Private Equity

23 Since the PE Seller will likely be winding down after the sale and will not be acquiring additional assets or businesses in the PE Seller entity after the sale, and since the PE Seller will not be able to bind its affiliates, obtaining a covenant not to compete solely from the PE Seller will not adequately protect the Buyer. The PE Fund will be hesitant to agree to a covenant not to compete that binds its other Portfolio Companies and affiliates (some of whom may already be competing in the area) or that prohibits the PE Fund from engaging in new business in the area with another Management Team. Oftentimes, when a post-closing covenant not to compete is signed in connection with the sale by a PE Seller, the parties agree that the covenants will be agreed to by the PE Seller and key individuals on the Management Team. 17 This result should give the Buyer some comfort that the individuals who sourced and developed the Assets the Buyer is acquiring will not compete after the sale and prevents the PE Fund from funding the same individuals in a new entity that would compete with the Buyer. If there will be a post-closing covenant not to compete executed by individuals, it should be structured so that it is executed at the signing of the PSA and effective upon the closing, so that there is not closing execution risk relating to the actions of the individuals. Conclusion The market for oil and gas assets and the sandbox in which PE Funds and their Portfolio Companies play has shifted: the shale oil and gas industry is entering a new stage in its evolution that is forcing PE Funds to rethink their investment model. The old model of originating or acquiring a leasehold, drilling a few wells and quickly flipping the asset is not working because public energy companies, which have historically been the traditional purchasers of their private equity-backed peers, are much more selective with the assets they buy. These Buyers are demanding that assets come with cash flow (many producing wells). To drill more wells and have larger operations, Portfolio Companies must employ larger staffs and precisely execute on their drilling and development plan—this is a change to how they have operated in the past. As a result, the way PE Funds and their Portfolio Companies think about acquisition and divestiture documents will have to evolve to address new market realities. Shearman & Sterling's Oil and Gas Team Shearman & Sterling's oil & gas team represents private equity and other investment funds, private and independent oil and gas companies, MLPs, and alternative asset investors in a variety of transactions in the oil & gas sector, including mergers, acquisitions, dispositions, joint ventures, project development, finance and restructuring in the upstream, midstream, and downstream sectors. Contact Andressa Lessa to be added to our mailing list for future oil & gas reports, updates and seminars. 17 These arrangements may or may not require the payment of additional consideration to the individuals to be bound.

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