TEL Offshore Trust Announces Auction Process for Sale of Royalty Interest
TEL OFFSHORE TRUST (the “Trust”) announced that Chevron U.S.A. Inc. (“Chevron”), as the managing general partner of the TEL Offshore Trust Partnership (the “Partnership”), has commenced a formal auction process for the sale by the Partnership of its overriding royalty interest, or “Royalty,” equivalent to eighty percent (80%) of a 25% net profits interest, proportionately reduced, in certain oil and gas properties located offshore Louisiana (the “Royalty Properties”). The principal asset of the Trust consists of a 99.99% interest in the Partnership. In turn, the principal asset of the Partnership is the Royalty. The Trust's source of capital is the Trust's share of the net proceeds from the Royalty Properties under the terms of the Royalty.
Chevron has engaged EnergyNet.com, Inc. to conduct the marketing process and the related auction for the Royalty, with the bids in the auction currently scheduled to be due on Wednesday, December 12, 2012. EnergyNet.com, Inc. is a FINRA-registered broker dealer that provides marketing services to the oil and gas industry. Potential bidders should contact EnergyNet.com, Inc. (by going to www.energynet.com or by calling Toll Free at (877) 351-4488) for further details regarding the process. The entire Royalty is being marketed for sale; however, the Partnership has reserved the right to sell all or only a portion of its interest in the Royalty.
On October 7, 2008, the Trust announced that production from the two most significant Royalty Properties had ceased following damage inflicted by Hurricane Ike in September 2008. The Trust has not received a distribution associated with net proceeds from the Royalty since December 2008. Consequently, the Trust has not been able to make a distribution to holders of Trust units since January 9, 2009.
The platforms and wells on Eugene Island 339 were completely destroyed by Hurricane Ike. Chevron is working on the plugging and abandonment of the existing wells, clearing debris and otherwise dealing with the remaining infrastructure, which activities are not expected to be completed until the fourth quarter of 2012. Chevron has informed the Bank of New York Mellon Trust Company, N.A. (the “Corporate Trustee”) that Chevron presently intends to pursue the redevelopment of platforms and wells at Eugene Island 339 in accordance with the terms and conditions established by the Bureau of Ocean Energy Management (“BOEM”) in response to Chevron's submission to the BOEM of a program to restore production at Eugene Island 339; however, there is no obligation for Chevron to pursue such redevelopment. The costs for the redevelopment would be significant. Failure or inability to pursue such a redevelopment, and on the timeframes approved by the BOEM, could result in a loss of the lease. At this time, there can be no assurance that production will be restored at Eugene Island 339. Chevron has informed the Trust that, under a participation agreement with a third party, the third party holds the right to earn an assignment of 65% of Chevron's working interest in the Eugene Island 339 properties. Because Chevron's working interests will, upon any assignment as may be earned by the third party under such participation agreement, be reduced by 65%, the Royalty held by the Partnership with respect to such properties will, effective as of the date of any such assignment, be reduced proportionately. According to Chevron, as a result of any assignment that may be earned and delivered under such participation agreement, neither Chevron nor the Trust will, except in the event of any subsequent amendment(s) of the participation agreement, bear the cost of the redevelopment of Eugene Island 339 under the terms of such participation agreement.
Production at Ship Shoal 182/183 ceased following damage inflicted by Hurricane Ike in September 2008. While the hurricane caused limited surface damage to the facilities at Ship Shoal 182/183, all of the wells at Ship Shoal 182/183 were shut-in following hurricane-related damage to a third-party transporter's natural gas pipeline. The third-party transporter's natural gas pipeline repairs were completed and gas sales at Ship Shoal 182/183 were restored on June 26, 2009. However, the pipeline was shut down in mid-September 2009 for additional repairs. Production sales for both oil and natural gas at Ship Shoal 182 and 183 were restored on October 8, 2009 following completion of such additional repairs. Production ceased at Ship Shoal 182/183 in late March 2010 due to a leak in the oil pipeline that services Ship Shoal 182/183. Such pipeline was repaired and Ship Shoal 182/183 was reopened on May 1, 2010 after a 36-day shut-in. In November 2010, the platform at Ship Shoal 182/183 was shut-in for tank replacement and production has slowly returned thereafter.
Total future net revenues attributable to the Partnership's interest in the Royalty were estimated at $11.5 million as of October 31, 2011. However, there are not likely to be distributable net proceeds from the Royalty Properties for the foreseeable future. Because of the lack of receipt of net proceeds, the Trust has in the past not had sufficient cash flow to pay expenses on a current basis and does not currently expect to have sufficient cash flow to pay expenses on a current basis.
On March 11, 2011, the trustees of the Trust provided written notice to Chevron that, pursuant to the Trust's trust agreement, the Trust needed funds to pay for liabilities of the Trust and that the trustees therefore instructed Chevron, as the managing general partner of the Partnership, to sell such portion, and only such portion, of the Royalty that would provide the Trust with a current distribution equal to $2,000,000 from the proceeds of such sale. Based on a recommendation from Chevron, as the managing general partner of the Partnership, Chevron marketed for sale by the Partnership the entire Royalty, while reserving the right to sell only a portion of the Royalty. Chevron engaged EnergyNet.com, Inc. to conduct the marketing process and the related auction for the Royalty. On October 27, 2011, the Trust issued a press release announcing that the Partnership had consummated the sale of 20% of the Royalty to RNR Production, Land and Cattle Company, Inc. (“RNR Production”). The sale generated $1,600,000 in gross proceeds and occurred as part of a formal auction process for the Royalty. The Trust received from the Partnership a distribution of approximately $1,485,851, representing 99.99% of the net proceeds from the sale of $1,486,000.
Based on the continuing expenses of the Trust and the lack of any distributions and any assurances as to the actual timing of any future distributions, on July 11, 2012, the trustees of the Trust provided written notice to Chevron that, pursuant to the trust agreement, the Trust needed funds to pay for liabilities of the Trust and that the trustees therefore instructed Chevron, as the managing general partner of the Partnership, to sell a portion of the Royalty so that the Trust will have sufficient funds to pay its liabilities. The trustees initiated contact with RNR Production to determine its interest in purchasing the additional five percent (5%) of the Royalty pursuant to an Option Agreement entered into between the Partnership and RNR Production in connection with the Partnership's previous sale of 20% of the Royalty to RNR Production. In addition, and pursuant to the Option Agreement, Chevron, as the managing general partner of the Partnership, provided RNR Production with formal notice that the Partnership would be marketing additional Royalty interests and that RNR Production must exercise its option to purchase the additional Royalty within ten days of the receipt of such notice. RNR Production has indicated that it is not interested in purchasing an additional part of the Royalty at this time pursuant to the Option Agreement. Accordingly, the trustees of the Trust, by letter dated October 16, 2012, provided written notice to Chevron to proceed with an alternative sale process to sell such portion, and only such portion, of the Royalty that will provide the Trust with a current distribution equal to $1,000,000 from the proceeds of such sale. Based on a recommendation from Chevron, as the managing general partner of the Partnership, Chevron is marketing for sale by the Partnership the entire Royalty; however, the Trust has reserved the right and expects to sell only a portion of the Royalty. Also based on a recommendation from Chevron, Chevron has again engaged EnergyNet.com, Inc. to conduct the marketing process and related auction of the Royalty. The trustees are in ongoing discussions with Chevron regarding the sales process. There can be no assurance that such a sale of interests in the Royalty will be consummated, or as to the terms, conditions and timing of such a sale of interests in the Royalty. In addition, there is no assurance that the proceeds, if any, from any such sale of interests in the Royalty will be sufficient to fund the continuing expenses of the Trust and the trustees shall continue to evaluate all other options available for the Trust.
This press release contains forward-looking statements. Although the managing general partner of the TEL Offshore Trust Partnership has advised the Trust that the managing general partner believes that the expectations contained in this press release are reasonable, no assurances can be given that such expectations will prove to be correct. The working interest owners of the Royalty Properties alone control historical operating data, and handle receipt and payment of funds relating to the Royalty Properties and payments to the Partnership for the related Royalty. The trustees of the Trust cannot assure that errors or adjustments by such working interest owners, whether historical or future, will not affect future royalty income and distributions by the Trust. Other important factors that could cause these statements to differ materially include delays and costs in connection with repairs or replacements of hurricane-damaged facilities and pipelines, including third-party transportation systems, the timing of capital expenditures, if any, the actual results of drilling operations, risks inherent in drilling and production of oil and gas properties, the valuation, terms and conditions of any potential sales of the Royalty and Royalty Properties, and other factors described in the Trust's Form 10-K for 2011 under “Part I, Item 1A. Risk Factors” and in the Trust's Form 10-Q for the quarterly periods ended June 30, 2012 and September 30, 2012 under “Part II, Item 1A. Risk Factors.” Statements made in this press release are qualified by the cautionary statements made in these risk factors. The Trust does not intend, and assumes no obligations, to update any of the statements included in this press release.
The Bank of New York Mellon Trust Company, N.A.
AS CORPORATE TRUSTEE
Mike Ulrich, 800-852-1422