Oil companies to pay record fee for pre-merger gun-jumping

WASHINGTON (CN) —The Federal Trade Commission announced Tuesday that a trio of oil companies will pay a record fee for engaging in pre-merger collaboration, often called gun-jumping.

The $5.6 million fee is the largest civil penalty imposed for a gun-jumping violation in U.S. history. At the time of the transaction, Verdun Oil Company II, managed by XCL Resource Holdings, spent $1.4 billion to acquire EP Energy.

The FTC claims the trio violated the Hart–Scott–Rodino Antitrust Improvements Act of 1976, which requires companies to submit a detailed filing of any proposed merger or acquisition for the FTC and the Justice Department to assess for antitrust violations. According to the FTC, EP relinquished control of its day-to-day business operations to XCL and Verdun at the time of the execution of the purchase agreement.

Merging parties are supposed to enter a waiting period after submitting their filings to ensure that the companies remain separate during the pendency of the antitrust review. However, XCL halted EP’s operations in the Unita Basin immediately after executing the purchase agreement

“XCL’s temporary halting of EP’s development activities contributed to EP having crude oil supply shortages in September and October 2021 at a time when the United States was experiencing significant supply shortages and spiking crude oil prices due to sudden demand increases as COVID-19 restrictions eased,” the FTC wrote in its complaint.

Before the FTC’s approval, Verdun coordinated with EP on EP’s contract negotiations with specific customers in Texas. The FTC claims Verdun observed that EP contracts included below-market prices and directed EP to raise the next contracting period.

“These contractual provisions allowed one competitor to control the other’s ordinary-course business activities relating to crude oil production before the transaction closed—a paradigmatic case of gun jumping through transfer of beneficial ownership,” the FTC wrote in its complaint. “All this occurred during a time when the U.S. market as a whole was facing significant supply shortages and multi-year highs in oil prices, resulting in Americans paying skyrocketing prices at the pump."

The FTC claims that XCL and Verdun illegally controlled EP from July 26 until Oct. 27, 2021, when they amended the purchase agreement to allow EP to operate independently again.

“This was no mere technical violation; the defendants’ conduct effectively allowed one competitor to acquire beneficial ownership, including control over key competitive decisions of the other, before the transaction closed, which is precisely what the HSR Act prohibits,” the FTC wrote in itscomplaint.

Meanwhile EP sold its crude oil wells in the Unita Basin area of Utah to XCL, while its wells in the Eagle Ford area of Texas went to Verdun. The FTC found that XCL’s acquisition of EP in Utah raised competitive concerns. The deal would have eliminated head-to-head competition between two of the four energy producers selling waxy crude oil to Salt Lake City refiners.

In March 2022, the FTC entered into a consent agreement with the three companies, requiring the divestiture of EP’s entire business and assets in Utah to Crescent Energy Company. Crescent, an experienced crude oil and natural gas production operator, is a new competitor to the basin.

An FTC investigation into XCL’s business documents revealed that the company, an EnCap Energy Capital Fund subsidiary, created memes indicating its plan to take over Utah. The acquisition of EP, XCL estimated, would allow it to increase its estimated market share of waxy crude from 14% to approximately 40%.

In 2019 EP filed for bankruptcy. It struggled to restructure due to sinking oil prices. A year later, after a rebound in oil prices, EP emerged from bankruptcy and handed control to its creditors, who eventually sold the asset to XCL and Verdun.

A Supreme Court decision is pending to determine whether developers can proceed with a rail expansion that could quadruple oil production by connecting remote areas with the broader rail network.

The appeal came after a federal court in Washington, D.C., sided with environmentalist groups and a Colorado county and vacated the Surface Transportation Board’s environmental approval for the project. According to the FTC, Uinta Basin waxy crude possesses distinct qualities that make it difficult to transport. However, it is especially valuable for producing transportation fuel and other petroleum products.

EnCap Energy Capital Fund sold XCL to SM Energy in October. Verdun owns over 280,000 acres in Texas and claims to have 1,100 undrilled locations remaining.