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Exhibit B
New Management Services Agreement Term Sheet
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New Management Services Agreement (the “Agreement”) Term Sheet1
Parties:
Ascent Resources Marcellus Holdings, Inc. (the “Company”) and its
subsidiaries (the “Company Entities”)
Ascent Resources Management Services, LLC (the “Manager”)
Business Plan:
Upon the approval of an Annual Budget by the post-bankruptcy
Company’s Board of Directors (the “Board”), the Manager will
implement a one-rig drilling plan and then subsequently work
according to the annual budget then in effect (the “Annual Budget”), as
timely approved by the Board in consultation with the Manager, to
provide Services (as defined below) in connection with the
management of the Company’s oil and gas properties (the “Properties”)
which will be subject to further approval by the Board in the event that:
(i) the drilling and completion capital expenditure exceeds the Annual
Budget therefor by 10%; (ii) the land and acreage acquisition amount
exceeds the Annual Budget therefor by 10% or (iii) the expenditure on
any line item of the Annual Budget exceeds the Annual Budget therefor
by 10%; provided that any amendment, modification or supplement to
the Annual Budget may not increase the liabilities and obligations of
the Manager in any material respect or materially increase the scope or
amount of Services to be provided by Manager, without Manager’s
prior written consent.
Services:
“Services” shall mean, on behalf of the Company Entities, the
following services in connection with the then-effective Annual
Budget, the Sale and the ongoing business of the Company Entities:
1. maintaining certain operational and financial performance targets
as set forth in the then-effective Annual Budget and to be mutually
agreed upon by the Board and the Manager, subject to market
conditions. At a minimum, the performance targets will include
reasonable variances around production, operating cash costs and
capital expenditures;
2. identifying and negotiating potential acquisitions of oil and gas
working interests for the Company Entities; provided that the
Manager shall not consummate any acquisitions not contemplated by
the then-effective Annual Budget during the period of such Annual
Budget, without the prior written consent of the Board, other than (a)
acquisitions not exceeding $5 million in the aggregate and (b) acreage
trades in the ordinary course of business;
3. arranging for the Company Entities’ procurement and purchase
of materials, equipment and supplies and contracting for labor and
services in connection with the drilling, completion and production of
1
Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Plan.
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oil and natural gas assets in the ordinary course of business and on a
competitive pricing basis;
4. management of preparation of any engineering design and
specifications necessary for development and operation of the
Properties;
5. finance and accounting administration, management of
preparation of all operational plans, government agency reporting,
audits, third party reserve reports, accounts payable, joint interest
billing accounting, accounts receivable, revenue accounting, cash and
financial account management (including the opening, closing and
management of bank and securities accounts), treasury risk
management, payroll and tax accounting and compliance functions
associated with each Company Entity’s business;
6. tax administration, including ad valorem taxes, sales and use
taxes, and severance and production taxes;
7. applying for all necessary licenses, permits, certificates, surety
bonds, orders, approvals and authorizations of any governmental
entity necessary in connection with the operations of the Company
Entities;
8. management of the operation, maintenance and repair of the
Company Entities’ existing assets and infrastructure, including
ordinary course procedures to maintain production;
9. supervision and administration of material contracts, easements
and covenants which may have been entered into in connection with a
Company Entity’s business, including payment on behalf of each
Company Entity of amounts due or payable thereunder;
10. interviewing and negotiating contracts for outside professionals,
contractors, consultants, accountants and attorneys as may be
necessary from time to time in the ordinary course of business;
11. maintenance of each Company Entities’ books and records;
12. maintenance of material lease, ownership, contract and property
records and databases relating to the business of the Company
Entities and their assets;
13. managing matters relating to the operation and maintenance of
properties, health, safety, security and the environment;
14. administering royalty payments, division orders and title changes
and providing indirect and routine legal services; provided that, other
than land-related litigation necessary for the formation of drilling
units in West Virginia, the Manager shall not commence, continue,
resolve or settle, in any manner or in any place, any existing or
potential cause of action, litigation or other proceeding in excess of
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$2 million without the Board’s prior written consent;
15. notwithstanding directors and officers insurance (which will be
procured, administered and maintained by the Board), procuring,
administering and maintaining the insurance coverages required by
the Agreement and such other coverages as may be reasonably
necessary from time to time (as determined by the Manager in good
faith and permitted by the then-effective Annual Budget) in the
ordinary course of business;
16. personnel and staffing decisions, including but not limited to
hiring, termination, compensation and benefits as permitted by the
then-effective Annual Budget;
17. managing the marketing of production from the Company
Entities’ oil and natural gas wells;
18. providing quarterly updates to the Board on key performance
metrics such as production, EBITDAX, LOE, and capital
expenditures compared to the then-effective Annual Budget;
19. facilitating the Sale;
20. recommending, and if approved by the Company2, reasonably
assisting the Company Entities’ efforts to raise funding whether by
way of debt or otherwise, including assisting in the preparation,
review, distribution and promotion of any offering memorandum in
respect thereof and
21. providing other management services reasonably required to
support the ongoing business of the Company Entities.
Standards of
Performance:
In performing the Services:
(a) The Manager will act at all times in good faith;
(b) The Manager will protect and promote the Company Entities’
interests and shall ensure that it shall devote sufficient resources to the
Company Entities and shall use its reasonable best efforts to complete
the Services on a timely basis;
(c) The Manager will ensure that any proposed transaction between the
Company Entities and an affiliate of the Manager is presented to the
Board for approval, and is on terms no less favorable than those that
could be obtained from an unaffiliated third party; provided that the
Board may approve specific exceptions on a case by case basis;
(d) The Manager will ensure that it and any individual, company,
partnership (whether general or limited), limited liability company,
corporation, trust, estate, association, nominee, governmental entity or
2
For purposes of this Term Sheet, “approval by the Company” means approval by the Board or an officer of the
Company authorized by the Board.
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other entity (each, a “Person”) who will perform any portion of the
Services have all legal, business and professional certifications, licenses
and consents required to perform the Services;
(e) The Manager will in all material respects observe all laws
applicable to it, the Company Entities, the Properties or the Services;
(f) The Manager will use reasonable best efforts to comply with all
policies, procedures, directives, timelines and schedules of the
Company Entities related to the Properties and the Services and
(g) The Manager will act as a reasonably prudent operator and in a
manner that meets or exceeds prevailing industry practices in the
Marcellus play in West Virginia.
Initial Term:
Subject to the Termination Rights of the Manager and the Company
detailed herein below, the Agreement will have an initial term of one
year commencing on the Effective Date (the “Initial Term”). After the
Initial Term, the Agreement will be renewed on an annual basis unless
either Party delivers a termination notice not less than 90 days prior to
the conclusion of the applicable term. The Agreement shall not renew
past the third anniversary of the Effective Date unless the Company
Entities and the Manager reach a written agreement on the fees and
economic terms in connection with provision of the Services. The
Agreement may also be terminated as provided under the “Termination
Right (Not For Cause)” or “Termination For Cause” sections below.
Company Expenses: The Manager will be reimbursed for all costs and expenses incurred
pursuant to the Annual Budget and any Board approved expenditures
exceeding the Annual Budget as provided under the “Business Plan”
section above, in each case which shall cover all out of pocket expenses
of the kind described on Exhibit 1 incurred by it in connection with
providing the Services. The Manager shall provide the Company with
an invoice on a regular basis, which shall be payable on demand to the
Manager, for the general and administrative costs and other expenses
incurred by the Manager on behalf of the Company Entities in respect
of the performance of the Services; provided that no such invoice shall
be paid later than the timeframe indicated thereon and no costs or
expenses payable pursuant to such invoice may include a profit
component.
Cost Allocation:
To the extent reasonably practicable, when allocating the general and
administrative costs and expenses, the Manager shall allocate to the
Company all general and administrative costs that are directly
attributable to the Services (the “Direct SG&A”), including costs and
expenses of the type described in Exhibit 1, (a) of any of the Manager’s
personnel that are working for the Company Entities, including any
field personnel, (b) of any third party service providers for the
Company Entities or (c) associated with reductions in workforce
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attributable to a sale of the Company Entities’ assets. For all other
remaining general and administrative costs and expenses of the type
described in Exhibit 1 (the “Allocated SG&A”), the percentage
allocated to the Company shall be calculated using a formula based on
the following indicative factors and weighted percentages:
Records:
Indicative Factor
Weighted Percentage
Total Net Acreage (developed
and undeveloped)
20
Total Production in Mcfe
20
SEC Reserves Volumes
10
SEC Reserves PV 10
10
Rig Count
10
Frac Crew Count
10
Drilling and Completion
Capital Expenditures
20
The Manager will maintain complete and accurate books and records in
connection with all aspects of its performance of the Services in
accordance with generally accepted accounting principles in the United
States applied on a consistent basis, including financial statements of
the Company, monthly reports summarizing expenses incurred by the
Manager related to the Services, and records and books of account with
respect to all operational, financial, sales, general and administrative
documents related to the Services. Such records and books of account
will be retained in digital format for a period of at least one year after
the termination of the Agreement.
The Manager shall provide quarterly unaudited financial statements 60
days after the quarter end and annual audited financial statements 90
days after year end.
Operating
Agreements:
The operation of the Company Entities’ assets will be governed by and
subject to the terms of the applicable operating agreements, gas
balancing agreements and participation agreements (collectively, the
“Operating Agreements”). As part of the Services, the Manager shall
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perform all services under the Operating Agreements where any of the
Company Entities are designated as the operator, including those
necessary to drill wells, install facilities and otherwise perform the
activities contemplated by the Operating Agreements.
If either Party delivers a notice of termination, the Company will have
the option to retain any field personnel dedicated solely to the assets of
the Company and keep operating contracts in place. The Company
shall be directly liable for any severance obligations of any field
personnel not retained.
Non-Exclusivity:
The duties of the Manager shall not preclude the Manager from
providing services of a like nature to any of the ARO Entities (as
defined below) and the Manager shall not be liable to account to the
Company for any amount earned from any such transaction or the
provision of any such services, provided that nothing herein shall
diminish the obligations of the Manager set forth under the “Standards
of Performance.”
ARMS NonCompete:
In the event of either a termination by the Manager (other than in the
event of a sale of all, or substantially all, of the Company’s assets or
equity interests of the Company) or a Termination for Cause (as defined
below), for the 18-month period following delivery of the notice of
termination, the Manager shall not, and shall cause Ascent Resources
Operating, LLC or its directly or indirectly wholly owned subsidiaries
(the “ARO Entities”) to not, without obtaining the prior written consent
of the Company, negotiate to acquire or acquire an oil and gas lease or
an interest in an oil and gas lease (including but not limited to any “top
lease”) covering any of the lands (i) in units in which the Company
holds record title to an oil and gas lease or other interest in an oil and
gas lease, mineral interest, royalty interest or working interest, as of the
Effective Date, (ii) in which the Company operates or maintains an oil
or natural gas well, as of the Effective Date, or (iii) which are pooled
with or contiguous to any such lands as described in subparts (i) and (ii)
above (collectively, the “Covered Land”). If any real property interest is
acquired by an ARO Entity in breach of the foregoing, the Company
shall have an option for a 30-day period after the Company acquires
actual knowledge of such fact (the “Option Period”) within which to
purchase and acquire any such property or interest for an amount equal
to the acquisition costs incurred to acquire such interest by the
applicable ARO Entity. The closing of such acquisition by the Company
shall occur not later than the fifth business day following expiration of
the Option Period. The limitation set forth in this clause shall not apply
to the acquisition by any ARO Entity of (i) any Person that directly or
indirectly owns any Covered Land; provided that the Covered Land
directly or indirectly owned by such Person does not constitute all or
substantially all of such Person’s assets and (ii) any portfolio where
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Covered Land constitutes no more than 15% of such portfolio.
Indemnities:
The Agreement will include standard mutual indemnification provisions.
D&O Insurance
The Board shall procure its own director and officer insurance.
Termination Right
(Not For Cause):
The Company can terminate the Agreement upon 90 days written
notice to the Manager. If the Company exercises its Termination Right
(Not For Cause):
(i) the Manager shall provide administrative and management
services to the Company until the termination date in accordance with
the terms and conditions hereof;
(ii) no further consideration shall be granted beginning on the
termination date in accordance with Exhibit 2 and the Manager shall
retain all Consideration (as defined in the Disclosure Statement)
granted through the termination date;
(iii) the Company shall have the option to repurchase the New ARM
Holdings Warrants granted as of the termination date, pursuant to the
terms of the New Warrant Agreement and
(iv) the Company shall have the option to retain any field personnel
dedicated solely to the Properties.
The Manager can terminate the Agreement upon 120 days written
notice to the Company. If the Manager exercises its Termination Right
(Not For Cause):
(i) the Manager shall provide administrative and management
services to the Company until the termination date in accordance with
the terms and conditions hereof;
(ii) the Company shall use best efforts to accelerate a management
transition at such time;
(iii) each Party shall bear their respective direct costs of transition, it
being understood that any new infrastructure costs required by the
Company will be borne by the Company;
(iv) no further Consideration shall be granted, any portion of the
Consideration not yet granted shall be forfeited and previously
granted Consideration shall be subject to clawback, in each case,
upon the delivery of the Manager’s notice to terminate the Agreement
and in accordance with Exhibit 2 and
(v) the Company shall have the option to retain any field personnel
dedicated solely to the Properties.
Termination For
Cause:
The Company may, at any time upon resolution of the Board, terminate
the Agreement for Cause by providing five days’ prior written notice to
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the Manager; provided that at the time of the occurrence of the Cause
(as defined below), the Company shall have (i) met its payment
obligations under the Agreement to the Manager and (ii) sufficient
capital and resources to perform the Services in accordance with the
then-effective Annual Budget. The Board shall use commercially
reasonable efforts to engage in good faith discussions with the Manager
during the 20 day period following receipt of the written notice by the
Manager.
If the Company exercises its Termination Right For Cause:
(i) the Manager shall provide administrative and management services
to the Company until the termination date in accordance with the terms
and conditions hereof;
(ii) no further Consideration shall be granted, any portion of the
Consideration not yet granted shall be forfeited and previously granted
Consideration shall be subject to clawback, in each case, upon the
delivery of the Company’s notice to terminate the Agreement and in
accordance with Exhibit 2 and
(iii) the Company shall have the option to retain any field personnel
dedicated solely to the Properties.
“Cause” means either: (a) the Manager’s failure to perform, or gross
negligence in performing, the Services, and such failure or gross
negligence continues for 20 days after receipt of written notice (stating
in reasonable detail the nature of the breach) from the Company or (b)
fraud or willful misconduct by the Manager.
Transition Costs:
Upon delivery of the notice of termination and until the termination
date, at the Company’s request, the Manager shall cooperate in good
faith and take all commercially reasonable steps to transition the
administration and management of the Company Entities, including the
transfer of all information and data required to operate the Properties, to
the successor manager. The costs and expenses incurred in connection
with such transition shall be borne by the Company Entities.
Force Majeure:
If a Party is rendered unable, wholly or in part, by reason of a Force
Majeure Event (as defined below) to perform its obligations under the
Agreement, other than obligations to make payments or provide
indemnification or defense when due under the Agreement, then such
Party’s obligations shall be suspended to the extent affected by the
Force Majeure Event. Any Party claiming any Force Majeure Event
shall provide prompt written notice thereof to the other Parties
including full particulars of such Force Majeure Event.
Force Majeure
Event:
A Force Majeure Event includes any cause or event not reasonably
within the control of the Party whose performance is sought to be
excused thereby that cannot, despite the exercise of commercially
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reasonable remediation or mitigation efforts, be prevented, avoided or
removed and that prevents the total or partial performance of
obligations of the affected Party under the Agreement. The following
causes and events (the list of which is not exhaustive) shall be
considered Force Majeure Events to the extent such causes and events
present the characteristics described in the preceding sentence: lack of
availability of drilling and completion equipment; governmental
ordered drilling, hydraulic fracturing, and other oil and natural gas
development moratoriums and delays, the inability or delay in
obtaining governmental permits, landowner restrictions and objections
or lack of access to sufficient water, act of God, act of the public
enemy, war, blockade, public riot, lightning, fire, storm, flood, freeze,
drought, excessive rainfall, snowfall or other act of nature, explosion,
governmental action (including changes in laws or regulations, policies
or, in each case, the enforcement thereof), governmental inaction,
including but not limited to delays in obtaining court approvals
necessary to obtain drilling rights, or any strike, work stoppage or other
organized labor difficulty.
Tax:
The Company will be entitled to deduct and withhold from amounts
otherwise payable to the Manager under the Agreement such amounts
as the Company is required to deduct and withhold under the Internal
Revenue Code of 1986 or any other applicable tax law, with respect to
the making of such payment, if any. To the extent that amounts are so
withheld, such withheld amounts will be treated for all purposes of the
Agreement as having been paid to the Manager in respect of whom
such deduction and withholding was made.
Independent
Contractor:
The relationship of the Manager to the Company Entities is as an
independent contractor. Nothing herein will be construed to create a
joint venture, partnership or an employee/employer relationship
between the Manager and any of the Company Entities. Nothing in the
Agreement will be deemed or construed to impose on the Manager an
express or implied fiduciary duty to any of the Company Entities.
Assignment:
The Company may, without the Manager’s prior consent, make a
collateral assignment of all or part of its right, title and interest in the
Agreement to any financing entity. Any such financing entity may
further sub-assign all or any portion of the Company’s rights hereunder
to the Company or any Affiliate of the Company. Any financing entity
may, in connection with any default under any financing document,
assign any rights assigned to it hereunder to any Person without the
consent of the Manager or the Company. The Manager agrees that,
upon receipt of written notice of such permitted assignment, it will
deliver all documents, data, notices, and other communications
reasonably required to be delivered to the Company hereunder to the
Company and to the financing entities or to any other permitted assignee
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at such address as such Persons will designate to the Manager in writing.
Except as set forth above, the Agreement will not be assignable by any
Party without the prior written consent of the other Party. The
Agreement will be binding upon and will inure to the benefit of the
Parties and their respective successors and permitted assigns.
Governing Law:
New York
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Exhibit 1
Costs and Expenses
Subject to the Annual Budget (to the extent applicable) the following is a list of general and
administrative costs and other expenses of the Manager that shall be reimbursable by the
Company to the Manager pursuant to the terms of the Agreement:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Personnel salaries and bonuses
Personnel burdens, benefits and other perquisites
Pension, retirement and insurance plans
Unemployment, payroll and other taxes
Administrative contractors or consultants
Office rent and occupancy costs
Office equipment and rentals
Office supplies
Office utilities
Data processing
Office maintenance and repairs
Employee parking
Telephone and communications
Postage and delivery expense
Business meals
Professional dues and subscriptions
Training expenses
Outsourced accounting services
Computer and software support
Banking and industry relationships, bank fees and service charges
General land services, title opinions, prosecution of court proceedings necessary to obtain
clear title and other title curative expenses
Information technology services including the provision of computer networks and
databases, technology systems, and phone networks and plans
Regulatory and governmental consulting or lobbying services
Engineering, operations or other technical consulting or counseling services
Approvals, authorizations, licenses or permits required in connection with ownership and
operation of the Properties or operation of the business
Audit expense
Independent geological, geophysical and engineering services
Tax related services and consultants
Hedge advisors
Valuation consultants
Investor reporting expense
Legal services (other than legal services for prosecuting or defending claims regarding
breach of the Agreement)
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•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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Acquisition and due diligence costs – engineering, title, general land services associated
with a Property acquisition, third-party consultants, environmental, broker fees, travel,
meals and lodging directly related to Property acquisitions for the Company Entities
Divestiture costs ‒ engineering, title, third-party consultants, financial advisors,
environmental, broker fees, travel, meals and lodging directly related to assets of the
Company Entities
Formation and offering costs of the Company or any Company Entity
Travel costs associated with Company Entity meetings, Board meetings, meeting with
any Company investors or debtholders, travel to the Company Entities’ field offices and
general business travel and entertainment.
Banking fees for account/ cash management
Financing services, fees and expenses, including any amendment, restatement or
replacement thereof and any waiver thereunder
Financial advisory services, administrative agent fees and collateral agent fees
COPAS overhead fees and standard district office expenses rebillable under the
applicable operating agreement
All costs associated with and necessary for drilling, completion, operating and production
of the Properties
Insurance
Franchise or state taxes
Third Party marketing fees, including but not limited to gathering, processing,
fractionation, transportation and related expenses, if applicable
Risk management expenses
Board meeting expenses
Director fees and expenses
All other costs and expenses included in the then-effective Annual Budget
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Exhibit 2
Grant Schedule
The Consideration shall be granted in equal installments every three months from the Effective Date until
fully granted on the third anniversary of the Effective Date in accordance with the schedule below. Upon
termination in accordance with the terms of the Agreement, no further Consideration shall be granted and
any Consideration previously granted shall be subject to claw back in accordance with the schedules
below.
Schedule 1: Consideration Grant and Clawback in the Event of Termination
From Effective
Date (month)
Start
Base Grant
(% Granted)
End
0
3
4
6
7
9
10
12
13
15
16
18
19
21
22
24
25
27
28
30
31
33
34
36
Thereafter
Equity
Warrants
8.33%
16.67%
25.00%
33.33%
41.67%
50.00%
58.33%
66.67%
75.00%
83.33%
91.67%
100.00%
n/a
8.33%
16.67%
25.00%
33.33%
41.67%
50.00%
58.33%
66.67%
75.00%
83.33%
91.67%
100.00%
n/a
% of Consideration Granted to Date Subject to Clawback
ARMS Termination
Company
Company Termination (Not for Cause)
Termination for
and Sale
Cause
Equity
Warrants
Equity
Warrants
Equity
Warrants
Warrants
(Termination)
(Sale)3
100.00% 100.00% 100.00% 100.00%
0.00%
100.00%
100.00% 100.00% 100.00% 100.00%
0.00%
100.00%
100.00% 100.00% 100.00% 100.00%
0.00%
100.00%
100.00% 100.00% 100.00% 100.00%
0.00%
100.00%
14.29%
100.00% 100.00% 100.00%
0.00%
100.00%
31.43%
100.00% 100.00% 100.00%
0.00%
100.00%
See
Schedule
42.86%
100.00% 100.00% 100.00%
0.00%
100.00%
2 Below
51.02%
100.00% 100.00% 100.00%
0.00%
100.00%
57.14%
100.00% 100.00% 100.00%
0.00%
100.00%
61.90%
100.00% 100.00% 100.00%
0.00%
100.00%
65.71%
100.00% 100.00% 100.00%
0.00%
100.00%
68.83%
100.00% 100.00% 100.00%
0.00%
100.00%
71.43%
100.00% 100.00% 100.00%
0.00%
100.00%
Schedule 2: Equity Clawback in the Event of Company Termination and Sale Termination
3
Start
End
9/25/17
9/26/18
9/27/18
12/27/18
3/27/19
12/26/18
3/26/19
Thereafter
Clawback all equity Consideration granted in excess
of:
Greater of (i) $12.5 million in total equity value of
the Company and (ii) 35.71% of total equity
Consideration
57.14% of total equity Consideration
78.57% of total equity Consideration
N/A
Only applies to a sale prior to a Sale Process Termination (as defined in the Restructuring Support Agreement).
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