknowledge that, pursuant to its right of access to the Assets, Purchasers will become privy to confidential and other information of Sellers and their Affiliates and that such confidential information (which includes Purchasers’ conclusions with respect to its evaluations) shall be held confidential by Purchasers in accordance with the terms of the Confidentiality Agreement and Section 8.3(b) and any applicable privacy Laws regarding personal information.
(d) In connection with the rights of access, examination, and inspection granted to Purchasers under this Section 8.1, (i) EACH PURCHASER (ON BEHALF OF ITSELF AND ITS AFFILIATES, INCLUDING, FROM AND AFTER CLOSING, THE COMPANY) WAIVES AND RELEASES ALL CLAIMS AGAINST THE SELLER GROUP ARISING IN ANY WAY THEREFROM OR IN ANY WAY CONNECTED THEREWITH AND (ii) PURCHASERS HEREBY AGREE TO INDEMNIFY, DEFEND, AND HOLD HARMLESS EACH MEMBER OF THE SELLER GROUP AND THIRD PARTY OPERATORS FROM AND AGAINST ANY AND ALL DAMAGES, INCLUDING THOSE ATTRIBUTABLE TO PERSONAL INJURY, DEATH, OR PHYSICAL PROPERTY DAMAGE, OR VIOLATION OF THE SELLER GROUP’S OR ANY THIRD PARTY OPERATOR’S RULES, REGULATIONS OR OPERATING POLICIES, IN EACH CASE PROVIDED IN WRITING TO PURCHASERS PRIOR TO PURCHASERS’ ACCESS TO THE PROPERTIES,, ARISING OUT OF, RESULTING FROM, OR RELATING TO ANY FIELD VISIT OR OTHER DUE DILIGENCE ACTIVITY CONDUCTED BY PURCHASERS WITH RESPECT TO THE ASSETS, 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 THE SELLER GROUP OR THIRD PARTY OPERATORS, EXCEPTING ONLY LIABILITIES TO THE EXTENT ACTUALLY RESULTING FROM (A) THE GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR FRAUD OF ANY MEMBER OF THE SELLER GROUP OR THIRD PARTY OPERATOR, OR (B) FROM MATTERS DISCOVERED OR UNCOVERED BY PURCHASERS AND THEIR REPRESENTATIVES IN THE COURSE OF SUCH DUE DILIGENCE INVESTIGATION TO THE EXTENT SUCH DISCOVERIES ARE OF PRE-EXISTING CONDITIONS (INCLUDING ANY ENVIRONMENTAL DEFECTS) NOT CAUSED OR EXACERBATED (WHICH TERM SHALL SPECIFICALLY EXCLUDE THE DISCOVERY OF SUCH CONDITIONS) BY PURCHASERS OR THEIR REPRESENTATIVES.
Section 8.2 [Reserved].
Section 8.3 Public Announcements; Confidentiality.
(a) No Party (or any of its Affiliates) shall make any press release or other public announcement 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”). The Public Announcement Restrictions shall not restrict disclosures to the extent (i) necessary for a Party to perform this Agreement (including disclosures to Governmental Bodies or Third Parties holding Preferential Rights, 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, (iii) made to Representatives, or (iv) that such Party has given the other Party a reasonable opportunity to review such disclosure prior to its release and no objection is raised. In the case of the disclosures described under subsections (i) and (ii) of this Section 8.3(a), each Party shall use its reasonable 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 (i) relating to the existence of this Agreement, the contents hereof, or the transactions contemplated hereby, or (ii) that is or was (at any point) subject to restrictions on disclosure pursuant to the terms and conditions of the Confidentiality Agreement (including, for the avoidance of doubt, any information made available to Purchasers pursuant to Section 8.1 or otherwise by or on behalf of Sellers or their Representatives prior to Closing) strictly confidential, except (A) for disclosures to Representatives of the Parties (in which event, the disclosing Party will be responsible for making sure that the Representatives keep such information and data confidential), (B) as required to perform this Agreement, (C) to the extent expressly contemplated by this Agreement (including in connection with the resolution of disputes hereunder), (D) for disclosures that are 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, (E) for disclosures to Governmental Bodies as required by Law, or (F) as to any information or data that is or becomes available to the public other than through the act or omission of such Party or its Representatives in violation of this Section 8.3(b); provided that, prior to making any disclosures permitted under subsection (A) above, the Party disclosing such information shall obtain an undertaking of confidentiality from the Person receiving such information.
(c) To the extent that the foregoing provisions of this Section 8.3 conflict with the provisions of the Confidentiality Agreement, the provisions of this Section 8.3 shall prevail and control to the extent of such conflict. If Closing should occur, the Confidentiality Agreement shall terminate as of the Closing, except as to (i) such portion of the Assets that are not conveyed to Purchasers (either directly or indirectly through the acquisition of the Company Interests) pursuant to the provisions of this Agreement, and (ii) any assets or properties of Sellers that are not “Assets” under this Agreement (including the Excluded Assets).
Section 8.4 Operation of Business. Except (i) for the operations set forth in Schedule 6.9, (ii) for the matters set forth on Schedule 8.4, (iii) for the matters described in Section 8.14 or set forth on Schedule 8.14, (iv) for operations, activities, or payments required pursuant to any applicable Law (including any Public Health Measures), (v) as required in the event of an emergency to protect life, property, or the environment, (vi) as expressly required by the terms of this Agreement, or (vii) as otherwise approved in writing by Purchasers (which approval shall not be unreasonably withheld, conditioned, or delayed), from the Execution Date until the Closing Date (or the earlier termination of this Agreement), R2KLP shall, and shall cause the Company to:
(a) conduct its business related to the Assets (i) in the ordinary course consistent with R2KLP’s and the Company’s recent practices, subject to interruptions resulting from force majeure, mechanical breakdown, or scheduled maintenance, (ii) as would a reasonable and prudent owner, and (iii) in accordance with all applicable Laws;
(b) not propose, elect to participate in or non-consent to any operation reasonably anticipated by the Company to require future capital expenditures by the owner of the Assets in excess of $10,000, net to the interest of the Company;
(c) except for expenditures required by a Material Contract, not make any capital expenditure or other expenditure which, individually, is in excess of $10,000;
(d) pay promptly when due all royalties, overriding royalties and similar burdens on production, Taxes, Property Costs and other payments that become due and payable in connection with the Assets; provided that, for the avoidance of doubt, that to the extent such Taxes are allocated to Purchasers pursuant to Section 13.2, such payment shall be on behalf of Purchasers, and promptly following the Closing Date, Purchasers shall pay to Sellers any such Taxes, but only to the extent that such amounts have not already been accounted for under Section 3.3;
(e) not voluntarily terminate, materially amend, execute, or extend any Material Contracts or enter into any contract that, if entered into on or prior to the Execution Date, would have constituted a Material Contract hereunder;
(f) maintain its existing insurance coverage on the Assets presently furnished by nonaffiliated Third Parties in the amounts and of the types presently in force;
(g) maintain all material Permits, approvals, bonds, and guaranties affecting the Assets, and make all filings that Sellers or the Company are required to make under applicable Law with respect to the Assets;
(h) not transfer, farmout, sell, hypothecate, encumber, mortgage, pledge or dispose of any Properties or Equipment except for sales and dispositions of Equipment or Hydrocarbons made in the ordinary course of business consistent with past practices;
(i) provide Purchasers with prompt written notice of any claim or investigation by any Third Party (including Governmental Bodies) made against the Company after the Company receives written notice thereof that materially affects, or could reasonably be likely to materially affect, the Company Interests or the Assets;
(j) provide Purchasers with prompt written notice of (i) any material Casualty Loss and (ii) any emergency with respect to the Assets and any related emergency operations;
(k) not waive, release, assign, settle, or compromise any claim of Damages attributable to the Assets or the Company, except for any settlement that (i) requires payment of less than $10,000 by the Company, and (ii) would not impose any material obligations or restrictions on the Assets or the business or operations of the Company, in each case, after the Closing;
(l) maintain the books, accounts and Records of the Company and Records relating to the Assets in the ordinary course of business consistent with past practice and in compliance with all applicable Laws and contractual obligations;
(m) not amend or otherwise change the Company Organizational Documents;
(n) not issue, sell, pledge, transfer, dispose of, or otherwise subject to any Encumbrance any Company Interests, or any options, warrants, convertible securities or other rights of any kind to acquire any such shares, or any other Interest in the Company;
(o) not declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property) in respect of, any Interests in the Company;
(p) not reclassify, combine, split, subdivide or redeem, or purchase or otherwise acquire, directly or indirectly, any Interests the Company, or make any other change with respect to the Company’s capital structure;
(q) not acquire any corporation, partnership, limited liability company, other business organization, or division thereof, or enter into any joint venture, strategic alliance, exclusive dealing, noncompetition, or similar contract or arrangement;
(r) not acquire any material amount of assets as to which the aggregate amount of the consideration paid or transferred by the Company in connection with all such acquisitions would not exceed $10,000;
(s) [Reserved.]
(t) not (i) hire any employees or any contingent workers or contractors or (ii) enter into, extend the term of, or otherwise amend any employment or consulting arrangement with any Person who performs or shall perform services in connection with the Assets;
(u) not enter into, amend or terminate any collective bargaining agreement, labor union contract, works council agreement or other contract with any union or similar organization;
(v) 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 the Company’s corporate structure;
(w) not make any change in any method of accounting or accounting practice or policy, except as required by GAAP;
(x) not make any settlement of or compromise any material Tax liability, make, adopt or change any material Tax election or Tax method of accounting; surrender any right to claim a material refund of Taxes; consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment; and
(y) not enter into an agreement with respect to or otherwise commit to do any of the foregoing.
Requests for approval of any action restricted by this Section 8.4 shall be delivered to either of the following individuals by electronic correspondence (at the email addresses set forth below), each of whom shall have full authority to grant or deny such requests for approval on behalf of Purchasers (such approval not to be unreasonably withheld, conditioned or delayed):
| | | | | |
| Derek Dixon | Benjamin E. Russ |
| Email: derek.dixon@chk.com | Email: ben.russ@chk.com |
Purchasers’ approval of any action restricted by this Section 8.4 shall be considered granted within 10 days after R2KLP’s notice to Purchasers requesting such consent unless Purchasers notify R2KLP to the contrary during that period. In the event of an emergency, R2KLP (or the Company) may take such action as a prudent owner or operator would take and shall notify Purchasers of such action promptly thereafter. In cases in which neither Sellers nor their Affiliate is the operator of the affected Assets, to the extent that the actions described in this Section 8.4 may only be taken by (or are the primary responsibility of) the operator of such Assets, the provisions of this Section 8.4 shall be construed to require only that R2KLP use, or cause the Company 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 8.5 Change of Name. Within 90 days after the end of the term of the Transition Services Agreement, Purchasers shall (a) eliminate the name “Radler,” “Tug Hill” and any variants thereof, from the Assets and shall have no right to use any logos, trademarks, or trade names belonging to Sellers or any of their Affiliates and (b) shall take all necessary company action (including filing all necessary documentation with applicable jurisdictions) to cause the name of the Company to be changed to a name that does not include “Radler,” “Tug Hill” or any variants thereof.
Section 8.6 Replacement of Bonds, Letters of Credit, and Guaranties.
(a) The Parties understand that none of the bonds, letters of credit, and guaranties, if any, posted by Sellers or their Affiliates (other than the Company) with Governmental Bodies or Third Parties relating to the Company or the Assets will be transferred to Purchasers. On or prior to Closing, Purchasers shall obtain, or cause to be obtained in the name of Purchasers, replacements for such bonds, letters of credit and guaranties with Third Parties to the extent set forth on Schedule 6.20 and with Governmental Bodies, to the extent such replacements are necessary to permit the cancellation of the bonds, letters of credit, and guaranties posted by Sellers or their Affiliates (other than the Company) or to consummate the transactions contemplated by this Agreement. From and after Closing, to the extent Purchasers have not obtained, or caused to be obtained in the name of Purchasers, replacements for any such bonds, letters of credit, and guaranties with Third Parties to the extent set forth on Schedule 6.20 or with Governmental Bodies, Purchasers shall indemnify the Seller Group against all Damages and liabilities incurred by the Seller Group under any such bond, letters or credit, or guaranties, as applicable, for which Purchasers have not obtained replacements, or caused replacements to be obtained in the name of Purchasers, to the extent such Damages and liabilities arise after Closing and relate to Purchasers’ ownership of the Company Interests or the Assets after Closing.
(b) To the extent required by a counterparty under any Specified Midstream Contract, on or prior to Closing, Purchasers shall, and if applicable, shall cause their Affiliates to, provide such bonds, letters of credit, guarantees, credit support and any other assurances as to financial capability, resources and creditworthiness in order for such counterparty to release Sellers and their Affiliates (other than the Company) (if applicable) from all obligations under such Specified Midstream Contract.
Section 8.7 Notification of Breaches. Between the Execution Date and the Closing Date:
(a) Without limitation of Purchasers’ rights to indemnity under this Agreement or the R&W Insurance Policy, Purchasers shall notify Sellers promptly after Purchasers obtain actual knowledge that any representation or warranty of any Seller contained in this Agreement is untrue in any material respect or will be untrue in any material respect as of the Closing Date or that any covenant or agreement to be performed or observed by Sellers prior to or on the Closing Date has not been so performed or observed in any material respect.
(b) Without limitation of Sellers’ rights to indemnity under this Agreement, Sellers shall notify Purchasers promptly after Sellers obtain actual knowledge that any representation or warranty of any Purchaser contained in this Agreement is untrue in any material respect or will be untrue in any material respect as of the Closing Date or that any covenant or agreement to be performed or observed by Purchasers prior to or on the Closing Date has not been so performed or observed in any material respect.
(c) If any of Purchasers’ or Sellers’ representations or warranties is untrue or shall become untrue in any material respect between the Execution Date and the Closing Date, or if any of Purchasers’ or Sellers’ covenants or agreements to be performed or observed prior to or on the Closing Date shall not have been so performed or observed in any material respect, but if such breach of representation, warranty, covenant, or agreement shall (if curable) be cured by the Closing (or, if the Closing does not occur, by the Scheduled Closing Date), then such breach shall be considered not to have occurred for all purposes of this Agreement.
Section 8.8 Amendment to Schedules. As of the Closing Date, all Schedules to this Agreement, as applicable, shall be deemed amended and supplemented by Sellers to include reference to any matter that results in an adjustment to the Adjusted Purchase Price pursuant to Section 3.3 as a result of the removal under the terms of this Agreement of any of the Assets. Until two (2) Business Days prior to the Scheduled Closing Date, (a) Sellers shall have the right to supplement their Schedules relating to the representations and warranties set forth in Article 5, and (b) R2KLP shall have the right to supplement its Schedules relating to the representations and warranties set forth in Article 6, in each case, with respect to any matters occurring subsequent to the Execution Date. However, all such supplements shall be disregarded for purposes of determining whether the condition to Purchasers’ obligation to close the transaction pursuant to Section 9.2(a) has been satisfied. If Sellers have supplemented their Schedules pursuant to this Section 8.8, and, based upon the matters relating to such supplements, Purchasers’ obligation to close the transaction pursuant to Section 9.2(a) has not been satisfied and Sellers provide Purchasers notice that such obligation to close has not been satisfied but Purchasers nevertheless elect to close the transactions contemplated hereunder, then, from and after the Closing Date, the matters that caused such obligation to close the transaction not to be satisfied shall be waived for all purposes, and Purchasers shall not be entitled to make a claim with respect thereto pursuant to the terms of this Agreement.
Section 8.9 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 8.10 [Reserved.]
Section 8.11 R&W Insurance Policy. The R&W Insurance Policy, to the extent obtained by Purchasers, shall (a) include terms to the effect that the R&W Insurer waives its rights to bring any claim against any member of the Seller Group by way of subrogation, claims for contribution or otherwise, other than with respect to a claim for Fraud, and (b) name the Seller Group as express third-party beneficiaries of such waiver. Purchasers agree to not make any amendment, variation or waiver of the R&W Insurance Policy (or do anything that has a similar effect) that would be adverse to Sellers without Sellers’ prior written consent or do anything that causes any right under the R&W Insurance Policy not to have full force and effect that would be adverse to Sellers without Sellers’ prior written consent. Notwithstanding anything to the contrary in this Agreement, for the avoidance of doubt, Purchasers acknowledge and agree that (i) obtaining of the R&W Insurance Policy is not a condition to the Closing and (ii) in the event that Purchasers do not obtain the R&W Insurance Policy (irrespective of the reason therefor), Purchasers shall remain obligated, subject only to the satisfaction or waiver of the conditions set forth in Section 9.2 of this Agreement, to consummate the transactions contemplated by this Agreement.
Section 8.12 Directors and Officers.
(a) Purchasers agree that all rights to indemnification, exculpation or advancement now existing in favor of any present or former directors, officers, employees, partners, members and agents of the Company, as provided in the Company Organizational Documents, whether asserted or claimed prior to, at or after the Closing (including, for the avoidance of doubt, in connection with (i) the transactions contemplated by this Agreement and (ii) actions to enforce this provision or any other indemnification, exculpation or advancement right of any of the foregoing), shall survive the Closing and shall continue in full force and effect for a period of not less than six years and that the Company will perform and discharge the obligations to provide such indemnity, exculpation and advancement after the Closing; provided, however, that all rights to indemnification, exculpation and advancement in respect of any action, suit or proceeding arising out of or relating to matters existing or occurring at or prior to the Closing Date and asserted or made within such six-year period shall continue until the final disposition of such action, suit or proceeding. From and after the Closing, Purchasers shall not, and shall cause each of its Subsidiaries and Affiliates (including the Company) not to, amend, repeal or otherwise modify the indemnification provisions of their Organizational Documents as in effect at the Closing in any manner that would adversely affect the rights thereunder of any present or former directors, officers, employees, partners, members and agents of the Company.
(b) Each Purchaser hereby covenants, for itself and its Affiliates, successors and assigns, that it and they shall not institute any action, suit or proceeding in any court or before any administrative agency or before any other tribunal against any present or former directors, officers, employees, partners, members or agents of the Company, in their capacity as such,
with respect to the execution of their duties up to the termination of their appointment, including in connection with, arising out of, resulting from or in any way related to the transactions contemplated hereby with respect to any liabilities, actions or causes of action, judgments, claims or demands of any nature or description (consequential, compensatory, punitive or otherwise), excluding however, in each case, instances of Fraud.
(c) In the event any Purchaser or the Company or any of their respective successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity in such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any Person, then and in either such case, Purchasers shall make proper provision so that the successors and assigns of such Purchaser or the Company, as the case may be, shall assume the obligations set forth in this Section 8.12.
(d) The provisions of this Section 8.12 shall survive the consummation of the Closing and continue for the periods specified herein. This Section 8.12 is intended to benefit the directors, officers, employees, partners, members and agents of the Company and any other Person or entity (and their respective heirs, successors and assigns) referenced in this Section 8.12 or indemnified hereunder, each of whom may enforce the provisions of this Section 8.12 (whether or not parties to this Agreement). Each of the Persons referenced in the immediately preceding sentence are intended to be third party beneficiaries of this Section 8.12.
Section 8.13 Cash Distributions. Pursuant to Section 2.4, the Parties acknowledge and agree that, notwithstanding any other provision of this Agreement, Sellers shall have the right, prior to Closing, to cause the Company to transfer to Sellers or any Affiliate of Sellers any cash and cash equivalents of the Company on hand or on deposit in any bank or brokerage account of the Company.
Section 8.14 Excluded Assets. Prior to the Closing Date, Sellers shall cause the Company to convey (whether by assignment, distribution, disbursement, dividend, or otherwise) all of its right, title, and interest in and to, and Sellers (or Sellers’ designee) shall assume all obligations and liabilities relating to, the Excluded Assets (including any Asset excluded from this transaction pursuant to Article 4 or Section 8.1) and the items set forth on Schedule 8.14 to Sellers or Sellers’ designee.
Section 8.15 [Reserved.]
Section 8.16 Certain Nasdaq Matters. CHK Parent shall use its reasonable best efforts to cause the shares of CHK Common Stock comprising the Stock Purchase Price to be approved for listing on the Nasdaq, subject to official notice of issuance, prior to the Closing.
Section 8.17 Financing and SEC Filing Assistance.
(a) Prior to the Closing and during the term of the Transition Services Agreement, Sellers shall, and shall cause the Company (prior to Closing) and their respective Representatives to, use Commercially Reasonable Efforts to provide to Purchasers, at Purchasers’ sole cost and expense, such reasonable and customary cooperation in connection with any financing by Purchasers or any of its Affiliates in connection with the transactions contemplated by this Agreement, in each case as may be reasonably requested by Purchasers or their Representatives.
Without limiting the generality of the foregoing, the Sellers shall, and shall cause the Company and their respective Representatives to, upon reasonable request, (i) furnish the report of the Company’s auditor on the three most recently available audited consolidated financial statements of the Company, and the report of the Company’s reserve engineer, and use its Commercially Reasonable Efforts to obtain the consent of such auditor and reserve engineer to the use of such reports, including in documents filed with the SEC under the Securities Act, in accordance with normal custom and practice and use Commercially Reasonable Efforts to cause such auditor and reserve engineer to provide customary comfort letters to the arrangers, underwriters, initial purchasers or placement agents, as applicable, in connection with any such financing; (ii) furnish any additional financial statements, schedules, business or other financial data, including reserve data, relating to the Company as may be reasonably necessary to consummate any such financing; it being understood that CHK Parent shall be responsible for the preparation of any pro forma financial information or pro forma financial statements required pursuant to the Securities Act or as may be customary in connection with any such financing; (iii) provide direct contact between (x) senior management and advisors, including auditors, of the Company and (y) the proposed arrangers, lenders, underwriters, initial purchasers or placement agents, as applicable, and/or CHK Parent’s auditors, as applicable, in connection with any such financing, at reasonable times and upon reasonable advance notice; (iv) make available the employees and advisors of the Company to provide reasonable assistance with CHK Parent’s or its Affiliate’s preparation of business projections, financing documents and offer materials; (v) obtain the cooperation and assistance of counsel to the Company in providing customary legal opinions and other services; (vi) assist in the preparation of (but not entering into or executing) documents, opinions and certificates, and other agreements (including indentures or supplemental indentures) and take other actions that are or may be customary in connection with any such financing or necessary or desirable to permit CHK Parent or its Affiliates to fulfill conditions or obligations under the financing documents, provided that such agreements shall be conditioned upon, and shall not take effect until, the Effective Time; (vii) assist in the preparation of one or more confidential information memoranda, prospectuses, offering memoranda and other marketing and syndication materials reasonably requested by CHK Parent; (viii) permit CHK Parent or its Affiliates’ reasonable use of the Company’s logos for syndication and underwriting, as applicable, in connection with any such financing (subject to advance review of and consultation with respect to such use), (ix) participate in a reasonable number of meetings, drafting sessions, due diligence sessions and presentations with arrangers and prospective lenders and investors, as applicable (including the participation in such meetings of the Company’s senior management), in each case at times and locations to be mutually agreed, and (x) use Commercially Reasonable Efforts to assist in procuring any necessary rating agency ratings or approvals.
(b) Prior to the Closing and during the term of the Transition Services Agreement, Sellers shall, and shall cause the Company (prior to Closing) and their respective Representatives to, use Commercially Reasonable Efforts to provide Purchasers, at Purchasers’ sole cost and expense, reasonable and customary cooperation in connection with the obligations of Purchasers or any of their Affiliates under 17 C.F.R. § 210.3-05 in connection with the transactions contemplated by this Agreement, in each case as may be reasonably requested by Purchasers or their Representatives.
(c) All of the information provided by Sellers, the Company and their respective Representatives pursuant to Section 8.17(a) is given without any representation or warranty, express or implied, and none of the Seller Group shall have any liability or responsibility with respect thereto. Notwithstanding anything to the contrary contained in this Section 8.17, nothing in this Section 8.17 shall require any such cooperation to the extent that it would (i) require any of Sellers, the Company or any of their respective Representatives, as applicable, to agree to pay any commitment or other similar fees, or incur any liability or give any indemnities or otherwise commit to take any similar action, (ii) require Sellers, the Company or any of their respective Representatives to provide any information that is not reasonably available to Sellers, the Company or such Representative, (iii) require Sellers, the Company or any of their respective Representatives to take any action that will conflict with or violate such Persons’ Organizational Documents, as applicable, or any applicable Laws or result in a violation or breach of, or default under, any Contract with a non-Affiliate to which such Person, as applicable, is a party, result in any officer or director of any such Person incurring any personal liability with respect to any matters relating to the financings by Purchasers or any of their Affiliates, or (iv) unreasonably interfere with the operations of the Sellers or any of the Company. Purchasers shall promptly upon request by any Seller reimburse Sellers for all reasonable and documented out-of-pocket costs and expenses incurred by Sellers in complying with this Section 8.17.
(d) Purchasers shall indemnify, defend, and hold harmless the Seller Group from and against all Damages incurred by, suffered by, or asserted against, such Persons, caused by, arising out of, or resulting from the provision to or use by Purchasers or any of their Affiliates, agents or representatives of information provided pursuant to this Section 8.17 to the fullest extent permitted by applicable Law; EVEN IF SUCH DAMAGES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT, OR CONCURRENT), STRICT LIABILITY, OR OTHER LEGAL FAULT OF THE SELLER GROUP, BUT EXCLUDING HOWEVER, IN EACH SUCH CASE, DAMAGES TO THE EXTENT ACTUALLY CAUSED BY THE FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY MEMBER OF THE SELLER GROUP.
Section 8.18 Certain Disclaimers.
(a) EXCEPT AS AND TO THE EXTENT EXPRESSLY REPRESENTED OTHERWISE BY SELLERS IN ARTICLE 5 AND R2KLP IN ARTICLE 6 OR CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b) AND WITHOUT LIMITING PURCHASERS’ RIGHTS UNDER THE R&W INSURANCE POLICY, SELLERS DO NOT MAKE, SELLERS EXPRESSLY DISCLAIM, AND PURCHASERS WAIVE, REPRESENT, AND WARRANT THAT PURCHASERS HAVE NOT RELIED UPON, ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT, 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, WARRANTY, OR OTHER STATEMENT, ORAL OR WRITTEN, AS TO (i) TITLE TO ANY OF THE COMPANY 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, OR RESERVE INFORMATION (OR ANY ANALYSIS OR INTERPRETATION THEREOF) RELATING TO THE COMPANY INTERESTS OR 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 COMPANY INTERESTS OR THE ASSETS OR FUTURE REVENUES GENERATED BY THE COMPANY INTERESTS 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, MATERIALS, OR INFORMATION (INCLUDING AS TO THE ACCURACY, COMPLETENESS, OR CONTENTS OF THE RECORDS) THAT MAY HAVE BEEN MADE AVAILABLE OR COMMUNICATED TO THE PURCHASER GROUP OR ANY FINANCING SOURCES OR INVESTORS IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY DISCUSSION OR PRESENTATION RELATING THERETO (INCLUDING ANY ACCOUNTING MATERIALS, LEASE OPERATING STATEMENTS, OR OTHER ITEMS PROVIDED IN CONNECTION WITH SECTION 8.1); AND SELLERS FURTHER DISCLAIM, AND PURCHASERS WAIVE, ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT, 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 OTHERWISE BY SELLERS IN ARTICLE 5 AND R2KLP IN ARTICLE 6 OR CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), THE COMPANY INTERESTS AND THE ASSETS ARE BEING TRANSFERRED “AS IS, WHERE IS,” WITH ALL FAULTS AND DEFECTS, AND THAT PURCHASERS HAVE MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS PURCHASERS DEEM APPROPRIATE. PURCHASERS SPECIFICALLY DISCLAIM ANY OBLIGATION OR DUTY BY SELLERS OR ANY MEMBER OF THE SELLER GROUP TO MAKE ANY DISCLOSURES OF FACT NOT REQUIRED TO BE DISCLOSED PURSUANT TO THE EXPRESS REPRESENTATIONS AND WARRANTIES SET FORTH HEREIN AND PURCHASERS EXPRESSLY ACKNOWLEDGE AND COVENANT THAT PURCHASERS DO NOT HAVE, WILL NOT HAVE, AND WILL NOT ASSERT ANY CLAIM, DAMAGES, OR EQUITABLE REMEDIES WHATSOEVER AGAINST ANY MEMBER OF THE SELLER GROUP EXCEPT FOR CLAIMS, DAMAGES, AND EQUITABLE REMEDIES AGAINST SELLERS FOR BREACH OF AN EXPRESS REPRESENTATION, WARRANTY, OR COVENANT OF A SELLER UNDER THIS AGREEMENT. PURCHASERS ACKNOWLEDGE AND AGREE THAT NONE OF THE SELLER GROUP SHALL HAVE ANY RESPONSIBILITY FOR FAILING OR OMITTING TO DISCLOSE ANY CONDITION, AGREEMENT, DOCUMENT, DATA, INFORMATION OR OTHER MATERIALS RELATING TO THE COMPANY INTERESTS OR THE ASSETS THAT IS NOT EXPRESSLY ADDRESSED BY THIS AGREEMENT.
(b) EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN ARTICLE 4 OR IN R2KLP’S REPRESENTATION AND WARRANTY SET FORTH IN SECTION 6.16, SELLERS SHALL NOT HAVE ANY LIABILITY IN CONNECTION WITH AND HAVE NOT AND WILL NOT MAKE (AND HEREBY DISCLAIM) ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT REGARDING ANY MATTER OR CIRCUMSTANCE RELATING TO ENVIRONMENTAL LAWS, ENVIRONMENTAL DEFECTS, 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 NOTHING IN THIS AGREEMENT OR OTHERWISE SHALL BE CONSTRUED AS SUCH A REPRESENTATION, WARRANTY, OR OTHER STATEMENT, AND PURCHASERS SHALL BE DEEMED TO BE TAKING THE ASSETS “AS IS, WHERE IS” FOR PURPOSES OF THEIR ENVIRONMENTAL CONDITION. PURCHASERS SHALL HAVE INSPECTED, OR WAIVED (AND UPON CLOSING SHALL BE DEEMED TO HAVE WAIVED) THEIR 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, OTHER MAN-MADE FIBERS, AND NORM. PURCHASERS ARE RELYING SOLELY UPON THE TERMS OF THIS AGREEMENT, EACH OTHER TRANSACTION DOCUMENT, AND THEIR OWN INSPECTION OF THE COMPANY INTERESTS AND THE ASSETS. AS OF CLOSING, PURCHASERS HAVE MADE ALL SUCH REVIEWS AND INSPECTIONS OF THE COMPANY INTERESTS AND THE ASSETS AND THE RECORDS AS PURCHASERS HAVE DEEMED NECESSARY OR APPROPRIATE TO CONSUMMATE THE TRANSACTION.
(c) PURCHASERS ACKNOWLEDGE THAT THEY SHALL ASSUME ALL RISK OF LOSS WITH RESPECT TO (i) CHANGES IN COMMODITY OR PRODUCT PRICES AND ANY OTHER MARKET FACTORS OR CONDITIONS (INCLUDING ANY PRICING DIFFERENTIALS) FROM AND AFTER THE EFFECTIVE TIME; (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 THE EXECUTION DATE; AND (iii) DEPRECIATION OF ANY ASSETS THAT CONSTITUTE PERSONAL PROPERTY THROUGH ORDINARY WEAR AND TEAR.
(d) SELLERS AND PURCHASERS AGREE THAT, TO THE EXTENT REQUIRED BY APPLICABLE LAW TO BE EFFECTIVE OR ENFORCEABLE, THE DISCLAIMERS OF CERTAIN REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE 5, ARTICLE 6, AND THE REST OF THIS AGREEMENT ARE “CONSPICUOUS” DISCLAIMERS FOR THE PURPOSE OF ANY APPLICABLE LAW.
Section 8.19 Company Financials. As soon as practicable after Closing, Sellers shall cause to be prepared and delivered to Purchasers (a) an audited statement of revenues and direct operating expenses for the Company as of December 31, 2020, and (b) an unaudited statement of revenues and direct operating expenses for the Company for the nine-month period ended September 30, 2021 (collectively, the “Company Financial Statements”). The Company Financial Statements shall be prepared in accordance with GAAP consistently applied by the Company and present fairly in all material respects the financial position, results of operations and cash flows of the Company as at the dates and for the periods indicated therein.
Section 8.20 Hedges. From the Execution Date to the Closing Date, (a) R2KLP shall maintain the Hedges in full force and effect in accordance with their terms, and (b) R2KLP and Purchasers shall take all steps to effectuate the transfer and novation of the Hedges, to Purchasers. Notwithstanding anything to the contrary herein, the Parties agree and acknowledge that Sellers’ obligations with respect to Indebtedness under Section 2.4 shall not include repaying or otherwise settling any liabilities or obligations of the Sellers Group (including the Company) with respect to the Hedges. At Closing, the Parties shall execute all necessary documents (including an ISDA Novation Agreement among R2KLP, the hedge counterparty and Purchasers) for R2KLP to transfer and novate the Hedges to CHK Purchaser or its designee.
ARTICLE 9
CONDITIONS TO CLOSING
Section 9.1 Sellers’ Conditions to Closing. The obligations of Sellers to consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by Sellers) on or prior to Closing of each of the following conditions precedent:
(a) Representations. (i) Each Purchaser’s non-Fundamental Representations set forth in Article 7 shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date (except for the representations and warranties that refer to a specified date, which need only be true and correct on and as of such specified date), and (ii) each Purchaser’s Fundamental Representations set forth in set forth in Article 7 shall be true and correct in all but de minimis respects as of the Closing Date as though made on and as of the Closing Date (other than representations and warranties that refer to a specified date, which need only be true and correct on and as of such specified date);
(b) Performance. Purchasers shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by Purchasers 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 (i) have been issued by any Governmental Body having jurisdiction over any Party and (ii) remain in force;
(d) Governmental Consents; HSR Act. (i) All material consents and approvals of any Governmental Body (including those required by the HSR Act) required for the transactions contemplated in this Agreement, except consents and approvals by Governmental Bodies 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) any HSR Act waiting period (and any extension thereof) applicable to the transactions contemplated under the terms of this Agreement, and any extensions to such waiting periods, shall have expired or shall have been terminated;
(e) Impairments. The sum of (without duplication of any amounts) (i) the aggregate amount of all Title Defects Amounts determined under Section 4.2 with respect to Title Defects (including Environmental Defects) less the sum of all Title Benefit Amounts determined under Section 4.3 with respect to Title Benefits, plus (ii) the aggregate sum of all Allocated Values of the Assets excluded from the transactions contemplated herein pursuant to Section 4.6, plus (iii) the aggregated amount of Casualty Losses, does not equal or exceed 15% of the aggregate Unadjusted Purchase Prices under this Agreement and the R2KPA MIPA;
(f) Deliveries. Purchasers shall deliver (or be ready, willing, and able to deliver at Closing) to Sellers duly executed counterparts of the documents and certificates to be delivered by Purchaser under Section 10.3; and
(g) Nasdaq Listing Approval. The shares of CHK Common Stock issuable as the Stock Purchase Price shall have been authorized for listing on the Nasdaq, subject to official notice of issuance.
Section 9.2 Purchasers’ Conditions to Closing. The obligations of Purchasers to consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by Purchasers) on or prior to Closing of each of the following conditions precedent:
(a) Representations. (i) Each Seller’s non-Fundamental Representations set forth in Article 5 and R2KLP’s non-Fundamental Representations set forth in Article 6, in each case, shall be true and correct as of the Closing Date (without regard to materiality, Material Adverse Effect or similar qualifiers) as though made on and as of the Closing Date (other than 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 such breaches, if any, as would not, individually or in the aggregate, have a Material Adverse Effect, and (ii) each Seller’s Fundamental Representations set forth in Article 5 and R2KLP’s Fundamental Representations set forth in Article 6, in each case, shall be true and correct in all but de minimis respects as of the Closing Date as though made on and as of the Closing Date (other than representations and warranties that refer to a specified date, which need only be true and correct on and as of such specified date);
(b) Performance. Each Seller shall have performed and observed, in all material respects, all covenants (other than the covenants set forth in Section 8.17) and agreements to be performed or observed by such Seller 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 (i) have been issued by any Governmental Body having jurisdiction over any Party and (ii) remain in force;
(d) Governmental Consents; HSR Act. (i) All material consents and approvals of any Governmental Body required for the transactions contemplated in this Agreement, except consents and approvals by Governmental Bodies that are customarily obtained after closing (including Customary Post-Closing Consents), shall have been granted, or the necessary waiting period shall have expired, or early termination of the waiting period shall have been granted, and (ii) any HSR Act waiting period (and any extension thereof) applicable to the transactions contemplated under the terms of this Agreement, and any extensions to such waiting periods, shall have expired or shall have been terminated;
(e) Impairments. The sum of (without duplication of any amounts) (i) the aggregate amount of all Title Defects Amounts determined under Section 4.2 with respect to Title Defects (including Environmental Defects) less the sum of all Title Benefit Amounts determined under Section 4.3 with respect to Title Benefits, plus (ii) the aggregate sum of all Allocated Values of the Assets excluded from the transactions contemplated herein pursuant to Section 4.6, plus (iii) the aggregated amount of Casualty Losses, does not equal or exceed 15% of the aggregate Unadjusted Purchase Prices under this Agreement and the R2KPA MIPA;
(f) Related Transactions. All conditions precedent to the closing of the transactions pursuant to the R2KPA MIPA and the PIPA shall have been satisfied and/or waived (as applicable) by the parties thereto, and the transactions thereunder shall be capable of being closed and completed concurrently with the Closing hereunder; provided that if such conditions precedent are not satisfied or the transactions thereunder are not capable of being closed and completed concurrently with the Closing, in each case solely as a result of Purchasers material breach of either the R2KPA MIPA or PIPA, then this condition precedent shall be deemed waived by Purchasers for all purposes hereunder; and
(g) Deliveries. Sellers shall deliver (or be ready, willing, and able to deliver at Closing) to Purchasers duly executed counterparts of the documents and certificates to be delivered by Sellers under Section 10.2.
ARTICLE 10
CLOSING
Section 10.1 Time and Place of Closing. Consummation of the purchase and sale transaction as contemplated by this Agreement (the “Closing”), shall, unless otherwise agreed to in writing by Purchasers and Sellers, take place at the offices of Gibson, Dunn & Crutcher LLP, counsel to Sellers, located at 811 Main Street, Suite 3000, Houston, Texas 77002, at 10:00 a.m., Central Time, on March 9, 2022 (“Scheduled Closing Date”), or if all conditions in Article 9 to be satisfied prior to Closing have not yet been satisfied or waived on the Scheduled Closing Date, within five Business Days of such conditions having 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), subject to the rights of the Parties under Article 11. The date on which the Closing occurs is herein referred to as the “Closing Date.”
Section 10.2 Obligations of Sellers at Closing. At the Closing, upon the terms and subject to the conditions of this Agreement, and subject to the simultaneous performance by Purchasers of their obligations pursuant to Section 10.3, Sellers shall deliver or cause to be delivered to Purchasers the following:
(a) Counterparts of the Assignment Agreement transferring the Company Interests to Purchasers, duly executed by Sellers;
(b) A certificate duly executed by an authorized officer of each Seller, dated as of Closing, certifying on behalf of such Seller (and not on behalf of the other Sellers) that the conditions applicable to such Seller set forth in Section 9.2(a) and Section 9.2(b) have been fulfilled;
(c) A valid and duly executed Internal Revenue Service Form W-9 (or applicable successor form) from each Seller (or, if such Seller is disregarded for U.S. federal income tax purposes, its regarded owner);
(d) Where approvals are received by Sellers pursuant to a filing or application under Section 8.2, copies of those approvals;
(e) Duly executed counterparts of the Registration Rights Agreement, executed by Sellers or Sellers’ designees whom Seller designates as a party thereto as identified in writing to Purchasers at least two Business Days prior to the Closing Date;
(f) Duly executed counterparts of joint written instructions in compliance with the Escrow Agreement, instructing the Escrow Agent to disburse the Deposit to Sellers;
(g) Resignations of each individual who serves as an officer, manager, or director of the Company in his or her capacity as such, effective as of the Closing Date;
(h) If applicable, (i) releases and terminations of any mortgages, deeds of trust, assignments of production, financing statements, fixture filings, liens, and other recorded encumbrances, in each case, burdening the Assets and securing borrowed monies or other substantially similar indebtedness incurred by Sellers or any of their Affiliates (including the Company), including under any debt or other similar instrument that is burdening the Assets, and (ii) authorizations to file UCC-3 termination statements releases in all applicable jurisdictions to evidence the release of all such liens on the Assets securing due and payable obligations, including under any debt or other similar instrument; and
(i) All other instruments, documents, and other items reasonably necessary to effectuate the terms of this Agreement, as may be reasonably requested by Purchasers.
Section 10.3 Obligations of Purchasers at Closing. At the Closing, upon the terms and subject to the conditions of this Agreement, and subject to the simultaneous performance by Sellers of their obligations pursuant to Section 10.2, Purchasers shall deliver or cause to be delivered to Sellers the following:
(a) A wire transfer of the Closing Cash Payment to the account(s) designated by Sellers in immediately available funds, and a wire transfer of the Defect Escrow Amount (if applicable) and a wire transfer of the Post-Closing Escrow Amount (if applicable) to the Escrow Agent in immediately available funds;
(b) The number of shares of CHK Common Stock comprising the Stock Purchase Price to Sellers (and/or, if applicable, to those Seller designees to whom Seller designates to receive all or a portion of the shares of CHK Common Stock identified in writing to Purchasers at least two Business Days prior to the Closing Date), free and clear of all encumbrances and restrictions other than restrictions set forth in the Registration Rights Agreement or otherwise imposed by applicable securities Laws;
(c) Duly executed counterparts of the Registration Rights Agreement executed by CHK Parent;
(d) Counterparts of the Assignment Agreement, duly executed by Purchasers;
(e) A certificate by an authorized officer of each Purchaser, dated as of Closing, certifying on behalf of such Purchaser (and not on behalf of the other Purchaser) that the conditions applicable to such Purchaser set forth in Section 9.1(a) and Section 9.1(b) have been fulfilled;
(f) Where approvals are received by Purchasers pursuant to a filing or application under Section 8.2, copies of those approvals;
(g) Duly executed counterparts of joint written instructions in compliance with the Escrow Agreement, instructing the Escrow Agent to disburse the Deposit to Sellers;
(h) Evidence of replacement bonds, guaranties, and letters of credit pursuant to Section 8.6; and
(i) All other instruments, documents, and other items reasonably necessary to effectuate the terms of this Agreement, as may be reasonably requested by Sellers.
Section 10.4 Closing Cash Payment and Post-Closing Purchase Price Adjustments.
(a) Not later than five Business Days prior to the Scheduled Closing Date (or, if the Closing will not occur on the Scheduled Closing Date, three Business Days prior to the Closing Date), Sellers shall prepare in good faith and deliver to Purchasers, in accordance with customary industry accounting practices and based upon the best information then available to Sellers, a preliminary settlement statement (i) estimating the initial Adjusted Purchase Price (including an estimate of the Base Cash Purchase Price) after giving effect to all adjustments to the Unadjusted Purchase Price set forth in Section 3.3, the Defect Escrow Amount and the Post-Closing Escrow Amount, (ii) setting forth the calculations for each adjustment, (iii) enclosing reasonable documentation available to support any credit, charge, receipt, or other item included in such statement and (iv) setting forth Sellers’ account for the wire transfer of funds. Within two Business Days after Purchasers’ receipt of the preliminary settlement statement, Purchasers shall deliver to Sellers a written report containing all changes that Purchasers propose in good faith to be made to the preliminary settlement statement together with the explanation therefor.
The Parties shall in good faith attempt to agree in writing on the preliminary settlement statement as soon as possible after Sellers’ receipt of Purchasers’ written report. The estimate of the initial Base Cash Purchase Price component of the Adjusted Purchase Price set forth in the preliminary settlement statement as agreed upon in writing by the Parties, less the Deposit less the Defect Escrow Amount (if applicable) and less the Post-Closing Escrow Amount shall constitute the Dollar amount to be paid by Purchasers to Sellers at the Closing (the “Closing Cash Payment”); provided that if the Parties do not agree in writing upon any or all of the adjustments set forth in the preliminary settlement statement, then the amount of such adjustment(s) used to adjust the Unadjusted Purchase Price at the Closing and to calculate the Closing Cash Payment shall be that amount set forth in the draft preliminary settlement statement delivered by Sellers to Purchasers pursuant to this Section 10.4(a). Final adjustments to the Unadjusted Purchase Price will be made pursuant to Section 10.4(c).
(b) At Closing, Purchasers shall deposit or cause to be deposited with the Escrow Agent in a separate account established pursuant to the terms and conditions of the Escrow Agreement an amount in cash equal to $250,000 to be held solely for purposes of securing the adjustments provided in Section 10.4(c) (such amount, the “Post-Closing Escrow Amount”).
(c) Sellers shall prepare in good faith and deliver to Purchasers a statement setting forth the final calculation of the Adjusted Purchase Price (including a final calculation of the Base Cash Purchase Price) and showing the calculation of each adjustment, based, to the extent possible, on actual credits, charges, receipts and other items before and after the Effective Time no later than the later of (i) the 120th day following the Closing Date and (ii) the date on which the Parties or the Title Arbitrator, as applicable, finally determines all Title Defect Amounts and Title Benefit Amounts under Section 4.4. Sellers shall, at Purchasers’ request, supply reasonable documentation available to support any credit, charge, receipt, or other item included in such statement. Purchasers shall deliver to Sellers a written report containing any changes that Purchasers propose be made to Sellers’ statement no later than the 60th day following Purchasers’ receipt thereof. The Parties shall undertake to agree on the final statement of the Adjusted Purchase Price no later than 210 days after the Closing Date. However, if the date on which the Parties or the Title Arbitrator, as applicable, finally determines all Title Defect Amounts and Title Benefit Amounts under Section 4.4 is later than the 120th day following the Closing Date, such 210-day period shall be extended the same number of days that such final determination occurs beyond the 120th day following the Closing Date. In the event that the Parties cannot reach agreement within such period of time, any Party may refer the remaining matters in dispute to the Houston office of KPMG US, LLP, or such other independent nationally recognized accounting firm mutually agreed upon by the Parties, 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 that such rules do not conflict with the terms of this Section 10.4(c). Neither Party may have any ex parte communications with the accounting firm concerning the accounting firm’s determination of the disputed matters. The accounting firm shall agree in writing to keep strictly confidential the specifics and existence of any matters submitted as well as all proprietary records of the Parties, if any, reviewed by the accounting firm in the process of resolving such disputes. The accounting firm’s determination shall be made within 30 days after submission of the matters in dispute and shall be final and binding on
both Parties, without right of appeal. In determining the proper amount of any adjustment to the Unadjusted Purchase Price, the accounting firm shall not increase the Unadjusted Purchase Price more than the increase proposed by Sellers nor decrease the Unadjusted Purchase Price more than the decrease proposed by Purchasers, as applicable. The accounting firm shall act for the limited purpose of determining the specific disputed matters submitted by the Parties and may not award damages or penalties to the Parties with respect to any matter. Any decision rendered by the accounting firm pursuant hereto shall be final, conclusive and binding on Sellers and Purchasers and, absent fraud or manifest error, and enforceable against any of the Parties in any court of competent jurisdiction. The Parties shall each bear its own legal fees and other costs of presenting its case. Sellers, on the one hand, shall bear one-half and Purchasers, on the other hand, shall bear one-half of the costs and expenses of the accounting firm.
(d) Within ten days after the earlier of (x) the expiration of Purchasers’ 60-day review period described in Section 10.4(c) without delivery of any written report or (y) the date on which the Parties finally determine the Adjusted Purchase Price or the accounting firm finally determines the disputed matters, as applicable:
(i) if the Base Cash Purchase Price component of the Adjusted Purchase Price (after deducting the Deposit, Defect Escrow Amount (if any), and the Post-Closing Escrow Amount) exceeds the Closing Cash Payment, then:
(A) Purchasers shall pay to Sellers the amount by which the Base Cash Purchase Price component of the Adjusted Purchase Price (after deducting the Deposit, Defect Escrow Amount (if any), and the Post-Closing Escrow Amount) exceeds the Closing Cash Payment; and
(B) the Parties shall jointly instruct the Escrow Agent to distribute the entirety of the Post-Closing Escrow Amount to Sellers; or
(ii) if the Closing Cash Payment exceeds the Base Cash Purchase Price component of the Adjusted Purchase Price (after deducting the Deposit, Defect Escrow Amount (if any), and the Post-Closing Escrow Amount) (such excess amount, the “Adjustment Excess”), then:
(A) the Parties shall instruct the Escrow Agent to distribute to Purchasers from the Post-Closing Escrow Amount an amount equal to the lesser of (1) the Adjustment Excess and (2) the Post-Closing Escrow Amount;
(B) if the Adjustment Excess is less than the Post-Closing Escrow Amount, then the Parties shall instruct the Escrow Agent to distribute to Sellers from the Post-Closing Escrow Amount an amount equal to the Post-Closing Escrow Amount less the Adjustment Excess; and
(iii) if the Post-Closing Escrow Amount is less than the Adjustment Excess, Sellers shall pay to Purchasers an amount equal to the Adjustment Excess less the Post-Closing Escrow Amount.
(e) Purchasers shall, and shall cause the Company to, assist Sellers in the preparation of the final statement of the Adjusted Purchase Price under Section 10.4(c) by furnishing invoices, receipts, reasonable access to personnel, and such other assistance as may be reasonably requested by Sellers to facilitate such process post-Closing.
(f) All payments made or to be made under this Agreement to Sellers shall be made by electronic transfer of immediately available funds to the account(s) designated by Sellers in writing. All payments made or to be made under this Agreement to Purchasers shall be made by electronic transfer of immediately available funds to the account(s) designated by Purchasers in writing to Sellers.
ARTICLE 11
TERMINATION
Section 11.1 Termination. This Agreement and the transactions contemplated herein may be terminated at any time prior to Closing (by written notice from the terminating Party to the other Parties):
(a) by the mutual prior written consent of the Parties;
(b) by any Party if the Closing does not occur on the Scheduled Closing Date as a result of the closing conditions described in Section 9.1(e) and Section 9.2(e) not being satisfied as of such date;
(c) by any Party if Closing has not occurred on or before 30 days after the Scheduled Closing Date (the “Outside Date”); provided, however, with respect to the HSR filing under the PIPA, 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 9.1 and Section 9.2 have been satisfied or waived (except for (i) the condition in Section 9.2(f) if such condition is not satisfied solely because 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 or (ii) any such conditions that by their nature may only be satisfied at or in connection with the occurrence of Closing, so long as the Parties are able to satisfy such conditions), then the Outside Date will automatically be extended to the date that is 90 days after the Execution Date;
(d) by Sellers, at Sellers’ option, if any of the conditions set forth in Section 9.1(a) or Section 9.1(b) have not been satisfied on or at any time after the Scheduled Closing Date (or, with respect to those conditions that can only be satisfied at the Closing, are not capable of being satisfied on or at any time after the Scheduled Closing Date), and, at such time, but for the material breach of Purchasers that causes any of the conditions set forth in Section 9.1(a) or Section 9.1(b) to be unsatisfied, Sellers are ready, willing and able to proceed to Closing; provided, however, that in the case of a breach that is capable of being cured, Purchasers shall have a period of ten Business Days following written notice from Sellers to Purchasers specifying the reason such condition is unsatisfied (including any breach by Purchasers of this Agreement) to cure such breach prior to the end of such ten Business Day period; provided, further, if (i) Purchasers’ conditions to Closing have been satisfied or waived in full and (ii) all of Sellers’ conditions to Closing have been satisfied or waived (other than Section 9.1(f)), then the refusal or willful or negligent delay by Purchasers to timely close the contemplated transactions shall constitute a failure of Sellers’ conditions to Closing (including Section 9.1(f)) and be a material breach of Purchasers’ obligations under this Agreement; or
(e) by Purchasers, at Purchasers’ option, if any of the conditions set forth in Section 9.2(a) or Section 9.2(b) have not been satisfied on or at any time after the Scheduled Closing Date (or, with respect to those conditions that can only be satisfied at the Closing, are not capable of being satisfied on or at any time after the Scheduled Closing Date), and, at such time, but for the material breach of Sellers that causes any of the conditions set forth in Section 9.2(a) or Section 9.2(b) to be unsatisfied, Purchasers are ready, willing and able to proceed to Closing; provided, however, that in the case of a breach that is capable of being cured, Sellers shall have a period of ten Business Days following written notice from Purchasers to Sellers specifying the reason such condition is unsatisfied (including any breach by Sellers of this Agreement) to cure such breach prior to the end of such ten Business Day period; provided, further, if (i) Sellers’ conditions to Closing have been satisfied or waived in full and (ii) all of Purchasers’ conditions to Closing have been satisfied or waived (other than Section 9.2(g)), then the refusal or willful or negligent delay by Sellers to timely close the contemplated transactions shall constitute a failure of Purchasers’ conditions to Closing (including Section 9.2(g)) and be a material breach of Sellers’ obligations under this Agreement;
provided, however, that no Party shall be entitled to terminate this Agreement under Section 11.1(c), Section 11.1(d) or Section 11.1(e) if the Closing has failed to occur because such Party failed to perform or observe in any material respect its covenants or agreements hereunder or is otherwise in material breach under this Agreement.
Section 11.2 Effect of Termination.
(a) If this Agreement is terminated pursuant to Section 11.1, this Agreement shall become void and of no further force or effect (except for the provisions of Section 5.7, Section 7.6, Section 8.1(d), Section 8.3, Section 8.17, Article 11, Article 14 (other than Section 14.14) and Appendix A, which shall continue in full force and effect) and, without prejudice to their rights under Section 11.2(c) (if applicable), Sellers shall be free immediately to enjoy all rights of ownership of the Assets and to sell, transfer, encumber, or otherwise dispose of the Assets or the Company Interests to any Person without any restriction under this Agreement.
(b) If this Agreement is terminated or may be terminated pursuant to Section 11.1(e), then Purchasers shall promptly elect in writing, as the sole and exclusive remedy of the Purchaser Group against any member of the Seller Group for the failure to consummate the transactions contemplated hereunder at Closing, to either (A) exercise its right to specific performance of this Agreement pursuant to Section 14.16, or (B) terminate this Agreement and receive the entirety of the Deposit for the sole account and use of Purchasers (and the Parties shall promptly provide joint written instructions to the Escrow Agent to deliver the Deposit to Purchasers), and Purchasers shall be entitled to seek additional damages from, or pursue other remedies against, R2KLP with respect to any breach by Sellers of their obligations under this Agreement.
(c) If this Agreement is terminated pursuant to Section 11.1(d), then Sellers shall be entitled, as the sole and exclusive remedy of the Seller Group against any member of the Purchaser Group for the failure to consummate the transactions contemplated hereunder at Closing, to either (i) exercise their right to specific performance of this Agreement pursuant to Section 14.16 or (ii) terminate this Agreement and receive the entirety of the Deposit as liquidated damages (and the Parties shall promptly provide joint written instructions to the Escrow Agent to deliver the Deposit to Sellers) for the sole account and use of Sellers.
IT IS EXPRESSLY STIPULATED BY THE PARTIES THAT THE ACTUAL AMOUNT OF DAMAGES RESULTING FROM SUCH TERMINATION WOULD BE DIFFICULT IF NOT IMPOSSIBLE TO DETERMINE ACCURATELY BECAUSE OF THE UNIQUE NATURE OF THIS AGREEMENT, THE UNIQUE NATURE OF THE COMPANY INTERESTS AND ASSETS, THE UNCERTAINTIES OF APPLICABLE COMMODITY MARKETS AND DIFFERENCES OF OPINION WITH RESPECT TO SUCH MATTERS, AND THAT THE LIQUIDATED DAMAGES PROVIDED FOR HEREIN ARE A REASONABLE ESTIMATE BY THE PARTIES OF SUCH DAMAGES UNDER THE CIRCUMSTANCES AND DO NOT CONSTITUTE A PENALTY.
(d) If this Agreement is terminated under Section 11.1 under circumstances other than those described in Section 11.2(b) or Section 11.2(c), the Parties shall promptly provide joint written instructions to the Escrow Agent to deliver the Deposit to Purchasers, free of any claims by Sellers or any other Person with respect thereto.
(e) 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 11.
ARTICLE 12
INDEMNIFICATION
Section 12.1 Indemnification.
(a) From and after Closing, subject to Purchasers’ right to indemnity pursuant to Section 12.1(b), Purchasers shall indemnify, defend, and hold harmless the Seller Group from and against all Damages incurred by, suffered by, or asserted against such Persons:
(i) caused by, arising out of, or resulting from Purchasers’ breach of any covenant or agreement made by Purchasers contained in this Agreement that by its terms applies or is to be performed in whole or in part after Closing; or
(ii) caused by, arising out of, or resulting from the commitments, contractual arrangements, business, operations, or activities of the Company, or the ownership of the Company Interests (or ownership or operation of the Assets, including, for purposes of certainty, Environmental Liabilities under CERCLA) regardless of whether such Damages arose prior to, at, or after the Effective Time;
EVEN IF SUCH DAMAGES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT, OR CONCURRENT), STRICT LIABILITY, OR OTHER LEGAL FAULT OF THE SELLER GROUP, BUT EXCLUDING HOWEVER, IN EACH SUCH CASE, DAMAGES TO THE EXTENT ACTUALLY CAUSED BY THE FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY MEMBER OF THE SELLER GROUP.
(b) From and after Closing, subject to the limitations set forth in Section 12.3, Sellers jointly and severally shall indemnify, defend, and hold harmless the Purchaser Group from and against all Damages incurred by, suffered by, or asserted against such Persons caused by, arising out of, or resulting from any Seller’s breach of any covenant or agreement made by such Seller contained in this Agreement that by its terms applies or is to be performed in whole or in part after Closing;
EVEN IF SUCH DAMAGES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT, OR CONCURRENT), STRICT LIABILITY, OR OTHER LEGAL FAULT OF THE PURCHASER GROUP, BUT EXCLUDING HOWEVER, IN EACH SUCH CASE, DAMAGES TO THE EXTENT ACTUALLY CAUSED BY THE FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY MEMBER OF THE PURCHASER GROUP.
(c) From and after Closing, subject to the limitations set forth in Section 12.3, R2KLP shall indemnify, defend, and hold harmless the Purchaser Group from and against all Damages incurred by, suffered by, or asserted against such Persons caused by, arising out of, or resulting from the Excluded Assets.
(d) Notwithstanding anything to the contrary contained in this Agreement, subject to, and without limitation of Section 8.1(d), Section 8.17(d), Article 11, Section 14.16 and Purchasers’ rights under the R&W Insurance Policy, from and after the Closing, this Section 12.1 contains the Parties’ exclusive remedies against each other with respect to the transactions contemplated hereby (except with respect to Fraud), including any breaches of the representations, warranties, covenants, and agreements of the Parties in this Agreement or any of the other Transaction Documents. Except for the remedies contained in this Section 12.1, Section 8.1(d), Section 8.17, Article 11, and Section 14.16, and without limitation of Purchasers’ rights under the R&W Insurance Policy, EACH SELLER (ON BEHALF OF ITSELF AND ON BEHALF OF THE SELLER GROUP) AND EACH PURCHASER (ON BEHALF OF ITSELF AND ON BEHALF OF THE PURCHASER GROUP) EACH KNOWINGLY, WILLINGLY, IRREVOCABLY, EXPRESSLY, AND TO THE FULLEST EXTENT PERMITTED UNDER APPLICABLE LAW, 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, THE TRANSACTION DOCUMENTS, AND ANY TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY; (ii) SELLERS’ OWNERSHIP OR USE OF THE COMPANY INTERESTS; (iii) THE BUSINESS OR OPERATIONS OF THE COMPANY; (iv) COMPANY’S OWNERSHIP, MANAGEMENT OR USE OF THE ASSETS, OR (v) 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 SELLERS, THE COMPANY, AND ANY PERSONS WHO ARE AFFILIATES OF SELLERS, AND RIGHTS UNDER INSURANCE MAINTAINED BY SELLERS, THE COMPANY, OR ANY PERSON WHO IS AN AFFILIATE OF SELLERS, 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; PROVIDED, HOWEVER, THAT THE FOREGOING PROVISIONS OF THIS SECTION 12.1(D) SHALL NOT LIMIT ANY PARTY’S RIGHTS TO PURSUE CLAIMS FOR FRAUD.
(e) The indemnity of each Party provided in this Section 12.1 shall be for the benefit of and extend to each Person included in the Seller Group and the Purchaser Group, as applicable. Any claim for indemnity under this Section 12.1 by any Third Party must be brought and administered by a Party to this Agreement. No Indemnified Person (including any Person within the Seller Group and the Purchaser Group) other than the Parties shall have any rights against Sellers or Purchasers under the terms of this Section 12.1 except as may be exercised on its behalf by Purchasers or Sellers, as applicable, pursuant to this Section 12.1(e). The Parties may elect to exercise or not exercise indemnification rights under this Section 12.1 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 12.1.
Section 12.2 Indemnification Actions. All claims for indemnification under Section 12.1 shall be asserted and resolved as follows:
(a) For purposes hereof, (i) the term “Indemnifying Person” when used in connection with particular Damages shall mean the Person or Persons having an obligation to indemnify another Person or Persons with respect to such Damages pursuant to this Article 12 and (ii) the term “Indemnified Person” when used in connection with particular Damages shall mean the Person or Persons having the right to be indemnified with respect to such Damages by another Person or Persons pursuant to this Article 12.
(b) To make a claim for indemnification under Section 12.1, an Indemnified Person shall notify the Indemnifying Person of its claim under this Section 12.2, 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 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 12.2 shall not relieve the Indemnifying Person of its obligations under Section 12.1 except 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 prejudices the Indemnifying Person’s ability to defend against the Third Person Claim. In the event that the claim for indemnification is based upon an inaccuracy or breach of a covenant or agreement, the Claim Notice shall specify the covenant or agreement that was inaccurate or breached.
(c) In the case of a claim for indemnification 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 this Article 12. 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 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.
(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. The Indemnifying Person shall have full control of such defense and proceedings, including any compromise or settlement thereof. 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 controlled by the Indemnifying Person pursuant to this Section 12.2(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) or (ii) may materially and adversely affect the Indemnified Person (other than as a result of money damages covered by the indemnity).
(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 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 at any time prior to settlement or final determination thereof. If the Indemnifying Person has not yet admitted its obligation to provide indemnification 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 10 days following receipt of such notice to (i) admit in writing its obligation to provide indemnification with respect to the Third Person Claim and if its obligation is so admitted, either (A) consent to the proposed settlement or (B) reject, in its reasonable judgment, the proposed settlement or (ii) deny its obligation to provide indemnification. Any failure by the Indemnifying Person to respond to such notice shall be deemed an election under clause (ii) immediately above.
(f) In the case of a claim for indemnification 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, (ii) admit its obligation to provide indemnification with respect to such Damages, or (iii) dispute the claim for such indemnification. If the Indemnifying Person does not notify the Indemnified Person within such 30-day period that it has cured the Damages or that it disputes the claim for such indemnification, the Indemnifying Person shall be deemed to have disputed such claim for indemnification.
If the Indemnifying Person does not admit or otherwise does deny its liability against a claim for indemnification not based upon a Third Person Claim within the 30-day time period set forth in this Section 12.2(f), then the Indemnified Person shall diligently and in good faith pursue its rights and remedies under this Agreement with respect to such claim for indemnification.
Section 12.3 Limitations on Actions.
(a) The representations and warranties of Sellers in Article 5 and of R2KLP in Article 6 shall, without limiting Purchasers’ rights under the R&W Insurance Policy, terminate as of the Closing Date. The representations and warranties of Purchasers in Article 7 shall terminate as of the Closing Date. Each of the respective covenants and performance obligations of Sellers and Purchasers set forth in this Agreement that are to be complied with or performed by Sellers or Purchasers, as applicable, at or prior to the Closing shall terminate as of the Closing Date. All other respective covenants and performance obligations of Sellers and Purchasers set forth in this Agreement that by their terms require performance after the Closing and the corresponding indemnity obligations hereunder shall survive the Closing and remain in full force and effect until fully satisfied and/or performed in accordance with the terms hereof. Notwithstanding anything to the contrary in this Section 12.3, the acknowledgements, disclaimers, and other terms, as applicable, in, Section 7.11, Section 7.12, Section 8.18, Section 14.17, Section 14.18, and Section 14.20 shall survive the Closing indefinitely. The provisions of Article 13 shall survive Closing until 30 days after the expiration of the applicable statute of limitations closes the taxable year to which the subject Taxes relate.
(b) Without limiting the generality of this Section 12.3 from and after the Closing, no action, suit, claim, investigation or proceeding will be brought, encouraged, supported, or maintained by, or on behalf of, Purchasers against any member of the Seller Group, and no recourse will be sought or granted against any member of the Seller Group, by virtue of, or based upon, any alleged misrepresentation or inaccuracy in, or breach of, any of the representations, warranties, covenants, or agreements of Sellers set forth or contained in this Agreement or any other document contemplated hereby or any certificate, instrument, agreement, or other document delivered hereunder (other than, and solely with respect to, any of the covenants in this Agreement that survive the Closing), the subject matter of this Agreement, or any other document contemplated hereby, the transactions contemplated by this Agreement, the business, ownership, management or use of the Assets, the business or operations of the Company, the ownership of the Company Interests, or any actions or omissions at, or prior to, the Closing. Without limiting the generality of this Section 12.3, from and after the Closing, Purchasers will not be entitled to rescind this Agreement or, subject to Article 11, treat this Agreement as terminated by reason of any breach of this Agreement, and Purchasers knowingly, willingly, irrevocably, and expressly waive any and all rights of rescission it may have in respect of any such matter.
(c) The indemnities in Section 12.1(a)(i) and Section 12.1(b) shall terminate as of the termination date of each covenant or agreement that is subject to indemnification thereunder, except in each case as to matters for which a specific written claim for indemnity has been delivered to the Indemnifying Person on or before such termination date. The indemnities in Section 12.1(a)(ii) and Section 12.1(c) shall continue without time limit.
(d) The foregoing provisions of this Section 12.3 shall not limit any Party’s rights to pursue claims for Fraud.
(e) The amount of any Damages for which an Indemnified Person is entitled to indemnity under this Article 12 shall be reduced by the amount of insurance proceeds realized 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).
(f) In no event shall any Indemnified Person be entitled to duplicate compensation with respect to the same Damage, liability, loss, cost, expense, claim, award, or judgment under more than one provision of this Agreement and the Transaction Documents.
(g) Each Indemnified Person shall take all reasonable steps to mitigate all Damages or other liabilities, losses, costs, and expenses after becoming actually aware of any event that could reasonably be expected to give rise to any Damages or other liabilities, losses, costs, or expenses that are indemnifiable or recoverable under this Agreement.
(h)
(i) Effective as of immediately prior to the Closing, Sellers hereby fully and unconditionally release, acquit and forever discharge the Company from any and all manner of actions, causes of actions, claims obligations, demands, damages, costs, expenses, compensation or other relief, whether known or unknown, whether in law or equity, of any kind, Sellers now have or have ever had against the Company, arising out of or relating to Sellers’ ownership of the Company Interests. The foregoing notwithstanding, the release and discharge provided for herein shall not release (A) the Company of its obligations or liabilities, if any, pursuant to this Agreement, (B) the Company of any indemnification and/or exculpation obligations of such Person to Sellers as a manager of such Person, in any Seller’s capacity as such, pursuant to such Person’s Organizational Documents or applicable Law or (C) be deemed to constitute a waiver of the availability of insurance to cover claims.
(ii) Effective as of the Closing, the Purchasers, for themselves and on behalf of the Company and their respective equity holders, successors and assigns, hereby fully and unconditionally releases, acquits, and forever discharges (A) Sellers and (B) all directors, managers, officers, employees, members, partners and agents of the Company holding such position at any time prior to the Closing from any and all manner of actions, causes of actions, claims, obligations, demands, damages, costs, expenses, compensation or other relief, whether known or unknown, whether in law or equity, of any kind, which the Company now has or has ever had against such Persons, arising out of or relating to (x) in respect of Sellers, Sellers’ ownership of the Company Interests and (y) in respect of such
directors, managers, officers, employees, members, partners and agents, acts and omissions on behalf of the Company or the relationship with the Company in each case, other than with respect to their respective obligations and liabilities, if any, under this Agreement or the Transaction Documents or for claims of Fraud.
ARTICLE 13
TAX MATTERS
Section 13.1 Tax Filings. Sellers shall prepare (or shall cause to be prepared) and shall file (or caused to be filed) all Flow-Through Returns of the Company for any taxable period ending on or before the Closing Date, including, for the avoidance of doubt, the Company’s final U.S. federal information return on IRS Form 1065 for the period ending on the Closing Date. Sellers shall be responsible for filing (or causing to be filed) with the applicable Governmental Bodies the Tax Returns of the Company required to be filed on or before the Closing Date, and Sellers shall be responsible for paying (or causing to be paid) the Taxes reflected on such Tax Returns as due and owing (provided that to the extent such Taxes are allocated to Purchasers pursuant to Section 13.2, such payment shall be on behalf of Purchasers, and no later than five days following Sellers’ delivery of evidence of the payment thereof, Purchasers shall pay to Sellers any such Taxes, but only to the extent that such amounts have not already been accounted for under Section 3.3). Purchasers shall be responsible for the filing with the appropriate taxing authorities the Tax Returns of the Company (other than Flow-Through Returns) for all taxable periods beginning prior to the Closing Date that are required to be filed after the Closing Date and paying the Taxes reflected on such Tax Returns as due and owing and shall do so consistently with past practice unless otherwise required by applicable Law (provided, that to the extent such Taxes are allocated to Sellers pursuant to Section 13.2, such payment shall be on behalf of Sellers, and, no later than five days following Purchasers’ delivery to Sellers of evidence of the payment thereof, Sellers shall pay to Purchasers any such Taxes, but only to the extent that such amounts have not already been accounted for under Section 3.3; provided, however, that in the event that Sellers are required by applicable Tax Law to file a Tax Return with respect to Taxes of the Company after the Closing Date which includes all or a portion of a Tax period for which Purchasers are liable for such Taxes, no later than five days following Sellers’ request therefor and delivery to Purchasers of evidence of the payment thereof, Purchasers shall pay to Sellers all such Taxes allocable to Purchasers pursuant to Section 13.2, but only to the extent that such amounts have not already been accounted for under Section 3.3, in each case, whether such Taxes arise out of the filing of an original return or a subsequent audit or assessment of Taxes). Sellers shall be entitled to all Tax credits and Tax refunds that relate to any such Taxes allocable to any Tax period, or portion thereof, (a) with respect to non-Income Taxes, ending before the Effective Time or (b) with respect to Income Taxes, ending at the end of the Closing Date, as applicable, and Purchasers shall promptly pay to Sellers an amount equal to the value of any such Tax credit or Tax refund received by Purchasers or the Company after the Closing Date, net of any reasonable Third Party costs and expenses incurred by Purchasers in obtaining such credit or refund. Sellers shall repay to Purchasers the amount of any Tax credit or Tax refund paid to Sellers pursuant to this Section 13.1 (plus any applicable penalties, interest or other charges imposed by the relevant Governmental Body and paid by Purchasers) in the event that Purchasers or any of their Affiliates are required to repay such credit or refund (including any applicable penalties, interest, or other charges imposed by the relevant Governmental Body) to such Governmental Body.
Section 13.2 Allocation of Taxes. For purposes of Section 3.3, Section 8.4(d), Section 13.1, and Section 13.4, in each case, notwithstanding that such Asset Taxes are payable by the Company (and not Sellers or Purchasers directly), (a) Asset Taxes that are ad valorem, property or other Asset Taxes imposed on a periodic basis that are assessed against the Assets with respect to a Tax period (or portion thereof) beginning at or after the Effective Time, but excluding any such Taxes that are based on the severance or production of Hydrocarbons or the Pennsylvania Impact Fee, shall be allocated entirely to Purchasers, and such Asset Taxes assessed against the Assets with respect to a Tax period (or portion thereof) ending prior to the Effective Time, shall be allocated entirely to Sellers, (b) Asset Taxes that are imposed on the severance or production of Hydrocarbons (including the Pennsylvania Impact Fee) shall be allocated between the Parties based on the number of units or value of production actually produced, as applicable, before, and at or after, the Effective Time, as applicable and (c) Asset Taxes based upon sales or receipts or resulting from specific transactions such as the sale or other transfer of property, shall be allocated to the period (i.e., prior to the Effective Time or following the Effective Time) in which the transaction giving rise to such Asset Taxes occurred (i.e., prior to the Effective Time or following the Effective Time). For purposes of sub-clause (b) of the immediately preceding sentence, the Pennsylvania Impact Fee shall be allocated between the Parties based on the period to which the underlying production relates, not the year in which the payment of the fee is due. For purposes of sub-clause (b) of the initial sentence of this Section 13.2, Sellers shall be allocated any Pennsylvania Impact Fee resulting from production periods prior to the Effective Time and Purchasers shall be allocated any Pennsylvania Impact Fee resulting from production periods after the Effective Time. For example, the year one Pennsylvania Impact Fee for a well spud in the 2021 calendar year and for which the fee is due in 2022 shall be allocated entirely to Sellers and the fee associated with the same well’s year two production, occurring in the 2022 calendar year and payable in the 2023 calendar year, shall be allocated entirely to Purchasers. For purposes of Section 3.3, Section 13.1, and Section 13.4, in the case of Income Taxes imposed on the Company, the amount of such Taxes allocated to Sellers shall be determined by closing the books of the Company as of the end of the Closing Date notwithstanding that such Taxes are payable by the Company (and not Sellers or Purchasers directly).
Section 13.3 Characterization of Certain Payments. The Parties agree that any payments made pursuant to this Article 13, Article 12, Section 2.2, or Section 10.4 shall be treated for all Tax purposes as an adjustment to the Unadjusted Purchase Price unless otherwise required by Law.
Section 13.4 Amended Tax Returns; Tax Elections. In each case to the extent doing so would cause Sellers or any of their Affiliates to be liable for any Taxes (including amounts for which Sellers are liable under this Agreement), Purchasers will not, without the prior written consent of Sellers (such consent not to be unreasonably withheld, conditioned or delayed) cause or permit any of their Affiliates to (a) file or amend or otherwise modify any Tax Return that relates in whole or in part to any Tax period, or portion thereof, for which Sellers are allocated responsibility for payment pursuant to Section 13.2 (other than to file Tax Returns in the ordinary course of business in accordance with Section 13.1), (b) make or change any election for, or that has retroactive effect to, any Tax period, or portion thereof, for which Sellers are allocated responsibility for payment pursuant to Section 13.2,
(c) enter into any voluntary disclosure Tax program, agreement or arrangement with any Tax authority with respect to any Taxes attributable to any Tax period, or portion thereof, for which Sellers are allocated responsibility for payment pursuant to Section 13.2, or (d) extend or waive the statute of limitations with respect to any Tax period, or portion thereof, for which Sellers are allocated responsibility for payment pursuant to Section 13.2.
Section 13.5 Cooperation. Purchasers and Sellers shall cooperate fully, as and to the extent reasonably requested by the other Party, in connection with (a) the filing of any Tax Returns pursuant to this Article 13 and (b) any Tax examination, audit, litigation or similar proceeding. Such cooperation shall include the retention and (upon the other Party’s request) the provision of such records and information which are reasonably relevant to any such Tax Return or examination, audit, litigation, or similar proceeding.
Section 13.6 Tax Audits. After the Closing Date, if Purchasers or any of their Affiliates receives notice of any audit, demand, claim, proposed adjustment, assessment, examination or other administrative or court proceeding with respect to the Company (a) that concerns Income Taxes (including, for the avoidance of doubt, any Taxes related to a Flow-Through Return) with respect to any Pre-Closing Tax Period (an “Income Tax Contest”) or (b) for all other Taxes, with respect to a Pre-Effective Time Tax Period (a “Non-Income Tax Contest” and, together with an Income Tax Contest, a “Tax Contest”), Purchasers shall notify Sellers as soon as practicable and in any event within ten days of receipt of such notice. Sellers shall have the right to control any such Tax Contest, provided that Purchasers shall have the right to participate, at Purchasers’ sole cost and expense, in the conduct of any Tax Contest involving a Straddle Period. If Sellers elect not to control such Tax Contest, Purchasers shall control, at their sole cost and expense, such Tax Contest and Sellers shall have the right to participate in such Tax Contest; provided, however, that, under such circumstances, Purchasers shall have no obligation to defend the Tax Contest or mitigate liabilities of Sellers with respect to such Tax Contest. Notwithstanding the foregoing, the controlling Party shall keep the other Party reasonably informed of the progress of such Tax Contest, and shall not settle any such Tax Contest that would reasonably be expected to have an adverse Tax impact on the other Party without the prior written consent of the other Party (which shall not be unreasonably withheld, conditioned or delayed). Notwithstanding anything in this Agreement to the contrary, the Parties shall cause there to be made or otherwise cooperate in the making, to the maximum extent provided by applicable Law, of one or more elections under Section 6226 of the Code (or any corresponding provision of state, local or non-U.S. Law) relating to any Pre-Closing Tax Period.
Section 13.7 Tax Treatment. The Parties agree that the transactions contemplated by this Agreement will be treated for U.S. federal income Tax purposes as (a) a sale of membership interests of the Company by the Sellers, which shall, for the avoidance of doubt, cause the Company’s taxable year as a partnership to close as of the end of the Closing Date for U.S. federal income tax purposes, and (b) an acquisition of the assets of the Company (other than the Excluded Assets), as described in Revenue Ruling 99-6, situation 2. No Party or any Affiliate thereof shall take a position inconsistent with the preceding sentence for any purpose unless otherwise required pursuant to a “determination” within the meaning of Section 1313(a) of the Code or corresponding provision of applicable U.S. state or local Law.
Section 13.8 Transaction Tax Deductions. Any Transaction Tax Deductions, to the fullest extent permitted by applicable Law (including electing the application of Revenue Procedure 2011-29 to deduct 70% of any “success-based fees” within the meaning of Treasury Regulations Section 1.263(a)-5(f)), shall be reported in a taxable period of the Company ending on or prior to the Closing Date (the benefit of which, for the avoidance of doubt, shall accrue to Sellers).
In the event a Transaction Tax Deduction cannot be fully reported in such a period but can be taken into account on a Tax Return for a Straddle Period, any item of deduction attributable to a Transaction Tax Deduction shall be treated (to the fullest extent permitted by applicable Law) as deductible in the pre-Closing portion of the Straddle Period (and the Purchasers shall take such actions as are permitted under applicable Law that are required to cause those deductions to be reported in the pre-Closing portion of the Straddle Period).
ARTICLE 14
MISCELLANEOUS
Section 14.1 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. Each 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 14.2 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 if sent during normal business hours of the recipient or on the next day if sent after normal business hours of the recipient with receipt acknowledged, with the receiving Party affirmatively obligated to promptly acknowledge receipt. Such notices and other communications must be sent to the following addresses or email addresses:
If to Sellers:
Radler 2000 Limited Partnership
1320 S. University Drive, Suite 500
Fort Worth, TX 76107
Attn: Evan Radler
Email: eradler@tug-hillop.com
With a copy to (which shall not constitute notice):
Gibson, Dunn & Crutcher LLP
811 Main Street, Suite 3000
Houston, Texas 77002
Attn: Michael P. Darden; Jeffrey A. Chapman
Email: mpdarden@gibsondunn.com; jchapman@gibsondunn.com
and
Akin Gump Strauss Hauer & Feld LLP
2300 N. Field Street, Suite 1800
Dallas, Texas 75201
Attn: Wesley P. Williams; Cole Bredthauer
Email: WilliamsW@akingump.com; CBredthauer@akingump.com
If to Purchasers:
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Attn: Derek Dixon
Telephone: (405) 935-4020
Email: derek.dixon@chk.com
With a copy to (which shall not constitute notice):
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Attention: Benjamin E. Russ
Telephone: (405) 935-6462
Email: ben.russ@chk.com
Any 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 14.3 Tax, Recording Fees, Similar Taxes & Fees. Purchasers, on the one hand, and Sellers, on the other hand, shall each bear and pay 50% of any Transfer Taxes and similar Taxes and fees incurred and imposed upon, or with respect to, the transactions contemplated hereby. If such transactions are exempt from any such Taxes or fees upon the filing of an appropriate certificate or other evidence of exemption, Purchasers or Sellers, as applicable, will timely furnish to the other Party such certificate or evidence. Except as otherwise provided herein, all costs and expenses (including legal and financial advisory fees and expenses) incurred in connection with, or in anticipation of, this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses. For the avoidance of doubt, all fees, costs and expenses of the R&W Insurance Policy shall be paid by Purchasers, and Sellers will not have any liability with respect thereto.
Section 14.4 Governing Law; Jurisdiction.
(a) THIS AGREEMENT, THE LEGAL RELATIONS BETWEEN THE PARTIES, AND ALL CLAIMS OR CAUSES OF ACTION (WHETHER IN TORT, CONTRACT, OR STATUTE) THAT MAY BE BASED UPON, ARISE OUT OF, OR RELATE TO THIS AGREEMENT, OR THE NEGOTIATION, EXECUTION OR PERFORMANCE OF THIS AGREEMENT, SHALL BE GOVERNED BY, CONSTRUED, AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS
(INCLUDING ITS STATUTES OF LIMITATIONS) WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION; PROVIDED, HOWEVER, THAT ANY MATTER RELATED TO TITLE TO ANY REAL PROPERTY INCLUDED IN THE ASSETS SHALL BE GOVERNED BY THE LAWS OF THE STATE WHERE SUCH ASSETS ARE LOCATED.
(b) THE PARTIES HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA LOCATED IN DALLAS COUNTY, TEXAS (OR, IF REQUIREMENTS FOR FEDERAL JURISDICTION ARE NOT MET, STATE COURTS LOCATED IN DALLAS 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 (EXCEPT TO THE EXTENT A DISPUTE, CONTROVERSY, OR CLAIM ARISING OUT OF, IN RELATION TO, OR IN CONNECTION WITH THE RESOLUTION OF ANY DISPUTED TITLE DEFECTS OR ENVIRONMENTAL DEFECTS, OR TITLE BENEFITS PURSUANT TO SECTION 4.4, OR THE DETERMINATION OF PURCHASE PRICE ADJUSTMENTS PURSUANT TO SECTION 10.4(C) IS REFERRED TO AN EXPERT PURSUANT TO THOSE SECTIONS), 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 ADDRESS SET OUT IN SECTION 14.2 OF THIS AGREEMENT 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 IN RESPECT OF ANY ACTION, SUIT, OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
(d) EACH PARTY, FOR ITSELF OR ANY OF ITS ASSETS, HEREBY WAIVES ANY IMMUNITY TO THE FULLEST EXTENT PERMITTED BY THE LAWS OF ANY APPLICABLE JURISDICTION. THIS WAIVER INCLUDES IMMUNITY FROM: (i) JURISDICTION; (ii) SERVICE OF PROCESS;
(iii) ANY LITIGATION, EXPERT DETERMINATION, MEDIATION, OR ARBITRATION PROCEEDING COMMENCED UNDER THIS AGREEMENT; (iv) ANY JUDICIAL, ADMINISTRATIVE, OR OTHER PROCEEDINGS THAT ARE PART OF, OR IN AID OF, THE LITIGATION, EXPERT DETERMINATION, MEDIATION, OR ARBITRATION COMMENCED UNDER THIS AGREEMENT; AND (v) ANY EFFORT TO CONFIRM, ENFORCE, OR EXECUTE ANY DECISION, SETTLEMENT, AWARD, JUDGMENT, SERVICE OF PROCESS, EXECUTION ORDER, OR ATTACHMENT (INCLUDING PRE-JUDGMENT ATTACHMENT) THAT RESULTS FROM LITIGATION, EXPERT DETERMINATION, MEDIATION, ARBITRATION, OR ANY JUDICIAL OR ADMINISTRATIVE PROCEEDINGS COMMENCED UNDER THIS AGREEMENT. FOR THE PURPOSES OF THIS WAIVER, PURCHASERS ACKNOWLEDGES THAT THEIR RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT ARE OF A COMMERCIAL AND NOT A GOVERNMENTAL NATURE.
Section 14.5 Waivers. Any failure by any 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 14.6 Assignment. Neither Sellers nor Purchasers shall assign all or any part of this Agreement, and shall not assign or delegate any of its rights or duties hereunder, without the prior written consent of the other Party (which consent may be withheld in such other Party’s sole discretion) and any assignment or delegation made without such consent 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 assigns.
Section 14.7 Entire Agreement. This Agreement (including, for purposes of certainty, the Appendix, Exhibits, and Schedules attached hereto), the documents to be executed hereunder, the Confidentiality Agreement, and the Escrow Agreement 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 14.8 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 14.9 No Third Party Beneficiaries. Nothing in this Agreement shall entitle any Person other than Purchasers and Sellers to any claims, cause of action, remedy, or right of any kind, except the rights expressly provided in Section 8.1(d), Section 8.12, Section 8.17, Section 12.1(e), and Section 14.18 to the Persons described therein.
Section 14.10 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 arm’s-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.
Section 14.11 Limitation on Damages. NOTWITHSTANDING ANYTHING TO THE CONTRARY, EXCEPT IN CONNECTION WITH ANY DAMAGES INCURRED BY THIRD PARTIES FOR WHICH INDEMNIFICATION IS SOUGHT UNDER THE TERMS OF THIS AGREEMENT, NONE OF PURCHASERS, SELLERS, OR ANY OF THEIR RESPECTIVE AFFILIATES 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 PURCHASER AND EACH SELLER, FOR ITSELF AND ON BEHALF OF ITS RESPECTIVE AFFILIATES, HEREBY EXPRESSLY WAIVES ANY RIGHT TO CONSEQUENTIAL, SPECIAL, INDIRECT, PUNITIVE, OR EXEMPLARY DAMAGES IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 14.12 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 14.13 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 (including any payment required hereunder) is not a Business Day (or if the period during which any notice is required or permitted to be given or any action taken expires on a date that 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 or permitted to be given or action taken) shall be the next day that is a Business Day.
Section 14.14 Delivery of Records. Sellers, at Purchasers’ cost and expense, shall deliver the Records to Purchasers within 30 days following Closing. Sellers may retain copies of the Records.
Section 14.15 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 14.16 Specific Performance. The Parties agree that if any of the provisions of this Agreement were not performed 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 Parties shall be entitled to specific performance of the terms hereof and immediate injunctive relief, in addition to any other remedy available at Law or in equity. Each of the Parties hereby further waives (a) any defense in any action for specific performance that a remedy at Law would be adequate and (b) any requirement under any Law to post security as a prerequisite to obtaining equitable relief.
Section 14.17 Reliance on Own Judgment; Disclaimer of Reliance. THE PARTIES AGREE THAT THE TERMS OF THIS AGREEMENT ARE NEGOTIATED TERMS AND NOT BOILERPLATE. PRIOR TO SIGNING THIS AGREEMENT, ALL TERMS WERE OPEN FOR NEGOTIATION. THE PARTIES ACKNOWLEDGE THAT THEY WERE EACH REPRESENTED BY COUNSEL AND RELIED UPON SUCH COUNSEL TO ADVISE THEM IN CONNECTION WITH THE NEGOTIATION AND DRAFTING OF THIS AGREEMENT. THE PARTIES ACKNOWLEDGE AND AGREE THAT THEY ARE EACH SOPHISTICATED AND KNOWLEDGEABLE IN BUSINESS MATTERS AND HAVE DEALT WITH EACH OTHER AT ARM’S LENGTH IN NEGOTIATING THIS AGREEMENT. BY SIGNING BELOW, EACH PARTY REPRESENTS THAT IT HAS CAREFULLY REVIEWED THIS AGREEMENT, UNDERSTANDS ITS TERMS, HAS SOUGHT AND OBTAINED INDEPENDENT LEGAL ADVICE WITH RESPECT TO THE NEGOTIATION AND PREPARATION OF THIS AGREEMENT, HAS RELIED WHOLLY UPON ITS OWN JUDGMENT, KNOWLEDGE, AND INVESTIGATION, AND THE ADVICE OF ITS RESPECTIVE COUNSEL, AND THAT IT HAS NOT RELIED UPON OR BEEN INFLUENCED TO ANY EXTENT IN MAKING OR ENTERING INTO THIS AGREEMENT BY ANY REPRESENTATIONS OR STATEMENTS MADE BY ANY OTHER PARTY, OR BY ANYONE ACTING ON BEHALF OF ANY OTHER PARTY, EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN THIS AGREEMENT OR CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), OR IN ANY OTHER TRANSACTION DOCUMENT. THE PARTIES ALSO ACKNOWLEDGE AND AGREE THAT THE OTHER PARTY HAS NO DUTY TO MAKE ANY DISCLOSURES TO ANY OTHER PERSON IN CONNECTION WITH MAKING OR ENTERING INTO THIS AGREEMENT. THE PARTIES EXPRESSLY DISCLAIM RELIANCE ON ANY REPRESENTATION OR STATEMENT NOT MADE IN THIS AGREEMENT IN DECIDING TO ENTER INTO THIS AGREEMENT OR CONFIRMED IN THE CERTIFICATE OF SELLERS TO BE DELIVERED AT THE CLOSING PURSUANT TO SECTION 10.2(b), OR IN ANY OTHER TRANSACTION DOCUMENT. IT IS UNDERSTOOD AND AGREED THAT, IN ENTERING INTO THIS AGREEMENT, EACH OF THE PARTIES EXPRESSLY ASSUMES THE RISK THAT A FACT NOW BELIEVED TO BE TRUE MAY HEREAFTER BE FOUND TO BE OTHER THAN TRUE, OR FOUND TO BE DIFFERENT IN MATERIAL OR IMMATERIAL RESPECTS FROM THAT WHICH IS NOW BELIEVED, AND THE PARTIES FURTHER UNDERSTAND AND AGREE THAT THIS AGREEMENT SHALL BE AND WILL REMAIN EFFECTIVE WITHOUT REGARD FOR ANY DIFFERENCES IN FACT, OR DIFFERENCES IN THE PERCEPTION OF FACTS, THAT MAY HEREAFTER BE FOUND.
THE PARTIES WAIVE AND DISCLAIM ANY RIGHT OR ABILITY TO SEEK TO REVOKE, RESCIND, VACATE, OR OTHERWISE AVOID THE OPERATION AND EFFECT OF THIS AGREEMENT ON THE BASIS OF AN ALLEGED FRAUDULENT INDUCEMENT, MISREPRESENTATION, OR MATERIAL OMISSION, OR ON THE BASIS OF A MUTUAL OR UNILATERAL MISTAKE OF FACT OR LAW, OR NEWLY DISCOVERED INFORMATION.
Section 14.18 Limitation on Recourse. THE PARTIES ACKNOWLEDGE AND AGREE THAT NO PAST, PRESENT, OR FUTURE DIRECTOR, MANAGER, OFFICER, EMPLOYEE, INCORPORATOR, MEMBER, PARTNER, STOCKHOLDER, AGENT, ATTORNEY, REPRESENTATIVE, AFFILIATE, OR FINANCING SOURCE AND THEIR RESPECTIVE PAST, PRESENT, OR FUTURE DIRECTORS, MANAGERS, OFFICERS, EMPLOYEES, INCORPORATORS, MEMBERS, PARTNERS, STOCKHOLDERS, AGENTS, ATTORNEYS, REPRESENTATIVES, AFFILIATES (OTHER THAN ANY OF THE PARTIES), OR FINANCING SOURCES OF ANY OF THE PARTIES (EACH, A “NON-RECOURSE PERSON” FOR PURPOSES OF THIS PROVISION), IN SUCH CAPACITY, SHALL HAVE ANY LIABILITY OR RESPONSIBILITY (IN CONTRACT, TORT, OR OTHERWISE) FOR ANY AND ALL SUITS, LEGAL OR ADMINISTRATIVE PROCEEDINGS, CLAIMS, DEMANDS, DAMAGES, LOSSES, COSTS, LIABILITIES, INTEREST, OR CAUSES OF ACTION WHATSOEVER, AT LAW OR IN EQUITY, KNOWN OR UNKNOWN, WHICH ARE ARISING FROM, BASED UPON, RELATED TO, OR ASSOCIATED WITH THE NEGOTIATION, PERFORMANCE, AND CONSUMMATION OF THIS AGREEMENT OR THE TRANSACTION CONTEMPLATED HEREUNDER. THIS AGREEMENT MAY ONLY BE ENFORCED AGAINST, AND ANY DISPUTE, CONTROVERSY, MATTER, OR CLAIM ARISING FROM, BASED UPON, RELATED TO, OR ASSOCIATED WITH THIS AGREEMENT, OR THE NEGOTIATION, PERFORMANCE, OR CONSUMMATION OF THIS AGREEMENT, MAY ONLY BE BROUGHT AGAINST THE ENTITIES THAT ARE EXPRESSLY NAMED AS PARTIES, AND THEN ONLY WITH RESPECT TO THE SPECIFIC OBLIGATIONS SET FORTH HEREIN WITH RESPECT TO SUCH PARTY. EACH NON-RECOURSE PERSON IS EXPRESSLY INTENDED AS A THIRD PARTY BENEFICIARY OF THIS SECTION 14.18 AND, NOTWITHSTANDING ANYTHING TO THE CONTRARY, SHALL HAVE THE RIGHT TO ENFORCE THIS PROVISION.
Section 14.19 Schedules. Neither the Schedules, any disclosure made in or by virtue of the Schedules, nor the inclusion of any matter or information on a Schedule, (a) constitutes or implies any representation, warranty, or covenant by Sellers not expressly set out in this Agreement, (b) has the effect of, or may be construed as, adding to, broadening, deleting from, or revising the scope of any of the representations, warranties, or covenants of Sellers in this Agreement, (c) is not an admission of liability under any applicable Law and does not mean that such information is required to be disclosed by this Agreement, that such information is material, or that such information does, or may, have a Material Adverse Effect, and (d) shall not be deemed an indication that such matter necessarily would, or may, breach a representation, warranty, or covenant absent its inclusion on such Schedule; rather, the Schedules, any disclosure made in or by virtue of the Schedules, and the inclusion of any matter or information on a Schedule are intended only to qualify the representations, warranties, and covenants in this Agreement and to set forth other information as may be required by this Agreement. Matters reflected in the Schedules are not limited to matters required by this Agreement to be reflected in the Schedules, and may be set forth on a Schedule for information purposes only.
Neither the specification of any Dollar amount, item, or matter in any representation, warranty, or covenant contained in this Agreement, nor the inclusion of any specific item or matter in any Schedule, is intended to imply that such amount, or a higher or lower amount, or the item or matter so included, or any other item or matter, is or is not material or in the ordinary course of business, and no Person shall use the setting forth of any such amount or the inclusion of any such item or matter in any dispute or controversy between the Parties as to whether any obligation, item, or matter described or not described therein or included or not included in the Schedules is or is not material or in the ordinary course of business for purposes of this Agreement. The information set forth on the Schedules shall not be used as a basis for interpreting the terms “material,” “materially,” “materiality,” “Material Adverse Effect,” or any similar qualification in this Agreement. The disclosure of any matter in any Schedule shall be deemed to be a disclosure under any other Schedule to the extent that the relevance of such matter to such other Schedule is readily apparent on its face. Headings have been inserted in the Schedules for reference only and do not amend the descriptions of the disclosed items set forth in this Agreement.
Section 14.20 Attorney-Client Privilege; Continued Representation. Purchasers agree, on their own behalf and on behalf of their respective directors, officers, managers, employees, and Affiliates, that, following the Closing, Gibson, Dunn & Crutcher LLP and Akin Gump Strauss Hauer & Feld LLP may each serve as counsel to Sellers or any of their Affiliates in connection with any matters related to this Agreement and the transactions contemplated hereunder, including any litigation, claim or obligation arising out of or relating to this Agreement or the transactions contemplated hereunder notwithstanding any representation by Gibson, Dunn & Crutcher LLP or Akin Gump Strauss Hauer & Feld LLP prior to the Closing Date of the Company. Each Purchaser, on behalf of itself and the Company, hereby (a) waives any claim they have or may have that either Gibson, Dunn & Crutcher LLP or Akin Gump Strauss Hauer & Feld LLP has a conflict of interest or is otherwise prohibited from engaging in such representation and (b) agrees that, in the event that a dispute arises after the Closing between Purchasers and Sellers or any of their respective Affiliates, Gibson, Dunn & Crutcher LLP and/or Akin Gump Strauss Hauer & Feld LLP may represent Sellers or any of their Affiliates in such dispute even though the interests of such Person(s) may be directly adverse to Purchasers or the Company and even though Gibson, Dunn & Crutcher LLP and/or Akin Gump Strauss Hauer & Feld LLP may have represented the Company in a matter substantially related to such dispute. Purchasers and the Company also further agree that, as to all communications prior to Closing among Gibson, Dunn & Crutcher LLP or Akin Gump Strauss Hauer & Feld LLP and the Company, Sellers, or any of their respective Affiliates and representatives that primarily relate to the negotiation of transactions contemplated hereunder, the attorney-client privilege, and the expectation of client confidence belongs to Sellers and may be controlled by Sellers and shall not pass to or be claimed by Purchasers or the members of the Company. Notwithstanding the foregoing, in the event that a dispute arises between Purchasers, the Company, and a Third Party other than a Party after the Closing, the Company may assert the attorney-client privilege to prevent disclosure of confidential communications by Gibson, Dunn & Crutcher LLP or Akin Gump Strauss Hauer & Feld LLP to such Third Party; provided, however, that the Company may not waive such privilege without the prior written consent of Sellers (not to be unreasonably withheld, conditioned, or delayed).
Section 14.21 Party Representatives.
(a) For purposes of this Agreement, Sellers, without any further action, shall be deemed to have appointed, and do hereby appoint, R2KLP as their representative (in such capacity, the “Seller Representative”), as the attorney-in-fact for and on behalf of Sellers (both individually and collectively),
with respect to the exercise of any decision, right, consent, election, or other action that any Seller is required or permitted to make or take under the terms of this Agreement (the “Seller Delegated Matters”), and Purchasers may rely on the decisions of Seller Representative with respect to all Seller Delegated Matters. For the avoidance of doubt, notwithstanding anything to the contrary contained herein, Sellers will be treated as a single party for purposes of any notice, election, exercise of a right, consent or similar action to be made by Sellers under this Agreement. The Parties further acknowledge that Purchasers shall have no responsibility to determine the portion of the Closing Cash Payment to be paid to Sellers and shall be entitled to rely on the preliminary settlement statement and the final settlement statement, as well as instructions by the Seller Representative, as to the portion of the Closing Cash Payment payable to each Seller. Sellers shall be jointly and severally liable for any Damages of any Seller or Sellers under this Agreement or any Transaction Document; provided, however that in no event shall Sellers be liable in any respect for any Damages of the Chief Parties under the PIPA.
(b) For purposes of this Agreement, Purchasers, without any further action, shall be deemed to have appointed, and do hereby appoint, CHK Parent as their representative (in such capacity, the “Purchaser Representative”), as the attorney-in-fact for and on behalf of Purchasers (both individually and collectively), with respect to the exercise of any decision, right, consent, election, or other action that any Purchaser is required or permitted to make or take under the terms of this Agreement (the “Purchaser Delegated Matters”), and Sellers may rely on the decisions of Purchaser Representative with respect to all Purchaser Delegated Matters. For the avoidance of doubt, notwithstanding anything to the contrary contained herein, Purchasers will be treated as a single party for purposes of any notice, election, exercise of a right, consent or similar action to be made by Purchasers under this Agreement.
Section 14.22 Purchaser Group Consent. To the extent the consent or approval of any member of the Purchaser Group is required in connection with the transfer or assignment of any contracts, agreements or instruments described on Schedule 6.11 from a Seller to the Company, Purchasers (on their own behalf and on behalf of each member of the Purchaser Group) hereby unconditionally and irrevocably grant such consent or approval.
[Signature Pages Follow]
IN WITNESS WHEREOF, this Agreement has been signed by each of the Parties on the Execution Date.
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| RADLER 2000 LIMITED PARTNERSHIP |
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| By: | Tug Hill, Inc., its general partner |
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| By: | /s/ Michael Radler |
| Name: | Michael Radler |
| Title: | President |
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| TUG HILL, INC. |
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| By: | /s/ Michael Radler |
| Name: | Michael Radler |
| Title: | President |
Signature Page to Membership Interest Purchase Agreement
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| PURCHASERS: |
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| CHESAPEAKE ENERGY CORPORATION |
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| By: | /s/ Domenic J. Dell'Osso, Jr. |
| Name: | Domenic J. Dell'Osso, Jr. |
| Title: | President and Chief Executive Officer |
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| CHESAPEAKE APPALACHIA, L.L.C. |
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| By: | /s/ Domenic J. Dell'Osso, Jr. |
| Name: | Domenic J. Dell'Osso, Jr. |
| Title: | President and Chief Executive Officer |
Signature Page to Membership Interest Purchase Agreement
APPENDIX A
ATTACHED TO AND MADE A PART OF THAT
CERTAIN MEMBERSHIP INTEREST PURCHASE AGREEMENT, DATED AS OF THE EXECUTION DATE, BY AND AMONG SELLERS AND PURCHASERS
DEFINITIONS
“Actual Knowledge” has the meaning set forth in Section 5.1(a).
“Adjusted Purchase Price” has the meaning set forth in Section 3.3.
“Adjustment Excess” has the meaning set forth in Section 10.4(d)(ii).
“AFEs” means authorization for expenditures issued pursuant to a Contract.
“Affiliate” means, with respect to any Person, any Person that directly or indirectly Controls, is Controlled by, or is under common Control with such Person. Notwithstanding anything to the contrary herein, (a) prior to Closing, the Company shall be deemed to be an Affiliate of Sellers, and not Purchasers, and (b) from and after the Closing, the Company shall be deemed to be an Affiliate of Purchasers, and not Sellers.
“Agreement” has the meaning set forth in the Preamble of this Agreement.
“Allocated Value” has the meaning set forth in Section 3.4.
“Arbitration Decision” has the meaning set forth in Section 4.4(e).
“Asset Taxes” means ad valorem, property, excise, severance, production, Pennsylvania Impact Fee, sales, use, or similar Taxes based upon the operation or ownership of the Assets or the production of Hydrocarbons therefrom or the receipt of proceeds therefrom; but excluding, for the avoidance of doubt, Income Taxes and Transfer Taxes.
“Assets” means, excluding the Excluded Assets, all of the assets and properties owned or leased by the Company, including all of the Company’s right, title, and interest in and to the following:
(a) the oil, gas, and mineral leases, subleases, and other leaseholds, royalties, overriding royalties, net profits interests, carried interests, farmout rights, and mineral fee interests described on Exhibit A-1, whether producing or non-producing, together with all leasehold estates created thereby, in each case, subject to the terms, conditions, covenants, and obligations set forth in such leases (collectively, the “Leases”), together with all pooled, communitized, or unitized acreage or rights that includes or constitutes all or part of any Leases (the “Units”), and all tenements, hereditaments, and appurtenances belonging to the Leases and Units;
(b) all oil, gas, water, disposal, injection, monitoring, and other wells located on the Leases or Units, whether producing, shut-in, completed, or temporarily or permanently plugged and abandoned, including the oil and gas wells described on Exhibit A-2 (collectively, the “Wells” and together with the Units and the Leases, the “Properties”);
and all tangible personal property, supplies, inventory, equipment, fixtures, and improvements, in each case, to the extent they are primarily owned or held for use in connection with the operation, production, treating, gathering, storing, transportation, or marketing of Hydrocarbons from the Wells (the “Equipment”);
(c) all contracts, agreements, and instruments (including any amendments thereto) that are binding on the Properties or relate to the ownership or operation of the Properties to the extent the foregoing primarily cover or are attributable to the Properties or the production of Hydrocarbons from the Properties, including operating agreements, unitization, pooling and communitization agreements, declarations and orders, area of mutual interest agreements, joint venture agreements, farmin and farmout agreements, bottom-hole agreements, participation agreements, exchange agreements, balancing agreements, Hydrocarbon gathering and transportation agreements, agreements for the sale and purchase of Hydrocarbons, and processing agreements; provided, however, the foregoing shall not include (i) any contracts, agreements, or instruments to the extent they relate to any of the Excluded Assets and (ii) the Leases, the Surface Interests, the Permits, and other instruments creating or evidencing an interest in the ownership of the Assets (subject to such exclusions, the “Contracts”); and
(d) all surface fee interests, easements, licenses, servitudes, rights-of-way, surface leases, and other surface rights appurtenant to, and used or held for use primarily in connection with, the Properties, including those surface interests set forth on Exhibit A-3, and all improvements, fixtures, structures, facilities and appurtenances (including any field offices or yards) located thereon or relating thereto (the “Surface Interests”).
“Assignment Agreement” means the assignment of the Company Interest from Sellers to Purchasers substantially in the form attached hereto as Exhibit B.
“Base Cash Purchase Price” has the meaning set forth in Section 3.1(a).
“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 that the Company sponsors, maintains or contributes to for the benefit of its employees or former employees.
“Business Day” means each calendar day except Saturdays, Sundays, and federal holidays.
“Casualty Loss” has the meaning set forth in Section 4.7.
“Central Time” means the central time zone of the United States of America.
“CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq., as amended.
“CHK Common Stock” means the common stock, par value $0.01 per share, of CHK Parent.
“CHK Parent” has the meaning set forth in the Preamble of this Agreement.
“CHK Purchaser” has the meaning set forth in the Preamble of this Agreement.
“Claim Notice” has the meaning set forth in Section 12.2(b).
“Closing” has the meaning set forth in Section 10.1.
“Closing Cash Payment” has the meaning set forth in Section 10.4(a).
“Closing Date” has the meaning set forth in Section 10.1.
“Code” means the United States Internal Revenue Code of 1986, as amended.
“Commercially Reasonable Efforts” means reasonable efforts of a Party under existing circumstances; provided, however, that such efforts shall not include the incurring of any liability or obligation or the payment of any money (unless the other Party has agreed in writing to pay such costs).
“Company” has the meaning set forth in the Recitals of this Agreement.
“Company Common Interest” has the meaning set forth in the Recitals of this Agreement.
“Company Financial Statements” has the meaning set forth in Section 8.19.
“Company Interests” has the meaning set forth in the Recitals of this Agreement.
“Company Organizational Documents” has the meaning set forth in Section 5.6(a).
“Company Preferred Interests” has the meaning set forth in the Recitals of this Agreement.
“Confidentiality Agreement” means that certain Confidentiality Agreement dated October 20, 2021 among Chief Oil & Gas LLC, Chief Exploration & Development LLC, Tug Hill Marcellus, LLC, Radler 2000, LP and Chesapeake Energy Corporation.
“Contracts” has the meaning set forth in the definition of “Assets”.
“Control” means the ability to direct the management and policies of a Person through ownership of voting shares or other equity rights, pursuant to a written agreement, or otherwise. The terms “Controls” and “Controlled by” and other derivatives shall be construed accordingly.
“COVID-19” means SARS-CoV-2 or COVID-19, and any variants or evolutions thereof or related or associated epidemics, pandemics or disease outbreaks.
“Cure Period” has the meaning set forth in Section 4.2(b)(i).
“Customary Post-Closing Consents” means the consents and approvals from Governmental Bodies with respect to the transactions contemplated hereunder that are customarily obtained after the consummation of similar transactions.
“Cut-off Date” means the day that is one year after Closing.
“Damages” means the amount of any actual liability, loss, cost, expense, claim, award, or judgment incurred or suffered by any Person, whether attributable to personal injury or death, property damage, contract claims (including contractual indemnity claims), torts, statutory or common law claims or otherwise, including reasonable fees and expenses of attorneys, consultants, accountants, or other agents and experts reasonably incident to matters indemnified against, and the reasonable costs of investigation and monitoring of such matters, and the reasonable costs of enforcement of the indemnity; provided, however, that the term “Damages” shall not include (i) lost profits or other consequential damages suffered by the Party claiming indemnification, or any punitive damages(except as otherwise provided herein), and (ii) any liability, loss, cost, expense, claim, award, or judgment to the extent directly resulting from or to the extent increased by the actions or omissions of any Indemnified Person after the Closing Date.
“Deemed Defect Amount” has the meaning set forth in Section 4.2(b)(ii).
“Defect Escrow Amount” has the meaning set forth in Section 4.2(b)(iii).
“Defensible Title” means that title of the Company with respect to each Lease and Well (as applicable) that is deducible of record or created or caused by a joint operating agreement, a pooling agreement, a unitization agreement, a farmout agreement, or any similar agreement, and that, except for and subject to the Permitted Encumbrances:
(i) with respect only to the Target Formation of each Lease or Well, as applicable, entitles the Company to receive Hydrocarbons within, produced, saved, and marketed from the Target Formation of such Lease or Well, as applicable, throughout the duration of the productive life of such Lease or Well, of not less than the Net Revenue Interest shown on Exhibit A-1 or Exhibit A-2 (as applicable) for such Lease or Well, except for (a) decreases in connection with those operations in which the Company may be a nonconsenting co-owner (if and to the extent permitted by this Agreement), (b) decreases resulting from the establishment or amendment of pools or units from and after the Effective Time (if and to the extent permitted by this Agreement), (c) decreases required to allow other working interest owners to make up past underproduction or pipelines to make up past under-deliveries, and (d) as otherwise expressly shown on Exhibit A-1 or Exhibit A-2 (as applicable);
(ii) with respect only to the Target Formation of each Well, obligates the Company to bear a percentage of the costs and expenses for the ownership, operation, maintenance, and development of, and operations relating to, such Well not greater than the working interest shown in Exhibit A-2 for such Well without increase throughout the productive life of such Well, except for
(a) increases that are accompanied by at least a proportionate increase in the Company’s Net Revenue Interest with respect to the Target Formation of the affected Well, (b) increases resulting from contribution requirements with respect to defaults by co-owners under the applicable operating agreement, and (c) as otherwise expressly shown on Exhibit A-2;
(iii) with respect only to the Target Formation of each Lease, entitles the Company to the Net Mineral Acres for such Lease as set forth on Exhibit A-1 throughout the productive life thereof, except for increases due to (a) increased working interests that are accompanied by at least a proportionate increase in the Company’s Net Revenue Interest with respect to the Target Formation of the affected Lease, (b) increased working interests resulting from contribution requirements with respect to defaults by co-owners under the applicable operating agreement, and (c) increased working interests resulting from matters otherwise expressly shown on Exhibit A-1; and
(iv) is free and clear of liens or similar encumbrances.
“Deposit” has the meaning set forth in Section 3.1(b).
“Dispute Notice” has the meaning set forth in Section 4.2(b)(ii).
“Disputed Defect” has the meaning set forth in Section 4.2(b)(ii).
“Disputed Title Matters” has the meaning set forth in Section 4.4(a).
“Disputing Party” has the meaning set forth in Section 4.4(a).
“DOJ” means the Department of Justice.
“Dollars” means U.S. Dollars.
“Effective Time” has the meaning set forth in Section 2.2(a).
“Encumbrance” means any charge, claim, license, limitation, condition, equitable interest, mortgage, lien, pledge, security interest, or similar encumbrance, right of first refusal and/or right 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 Defect” means (i) a condition that is the subject of any written notice from a Governmental Body asserting or alleging a violation of an Environmental Law attributable to the use, ownership or operation of the Assets, (ii) a condition on or affecting an Asset that violates or causes an Asset (or the Company with respect to an Asset) not to be in compliance with any Environmental Law, or (iii) a condition on or otherwise affecting or arising from any Asset with respect to which investigation, reporting, monitoring, remedial, response, or corrective action is required under Environmental Law; provided, however, that the following shall not be considered Environmental Defects for any purpose of this Agreement: (a) any matter listed on Schedule 6.16 as of the Execution Date, and (b) any matter to the extent affecting an Asset that is operated by Purchasers or any of their Affiliates as of the Execution Date to the extent Purchasers had knowledge of such matter prior to the Title Claim Date.
“Environmental Defect Deductible” has the meaning set forth in Section 4.5(b).
“Environmental Defect Threshold” has the meaning set forth in Section 4.5(b).
“Environmental Laws” means, as the same have been amended to the Execution Date, 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. § 1471 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.; and the Safe Drinking Water Act, 42 U.S.C. §§ 300f through 300j; and all similar Laws as of the Execution Date of any Governmental Body having jurisdiction over the property in question addressing pollution or protection of the environment, natural resources or threatened, endangered or otherwise protected species, including those Laws relating to the storage, handling and use of Hazardous Substances and those Laws relating to the generation, processing, treatment, storage, handling, use, transportation, disposal or other management thereof, and all regulations implementing the foregoing that are applicable to the ownership, operation and maintenance of the Assets.
“Environmental Liabilities” means any and all environmental response costs (including costs of remediation), damages, natural resource damages, settlements, consulting fees, expenses, penalties, fines, orphan share, prejudgment and post-judgment interest, court costs, attorneys’ fees, and other liabilities incurred or imposed (i) pursuant to any order, notice of responsibility (including requirements embodied in Environmental Laws), injunction, judgment, or similar act (including settlements) by any Governmental Body or court of competent jurisdiction to the extent arising out of any violation of, or remedial obligation under, any Environmental Laws that are attributable to the ownership or operation of the Assets or (ii) pursuant to any claim or cause of action by a Governmental Body or other Person for personal injury, property damage, damage to natural resources, remediation, or response costs to the extent arising out of any violation of, or any remediation obligation under, any Environmental Laws that are attributable to the ownership or operation of the Assets.
“Equipment” has the meaning set forth in the definition of “Assets.”
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
“Escrow Account” means the escrow account established and maintained pursuant to the Escrow Agreement.
“Escrow Agent” means JPMorgan Chase Bank, N.A.
“Escrow Agreement” means the escrow agreement, dated as of the Execution Date, executed by Sellers, Purchasers, and the Escrow Agent, in respect of the receipt, holding, and distribution, as the case may be, of the Deposit.
“Excluded Assets” means: (a) the Excluded Records; (b) except for Imbalances, all trade credits, accounts receivable, and other proceeds, income, or revenues attributable to the Assets with respect to any period of time prior to the Effective Time; (c) to the extent they do not relate to matters for which Purchasers are providing indemnification hereunder, all claims, audit rights, and causes of action of Sellers or their Affiliates arising under or with respect to any Contract that are attributable to the period of time prior to the Effective Time (including claims for adjustments or refunds);
(d) all claims, rights, and interests of Sellers or their Affiliates (i) under any policy or agreement of insurance or indemnity agreement, (ii) under any bond or security instrument or (iii) to any insurance or condemnation proceeds or awards arising, in each case, from acts, omission or events, or damage to or destruction of property prior to the Effective Time or matters for which Sellers are otherwise required to provide indemnification to Purchasers hereunder; (e) any Tax refunds or Tax carry-forward amounts attributable to (i) the Assets or the Company (A) prior to the Effective Time (with respect to non-Income Taxes) or (B) prior to the Closing Date (with respect to Income Taxes) or (ii) to Sellers’ businesses generally; (f) all of Sellers’ and their Affiliates’ software licenses, proprietary computer software, patents, trade secrets, copyrights, names, trademarks, logos, and other intellectual property; (g) all data and Contracts that cannot be disclosed to Purchasers as a result of confidentiality arrangements under agreements with Third Parties (provided that Sellers use Commercially Reasonable Efforts to obtain a waiver of any such confidentiality restriction); (h) any of the Assets excluded from the transactions contemplated hereunder pursuant to Section 4.6, Section 8.1, Section 8.14, or otherwise excluded under this Agreement; (i) all seismic, geological, geophysical and similar licenses held by a member of the Company Group, (j) all right, title, and interest to the properties (including personal property) or other assets (including contractual rights) set forth on Exhibit A-4, which properties and assets, for the avoidance of doubt, will be assigned to Sellers pursuant to Section 8.14; and (k) any contract evidencing any indebtedness of any Seller or the Company.
“Excluded Defect” has the meaning set forth in the definition of “Title Defect”.
“Excluded Records” means (i) all corporate, financial, income, and franchise Tax and legal records of Sellers that relate to Sellers’ businesses generally (whether or not relating to the Assets), (ii) any records to the extent disclosure or transfer is restricted by any Third Party license agreement, other Third Party agreement, or applicable Law (provided that Sellers use Commercially Reasonable Efforts to obtain a waiver of any such restriction), (iii) Sellers’ and their Affiliates’ (other than the Company) computer software, (iv) all legal records and legal files of Sellers and all other work product of and attorney-client communications with any of Sellers’ legal counsel (other than copies of (a) title opinions, (b) Contracts, and (c) records and files with respect to any previous litigation matters), (v) personnel records, (vi) records relating to the sale of the Assets, including bids received from and records of negotiations with Third Parties, and (vii) any records with respect to the other Excluded Assets.
“Execution Date” has the meaning set forth in Preamble of this Agreement.
“Final Disputed Title Matters” has the meaning set forth in Section 4.4(b).
“Financial Statements” has the meaning set forth in Section 7.16(a).
“Flow-Through Return” means a Tax Return reporting income of the Company that is allocable to and reportable as income of the direct or indirect beneficial owner(s) of the Company under applicable Law.
“Fraud” means an actual, intentional, and willful misrepresentation by a Party with respect to the making of any representation or warranty set forth in Article 5, Article 6, or Article 7 of this Agreement, as applicable; provided, that (a) the Party making such representation or warranty had actual knowledge that the applicable representation or warranty, as may be qualified in this Agreement, was false at the time it was made, (b) the representation or warranty was made with the intention that the other Party rely thereon to its detriment, (c) the representation or warranty was relied upon by the other Party to such other Party’s detriment, and (d) “Fraud” does not include constructive fraud or other claims based upon constructive knowledge, negligent misrepresentation, recklessness, or other similar theories.
“FTC” means the Federal Trade Commission.
“Fundamental Representations” means (a) with respect to each Seller, the representations and warranties of such Seller in Section 5.2, Section 5.3, Section 5.4, Section 5.5(a), Section 5.6(a), Section 5.7 and Section 5.9, (b) with respect to R2KLP, the representations and warranties of R2KLP in Section 6.2, Section 6.3, Section 6.4(a), Section 6.5(a), Section 6.6, and Section 6.19 and (c) with respect to each Purchaser, the representations and warranties of such Purchaser in Section 7.2, Section 7.3, Section 7.4, Section 7.5, Section 7.6, and Section 7.10.
“GAAP” means U.S. generally accepted accounting principles as in effect on the Execution Date.
“Governmental Body” 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, tribal, or other government or political subdivision thereof, or any quasi-governmental or private body exercising any administrative, executive, judicial, legislative, police, regulatory, taxing, importing, tribal, or other governmental or quasi-governmental authority.
“Hazardous Substances” means any pollutants, contaminants, toxic or hazardous or radioactive 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 (but excluding any Hydrocarbons and NORM).
“Hedges” means any future, hedge, derivative, swap, collar, put, call, cap, option, or other contract that is intended to benefit from, relate to, or reduce or eliminate the risk of fluctuations in interest rates, basis risk, or the price of commodities, including Hydrocarbons or securities, to which Sellers, their Affiliates (including the Company), or the Properties are bound, including the Hedges listed on Schedule 8.20.
“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.
“Imbalances” means any imbalance at the wellhead between the amount of Hydrocarbons produced from any of the Wells and allocated to the interests of the Company therein and the shares of production from the relevant Well to which the Company 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 the Company and the Hydrocarbons actually delivered on behalf of the Company at that point.
“Income Tax Contest” has the meaning set forth in Section 13.6.
“Income Taxes” means any income, franchise, capital gains and similar Taxes.
“Indebtedness” of any Person means, without duplication, (a) the principal of and accrued and unpaid interest, prepayment premiums or penalties, and fees and expenses in respect of indebtedness of such Person for borrowed money; (b) all obligations (contingent or otherwise) of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable incurred in the ordinary and usual course of business of normal day-to-day operations of the business consistent with past practice); (c) all capitalized lease obligations; (d) all obligations of the type referred to in clauses (a) through (c) of any Persons the payment of which such Person is responsible or liable, directly or indirectly, as obligor, guarantor, surety or otherwise; and (e) all obligations of the type referred to in clauses (a) through (d) of other Persons secured by any lien on any property or asset of such Person (whether or not such obligation is assumed by such Person).
“Indemnified Person” has the meaning set forth in Section 12.2(a).
“Indemnifying Person” has the meaning set forth in Section 12.2(a).
“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.
“Laws” means all Permits, statutes, rules, regulations, ordinances, orders, and codes of Governmental Bodies.
“Leases” has the meaning set forth in the definition of “Assets.”
“Marcellus Formation” means the interval from the stratigraphic equivalent of the top of the Marcellus Shale at 6,905 ft MD through to the stratigraphic equivalent of the top of the Onondaga Limestone at 7,305 ft MD, as such intervals are generally shown in the Bishop Unit 7 wellbore (API: 37115213110000) located in Susquehanna County; Auburn Township, Pennsylvania.
“Material Adverse Effect” means any event, occurrence, change, circumstance, development, state of facts, effect, or condition that, individually or in the aggregate, (a) has been, or would be reasonably likely to be, materially adverse to (I) the Sellers, any of the Company Interests or the Assets, in each case, taken as a whole and as currently owned and operated, or (II) for the Purchasers, the business, liabilities, financial condition, or results of operations of CHK Parent or
(b) materially and adversely affects the ability of the applicable Party to timely 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 or prospective change in applicable Laws or accounting standards or the interpretation or enforcement thereof; (ii) any change in economic, political, or business conditions or financial, credit, debt, or securities market conditions generally, including changes in interest rates, exchange rates, commodity prices, electricity prices, or fuel costs; (iii) any legal, regulatory, or other change generally affecting the industries, industry sectors, or geographic sectors (A) for the Sellers, of the Assets, or (B) for the Purchasers, of the CHK Parent, in each case, including any change in the prices of oil, natural gas, or other Hydrocarbon products 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 regulators); (v) any change resulting or arising from political, geopolitical, social, or regulatory conditions, including any outbreak, continuation, or escalation of any military conflict, declared or undeclared war, armed hostilities, civil unrest, public demonstrations, or acts of foreign or domestic terrorism or sabotage (including any cyber-attack or hacking), or the escalation of any of the foregoing; (vi) any epidemic, pandemic, or outbreak of disease (including, for the avoidance of doubt, COVID-19), or the escalation of any of the foregoing; (vii) any natural or manmade disasters or calamities, weather conditions including hurricanes, floods, tornados, tsunamis, earthquakes, and wild fires, or other force majeure events, or the escalation of any of the foregoing; (viii) any change resulting or arising from the taking of, or failure to take, any action by Sellers, the Company, or any of their respective Affiliates, required or otherwise expressly contemplated by this Agreement or consented to or requested by Purchasers; or (ix) any change resulting or arising from the taking of, or failure to take, any action by Purchasers, the Purchaser Group, or any of their respective Affiliates, required or otherwise expressly contemplated by this Agreement or consented to or requested by Sellers. For the avoidance of doubt, a Material Adverse Effect shall not be measured against any forward-looking statements, financial projections, or forecasts applicable to the Assets.
“Material Contracts” has the meaning set forth in Section 6.11(a).
“Measurement Date” has the meaning set forth in Section 7.15(a).
“Net Mineral Acres” means, as computed separately with respect to each Lease, (i) the number of gross acres in the land covered by such Lease, multiplied by (ii) the lessor’s undivided mineral interest in the Hydrocarbons in the Target Formation in such lands covered by such Lease, multiplied by (iii) the Company’s working interest in such Lease; provided, however, if items (i) and (ii) of this definition vary as to different areas within any tracts or parcels burdened by such Lease, a separate calculation shall be performed with respect to each such area.
“Net Revenue Interest” means, with respect to each Lease or Well (limited, however to the Target Formation with respect to each Lease and Well), the interest in and to all Hydrocarbons produced and saved or sold from or allocated to the Target Formation of such Lease or Well, in each case, after giving effect to all royalties, overriding royalties, net profits interests, or other similar burdens on or measured by production of Hydrocarbons.
“Non-Income Tax Contest” has the meaning set forth in Section 13.6.
“Non-Recourse Person” has the meaning set forth in Section 14.18.
“NORM” means naturally occurring radioactive material.
“Organizational Documents” means (a) with respect to any Person that is a corporation, its articles or certificate of incorporation or memorandum and articles of association, as the case may be, and bylaws, (b) with respect to any Person that is a partnership, its certificate of partnership and partnership agreement, (c) with respect to any Person that is a limited liability company, its certificate of formation and limited liability company or operating agreement, (d) with respect to any Person that is a trust or other entity, its declaration or agreement of trust or other constituent document, (e) in each case of the preceding clauses, all other similar documents, instruments, or certificates executed, adopted, or filed in connection with the creation, formation, or organization of any such Person, including any amendments thereto, and (f) with respect to any other Person, its comparable organizational documents.
“Outside Date” has the meaning set forth in Section 11.1(c).
“Party” and “Parties” have the meanings set forth in the Preamble of this Agreement.
“Pennsylvania Impact Fee” means the Pennsylvania unconventional gas well fee provided for in Pa. Cons. Stat. Ann. § 2302.
“Permits” means any permits, approvals or authorizations by, or filings with, Governmental Bodies.
“Permitted Encumbrances” means any or all of the following:
(i) royalties and any overriding royalties, net profits interests, production payments, reversionary interests, and other similar burdens on the production of Hydrocarbons to the extent that the net cumulative effect of such burdens does not (a) reduce the Company’s Net Revenue Interest with respect to the Target Formation for any Lease or Well below that shown in Exhibit A-1 or Exhibit A-2 (as applicable) for such Lease or Wells, (b) increase the Company’s Net Mineral Acres (due to an increased working interest) with respect to the Target Formation in any Lease or working interest in any Lease or Well above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) without, in each case, a proportionate increase in the Net Revenue Interest of the Company with respect to the Target Formation or (c) decrease the Company’s Net Mineral Acres with respect to the Target Formation in any Lease below that shown in Exhibit A-1;
(ii) 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, to the extent that the net cumulative effect of such instruments does not (a) reduce the Company’s Net Revenue Interest with respect to the Target Formation for any Lease or Well below that shown in Exhibit A-1 or Exhibit A-2 (as applicable)
(b) increase the Company’s Net Mineral Acres (due to an increased working interest) with respect to the Target Formation in any Lease or working interest in any Lease or Well above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) without, in each case, a proportionate increase in the Net Revenue Interest of the Company with respect to the Target Formation or (c) decrease the Company’s Net Mineral Acres with respect to the Target Formation in any Lease below that shown in Exhibit A-1;
(iii) Preferential Rights, Third Party consents to assignment or similar transfer restrictions; provided that, with respect to Preferential Rights and Specified Consent Requirements, the Sellers shall have complied with the provisions of Section 4.6;
(iv) liens for Taxes or assessments not yet delinquent or, if delinquent, being contested in good faith by appropriate actions;
(v) any (a) inchoate liens or charges constituting or securing the payment of expenses incurred incidental to maintenance, development, production, or operation of the Leases and Wells or for the purpose of developing, producing, or processing Hydrocarbons therefrom or therein, and (b) 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 (including any amounts being withheld as provided by Law), or if delinquent, being contested in good faith by appropriate actions;
(vi) all rights to consent by, required notices to, filings with, or other actions by Governmental Bodies in connection with the transactions contemplated hereby, if they are not required or customarily obtained in the region where the Assets are located prior to sale or conveyance, including Customary Post-Closing Consents;
(vii) 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;
(viii) easements, rights-of-way, restrictions, covenants, servitudes, Permits, surface leases, rights in respect of surface operations, and other encumbrances or rights that do not prevent or adversely affect operations as currently conducted on the Properties;
(ix) calls on production under existing Contracts;
(x) gas balancing and other production balancing obligations, and obligations to balance or furnish make-up Hydrocarbons under Hydrocarbon sales, gathering, processing, or transportation contracts;
(xi) all rights reserved to or vested in any Governmental Bodies (a) 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 Body or under any right, franchise, grant, license, or Permit issued or afforded by any Governmental Body, or (b) to terminate any right, franchise, grant, license, or Permit issued or afforded by such Governmental Body;
(xii) any lien, charge, or other encumbrance on or affecting the Assets that is discharged by Sellers or the Company at or prior to Closing;
(xiii) any lien or trust arising under worker’s compensation, unemployment insurance, pension or employment Laws, or regulations;
(xiv) the terms and conditions of the Leases (including any free gas arrangements under the Leases), including any depth limitations or similar limitations that may be set forth therein, to the extent that the net cumulative effect of such terms and conditions does not (a) reduce the Company’s Net Revenue Interest with respect to the Target Formation for any Lease or Well below that shown in Exhibit A-1 or Exhibit A-2 (as applicable) for such Lease or Well, (b) increase the Company’s Net Mineral Acres (due to an increased working interest) with respect to the Target Formation in any Lease or working interest in any Lease or Well above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) without, in each case, a proportionate increase in the Net Revenue Interest of the Company with respect to the Target Formation or (c) decrease the Company’s Net Mineral Acres with respect to the Target Formation in any Lease below that shown in Exhibit A-1;
(xv) the terms and conditions of the Contracts to the extent that the net cumulative effect of such instruments does not (a) reduce the Company’s Net Revenue Interest with respect to the Target Formation for any Lease or Well below that shown in Exhibit A-1 or Exhibit A-2 (as applicable) for such Lease or Well, (b) increase the Company’s Net Mineral Acres (due to an increased working interest) with respect to the Target Formation in any Lease or working interest in any Lease or Well above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) without, in each case, a proportionate increase in the Net Revenue Interest of the Company with respect to the Target Formation or (c) decrease the Company’s Net Mineral Acres with respect to the Target Formation in any Lease below that shown in Exhibit A-1;
(xvi) any matters shown on Schedule 3.4, Exhibit A-1, Exhibit A-2, Schedule 5.8, and Schedule 6.7, as applicable;
(xvii) any lien, mortgage, security interest, pledge, charge, or similar encumbrance resulting from Sellers’ or the Company’s conduct of business in compliance with this Agreement;
(xviii) the terms and conditions of the following agreements and contracts: (a) that certain Amended and Restated Participation Agreement dated May 2, 2019 between The Quillin-Morgan Trust, Robert Quillin & Vanessa Morgan, Trustees, The Robbs Family Trust, Edward E. Robbs & Belinda Robbs, Co-Trustees; The Schnerk Revocable Trust, George C. Schnerk, Trustee, Source Oil & Gas, LLC, Giana Resources, LLC, Denpeer Energy, LP, XYR Oil and Gas, LLC, Reach Petroleum, LLC, Unconventionals Natural Gas, LLC, Chief Exploration & Development LLC, Radler 2000 Limited Partnership, Tug Hill Marcellus, LLC, and Enerplus Resources (USA) Corporation, as amended by that certain First Amendment of Amended and Restated Participation Agreement dated October 13, 2020, (b) that certain Side Letter Agreement related to Amended and Restated Participation Agreement dated May 2, 2019 between The Quillin-Morgan Trust,
Robert Quillin & Vanessa Morgan, Trustees, The Robbs Family Trust, Edward E. Robbs & Belinda Robbs, Co-Trustees; The Schnerk Revocable Trust, George C. Schnerk, Trustee, Source Oil & Gas, LLC, Giana Resources, LLC, Denpeer Energy, LP, XYR Oil and Gas, LLC, Reach Petroleum, LLC, Unconventionals Natural Gas, LLC, Chief Exploration & Development LLC, Radler 2000 Limited Partnership, Tug Hill Marcellus, LLC, and Enerplus Resources (USA) Corporation, (c) that certain Participation Agreement between Seaspin Pty Ltd, as trustee of the Aphrodite Trust, Craig Ian Burton, as trustee of the CI Burton Family Trust, and eCorp Resource Partners I, LP, dated February 2006, as amended by that certain Amendment to Participation Agreement dated November 20, 2006, and (d) that certain Agreement related to Participation Agreement between Seaspin Pty Ltd, as trustee of the Aphrodite Trust, Craig Ian Burton, as trustee of the CI Burton Family Trust, and eCorp Resource Partners I, LP, dated March 15, 2008;
(xix) any Excluded Defects; and
(xx) any (a) lien, mortgage, security interest, pledge, charge or similar encumbrance in favor of, or held by, any member of the Purchaser Group, and (b) consent to assignment or similar transfer restriction in favor of, or held by, any member of the Purchaser Group.
“Person” means any individual, firm, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization, Governmental Body, or any other entity.
“Phase I Environmental Site Assessment” means an environmental site assessment performed pursuant to the American Society for Testing and Materials ASTM-1527-13, or any similar environmental assessment.
“Phase II Environmental Site Assessment” has the meaning set forth in Section 8.1(a).
“PIPA” means that certain Partnership Interest Purchase Agreement entered on the Execution Date by and among the Jan & Trevor Rees-Jones Revocable Trust, Rees –Jones Family Holdings, LP, Chief E&D Participants, LP, and Chief E&D (GP) LLC, as sellers (“Chief Parties”), and Purchasers, as purchasers, in relation to the sale and purchase of all interests in Chief E&D Holdings LP, Chief Exploration and Development LLC and Chief Oil & Gas LLC.
“Post-Closing Escrow Amount” has the meaning set forth in Section 10.4(b).
“Pre-Closing Tax Period” means any taxable period ending on or before the Closing Date and the portion of any Straddle Period up to and including the Closing Date.
“Pre-Effective Time Tax Period” means any taxable period ending before the Effective Time.
“Preferential Rights” has the meaning set forth in Section 4.6(a).
“Properties” has the meaning set forth in the definition of “Assets”.
“Property Costs” means (i) all operating and production expenses (including costs of insurance, rentals, shut-in payments and royalty payments; title examination and curative actions; and gathering, processing, and transportation costs in respect of Hydrocarbons produced from the Properties) and capital expenditures (including bonuses, broker fees, lease acquisition costs,
lease renewal costs, and lease extension costs (in each case, other than costs to correct, cure, and remedy any Title Defect), costs of drilling and completing wells, and costs of acquiring equipment) incurred in the ownership or operation of the Assets in the ordinary course of business and, where applicable, in accordance with the relevant operating or unit agreement or pooling order, if any, (ii) monthly Hedge settlement payments in the ordinary course of business, and (iii) Third Party overhead costs charged to the Assets under the applicable operating agreement; provided, however, “Property Costs” shall not include obligations and liabilities attributable to (a) personal injury or death, property damage, torts, breach of Contract claims, or violation of Law, (b) obligations related to the abandonment or plugging of wells, dismantling or decommissioning facilities, or closing pits and restoring the surface around such wells, facilities or pits, (c) the remediation of any Environmental Liabilities, including obligations to remediate any contamination of groundwater, surface water, soil, sediments, or personalty under applicable Environmental Laws, (d) the costs to correct, cure, and remedy any Title Defect or any Casualty Loss, (e) obligations to pay royalties, overriding royalties, net profits interests, or other similar burdens paid to Third Parties on or measured by production of Hydrocarbons relating to the Assets, including those held in suspense, (f) obligations with respect to any Imbalances associated with the Assets, (g) obligations with respect to Hedges (other than monthly Hedge settlement payments in the ordinary course of business), (h) claims for indemnification or reimbursement from Third Parties with respect to costs of the types described in the preceding clauses (a) through (h), (i) Asset Taxes, Income Taxes or Transfer Taxes, and (j) any and all general and administrative expenses (including corporate G&A) of the Company or Sellers.
“Public Announcement Restrictions” has the meaning set forth in Section 8.3(a).
“Public Health Measures” means any closures, “shelter-in-place,” “stay at home,” workforce reduction, social distancing, shut down, closure, curfew or other restrictions or any other Laws, orders, directives, guidelines or recommendations issued by any Governmental Body, the Centers for Disease Control and Prevention, the World Health Organization or any industry group in connection with COVID-19 or any other epidemic, pandemic or outbreak of disease, or in connection with or in response to any other public health conditions.
“Purchase Price Allocation Schedule” has the meaning set forth in Section 3.2.
“Purchaser” and “Purchasers” have the meaning set forth in the Preamble of this Agreement.
“Purchaser Delegated Matters” has the meaning set forth in Section 14.21(b).
“Purchaser Group” means Purchasers, their current and former Affiliates, and each of their respective officers, directors, employees, agents, advisors, and other Representatives.
“Purchaser Material Adverse Effect” means a Material Adverse Effect with respect to the Purchasers, taken as a whole.
“Purchaser Representative” has the meaning set forth in Section 14.21(b).
“R&W Insurance Policy” means that certain buyer-side representations and warranties insurance policy described in Section 8.11 in the name and for the benefit of Purchasers, their Affiliates, and their respective officers, directors, employees, and agents.
“R&W Insurer” means the insurer providing the R&W Insurance Policy.
“R2KLP” has the meaning set forth in the Preamble of this Agreement.
“R2KPA MIPA” means that certain Membership Interest Purchase Agreement entered on the Execution Date by and among Sellers and Purchasers in relation to the sale and purchase of all membership interests in Radler 2000 PA, LLC.
“Records” means the books, records, and files of the Company, to the extent in the possession or control of Sellers or their Affiliates, whether written or electronically stored, relating to the Assets, including: (i) land and title records (including abstracts of title, title opinions, and title curative documents); (ii) Contract files; (iii) operations, environmental, production, and accounting records; and (iv) production, facility, and well records and data; provided, however, that the term “Records” shall not include any of the foregoing items that are Excluded Records and any information that cannot, without unreasonable effort or expense that Purchasers do not agree to undertake or pay, as applicable, be separated from any files, records, maps, information, and data related to the Excluded Assets.
“Registration Rights Agreement” means the Registration Rights Agreement in the form attached hereto as Exhibit C to be executed and delivered at Closing by CHK Parent and the Sellers (and those Sellers’ designees whom Seller designates as a party thereto as identified in writing to Purchaser at least two Business Days prior to the Closing Date).
“Remediation” means with respect to an Environmental Defect, the implementation and completion of any remedial, removal, response, or other corrective actions, including monitoring, to the extent but only to the extent required under Environmental Laws to correct or remove such Environmental Defect.
“Remedy Deadline” has the meaning set forth in Section 4.2(b)(iv).
“Remedy Notice” has the meaning set forth in Section 4.2(b)(ii).
“Representatives” means (i) any prospective purchaser of a Party or an interest in a Party; (ii) partners, employees, officers, directors, members, equity owners, and counsel of a Party or any of its Affiliates or of any of the parties listed in subsection (i) above; (iii) any consultant or agent retained by a Party or the parties listed in subsection (i) or (ii) above; and (iv) any bank, other financial institution, or entity funding, or proposing to fund, such Party’s operations in connection with the Assets, including any consultant retained by such bank, other financial institution, or entity.
“Scheduled Closing Date” has the meaning set forth in Section 10.1.
“SEC Documents” has the meaning set forth in Section 7.16(a).
“Securities Act” has the meaning set forth in Section 7.10.
“Seller” and “Sellers” have the meaning set forth in the Preamble of this Agreement.
“Seller Delegated Matters” has the meaning set forth in Section 14.21(a)
“Seller Group” means Sellers, their current and former Affiliates (except, from and after the Closing, the Company), and each of their respective officers, directors, employees, agents, advisors, and other Representatives.
“Seller Representative” has the meaning set forth in Section 14.21(a)
“Specified Consent Requirement” means a requirement to obtain a lessor’s or other Person’s prior consent to assignment or transfer of an interest in a Company Interest or an Asset that (i) is triggered by the transactions contemplated by this Agreement and (ii) expressly provides that (a) any purported assignment or transfer in the absence of such consent first having been obtained is void, invalid, or unenforceable against such Person, (b) the Person holding the right may terminate the applicable Lease, Permit, Contract, or other instrument creating Sellers’ or the Company’s rights in the affected Company Interest or Property, or (c) the Person holding the right may impose additional conditions on the proposed assignee or transferee that involve the payment of money, the posting of collateral security, or the performance of other obligations by the assignee or transferee that would not be required in the absence of the transactions contemplated by this Agreement.
“Specified Midstream Contracts” means the Contracts set forth on Schedule 1.1.
“Stock Purchase Price” has the meaning set forth in Section 3.1(a).
“Straddle Period” means any Tax period beginning on or prior to and ending after the Closing Date.
“Subsidiary” means, with respect to any Person, any other Person of which at least 50% of the outstanding voting securities or other voting equity interests are owned, directly or indirectly, by such first Person.
“Surface Interests” has the meaning set forth in the definition of “Assets.”
“Suspense Funds” has the meaning set forth in Section 6.17.
“Target Formation” means (a) with respect to each Well, the currently producing formation of such Well, and (b) with respect to each Lease, to the extent not allocated to a Well, the Marcellus Formation.
“Tax Contest” has the meaning set forth in Section 13.6.
“Tax Return” means any return (including any information 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 Body with respect to any Tax.
“Taxes” means all federal, state, local, and foreign income, profits, franchise, sales, use, ad valorem, property, severance, production, excise, stamp, documentary, real property transfer or gain, gross receipts, goods and services, registration, capital, transfer, or withholding taxes or other assessments, duties, fees, or charges imposed by any Governmental Body, including any interest, penalties, or additional amounts that may be imposed with respect thereto.
“THI” has the meaning set forth in the Recitals of this Agreement.
“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 12.2(b).
“Title Arbitration Notice” has the meaning set forth in Section 4.4(b).
“Title Arbitrator” has the meaning set forth in Section 4.4(c).
“Title Benefit” means any right, circumstance, or condition that operates to (i) increase the Net Revenue Interest of the Company in the Target Formation of any Lease or Well as set forth on Exhibit A-1 or Exhibit A-2 (as applicable) above that shown on Exhibit A-1 or Exhibit A-2 (as applicable) with respect to such Lease or Well without a greater than proportionate increase in the Company’s working interest above that shown in Exhibit A-1 or Exhibit A-2 (as applicable) for the applicable Lease or Well, or (ii) in the case of any Lease, increase the Net Mineral Acres for such Lease in the Target Formation as set forth in Exhibit A-1 above that shown on Exhibit A-1 as a result of an increase in (a) the number of gross acres in the lands covered by such Lease or (b) the undivided percentage interest in oil, gas, and other minerals covered by the Lease in such lands.
“Title Benefit Amount” has the meaning set forth in Section 4.3(b).
“Title Benefit Notice” has the meaning set forth in Section 4.3(a).
“Title Benefit Property” has the meaning set forth in Section 4.3(a).
“Title Claim Date” has the meaning set forth in Section 4.2(a).
“Title Defect” means (i) an Environmental Defect or (ii) any lien, charge, encumbrance, obligation, defect, or other similar matter that causes the Company not to have Defensible Title in and to the Leases and the Wells, as applicable, as of the Title Claim Date or the Closing Date; provided, however, that the following shall not be considered Title Defects for any purpose of this Agreement (each an “Excluded Defect”):
(a) defects in the chain of title consisting of the failure to recite marital status in a document or omissions of successions of heirship or estate proceedings, unless Purchasers provide affirmative evidence that such failure or omission could reasonably be expected to result in another Person’s superior claim of title to the relevant Asset;
(b) defects arising out of lack of survey, unless a survey is expressly required by applicable Laws;
(c) defects based on a gap in the Company’s chain of title in the federal records as to federal Leases, the state’s records as to state Leases, or in the county records as to other Leases, unless, in the case of any of the foregoing, such gap is affirmatively shown to exist in the county records by an abstract of title, title opinion, or landman’s title chain or runsheet, which documents shall be included in a Title Defect Notice;
(d) defects as a consequence of cessation of production, insufficient production, or failure to conduct operations on any of the Properties held by production, or lands pooled, communitized, or unitized therewith, except to the extent the cessation of production, insufficient production, or failure to conduct operations could reasonably be expected to give rise to a right to terminate the Lease in question, evidence of which shall be included in a Title Defect Notice;
(e) defects based (i) solely on the lack of information in Sellers’ or the Company’s files, or (ii) solely on information in Sellers’ or the Company’s files, in each case, unless Purchasers provide evidence that such lack of information could reasonably result in another Person’s superior claim of title to the relevant Property;
(f) defects based solely on references to a document because such document is not in Sellers’ or the Company’s files;
(g) defects based on Tax assessment, Tax payment or similar records (or the absence of such activities or records);
(h) defects arising out of (i) lack of corporate or other entity authorization or (ii) failure to demonstrate of record proper authority for execution by a Person on behalf of a corporation, limited liability company, partnership, trust, or other entity, in each case, unless such lack of authorization or failure to demonstrate of record proper authority results in a Third Party’s actual and superior claim of title to the relevant property;
(i) defects that have been cured by the passage of time or such other means that would render such defect invalid according to applicable Law, or as to which the applicable Laws of limitations or prescription would bar any attack or claim;
(j) defects, encumbrances, or loss of title affecting ownership interests in formations other than the relevant Target Formation;
(k) defects based upon the failure to record any federal, state, or Indian Leases (or assignments thereof), in any applicable county records;
(l) defects that affect only which person has the right to receive royalty (or similar) payments (rather than the amount or the proper payment of such royalty payment);
(m) defects arising from prior oil and gas leases in the chain of title that are not surrendered of record, unless Purchasers affirmatively demonstrate that such prior oil and gas leases had not expired prior to the creation of the Asset in question;
(n) defects or irregularities arising out of the lack of recorded powers of attorney from any Person to execute and deliver documents on their behalf, unless affirmative evidence exists (and is provided) that the action was not authorized and results in a Person’s assertion of superior title;
(o) defects or irregularities resulting from the failure to record releases of liens, mortgages, security interests, pledges, charges, or similar encumbrances that have expired by their own terms;
(p) defects based on or arising out of the failure of the Company or any Third Party to enter into, be party to, or be bound by, pooling provisions, a pooling agreement, declaration or order, production sharing agreement, production allocation agreement, production handling agreement, or other similar agreement with respect to any horizontal Well that crosses more than one Lease or tract, to the extent that (i) such Well has been permitted by the applicable Governmental Body or (ii) the allocation of Hydrocarbons produced from such Well among such Leases or tracts is based upon the length of the “as drilled” horizontal wellbore open for production, take points, the total length of the horizontal wellbore, or other methodology that is intended to reasonably attribute to each such Lease or tract its share of such production; or
(q) defects arising from any Encumbrance created by a mineral owner, which has not been subordinated to the lessee’s interest.
“Title Defect Amount” has the meaning set forth in Section 4.2(d).
“Title Defect Deductible” has the meaning set forth in Section 4.5(b).
“Title Defect Notice” has the meaning set forth in Section 4.2(a).
“Title Defect Property” has the meaning set forth in Section 4.2(a).
“Title Defect Threshold” has the meaning set forth in Section 4.5(b).
“Transaction Documents” means this Agreement and any other documents executed in connection with this Agreement.
“Transaction Tax Deductions” means the Tax deductions related to or arising by reason of, without duplication, (i) the payment of Indebtedness contemplated by this Agreement (including any deferred financing costs) and (ii) any other amounts paid by (or treated for U.S. federal income Tax purposes as paid by) the Company at or prior to the Closing or otherwise economically borne by any of the Sellers that would not have been paid in the absence of the transactions contemplated by this Agreement.
“Transfer Taxes” means all transfer, documentary, sales, use, stamp, stamp duty, registration, recording, deed recording fee, value added, mortgage, license, lease, leasehold interest, filing, gross receipts, excise, stock, and conveyance taxes and other such Taxes and fees (including any penalties and interest, but excluding any Income Taxes) incurred in connection with the transactions contemplated by this Agreement and the documents to be delivered hereunder (or under any Transaction Document).
“Transition Services Agreement” means that certain Transition Services Agreement to be entered into pursuant to the PIPA between Rees-Jones Holdings LLC and Purchasers.
“Unadjusted Purchase Price” has the meaning set forth in Section 3.1(a).
“Units” has the meaning set forth in the definition of “Assets”.
“Wells” has the meaning set forth in the definition of “Assets”.
CHESAPEAKE ENERGY CORPORATION
an Oklahoma Corporation
SIGNIFICANT SUBSIDIARIES*
| | | | | | | | |
|
| Limited Liability Companies | | State of Organization |
| Chesapeake Operating, L.L.C. | | Oklahoma |
| Chesapeake Exploration, L.L.C. | | Oklahoma |
| Chesapeake Appalachia, L.L.C. | | Oklahoma |
| Chesapeake Energy Marketing, L.L.C. | | Oklahoma |
| Chesapeake Land Development Company, L.L.C. | | Oklahoma |
| Vine Oil & Gas Parent GP LLC | | Delaware |
| Brix Oil & Gas Holdings GP LLC | | Delaware |
| | |
| Partnerships | | State of Organization |
| Chesapeake Louisiana, L.P. | | Oklahoma |
| | |
| * In accordance with Regulation S-K Item 601(b)(21), the names of particular subsidiaries that, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary (as that term is defined in Rule 1-02(w) of Regulation S-X) as of the end of the year covered by this report have been omitted. |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-256214 and 333-260833) and Form S-8 (Nos. 333-253340 and 333-260834) of Chesapeake Energy Corporation (Successor) of our report dated February 24, 2022 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
February 24, 2022
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-256214 and 333-260833) and Form S-8 (Nos. 333-253340 and 333-260834) of Chesapeake Energy Corporation (Predecessor) of our report dated February 24, 2022 relating to the financial statements, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
February 24, 2022
CONSENT OF LAROCHE PETROLEUM CONSULTANTS, LTD.
We consent to the incorporation by reference in the Registration Statement on Form S-8 (File Nos. 333-253340 and 333-260834) and on Form S-3 (File Nos. 333-256214 and 333-260833) of Chesapeake Energy Corporation of our report for the Company and the references to our firm and said report, in the context in which it appears, in this Annual Report on Form 10-K of the Company for the year ended December 31, 2021 (this “Form 10-K”), which report is included as an exhibit to this Form 10-K.
| | | | | | | | |
| | LaRoche Petroleum Consultants, Ltd. By: LPC, Inc., as General Partner
|
| By: | /s/ William M. Kazmann |
| | William M. Kazmann |
| | President |
February 24, 2022
CERTIFICATION
I, Domenic J. Dell'Osso, Jr., certify that:
1.I have reviewed this Annual Report on Form 10-K of Chesapeake Energy Corporation;
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(s) 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(s) 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.
| | | | | | | | |
| February 24, 2022 | By: | /s/ DOMENIC J. DELL'OSSO, JR. |
| | Domenic J. Dell'Osso, Jr. |
| | President and Chief Executive Officer |
CERTIFICATION
I, Mohit Singh, certify that:
1.I have reviewed this Annual Report on Form 10-K of Chesapeake Energy Corporation;
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(s) 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(s) 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.
| | | | | | | | |
| February 24, 2022 | By: | /s/ MOHIT SINGH |
| | Mohit Singh |
| | Executive Vice President and Chief Financial Officer |
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Chesapeake Energy Corporation (the “Company”) on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Domenic J. Dell'Osso, Jr., President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1.The Report fully complies with the requirements of Section 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.
| | | | | | | | |
| February 24, 2022 | By: | /s/ DOMENIC J. DELL'OSSO, JR. |
| | Domenic J. Dell'Osso, Jr. |
| | President and Chief Executive Officer |
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Chesapeake Energy Corporation (the “Company”) on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mohit Singh, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1.The Report fully complies with the requirements of Section 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.
| | | | | | | | |
| February 24, 2022 | By: | /s/ MOHIT SINGH |
| | Mohit Singh |
| | Executive Vice President and Chief Financial Officer |
Exhibit 95.1
Mine Safety Disclosures
Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act") and Item 104 of Regulation S-K (17 CFR 229.104) require certain disclosures by companies required to file periodic reports under the Securities Exchange Act of 1934, as amended, that operate mines regulated under the Federal Mine Safety and Health Act of 1977 (as amended by the Mine Improvement and New Emergency Response Act of 2006, the "Mine Act").
Burleson Sand LLC ("Burleson Sand") is a wholly owned subsidiary of Brazos Valley Longhorn, L.L.C. (successor in interest to WildHorse Resource Development Corporation) ("WildHorse"), which is a wholly owned subsidiary of Chesapeake Energy Corporation. On January 4, 2018, Burleson Sand acquired surface and sand rights on approximately 727 acres in Burleson County, Texas to construct and operate an in-field sand mine to support WildHorse's exploration and development operations. Burleson Sand began operations in September 2018 and is subject to regulation by the federal Mine Safety and Health Administration ("MSHA") under the Mine Act. The MSHA inspects mining facilities on a regular basis and issues citations and orders when it believes a violation has occurred under the Mine Act.
The MSHA, upon determination that a violation of the Mine Act has occurred, may issue a citation or an order which generally proposes civil penalties or fines upon the mine operator. Citations and orders may be appealed with the potential of reduced or dismissed penalties.
The table below reflects citations, orders, violations and proposed assessments issued to Burleson Sand by MSHA during the three-month period ended December 31, 2021. Due to timing and other factors, the data may not agree with the mine data retrieval systems maintained by MSHA at www.MSHA.gov.
| | | | | | | | |
| | Burleson Sand Mine 41-05369 |
| | | |
| Section 104 significant and substantial citations | | — | |
| Section 104(b) orders | | — | |
| Section 104(d) citations and orders | | 2 | |
| Section 110(b)(2) violations | | — | |
| Section 107(a) orders | | — | |
| Total dollar value of MSHA assessments proposed | | $ | — | |
| Total number of mining related fatalities | | — | |
| Received notice of pattern of violations under section 104(e) | | No |
| Received notice of potential to have pattern under section 104(e) | | No |
| Legal actions pending as of last day of period | | — | |
| Legal actions initiated during period | | — | |
| Legal actions resolved during period | | None |
February 4, 2022
Ms. Effie Ashu
Director of Reserves
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, OK 73118
Dear Ms. Ashu:
At your request, LaRoche Petroleum Consultants, Ltd. (LPC) has estimated the proved reserves and future net cash flow, as of December 31, 2021, to the Chesapeake Energy Corporation (CHK) interest in certain properties located in the United States. The work for this report was completed as of the date of this letter. This report was prepared to provide CHK with U.S. Securities and Exchange Commission (SEC) compliant reserve estimates. It is our understanding that the properties evaluated by LPC comprise ninety and nine tenths' percent (90.9%) of CHK’s proved reserves. We believe the assumptions, data, methods, and procedures used in preparing this report, as set out below, are appropriate for the purpose of this report. This report has been prepared using constant prices and costs and conforms to our understanding of the SEC guidelines, reserves definitions, and applicable financial accounting rules.
Summarized below are LPC’s estimates of net reserves and future net cash flow. Future net cash flow is after deducting estimated production and ad valorem taxes, operating expenses, and future capital expenditures but before consideration of federal income taxes. The discounted cash flow values included in this report are intended to represent the time value of money and should not be construed to represent an estimate of fair market value. We estimate the net reserves and future net cash flow to the CHK interest, as of December 31, 2021, to be:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Reserves | | Future Net Cash Flow (M$) | |
| | Oil | | Gas | | NGL | | | | Present Worth | |
| Category | | (MB) | | (MMCF) | | (MB) | | Total | | at 10% | |
| Proved Developed | | | | | | | | | | | |
| Producing | | 160,668 | | 3,977,988 | | 59,312 | | $15,417,747 | | $9,297,084 | |
| Non-Producing | | 0 | | 12,285 | | 0 | | 27,225 | | 13,168 | |
| Proved Undeveloped | | 0 | | 3,392,922 | | 0 | | 6,397,707 | | 3,855,827 | |
| | | | | | | | | | | |
Total Proved(1) | | 160,668 | | 7,383,195 | | 59,312 | | $21,842,679 | | $13,166,079 | |
| | | | | | | | | | | |
(1) The total proved values above may or may not match those values on the total proved summary page that follows this letter due to rounding by the economics program. | |
The CHK reserves presented above are for the Business Units designated by CHK’s internal naming system. These Business Units include Haynesville, Marcellus, Eagle Ford and Powder River Basin Business Units.
2435 N Central Expressway, Suite 1500 ● Richardson, TX 75080 ● Phone (214) 363-3337 ● Fax (214) 363-1608
The oil reserves include crude oil, condensate, and natural gas liquids (NGL). Oil and NGL reserves are expressed in barrels which are equivalent to 42 U.S. gallons. Gas reserves are expressed in thousands of standard cubic feet (Mcf) at the contract temperature and pressure bases.
The estimated reserves and future net cash flow shown in this report are for proved developed producing reserves and, for certain properties, proved developed non-producing and proved undeveloped reserves. This report does not include any value that could be attributed to interests in undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated.
Estimates of reserves were prepared using standard geological and engineering methods generally accepted by the petroleum industry. The reserves in this report have been estimated using deterministic methods. The method or combination of methods utilized in the evaluation of each reservoir included consideration of the stage of development of the reservoir, quality and completeness of basic data, and production history. Recovery from various reservoirs and leases was estimated after consideration of the type of energy inherent in the reservoirs, the structural positions of the properties, and reservoir and well performance. In some instances, comparisons were made to similar properties where more complete data were available. We have used all methods and procedures that we considered necessary under the circumstances to prepare this report. We have excluded from our consideration all matters to which the controlling interpretation may be legal or accounting rather than engineering or geoscience.
The estimated reserves and future net cash flow amounts in this report are related to hydrocarbon prices. Historical prices through December 2021 were used in the preparation of this report as required by SEC guidelines; however, actual future prices may vary significantly from the SEC prices. In addition, future changes in environmental and administrative regulations may significantly affect the ability of CHK to produce oil and gas at the projected levels. Therefore, volumes of reserves actually recovered and amounts of cash flow actually received may differ significantly from the estimated quantities presented in this report.
Benchmark prices used in this report are based on the twelve-month, unweighted arithmetic average of the first day of the month price for the period January 2021 through December 2021. Gas prices are referenced to a Henry Hub price of $3.60 per MMBtu, as posted by Platts Gas Daily, and are adjusted for energy content, transportation fees, and regional price differentials. Oil prices are referenced to a Cushing West Texas Intermediate crude oil price of $66.56 per barrel, and are adjusted for gravity, crude quality, transportation fees, and regional price differentials. NGL prices are based on a Mt. Belview composite product price of $35.81 per barrel, as published in the OPIS daily price bulletin, adjusted by area for composition, quality, transportation fees, and regional price differentials. These reference prices are held constant in accordance with SEC guidelines. The weighted average prices after adjustments over the life of the properties are $63.41 per barrel for oil, $2.52 per Mcf for gas, and $27.65 per barrel for NGL.
Lease and well operating expenses are based on values reported by CHK and reviewed and confirmed by LPC at the Business Unit level. Expenses for the properties operated by CHK include direct lease and field level costs as well as allocated overhead costs. Leases and wells operated by others include all direct expenses as well as general and administrative overhead costs allowed under the specific joint operating agreements. Lease and well operating costs are held constant in accordance with SEC guidelines.
Capital costs and timing of all investments have been provided by CHK and are included as required for workovers, new development wells, and production equipment. CHK has represented to us that
LaRoche Petroleum Consultants, Ltd.
they have the ability and intent to implement their capital expenditure program as scheduled. CHK’s estimates of the cost to plug and abandon the wells net of salvage value are included and scheduled at the end of the economic life of individual properties. These costs are also held constant.
LPC has made no investigation of possible gas volume and value imbalances that may have resulted from the overdelivery or underdelivery to the CHK interest. Our projections are based on the CHK interest receiving its net revenue interest share of estimated future gross oil, gas, and NGL production.
Technical information necessary for the preparation of the reserve estimates herein was furnished by CHK or was obtained from state regulatory agencies and commercially available data sources. No special tests were obtained to assist in the preparation of this report. For the purpose of this report, the individual well test and production data as reported by the above sources were accepted as represented together with all other factual data presented by CHK including the extent and character of the interest evaluated.
An on-site inspection of the properties has not been performed nor has the mechanical operation or condition of the wells and their related facilities been examined by LPC. In addition, the costs associated with the continued operation of uneconomic properties are not reflected in the cash flows.
The evaluation of potential environmental liability from the operation and abandonment of the properties is beyond the scope of this report. In addition, no evaluation was made to determine the degree of operator compliance with current environmental rules, regulations, and reporting requirements. Therefore, no estimate of the potential economic liability, if any, from environmental concerns is included in the projections presented herein.
The reserves included in this report are estimates only and should not be construed as exact quantities. They may or may not be recovered; if recovered, the revenues therefrom and the costs related thereto could be more or less than the estimated amounts. These estimates should be accepted with the understanding that future development, production history, changes in regulations, product prices, and operating expenses would probably cause us to make revisions in subsequent evaluations. A portion of these reserves are for behind-pipe zones, undeveloped locations, and producing wells that lack sufficient production history to utilize performance-related reserve estimates. Therefore, these reserves are based on estimates of reservoir volumes and recovery efficiencies along with analogies to similar production. These reserve estimates are subject to a greater degree of uncertainty than those based on substantial production and pressure data. It may be necessary to revise these estimates up or down in the future as additional performance data become available. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geological data; therefore, our conclusions represent informed professional judgments only, not statements of fact.
The results of our third-party study were prepared in accordance with the disclosure requirements set forth in the SEC regulations and intended for public disclosure as an exhibit in filings made with the SEC by CHK.
CHK makes periodic filings on Form 10-K with the SEC under the 1934 Exchange Act. Furthermore, CHK has certain registration statements filed with the SEC under the 1933 Securities Act into which any subsequently filed Form 10-K is incorporated by reference. We have consented to the incorporation by reference in the registration statements on Form S-3 and Form S-8 of CHK of the references to our name as well as to the references to our third-party report for CHK which appears
LaRoche Petroleum Consultants, Ltd.
in the December 31, 2021 annual report on Form 10-K and/or 10-K/A of CHK. Our written consent for such use is included as a separate exhibit to the filings made with the SEC by CHK.
We have provided CHK with a digital version of the original signed copy of this report letter. In the event there are any differences between the digital version included in filings made by CHK and the original signed report letter, the original signed report letter shall control and supersede the digital version.
The technical persons responsible for preparing the reserve estimates presented herein meet the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the “Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information” promulgated by the Society of Petroleum Engineers. The technical person primarily responsible for overseeing the preparation of reserves estimates herein is William M. Kazmann. Mr. Kazmann is a Licensed Professional Engineer in the State of Texas who has 47 years of engineering experience in the oil and gas industry. Mr. Kazmann earned his Bachelor of Science and Master of Science degrees in Petroleum Engineering from the University of Texas at Austin and has prepared and overseen preparation of reports for public filings for LPC for the past 26 years. LPC is an independent firm of petroleum engineers, geologists, and geophysicists and is not employed on a contingent basis. Data pertinent to this report are maintained on file in our office.
| | |
| Very truly yours, |
|
LaRoche Petroleum Consultants, Ltd.
State of Texas Registration Number F-1360
By LPC, Inc. General Partner |
|
| /s/ Joe A. Young |
Joe A. Young, Vice President
Licensed Professional Engineer
State of Texas No. 62866 |
| | |
| /s/ William M. Kazmann |
William M. Kazmann, President
Licensed Professional Engineer
State of Texas No. 45012 |
JAY:mam
Job # 21-940
LaRoche Petroleum Consultants, Ltd.
