TXCO Resources Inc. (fka TXCOQ)

[MWM]

On December 31, 2009, TXCO Resources Inc. (the “Company”) and its subsidiaries TXCO Energy Corp., Texas Tar Sands Inc., Output Acquisition Corp., Opex Energy, LLC, Charro Energy, Inc., TXCO Drilling Corp., Eagle Pass Well Service, L.L.C., PPL Operating, Inc., Maverick Gas Marketing, Ltd., and Maverick-Dimmit Pipeline, Ltd. (collectively, “TXCO”), entered into a definitive Purchase and Sale Agreement (the “Agreement”) to sell a substantial portion of TXCO’s assets to Anadarko E&P Company LP for total consideration of the lesser of (i) $1 million more than the sum of the amounts sufficient to (a) repay TXCO’s lenders (including TXCO’s debtor-in-possession financing and revolver or term loan credit facilities), (b) pay all other creditors of TXCO in full, including interest thereon, and (c) pay any cure amounts of executory contracts to be assumed by Anadarko (other than Anadarko’s claims which will be waived at closing), or (ii) $310 million in cash, subject to customary purchase price adjustments. The sale is expected to close before February 28, 2010, but the economic effective date of the sale will be January 1, 2010.


Under the terms of the Agreement, certain assets are excluded from the assets being purchased by Anadarko and will be retained by TXCO, including, among others, TXCO’s drilling rigs, offshore properties, Oklahoma properties, non-operated properties within the Williston Basin, non-operated properties in south Texas outside of Maverick, LaSalle, Zavala and Dimmit Counties, and its interests in the “Dexter Waterflood Unit”, the “Forrest WM B1U” and the “Vinton Dome.”


TXCO previously entered into a definitive Purchase and Sale Agreement (the “Newfield PSA”) on November 6, 2009, to sell the same assets covered by the Agreement to Newfield Exploration Company for total consideration of $223 million. The board of directors of TXCO has determined that the Agreement constitutes a superior proposal to the Newfield PSA. Accordingly, TXCO intends to seek the entry of an order of the Bankruptcy Court authorizing the transactions contemplated by the Agreement. If the Bankruptcy Court authorizes the transactions contemplated by the Agreement, the Newfield PSA will be terminated.


TXCO filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Western District of Texas (the “Bankruptcy Court”) on May 17, 2009. TXCO continues to operate its business as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As debtors-in-possession, TXCO may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Accordingly, the consummation of the sale of assets to Anadarko contemplated by the Agreement is subject to the entry of a final order of the Bankruptcy Court authorizing the sale. TXCO’s currently proposed Plan of Reorganization contemplated the potential submission of superior proposals to that contained in the Newfield PSA and TXCO intends to file a proposed amended plan of reorganization, to the extent necessary, incorporating the terms of the Agreement with the Bankruptcy Court. The Company currently does not expect that holders of the Company’s equity securities will receive any cash or other property in respect of such securities, and it is likely that such securities will be cancelled under the plan of reorganization. Accordingly, the Company urges that extreme caution be exercised with respect to existing and future investments in any Company equity securities.




2
--------------------------------------------------------------------------------


The Agreement contains customary representations, warranties, covenants, and indemnities of TXCO and Anadarko. In addition to having to obtain the Bankruptcy Court’s approval, the completion of the sale of assets to Anadarko is subject to various customary conditions, including, among others, (i) subject to certain materiality qualifications, the accuracy of the representations and warranties made by Anadarko and TXCO, respectively, and compliance by Anadarko and TXCO with their respective obligations under the Agreement, (ii) the absence of any pending lawsuit, action, or other proceeding seeking to restrain or prohibit the consummation of the sale transaction, and (iii) the aggregate sum of all casualty and condemnation losses not exceeding 10% of the unadjusted purchase price.


TXCO has agreed not to solicit proposals relating to alternative acquisition transactions, provided, however, that TXCO may still (i) respond to inquiries and provide access to information to persons that TXCO determines may submit a superior proposal, and (ii) engage in negotiations or discussions with any person who makes an unsolicited acquisition proposal that is, or is reasonably likely to be, a superior proposal if TXCO determines that such negotiations or discussions are necessary in order to comply with applicable law. The deadline for any person to submit an alternative acquisition proposal is 5:00 p.m. central time on January 6, 2010. TXCO is required to provide Anadarko with notice by no later than January 13, 2010, if TXCO intends to pursue a superior proposal or alternative plan of reorganization. Additionally, if TXCO elects to pursue a superior proposal or alternative plan of reorganization that is not ultimately consummated, TXCO has agreed to offer Anadarko a back-up bid option following the failure of the superior proposal or alternative plan of reorganization giving Anadarko the right to consummate the purchase of assets on substantially the same terms and conditions contemplated by the Agreement. However, the back-up bid option offered to Anadarko is subordinate to the existing back-up bid option offered to Newfield under the terms of the Newfield PSA.


The Agreement also contains certain termination rights for each of Anadarko and TXCO, including, among others, the right of either party to terminate the Agreement if TXCO enters into or seeks Bankruptcy Court approval of a superior proposal or alternative plan of reorganization, and Anadarko’s right to terminate (i) if the Bankruptcy Court has not entered an order on or before January 31, 2010 authorizing the sale of the assets to Anadarko, and (ii) if an order of the Bankruptcy Court authorizing the sale of the assets to Anadarko is not final by February 15, 2010. In addition, the Agreement will be deemed terminated upon the consummation of any superior proposal or alternative plan of reorganization.


The foregoing description of the Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Agreement, a copy of which is filed as Exhibit 10.1 to this Current Report on Form 8-K and incorporated herein by reference.


The Agreement has been included to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual or financial information about TXCO or its subsidiaries and affiliates. The representations, warranties, and covenants contained in the Agreement were made only for purposes of that agreement and as of specific dates; were solely for the benefit of the parties to the Agreement; may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Agreement instead of establishing these matters as facts; and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Investors should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts or condition of TXCO or any of its subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties, and covenants may change after the date of the Agreement, which subsequent information may or may not be fully reflected in public disclosures by TXCO. The Agreement should not be read alone, but should instead be read in conjunction with the other information regarding TXCO that will be contained in, or incorporated by reference into, other filings that TXCO makes with the SEC.