Farm-Out Agreement Case
You were recently hired to work for Bacchus Oil and Gas Company, Inc. Bacchus is a Delaware corporation headquartered in Dallas, Texas.
Almost three years ago, Bacchus acquired a three-year Primary Term Lease on a 3,000 acre tract in Maverick County, Texas. This tract is affectionately known as the “Probably Isn’t Anything There” Lease. Bacchus acquired this property when oil prices were high and paid a $2,000 per acre Bonus for the Lease. With the fall in oil prices, this lease has been overlooked and will expire in 3 months. If the Lease expires, Bacchus will lose all of its investment. Bacchus has no funds available to put into drilling a well on the Lease, but would like to have the property drilled to test its potential and, extend the term of the Lease.
As a rising star in the organization, Bacchus has requested you Farm-out 50% of the working interest in this lease to a party willing to drill, and pay 100% of the costs to drill, complete and produce a horizontal well (with a 4,000ft Lateral) sufficient to test the Eagle Ford Formation (usually found at a depth of 8,000 ft Total Vertical Depth) on the property. It is anticipated this well will cost $6MM.
The well must be drilled as close to the Southwest corner of the Lease as regulations permit, and must be commenced no later than 3 months from today to extend the Lease. If this well is unable to be drilled, completed and produced as provided above, the Farm-In party shall be allowed (but not required) to drill as many substitute wells as desires at locations on the lease of its choosing provided it has maintained the Lease in effect.
You have secured the “Better Luck Next Time Corporation” an oil and gas company incorporated in Arkansas but headquartered in Oklahoma, who has agreed to Farm-In to the “Probably Isn’t Anything There” Lease and drill the test well in accordance with the above terms. By drilling and producing this well, Better Luck Next Time will earn a 50% interest in the Lease. Bacchus will keep the remaining 50% interest in the Lease. You are concerned that Better Luck Next Time may not have the financial resources to drill this well on time, but they are the only party interested in this transaction.
Your task is two-fold.
First, you must draft the first version of the Farm-Out Agreement (10 pages or less, double-spaced) which you recommend be used, consistent with the above terms, to bring the “Better Luck Next Time” company into the “Probably Isn’t Anything There” Lease.
Information and materials contained in the Lectures, as well as the Textbook and Forms Manual books, is to be used to assist you in drafting your Farm-Out Agreement. Templates/Forms found in the books must be modified to fit this situation. Exhibits needed for your Farm-Out Agreement must be appropriately referenced in the Agreement, but are not to be completed or attached to the Agreement as part of this assignment.
Second, write a brief (1-page) Memo to your boss describing your efforts to Farm-out this acreage, your concerns about Better Luck Next Time’s ability to meet its obligations under the Farm-Out Agreement and the steps you have taken in the Agreement to reduce your company’s risk if this company defaults on its obligations Finally, if you feel any essential facts or information concerning the transaction is required to properly complete the Farm-Out Agreement, please specifically describe the information you feel is needed in your memo to your boss.