ACQUISITION OF XTO OIL AND NATURAL GAS PROPERTIES

9 Months Ended

Sep. 30, 2021

Acquisition Of Xto Oil And Natural Gas Properties

ACQUISITION OF XTO OIL AND NATURAL GAS PROPERTIES

5.       ACQUISITION OF XTO OIL AND NATURAL GAS PROPERTIES

On March 12, 2021 the Company, through its wholly owned subsidiary Empire New Mexico, entered into a purchase and sale agreement with XTO Holdings, LLC (a subsidiary of ExxonMobil) (the “Seller’) to acquire, among other things, certain oil and natural gas properties in New Mexico. The purchase price was $17,800,000 subject to customary adjustments. The Company wired a deposit of $1,780,000 to the Seller on March 12, 2021. The transaction closed on May 14, 2021 with an effective date of January 1, 2021.

The XTO acquisition has been assessed under the screen test for business combinations under FASB ASC 805, Business Combinations (“ASC 805”). The XTO acquisition met the screen test and has been accounted for as an asset acquisition using the acquisition method of accounting. Under the accounting for asset acquisitions, the acquisition is recorded using a cost accumulation and allocation model under which the cost of the acquisition is allocated on a relative fair value basis to the assets acquired and liabilities assumed. Acquisition-related transaction costs are capitalized as a component of the cost of the assets acquired. 

As a condition of the sale, the Company purchased a $5,000,000 performance bond for the benefit of the seller for proper plugging, abandonment and restoration of the purchased properties. The performance bond is collateralized with a letter of credit in the amount of $3,750,000. To effect the letter of credit, the Company entered into a Promissory Note Agreement with Bank of Oklahoma, NA in the amount of $3,750,000 which is due on demand with an interest rate established by the Bank, currently at 4%. The Promissory Note, and associated letter of credit, is collateralized with a bank certificate of deposit in a corresponding amount. In addition, the Company is required to deposit $100,000 per month, up to $1,250,000, into a sinking fund to be held by the surety.  Subsequent amendments increased the monthly payment amounts to $160,000 in response to additional bonding requested by the State of New Mexico.

The following table sets forth the Company’s preliminary purchase price allocation:

Preliminary Fair Value of Assets Acquired
Inventory of oil in tanks		318,546
Vehicles		179,156
Asset retirement obligation		6,117,709
Oil and natural gas properties		17,662,402
Total Preliminary Assets Acquired	$	24,277,813
Preliminary Fair Value of Liabilities Assumed
Royalty suspense		290,325
Asset retirement obligations		6,117,709
Total Preliminary Liabilities Assumed	$	6,408,034
Purchase Price	$	17,869,779

The value of oil and gas properties was based on an allocation of the purchase price which included assignment of values to the other identifiable assets acquired and liabilities assumed. The value of inventory, vehicles, and royalty suspense was based on their relative fair values as described above.

The fair value of asset retirement obligations are included in proved oil and natural gas properties with a corresponding liability in the table above. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs.