SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(A) of
the Securities Exchange Act of 1934

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

þ Preliminary Proxy Statement
o CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14A-6(E)(2))
o Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to Rule 14a-12

Chaparral Resources, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
o		No fee required.
þ		Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and 0-11.
		(1)		Title of each class of securities to which transaction applies:
				Common Stock, par value $0.0001 per share
		(2)		Aggregate number of securities to which transaction applies:
				15,283,801 shares of Common Stock
		(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
				In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, and Fee Rate Advisory #5 for Fiscal Year 2006 issued by the Securities and Exchange Commission on November 23, 2005, the amount of the filing fee was determined by multiplying $0.000107 by the transaction value. The transaction value was determined by multiplying 15,283,801 shares of common stock, par value $0.0001 per share, of Chaparral Resources, Inc. by $5.80 per share. The number of shares of common stock is equal to the total number of outstanding shares of common stock of Chaparral Resources, Inc. entitled to receive the merger consideration.
		(4)		Proposed maximum aggregate value of transaction:
				$88,646,045.80
		(5)		Total fee paid:
				$9,485.13
þ		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
		(1)		Amount Previously Paid:
		(2)		Form, Schedule or Registration Statement No.:
		(3)		Filing Party:
		(4)		Date Filed:

CHAPARRAL

 

CHAPARRAL RESOURCES, INC.
2 Gannett Drive, Suite 418
White Plains, New York 10604

 

A MERGER PROPOSAL — YOUR VOTE IS VERY IMPORTANT

 

Dear Chaparral Stockholders:

 

You are cordially invited to attend the special meeting of our stockholders to be held on          , 2006, at 10:00 a.m. local time at          , London, England.

 

At the special meeting, you will be asked to consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated March 13, 2006, among Chaparral, LUKOIL Overseas Holding Ltd. and NRL Acquisition Corp., and approve the merger between Chaparral and NRL Acquisition pursuant to the terms of the merger agreement. If our stockholders adopt the merger agreement, NRL Acquisition will merge with and into Chaparral and each issued and outstanding share of our common stock (other than shares held by LUKOIL or its affiliates and any shares with respect to which appraisal rights have been properly perfected under Delaware law) will be converted into the right to receive $5.80 in cash, without interest and less any applicable withholding taxes. As a result of the merger, we will cease to be a publicly traded company and will become an indirect wholly owned subsidiary of LUKOIL.

 

The merger consideration represents a premium of (1) approximately 9% over $5.30, the last trade price for the shares of our common stock on March 10, 2006, the last trading day before we announced the execution of the merger agreement, (2) approximately 12% over $5.19, the average last trade price per share during the one week period preceding the initial announcement regarding the executed merger agreement, and (3) approximately 180% over the average closing price of our common stock during the first half of 2005.

 

This attached proxy statement provides you with detailed information about the proposed merger and the special meeting. You can also obtain financial and other information about us from documents we have filed with the Securities and Exchange Commission.

 

The special committee, consisting of two independent directors, (1) has approved the merger agreement and the transactions contemplated thereby, including the merger and (2) has determined that the terms of the merger agreement and the transactions contemplated thereby, including the merger, are advisable, fair to and in the best interests of our public stockholders.

 

Our board of directors, upon the recommendation of a special committee and by unanimous vote and after careful consideration, (1) has approved the merger agreement and the transactions contemplated thereby, including the merger, and (2) has determined that the terms of the merger agreement and the transactions contemplated thereby, including the merger, are advisable, fair to and in the best interests of our unaffiliated stockholders. Accordingly, our board of directors unanimously recommends that our stockholders vote “FOR” the approval and adoption of the merger agreement and the merger.

 

The special committee received the written opinion of Petrie Parkman & Co., Inc. to the effect that, as of March 10, 2006, based upon and subject to the matters set forth in the opinion, the merger consideration to be received by the holders of our common stock (other than LUKOIL and its affiliates) was fair, from a financial point of view, to such holders.

 

The affirmative vote of a majority of the outstanding shares of our common stock is required to approve and adopt the merger agreement and the merger. LUKOIL controls 60% of our outstanding common stock and has committed to vote its shares in favor of the merger agreement and the merger. The affirmative vote of the shares controlled by LUKOIL is sufficient under Delaware law to adopt the merger agreement and approve the merger. The proposed transaction does not require the approval of a majority of our unaffiliated stockholders.

 

Dissenting stockholders are entitled to appraisal rights under Delaware law as described in the attached proxy statement.

 

It is very important to us and the special committee that your shares be represented at the special meeting, whether or not you plan to attend personally. Therefore, please complete and sign the enclosed proxy card and return it as soon as possible in the enclosed postage-paid envelope. This will ensure that your shares are represented at the special meeting.

 

Thank you for your cooperation.

 

Sincerely,

 

Boris Zilbermints

Chief Executive Officer

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of this transaction, passed upon the fairness or merits of this transaction, or passed upon the accuracy or adequacy of the disclosure in this document. Any representation to the contrary is a criminal offense.

 

This proxy statement is dated          , 2006 and is first being mailed to stockholders on or about          , 2006.

 

CHAPARRAL

 

CHAPARRAL RESOURCES, INC.
2 Gannett Drive, Suite 418
White Plains, New York 10604

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD          , 2006

 

To our stockholders:

 

We will hold a special meeting of the stockholders of Chaparral Resources, Inc. on          , 2006 at 10:00 a.m. local time at          , London, England for the following purposes, as more fully described in the enclosed proxy statement:

 

1. To consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of March 13, 2006, among LUKOIL Overseas Holding Ltd., NRL Acquisition Corp., and Chaparral, and approve the merger between Chaparral and NRL Acquisition, with Chaparral being the surviving corporation, pursuant to the merger agreement. In the merger, each Chaparral stockholder (other than LUKOIL and its affiliates) will be entitled to receive $5.80 per share in cash, without interest, for each share of our common stock in accordance with and subject to the terms and conditions contained in the merger agreement. The merger agreement is more fully described in the accompanying proxy statement and a copy of the merger agreement is attached as Exhibit A to the accompanying proxy statement.

 

2. To consider, act upon and transact such other matters as may properly come before the special meeting or any adjournments or postponements thereof.

 

The affirmative vote of a majority of the outstanding shares of our common stock is required to adopt the merger agreement and approve the merger. LUKOIL controls 60% of our outstanding common stock and has committed to vote its shares in favor of the merger agreement and the merger. The affirmative vote of the shares controlled by LUKOIL is sufficient under Delaware law to adopt the merger agreement and approve the merger. The proposed transaction does not require the approval of a majority of our unaffiliated stockholders.

 

Our board of directors, upon the recommendation of the special committee consisting of two independent directors and by unanimous vote and after careful consideration, (1) has approved the merger agreement and the transactions contemplated thereby, including the merger and (2) has determined that the terms of the merger agreement and the transactions contemplated thereby, including the merger, are advisable, fair to and in the best interests of our unaffiliated public stockholders. Accordingly, our board of directors unanimously recommends that our stockholders vote “FOR” the adoption of the merger agreement and approval of the merger. In considering the recommendation of our board of directors, you should be aware that our non-independent directors have interests in the proposed transaction that are different from, or are in addition to, the interests of our stockholders (other than LUKOIL and its affiliates) generally. These interests and benefits are described in the attached proxy statement.

 

Our stockholders of record as of the close of business on          , 2006 will be entitled to notice of and to vote at the special meeting and any postponement or adjournment thereof.

 

Attendance at the meeting is limited to our stockholders. Registration will begin at 9:00 a.m. and the meeting will begin at 10:00 a.m., London time. Each stockholder holding shares in brokerage accounts will need to bring a copy of a brokerage statement reflecting stock ownership as of the record date. Please note that you may be asked to present valid picture identification, such as a driver’s license or passport.

Under Delaware law, if you do not wish to accept the cash payment provided for in the merger agreement, you have the right to dissent from the merger and to receive payment in cash for the fair value of your shares of our common stock, exclusive of any element of value arising from the accomplishment or expectation of the merger. Stockholders electing to exercise appraisal rights must comply with the provisions of Section 262 of the Delaware General Corporation Law in order to perfect their rights, and must deliver a written demand for appraisal of their shares to us before the vote with respect to the merger is taken at the special meeting. We will require strict compliance with the statutory procedures. See “THE MERGER — Appraisal Rights.” A copy of these provisions is included as Exhibit B to the attached proxy statement. We also refer you to the information included in the section of the attached proxy statement entitled “THE MERGER — Appraisal Rights.”

 

It is very important to us and the special committee that your shares be represented at the special meeting, whether or not you plan to attend personally. Therefore, please complete and sign the enclosed proxy card and return it as soon as possible in the enclosed postage-paid envelope. This will ensure that your shares are represented at the special meeting. You may revoke your proxy at any time before it is voted at the special meeting.

 

If you have certificates representing shares of our common stock, please do not send your certificates to us at this time. If the merger is completed, you will be sent instructions regarding the surrender of your certificates to receive payment for your shares of our common stock. If you hold your shares of our common stock in book-entry form – that is, without a stock certificate – you do not need to do anything to receive payment for your shares of our common stock. In such a case, following completion of the merger, the paying agent will automatically mail you the merger consideration in exchange for the cancellation of your shares of our common stock.

 

If you have any questions or need assistance in voting your shares of our common stock, please contact: Chaparral Resources, Inc., 2 Gannett Drive, Suite 418, White Plains, New York 10604, (866) 559-3822. You may also call our proxy solicitor, Georgeson Shareholder Communications, toll-free at 1-866-800-7519.

 

BY ORDER OF THE BOARD OF DIRECTORS

Alan D. Berlin

Secretary

 

White Plains, New York

          , 2006

 

TABLE OF CONTENTS

 

 

The information provided in question and answer format below is for your convenience and is merely a summary of certain information contained in this proxy statement. You should carefully read this entire proxy statement, including each of the exhibits to this proxy statement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chaparral Resources, Inc.

2 Gannett Drive, Suite 418

White Plains, New York 10604

Telephone: (866) 559-3822

Attn: Alan D. Berlin, Secretary

 

You may also call our proxy solicitor, Georgeson Shareholder Communications, toll-free at 1-866-800-7519.

 

This summary section highlights selected information from this proxy statement regarding the stockholder proposal and may not contain all of the information that is important to you. We urge you to carefully read this entire proxy statement, including the exhibits to the proxy statement and the documents that are incorporated by reference. You may obtain a copy of the documents that we have incorporated by reference without charge by following the instructions in the section entitled “Where You Can Find More Information” beginning on page 65. We have included page references in this summary to direct you to more complete descriptions of the topics presented in this summary.

 

Chaparral Resources, Inc.

 

We are an independent oil and gas development and production company. Through intermediate holding companies, Central Asian Petroleum (Guernsey), Ltd., a Guernsey company, Korporatsiya Mangistau Terra International Limited, a Kazakhstan company, and Central Asian Petroleum, Inc., a Delaware company, we own a 60% interest in ZAO Karakudukmunay, a Kazakhstani joint stock company that holds a governmental license to develop the Karakuduk Oil Field, a 16,900-acre oil field in the Republic of Kazakhstan. Currently, the Karakuduk Field is our only oil field. We have no other significant subsidiaries besides Central Asian Petroleum (Guernsey), Korporatsiya Mangistau Terra International, and Central Asian Petroleum.

 

Approximately 40% of our outstanding common stock is quoted on the OTC Bulletin Board under the symbol “CHAR.ob” and is held by the public. Since December 2005, LUKOIL has indirectly owned 60% of our outstanding common stock. Our corporate headquarters are located at 2 Gannett Drive, Suite 418, White Plains, New York 10604, and our telephone number is (866) 559-3822. See “PARTIES TO THE MERGER” beginning on page 46.

 

LUKOIL Overseas Holding Ltd.

 

LUKOIL is a subsidiary of Open Joint Stock Company “Oil Company “LUKOIL,” a Russian energy company whose shares are traded on the London Stock Exchange, and is responsible for managing its parent’s international oil and gas projects. See “PARTIES TO THE MERGER” beginning on page 46.

 

LUKOIL, through its ownership of NRL Acquisition, controls 60% of our outstanding common stock and has committed to vote these shares in favor of the merger agreement and the merger. The affirmative vote of the shares controlled by LUKOIL is sufficient under Delaware law to adopt the merger agreement and approve the merger. The proposed transaction does not require the approval of a majority of the unaffiliated stockholders.

 

NRL Acquisition Corp.

 

NRL Acquisition is a Delaware corporation wholly owned by LUKOIL whose sole activity is the ownership of shares of our common stock. NRL Acquisition owns 60% of our outstanding common stock and has committed to vote its shares in favor of the merger agreement and the merger. See “PARTIES TO THE MERGER” beginning on page 46.

 

Pursuant to the merger agreement, LUKOIL will acquire Chaparral for $5.80 per share of outstanding common stock (other than shares held by LUKOIL or its affiliates and shares to which appraisal rights have been properly perfected under Delaware law) in cash, without interest, through the merger of its wholly owned subsidiary, NRL Acquisition, with and into Chaparral. Chaparral will survive the merger, and at the closing of the merger, we will be a privately held, wholly owned subsidiary of LUKOIL, and NRL Acquisition will cease to exist as a separate entity.

 

Certain of our directors are officers of LUKOIL or its affiliates. Because these directors have financial or other interests that may be different from, or in addition to, your interests in the merger, our board of directors decided that, in order to protect the interests of our unaffiliated stockholders in evaluating and negotiating the merger agreement, a special committee of independent directors who are not otherwise affiliated with Chaparral or LUKOIL or its affiliates, and who have no financial interest in the merger (other than as stockholders of Chaparral) should be formed to perform those tasks and, if appropriate, recommend the merger and the terms of the merger agreement to our entire board of directors and our stockholders. Our board of directors subsequently formed a special committee consisting of two independent directors, Peter G. Dilling and Alan D. Berlin. Mr. Dilling is chairman of the special committee.

 

The merger agreement must be adopted and the merger approved by the affirmative vote of a majority of the voting power of our common stock outstanding on the record date for the special meeting described in this proxy statement. For this vote, abstentions and broker non-votes, as well as shares that are not voted, will have the same effect as a vote against both adoption of the merger agreement and approval of the merger.

 

The proposed transaction does not require the approval of a majority of our unaffiliated stockholders. LUKOIL controls 60% of our outstanding common stock and has committed to vote its shares in favor of the merger agreement and the merger. The affirmative vote of the shares controlled by LUKOIL is sufficient under Delaware law to adopt the merger agreement and approve the merger. As of          , 2006, other than Mr. Berlin, none of our directors or executive officers own any shares of our common stock. Mr. Berlin beneficially owns 167 shares of our common stock, which represents less than 1% of the voting power of our common stock. We anticipate that Mr. Berlin will vote in favor of the merger.

 

It is very important to us and the special committee that your shares be represented at the special meeting, whether or not you plan to attend personally. Therefore, please complete and sign the enclosed proxy card and return it as soon as possible in the enclosed postage-paid envelope. This will ensure that your shares are represented at the special meeting. You may revoke your proxy at any time before it is voted at the special meeting.

 

After careful consideration, and in light of the factors described in the section of this proxy statement entitled “SPECIAL FACTORS — Reasons for the Special Committee’s Determination; Fairness of the Merger,” the special committee has unanimously determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable, fair to, and in the best interests of our unaffiliated stockholders.

 

After careful consideration, our board of directors, based solely on the recommendation of the special committee, has unanimously determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable, fair to, and in the best interests of our unaffiliated stockholders. Our board of directors recommends that you vote “FOR” the adoption of the merger agreement and the merger.

 

For a discussion of the material factors considered by the special committee in reaching its conclusion and the reasons why our board of directors determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable, fair to, and in the best interests of our unaffiliated stockholders, see the section of this proxy statement entitled “SPECIAL FACTORS — Reasons for the Special Committee’s Determination; Fairness of the Merger” beginning on page 18 and “SPECIAL FACTORS — Reasons for our Board of Directors’ Determination; Fairness of the Merger” beginning on page 23.

 

The special committee received the written opinion of Petrie Parkman & Co., Inc. to the effect that, as of March 10, 2006, based upon and subject to the matters set forth in the opinion, the merger consideration to be received by the holders of our common stock (other than LUKOIL and its affiliates) was fair, from a financial point of view, to such holders. The full text of Petrie Parkman’s written opinion, dated March 10, 2006, is attached as Exhibit C to this proxy statement. We encourage you to read this opinion carefully in its entirety for a description of the procedures followed, assumptions made, matters considered and limitations on the review undertaken.

 

Petrie Parkman’s opinion was provided to the special committee in connection with its evaluation of the merger consideration and relates to the fairness, from a financial point of view, of the merger consideration; it does not address any other aspect of the proposed merger and does not constitute a recommendation to any stockholder as to any matters relating to the merger or any related transaction, including as to how any stockholders should vote on the merger.

 

 

When considering the recommendation of our board of directors that you vote for approval and adoption of the merger agreement and the transactions contemplated thereby, including the merger, you should be aware that certain of our directors and officers have interests in the merger that are different from, or in addition to, yours and that may present, or appear to present, a conflict of interest. These interests include the following:

 

 

In addition, you should be aware that one of our directors, Mr. Berlin, owns 167 shares of our common stock and will receive the merger consideration for these shares. No other officer or director of Chaparral owns any shares of our common stock.

 

 

Upon completion of the merger, NRL Acquisition will merge with and into Chaparral, with Chaparral surviving the merger. LUKOIL will indirectly own 100% of our then-outstanding common stock, and you will no longer be a stockholder of, or have any ownership interest in, Chaparral. We will no longer be a public company, and our common stock will no longer be quoted on the OTC Bulletin Board. The registration of our common stock under the Securities Exchange Act of 1934, as amended, will terminate, and we will cease to file periodic reports with the Securities and Exchange Commission under the Exchange Act. The management of NRL Acquisition immediately before the effective time will become the management of Chaparral.

 

 

Conditions to the Obligations of the Parties.  The obligations of each party to complete the merger are subject to the satisfaction or waiver of certain conditions, including the following:

 

 

Conditions to our Obligations.  Our obligations to complete the merger are subject to the satisfaction or waiver of certain other conditions, including the following:

 

 

 

Conditions to the Obligations of LUKOIL and NRL Acquisition.  The obligations of LUKOIL and NRL Acquisition to complete the merger are subject to the satisfaction or waiver of certain other conditions, including the following:

 

 

 

The merger agreement may be terminated before the effective time of the merger for a number of reasons, including the following:

 

 

 

 

If the merger agreement is terminated by LUKOIL or us because the special committee accepts a superior proposal, we will pay LUKOIL a termination fee of $2,500,000 plus the amount of LUKOIL’s and NRL

Acquisition’s actual and reasonable expenses incurred in connection with the merger agreement. However, the aggregate amount of the termination fee plus expenses may not be more than $3,000,000.

 

We estimate that $91.5 million will be necessary to complete the merger and pay related fees and expenses. LUKOIL and NRL Acquisition expect to fund this amount through LUKOIL’s internal working capital.

 

The conversion of shares of our common stock into cash pursuant to the merger agreement is a taxable transaction for United States federal income tax purposes and may also be a taxable transaction under applicable state, local or foreign tax laws. LUKOIL and NRL Acquisition will have different tax consequences from the merger than stockholders generally. You should consult your own tax advisor about the particular tax consequences of the merger to you.

 

Following our announcement of the merger agreement on March 13, 2006, three separate complaints were filed in the Delaware Court of Chancery and one complaint was filed in the Supreme Court of the State of New York, to commence class action lawsuits on behalf of our stockholders against LUKOIL, Chaparral and our board of directors. The Delaware cases were consolidated on March 31, 2006. The Delaware plaintiffs filed a consolidated amended complaint on July 3, 2006. On July 26, 2006, the defendants filed their respective answers to this consolidated amended complaint. Parties to the New York case have agreed that defendants have until August 31, 2006 to respond to that suit.

 

Under Delaware law, if you do not wish to accept the cash payment provided for in the merger agreement, you have the right to dissent from the merger and to receive payment in cash for the fair value of your shares of our common stock, exclusive of any element of value arising from the accomplishment or expectation of the merger. Stockholders electing to exercise appraisal rights must comply with the provisions of Section 262 of the Delaware General Corporation Law in order to perfect their rights, and must deliver a written demand for appraisal of their shares to us before the vote with respect to the merger is taken at the special meeting. We will require strict compliance with the statutory procedures. See “THE MERGER — Appraisal Rights.”

 

If, after reading this proxy statement, you have additional questions about the merger or other matters discussed in this proxy statement, need additional copies of this proxy statement or require assistance with voting your shares of our common stock, please contact:

 

Chaparral Resources, Inc.

2 Gannett Drive, Suite 418

White Plains, New York 10604

Telephone: (866) 559-3822

 

You may also call our proxy solicitor, Georgeson Shareholder Communications, toll-free at 1-866-800-7519.

 

Since May 2004, 60% of our outstanding common stock has been held by Nelson Resources Limited and currently, as a result of the transaction between Nelson and LUKOIL described below, by LUKOIL. Approximately 40% of our outstanding common stock is currently quoted on the OTC Bulletin Board under the symbol “CHAR.ob” and is held by the public. Throughout our existence as a public company, the market value and liquidity of our common stock have been negatively impacted generally by the inherent difficulty of attracting analyst and investor interest to a company with a majority stockholder and a small public float. As a result, the liquidity of the market for our common stock has remained consistently limited.

 

After being approached by the senior management of LUKOIL, on September 30, 2005, Nelson announced that it had entered into an agreement to negotiate with LUKOIL concerning a proposal received from LUKOIL to acquire 100% of the fully diluted common shares of Nelson for US$2 billion in cash.

 

On October 3, 2005, our board of directors, which consisted of three Nelson appointees and two independent directors, established a special committee to determine what actions would be appropriate to take in order to protect the interests of our minority stockholders in connection with LUKOIL’s acquisition of Nelson. The special committee is composed of two independent directors, Alan D. Berlin and Peter G. Dilling. The special committee is chaired by Peter G. Dilling. Our board of directors authorized the committee to retain advisors, to obtain further information from LUKOIL and Nelson and to act to protect the interests of all of our public stockholders.

 

Also on October 3, 2005, Nelson held an investor/shareholder conference call, led by Nick Zana, Chairman and Chief Executive Officer of Nelson, to discuss the transaction with LUKOIL. Alan Berlin and Peter Dilling dialed into the conference call and monitored the comments and the questions and answers provided during the call.

 

After the announcement of the transaction between Nelson and LUKOIL, Chaparral received numerous telephone calls and a number of e-mails raising concerns about the effects of the amalgamation on Chaparral. The reaction was varied and included:

 

 

Similar questions and sentiments were expressed on the Nelson investor / shareholder conference call held on October 3, 2005.

 

On October 4, 2005, we issued a press release announcing (1) that Nelson announced it had entered into an agreement to negotiate regarding a proposal received from LUKOIL to acquire 100% of the fully diluted common shares of Nelson for US$2 billion in cash, (2) that we had received no information regarding the intentions of LUKOIL with respect to Chaparral in the event the proposed transaction with Nelson is completed, (3) that we were not informed of the proposed transaction in advance of the public announcements by Nelson and LUKOIL and were not a party to the discussions between those companies, and (4) that a special committee had been appointed to be chaired by Mr. Dilling to represent the interests of our minority stockholders with respect to this potential transaction.

 

On October 11, 2005, the special committee retained the law firm of Baker Botts L.L.P. of Houston and London to advise the special committee in connection with LUKOIL’s acquisition of Nelson and any

subsequent transaction between LUKOIL and Chaparral. Baker Botts has in the past provided and currently provides limited legal services to LUKOIL and its affiliates in matters unrelated to Chaparral primarily out of its Moscow office, and may continue to do so in the future. Baker Botts was unaware of the potential conflict with regard to LUKOIL when it conducted its initial conflicts check. Upon discovery of this representation of LUKOIL affiliates in January or February, Baker Botts discussed it with the special committee, which was already well into the negotiating process. The special committee determined that such representation would not affect the quality of the advice it would receive from Baker Botts because (1) of the reputation of Baker Botts for integrity, work ethic, and the quality of its legal advice, (2) none of the attorneys representing the special committee have provided legal advice to LUKOIL or its affiliates, (3) the legal fees paid by LUKOIL to Baker Botts between April 2005 and March 2006 represent a very small percentage of Baker Botts’ revenue during that period (less than 0.1%), and (4) Baker Botts provides legal services to LUKOIL primarily out of its Moscow and London offices, and provides legal services to the special committee primarily out of its Houston office. See “SPECIAL FACTORS — Certain Relationships and Related Transactions” beginning on page 38.

 

At a telephonic meeting on October 13, 2005, the special committee discussed, among other things, the applicability of Section 203 of the Delaware General Corporation Law with respect to approval rights of our minority stockholders, the need to retain a financial advisor, and the advisability of preparing a stockholder rights plan.

 

On October 14, 2005, Nelson announced that it had entered into a definitive agreement with LUKOIL dated October 13, 2005 to effect an amalgamation between Nelson and a wholly-owned subsidiary of LUKOIL. Nelson indicated in a press release that the amalgamation was subject to certain conditions, including approval of the holders of 75% of the votes cast by Nelson’s shareholders at a special meeting of Nelson’s shareholders. Also on October 14, 2005, LUKOIL announced that it had purchased approximately 65% of Nelson’s outstanding shares from four principal shareholders of Nelson on the same terms offered to the other shareholders of Nelson in the amalgamation.

 

Also on October 14, 2005, the Nelson members of our board of directors informed the special committee that they would brief the special committee regarding the Nelson transaction with LUKOIL. The special committee requested a meeting with LUKOIL to discuss LUKOIL’s intentions with respect to Chaparral, and requested a copy of the definitive amalgamation agreement between Nelson and LUKOIL and any other documentation that was pertinent to Chaparral in connection with the Nelson amalgamation with LUKOIL.

 

At a telephonic meeting on October 14, 2005, the special committee ratified the retention of Baker Botts as its legal advisors, and Mr. Swanson of Baker Botts provided a brief summary of Delaware law regarding the business judgment rule, director’s duty of care and loyalty and the protection of our minority stockholders. The special committee agreed to make a formal request to Nelson for copies of the amalgamation agreement and BMO Nesbitt Burns valuation analysis. Mr. Dilling spoke with Mr. Thieffry, a member of Nelson’s board of directors and chair of the special committee of Nelson’s board of directors evaluating the transaction with LUKOIL, and requested a copy of the amalgamation agreement and related materials. The special committee also discussed whether Section 203 of the Delaware General Corporation Law would apply in this situation, but noted that Chaparral is exempt from Section 203 because our stock is not listed on a national securities exchange, is not authorized for quotation on The NASDAQ Stock Market, and is held by less than 2,000 record owners, and again discussed whether a stockholder rights plan would be advisable.

 

Also on October 14, 2005, we issued a press release announcing (1) the execution of a definitive amalgamation agreement by LUKOIL and Nelson, (2) that the special committee was continuing to monitor this transaction and had retained Baker Botts L.L.P. to advise the committee in connection with this transaction, (3) that the special committee had requested a meeting with LUKOIL to discuss the intentions of LUKOIL with respect to Chaparral, and (4) that the committee had requested that Nelson provide the special committee with additional information regarding the agreement between Nelson and LUKOIL.

 

On October 20, 2005, the special committee sent a letter to Nick Zana, Chairman and Chief Executive Officer of Nelson, requesting (1) a copy of the definitive amalgamation agreement between Nelson and LUKOIL, and (2) a copy of the financial analysis supporting the fairness opinion delivered to Nelson by BMO

Nesbitt Burns in connection with the Nelson acquisition. The special committee offered to execute a customary confidentiality agreement relating to materials not otherwise publicly disclosed.

 

On the same day, the special committee sent a letter to Ravil Maganov, Chairman of the Board of Directors of LUKOIL, requesting a meeting with Mr. Maganov and other key members of the LUKOIL transaction team to discuss the intentions of LUKOIL with respect to Chaparral after the Nelson acquisition was completed. The special committee offered to execute a customary confidentiality agreement relating to materials not otherwise publicly disclosed in connection with the meeting. In response, Dmitry Timoshenko, Vice President/General Counsel of LUKOIL, indicated to the special committee that LUKOIL was focused on completing the Nelson acquisition and did not expect to develop plans relating to Chaparral until after the Nelson acquisition was completed. In addition, Mr. Timoshenko indicated that LUKOIL was not comfortable meeting with the special committee before LUKOIL’s acquisition of Nelson was completed, and declined to do so.

 

On October 24, 2005, the special committee and its advisors received from Nelson a copy of the amalgamation agreement between Nelson and LUKOIL and a Form 51-102F3 Material Change Report (which contained a summary of the Nelson transaction) for Nelson. The special committee did not receive a copy of Nelson’s financial advisor’s report. The special committee reviewed the amalgamation agreement and the Material Change Report and discussed both documents with its legal advisors. In particular, the special committee and its legal advisors discussed the terms of the amalgamation agreement, including the closing conditions, timing of the transaction, and the receipt by Nelson of a fairness opinion, and the impact the Nelson transaction may have on Chaparral.

 

At a meeting on October 25, 2005, our board of directors, which consisted of three Nelson appointees and two independent directors, approved the compensation to be paid to members of the special committee for their service on the special committee through the end of the year. Our board of directors determined that each member of the special committee would receive a one-time fee of $25,000 to cover work by the committee members through December 31, 2005 in addition to our normal compensation for board committee participation of (1) $700 for each special committee meeting attended by teleconference, (2) $1,000 for each special committee meeting attended in person, and (3) $2,000 per day while traveling on business related to the special committee. We agreed to indemnify Messrs. Berlin and Dilling for any expenses, liabilities and losses relating to their service as members of the special committee and/or our board of directors.

 

Near the end of October 2005, Mr. Dilling requested a meeting with representatives of LUKOIL, including Dmitry Timoshenko, Vice President of LUKOIL, Oktay Movsumov, Vice President Finance of LUKOIL, and Andrei Kuzyaev, President of LUKOIL, to discuss LUKOIL’s intentions with respect to Chaparral after its amalgamation with Nelson.

 

At a telephonic meeting on October 27, 2005, the special committee discussed the status and anticipated timing of the amalgamation between Nelson and LUKOIL and the discussions between Mr. Dilling and representatives of LUKOIL in London regarding LUKOIL’s plans with respect to Chaparral. The LUKOIL representatives had indicated that LUKOIL would not focus on Chaparral until after the amalgamation with Nelson was consummated, and declined an invitation to attend the annual meeting of our stockholders. The special committee also discussed the advisability of a press release regarding LUKOIL’s acquisition of Nelson, and continued to discuss whether a stockholder rights agreement could be adopted by our board of directors in light of the agreement between Nelson and LUKOIL.

 

At a telephonic meeting held in early November 2005, the special committee discussed postponing the annual meeting of our stockholders until after the consummation of the amalgamation between Nelson and LUKOIL, but decided that the meeting should proceed as previously scheduled. The special committee noted that it is rare for Chaparral’s stockholders, but not for stockholders generally, to attend annual meetings in person. The special committee also discussed Nelson’s press release regarding the amalgamation and the anticipated closing date of the amalgamation.

 

On November 4, 2005, Nelson distributed a Notice of General Meeting of Shareholders of Nelson to be convened on December 2, 2005, to vote on the offer by LUKOIL to amalgamate. The amalgamation was approved by Nelson’s shareholders on December 2, 2005.

On November 14, 2005, we issued a press release summarizing the status of LUKOIL’s acquisition of Nelson. We noted in the press release that LUKOIL indicated that it was not prepared to discuss Chaparral issues until the amalgamation with Nelson was completed.

 

At a meeting on November 30, 2005 held in New York, New York, the special committee discussed, among other things, the retention of BMO Nesbitt Burns or Petrie Parkman as its financial advisor. Although BMO Nesbitt Burns had experience in Kazakhstan and familiarity with Nelson due to its retention by the special committee of Nelson’s board of directors in connection with Nelson’s amalgamation with LUKOIL, the special committee was concerned about the perception of a conflict of interest if it were to rely upon the financial advisor used by a LUKOIL-controlled entity. The special committee also discussed Petrie Parkman’s recent experience in Kazakhstan and the favorable experience of Mr. Berlin and the special committee’s legal advisors with Petrie Parkman on unrelated transactions. The special committee deferred the decision until further developments with LUKOIL, but placed a call to Petrie Parkman on that day to determine its availability to represent the special committee.

 

Following the shareholder meeting approving the LUKOIL transaction on December 2, 2005, the three members of our board of directors that had been appointed by Nelson resigned. These positions were filled by LUKOIL appointees effective as of December 2, 2005. Alan D. Berlin and Peter G. Dilling continued to serve on our board of directors as independent directors. On December 5, 2005, Nelson was amalgamated with Caspian Investments Resources Limited, and Nelson ceased to exist. In addition, as a result of the amalgamation, (1) our Chief Executive Officer was replaced by a LUKOIL appointee in January 2006 following the resignation of Mr. Gill, a Nelson appointee, in December 2005, and (2) certain other key management positions in our subsidiary, ZAO Karakudukmunay, have also been replaced with LUKOIL appointees, including the General Director, the Finance Director, the Financial Controller, the Commercial Manager and the Chief Geologist. A number of other positions with ZAO Karakudukmunay have become vacant since the amalgamation of Nelson and LUKOIL, including the Logistics Manager and Field Manager.

 

On December 2, 2005, the special committee received background information and a draft engagement letter from Petrie Parkman. At a telephonic meeting on December 7, 2005, the special committee reviewed the Petrie Parkman materials. While the special committee also discussed obtaining a price quote from Houlihan Lokey Howard & Zukin (who acted as an investment advisor to Chaparral in connection with a restructuring transaction in the 1990s) to act as its financial advisors, the special committee decided not to do so because of the qualifications of Petrie Parkman and favorable experience with Petrie Parkman on unrelated transactions.

 

On December 9, 2005, Mr. Dilling again requested a meeting with, and met with, representatives of LUKOIL, including Mr. Movsumov, in London to discuss LUKOIL’s intentions with respect to Chaparral. Mr. Movsumov indicated that, because Chaparral represented a relatively insignificant portion of Nelson’s asset base, Chaparral had not been a strategic element of LUKOIL’s acquisition of Nelson, and that LUKOIL had not yet developed plans relating to Chaparral. During this meeting, Mr. Dilling explained the role of the special committee in providing information to, and protection for, our minority stockholders. Mr. Movsumov indicated that now that the amalgamation had closed, LUKOIL was in a position to develop plans regarding Chaparral, but would need more time to do so.

 

The special committee held informal meetings almost every day from its formation through the end of December 2005. The special committee discussed with its legal advisors the effect the acquisition would have on our minority stockholders, and in particular whether Section 203 of the Delaware General Corporation Law or a stockholder rights plan would provide additional protections to the stockholders. During this period, the special committee also discussed the need to retain independent directors of Chaparral to protect the interests of our minority stockholders. In particular, the special committee and its legal advisors analyzed whether Chaparral is subject to Section 203 of the Delaware General Corporation Law and, if so, whether Section 203 would prevent LUKOIL from acquiring the publicly traded shares of our common stock without the consent of a majority of the public stockholders. The special committee also considered, among other things, proposing the adoption of a stockholder rights plan, but believed Nelson would be precluded from permitting its adoption under its agreement with LUKOIL. Although the special committee had reviewed a copy of the BMO Nesbitt Burns fairness opinion delivered to Nelson in connection with the Nelson acquisition, which was publicly available, throughout this time, the special committee continued to request a copy of the financial analysis supporting the BMO Nesbitt Burns fairness opinion, which Nelson refused to provide.

On or around December 15, 2005, LUKOIL confirmed to the special committee that LUKOIL was not willing to sell its 60% ownership in Chaparral due to its ongoing strategy of increasing its asset base in the Republic of Kazakhstan, and that it was not willing to consummate a transaction for the shares of our common stock that it did not already own for consideration other than cash.

 

The special committee first learned of LUKOIL’s interest in a possible transaction during the regular meetings of our full board of directors held on January 19 and January 20, 2006 in Moscow. During these meetings, LUKOIL expressed an interest in seeing if a transaction could be negotiated to purchase the shares of our common stock held by the public and proposed a purchase price of $4.50 to $5.00 per share. Mr. Dilling understood LUKOIL to be proposing a purchase price of $4.75 per share. During these discussions, Mr. Dilling indicated that he would present the proposal from LUKOIL to the special committee for its consideration, but that the per share purchase price was too low and would not be fair to the minority stockholders. At the conclusion of the board meeting on January 19, 2005, LUKOIL’s intention to purchase all non-LUKOIL shares in Chaparral became the plan going forward.

 

Following the board meetings on January 19 and January 20, 2006, and in order to move forward with evaluation of a possible transaction with LUKOIL, the special committee telephonically interviewed Petrie Parkman again, and also telephonically interviewed BMO Nesbitt Burns, regarding advising the special committee in connection with LUKOIL’s proposal, and providing the special committee with a reference valuation analysis of the minority public interest in Chaparral. In January 2006, the special committee met by telephone and resolved to retain Petrie Parkman as financial advisor to the special committee due, in part, to (1) its professional reputation and recent experience in Kazakhstan, (2) the favorable experience of Mr. Berlin and the special committee’s legal advisors with Petrie Parkman on unrelated transactions, and (3) the concerns about the appearance of a conflict if the special committee were to use Nelson’s financial advisors, BMO Nesbitt Burns. Subsequently, the special committee executed an engagement letter with Petrie Parkman, dated as of January 21, 2006, to act as its financial advisor in connection with a potential transaction with LUKOIL. The engagement letter provided that Petrie Parkman would:

 

 

 

 

 

 

Petrie Parkman began its due diligence review of Chaparral shortly after execution of the engagement letter.

 

On January 27, 2006, Petrie Parkman presented the special committee and its legal advisors with a preliminary financial review of Chaparral based on the information it had received to date, including a review of our business, competitors, financial forecasts and reserve reports. Petrie Parkman also reviewed the standard reference valuation methodologies that it had utilized in precedent transactions where Petrie Parkman had provided a fairness opinion and that they planned to utilize in an analysis of Chaparral. These methodologies included: (1) a discounted cash flow analysis of our potential future cash flows assuming various pricing scenarios and discount rates, (2) a comparable transaction analysis based upon the review of implied purchase price multiples for selected comparable assets and corporate acquisition transactions and the application of selected benchmark multiples to the financial and operating measures of Chaparral, and (3) a common stock comparison based upon the review of market capitalization multiples for selected publicly traded companies with operations similar to Chaparral and the application of selected benchmark multiples to the financial and operating measures of Chaparral. Petrie Parkman also discussed recent energy sector merger and acquisition transactions and related transaction metrics. The special committee instructed Petrie Parkman to undertake such further steps as it deemed necessary to complete its analysis. At this meeting, Petrie Parkman also discussed with the special

committee other strategic options potentially available to Chaparral as an independent company, including continued operation as a standalone entity or expansion of Chaparral’s operations beyond the Karakuduk field, or through the possible sale to or merger with a third party, including the assessment by Petrie Parkman of the likelihood that (based on knowledge of the industry but without having made specific inquiries) other companies would have the interest or ability to make an offer to acquire or merge with Chaparral. Petrie Parkman indicated it was in the process of preparing an advocacy presentation for use by Mr. Dilling in discussions with LUKOIL that supported the special committee’s view that LUKOIL should increase its proposed purchase price. Petrie Parkman also indicated that the presentation would be biased in favor of supporting an increase in LUKOIL’s proposed purchase price by making as many persuasive points as possible to support an increase in price.

 

In January 2006, the special committee presented a budget for the special committee to LUKOIL, which was approved by Mr. Movsumov, that included, among other things, compensation for the members of the special committee. Each of Messrs. Berlin and Dilling has received or will receive a one-time fee of $85,000 to cover work by the committee members for the period from January 1, 2006 through March 31, 2006, a fee of $21,500 for the month of April, and a fee of $21,500 for the month of May 2006. The members of the special committee also will be reimbursed for their reasonable out-of-pocket expenses related to services on the special committee.

 

The special committee held telephonic meetings with its legal and financial advisors during the month of January to discuss the meetings held January 19 and 20, 2006, LUKOIL’s proposal and developments since the prior special committee meetings. The special committee also discussed its views with respect to the adequacy of LUKOIL’s offer. The special committee believed that LUKOIL’s $4.75 per share proposal was not attractive, given our then-current trading price, business strategies and growth prospects. The special committee authorized Mr. Dilling to engage in further exploratory discussions with LUKOIL to determine if LUKOIL would be willing to offer a higher price, and authorized Mr. Dilling to give LUKOIL a preliminary update regarding Petrie Parkman’s valuation analysis.

 

In early February 2006, Mr. Dilling advised Mr. Movsumov by telephone that the special committee had no interest in pursuing a transaction at a price of $4.75 per share, and suggested a purchase price of higher than $6.00 per share. Mr. Dilling advised Mr. Movsumov that, if LUKOIL were interested in pursuing a transaction, it should propose a higher per share price and act quickly, in order to minimize any disruption to Chaparral. In order to help LUKOIL evaluate the value of the unaffiliated minority interest in Chaparral, Mr. Dilling discussed with Mr. Movsumov certain aspects of the Petrie Parkman preliminary reference value analysis approach, including preliminary valuation results.

 

On February 8, 2006, the special committee met with representatives of LUKOIL, including Mr. Movsumov and Nikolai Isaakov, head of the legal division of LUKOIL, and LUKOIL’s legal advisors in New York City, New York. The special committee’s legal advisors were present at the meeting by telephone. At that meeting, the special committee indicated that it would be willing to consider a simple, unconditional offer to purchase the outstanding shares of common stock held by our minority stockholders for cash at a purchase price that would be fair to the minority stockholders. Based on, among other things, the Petrie Parkman preliminary reference value analysis and discussions with Whittier Ventures, L.L.C. and Allen & Company Incorporated, two of our largest stockholders and sophisticated investors, with an estimated combined ownership in Chaparral of approximately 13% of the outstanding public shares, the special committee informed LUKOIL that a purchase price of at least $6.00 per share would be necessary for a successful offer. In order to help LUKOIL evaluate the value of the minority interest, Mr. Dilling again discussed the Petrie Parkman preliminary reference value analysis approach with Mr. Movsumov.

 

Following these meetings, Mr. Movsumov sent an offer letter to the special committee dated February 8, 2006, proposing cash consideration of $5.50 per share for our minority stockholders. The proposed transaction was highly complex with numerous conditions, including (1) a condition that Whittier Ventures and Allen & Company enter into a lock-up agreement with LUKOIL in a form satisfactory to LUKOIL before or at the same time as the execution of a definitive transaction agreement, (2) that LUKOIL have completed its tax due diligence review of Chaparral as soon as practicable and no later than 5 p.m. (London time) on February 28, 2006, and (3) that LUKOIL and Chaparral have negotiated and documented a mutually satisfactory definitive

merger agreement including a structure to implement the transaction and any other definitive documentation that might be required for the merger transaction.

 

Following the February 8, 2006 meeting, the special committee discussed LUKOIL’s offer letter with its legal and financial advisors, and forwarded the offer letter to Whittier Ventures and Allen & Company for review. After extensive discussions between the special committee, its legal and financial advisors, LUKOIL’s proposal was rejected as too complex and conditional. In addition, the special committee was of the view that LUKOIL’s $5.50 per share proposal was not sufficiently attractive based on the Petrie Parkman valuation analysis and because LUKOIL appeared to be willing to further negotiate the price, and believed that it may be able to get a higher offer. Mr. Dilling was informed that Whittier Ventures and Allen & Company also had rejected LUKOIL’s offer due to the numerous conditions imposed by LUKOIL, the low offer price and because the offer did not match market conditions.

 

Mr. Dilling met with Mr. Movsumov several times over the next few weeks to negotiate a transaction between Chaparral and LUKOIL. At these meetings, Mr. Dilling advised Mr. Movsumov that the offered purchase price of $5.50 per share was too low, that the special committee wanted a purchase price of more than $6.00 per share, that the structure of the transaction had to be simple and unconditional, and that the special committee was unwilling to agree to any transaction that did not require the approval of a majority of the minority stockholders as a condition to the transaction. Mr. Movsumov indicated that LUKOIL was unwilling to pay more than $5.50 per share. However, Mr. Movsumov indicated that LUKOIL would agree to eliminate most of the conditions to the merger set forth in its February 8, 2006 offer letter but for a lock-up agreement with Whittier Ventures and Allen & Company requiring Whittier Ventures and Allen & Company to vote in favor of the merger at a special meeting of the stockholders and refused to agree to the approval of the merger by a majority of the minority stockholders as a condition to closing.

 

During this time, Mr. Dilling, on behalf of the special committee, held several discussions about a possible transaction with LUKOIL with Brian Murphy, an investment banker at Allen & Company, and James Jeffs, chief investment officer of Whittier Ventures and previous vice chairman and director of Chaparral, at the request of LUKOIL and the LUKOIL representatives on our board of directors. LUKOIL specifically indicated that it would be interested in negotiating a transaction with Allen & Company and Whittier Ventures to purchase all of their shares in Chaparral at a purchase price that would subsequently be paid to all of our shareholders. Over the course of these meetings, Mr. Jeffs expressed an interest in a purchase price of approximately $6.00 per share, and indicated cautious optimism that Allen & Company would be interested in selling its shares at a price that would also be acceptable to Whittier Ventures.

 

The special committee conveyed this information to the LUKOIL representatives on our board of directors, and also urged LUKOIL to speak with Allen & Company and Whittier Ventures directly. The special committee understands that LUKOIL and its financial advisors may have had separate discussions with Allen & Company during this time.

 

The special committee was informed that both Whittier Ventures and Allen & Company refused to execute a lock-up agreement with LUKOIL with respect to the transaction as proposed by LUKOIL at that time, expressing a desire to sell their shares quickly and in a transaction that would not require regulatory approvals. However, both expressed a willingness to sell their shares to LUKOIL independent of a transaction for all of the minority shares. LUKOIL indicated that it would not purchase the shares held by Whittier Ventures and Allen & Company in a separate transaction. Both the special committee and LUKOIL were concerned that if they did so before the record date for the special meeting of stockholders, it would be extremely difficult to obtain the approval of the merger from the majority of the minority stockholders if that condition were to remain in the merger agreement.

 

The special committee met regularly during the month of February and discussed, among other things, its fiduciary duties to the minority stockholders in responding to LUKOIL’s proposal. The special committee determined that it would be in the best interest of the minority stockholders for the special committee’s legal advisors to prepare a draft of the merger agreement, and at a telephonic meeting on February 16, 2006, discussed the terms of a draft merger agreement between Chaparral and LUKOIL. On February 17, 2006, representatives of Baker Botts distributed to LUKOIL a draft merger agreement containing the terms (other

than price) on which the special committee would be willing to recommend a transaction to our board of directors and the minority stockholders. On February 18, 2006, the parties commenced negotiation of the merger agreement. The terms included, among other things, a provision requiring the approval of a majority of the shares of our common stock held by the public.

 

On February 21, 2006, Petrie Parkman presented the special committee and its legal advisors with an update of its diligence and valuation work completed to date and the current commodity and equity market environment. Petrie Parkman also discussed the results of its preliminary reference value analysis of Chaparral based on information received to date, including a draft of the 2005 reserve report and preliminary 2005 financial results, and reviewed the valuation methodologies that it had performed consistent with those reviewed with the committee on January 27, 2006. (see “— Opinion of Financial Advisor to the Special Committee” for further discussion of Petrie Parkman’s reference value analysis methodologies) The preliminary results of these methodologies as of February 21, 2006 are summarized as follows:

 

 

At this meeting, the special committee instructed Petrie Parkman to undertake further steps as it deemed necessary to complete its analysis. Petrie Parkman completed its analysis, and the respective final report was provided to the special committee on March 10, 2006. During these meetings, the special committee noted that during the course of negotiations with LUKOIL, it was under the impression that LUKOIL had threatened to shut our field in, cease development activities at the field, replace our board of directors and terminate the special committee if no deal could be reached. LUKOIL believes this impression is unfounded.

 

From March 1, 2006 through March 5, 2006, the special committee and its legal advisors met with representatives of LUKOIL and its legal advisors in London, England to negotiate the merger agreement. During these meetings, the special committee reiterated that the purchase price should be higher than $6.00 per share. LUKOIL, who had previously been unwilling to pay any more than $5.50 per share, ultimately agreed to pay $5.80 per share. The special committee accepted this offer subject to the ability of Petrie Parkman to deliver a fairness opinion at that price, and approval by the board of directors of each of LUKOIL and Chaparral. The special committee also strongly argued for the inclusion of the provision in the merger agreement requiring approval of the transaction by a majority of the minority stockholders. LUKOIL strenuously objected to this provision and insisted on removal of this condition from the merger agreement. LUKOIL believed, and the special committee ultimately concurred, that it would be mathematically extremely difficult to obtain the approval of a majority of our minority stockholders because:

 

 

 

 

Given that as much as 77% of the minority shares that would be necessary to approve the merger were at risk of not voting for the proposals (in the case of the two large stockholders) or not responding (in the case of shares not represented at a recent meeting), and because it did not want to risk the extraordinary amount of time, effort and expense that is required in a transaction of this type only to have it fail, LUKOIL absolutely refused to agree to a condition requiring the approval of the majority of our minority stockholders. Even if Whittier Ventures and Allen & Company did support the transaction, we would have

needed almost 100% of the remaining shares voting in favor of the transaction to satisfy the majority of the minority condition. This was not considered likely or practical. The special committee reluctantly decided to yield its position on the majority of the minority approval as a condition to the merger based on the belief that a transaction with LUKOIL would be in the best interest of the public stockholders.

 

From March 6, 2006 through March 12, 2006, representatives of the parties continued negotiation of the merger agreement. Through these negotiations the parties finalized the terms of the proposed merger agreement. On March 7, 2006, the special committee met telephonically to discuss the outstanding issues in the merger agreement, the Petrie Parkman fairness opinion, and disclosure schedules to be delivered by Chaparral under the merger agreement.

 

During the morning of March 10, 2006, representatives of Petrie Parkman made a presentation to the special committee and its legal advisors regarding Petrie Parkman’s financial analyses with respect to the proposed transaction. This presentation was substantially similar to Petrie Parkman’s presentation on February 21, 2006, except that Petrie Parkman updated its written materials to provide revised reference values based on recent market activity and additional diligence. Following this presentation, Petrie Parkman orally delivered its opinion to the special committee, which was subsequently confirmed in writing, to the effect that, as of March 10, 2006, based upon and subject to the matters set forth in the opinion, the $5.80 in cash per share of our common stock to be received by the holders of our common stock (other than LUKOIL or its related entities) pursuant to the proposed merger agreement was fair from a financial point of view to those holders.

 

The special committee evaluated the possibility of turning down the proposed merger consideration and remaining a public company, but was concerned that such decision might result in the minority stockholders losing the opportunity to receive $5.80 per share. The special committee noted that our stock price was historically very vulnerable to fluctuations in the international price of oil, and that oil prices are cyclical. The special committee also noted that the our common stock price had been in the range of $2.00 per share as recently as June of 2005. In addition, the special committee noted that LUKOIL is a large, multi-national corporation with many different priorities, which may not include maximizing share value for our public stockholders. The special committee also considered each of Petrie Parkman’s presentations, the implied valuations resulting from the analyses that Petrie Parkman conducted, and that Petrie Parkman was in a position to issue a fairness opinion with respect to a proposed price of $5.80 per share. The special committee further considered that the proposed price was within the range of premiums paid in other comparable transactions with less than a 50% minority ownership, and discounted cash flow reference value ranges analyzed in Petrie Parkman’s presentations. For further discussion of the valuation methods and ranges that the special committee considered, see “— Opinion of Financial Advisor to the Special Committee” below. Finally, the special committee noted that it was unlikely that a third party would attempt to purchase our stock held by minority stockholders due to LUKOIL’s substantial beneficial ownership interest in Chaparral. On March 10, 2006, the special committee indicated to LUKOIL that, subject to resolution of outstanding merger agreement issues, the special committee would recommend the proposed merger based on the $5.80 purchase price per share to our board of directors.

 

On March 11, 2006, the special committee held a telephonic meeting to consider the LUKOIL proposal with representatives of Baker Botts present. The special committee discussed events relating to the transaction since December 2005. A representative of Baker Botts advised the members of the special committee of their legal duties in connection with considering the proposed transaction and reviewed the terms of the merger agreement. Representatives of Baker Botts also reviewed with the special committee various topics relating to Chaparral and the revised LUKOIL proposal. In addition, the special committee discussed and deliberated the following during the meeting:

 

 

 

After extensive discussion and deliberation and based on the factors described below under “— Reasons for the Special Committee’s Determination; Fairness of the Merger,” after which the special committee unanimously determined that the merger agreement, the merger and the transactions contemplated thereby were fair to and in the best interests of Chaparral and its stockholders, including all the unaffiliated stockholders, the special committee approved and declared advisable the merger agreement and the transactions contemplated thereby and resolved to recommend that our stockholders vote to adopt the merger agreement.

 

On March 13, 2006, based on the factors described below and the recommendation of the special committee, our board of directors unanimously determined that the merger agreement, the merger and the transactions contemplated thereby were fair to and in the best interests of Chaparral and its stockholders, including all the unaffiliated stockholders, approved and declared advisable the merger agreement and resolved to recommend that our stockholders vote to adopt the merger agreement.

 

Following the meeting of the special committee and the approval by our board of directors described above, the merger agreement was executed by Chaparral, LUKOIL, and NRL Acquisition. Later that morning, we issued a press release publicly announcing that the parties had entered into the merger agreement.

 

The day following the issuance of the press release announcing the execution of the merger agreement, the first of three purported class action suits was filed in the Court of Chancery of the State of Delaware. Shortly thereafter, a purported class action suit was filed in the Supreme Court of the State of New York against Chaparral, members of our board of directors, and LUKOIL. The complaints generally allege that our directors, Chaparral and LUKOIL breached their fiduciary duties to our stockholders in connection with the merger, and that the merger consideration offered by LUKOIL is inadequate. These suits generally seek to enjoin the merger or, in the alternative, recover damages in an unspecified amount and rescission in the event of a merger, as more fully described in the section of this proxy statement called “THE MERGER — Litigation Relating to the Merger.”

 

The Delaware cases were consolidated on March 31, 2006. The Delaware plaintiffs filed a consolidated amended complaint on July 3, 2006, which in addition to the previous allegations, asserts that the revised preliminary proxy statement filed on June 19, 2006 either did not disclose or falsely characterized numerous matters relating to the Special Committee process, its negotiations efforts, and the merger agreement. Plaintiffs’ consolidated amended complaint is attached to this proxy statement as Exhibit I and is incorporated herein by reference. While the special committee denies the allegations contained in the consolidated amended complaint and believes them to be baseless, all shareholders are encouraged to read the complaint in its entirety to apprise themselves of the complaints made by the plaintiffs, which they purport to bring on behalf of themselves and our other minority stockholders.

 

The parties to the Delaware cases have agreed upon an expedited scheduling order. Defendants filed answers to the amended complaint on July 26, 2006. Defendants have further agreed to keep plaintiffs apprised of the expected date of mailing of the definitive proxy statement and to give plaintiffs notice at least 14 calendar days before the mailing of the definitive proxy statement, to supply plaintiffs with the text of the definitive proxy statement at the soonest practicable date, and not to schedule the vote on the merger transaction less than 30 calendar days after the mailing of the definitive proxy statement. Parties to the New York case have agreed that defendants have until August 31, 2006 to respond to that suit.

Neither the special committee nor Chaparral solicited any alternative proposal to LUKOIL’s offer in light of LUKOIL’s unwillingness to sell its portion of our common stock to a third party, the attractiveness of LUKOIL’s proposal and the restrictions against seeking other offers in the merger agreement. However, under the terms of the merger agreement, we can furnish information to and conduct negotiations with a third party, in connection with an unsolicited superior proposal. No such offer or proposal has been received to date.

 

Certain of our directors are also officers of LUKOIL or its affiliates. Because these directors have financial and other interests that may be different from, and in addition to, your interests in the merger, our board of directors decided that, in order to protect the interests of our unaffiliated stockholders in evaluating and negotiating the merger agreement, a special committee of independent directors who are not affiliated with LUKOIL or its affiliates, and who have no financial interest in the merger (other than as stockholders of Chaparral), should be responsible for these tasks and, if appropriate, recommend the merger and the terms of the merger agreement to our entire board.

 

The special committee has unanimously determined that the terms of the merger agreement and the merger are advisable, fair to and in the best interests of, Chaparral and the stockholders of Chaparral (other than LUKOIL and its affiliates). The special committee unanimously recommended to our board of directors that the merger agreement be adopted and approved and recommended to the stockholders. The special committee considered a number of factors, as more fully described above under “— Background of the Merger” and below under “— Reasons for the Special Committee’s Determination; Fairness of the Merger” in making its recommendation.

 

Our board of directors, acting solely upon the recommendation of the special committee, unanimously determined that the terms of the merger agreement and the proposed merger are fair to, and in the best interests of, Chaparral and our stockholders (other than LUKOIL and its affiliates). Our board of directors, based on the unanimous recommendation of the special committee, recommends that the stockholders vote “FOR” the adoption of the merger agreement and approval of the merger.

 

In recommending adoption of the merger agreement and approval of the merger to our board of directors, the special committee considered a number of factors which, in the opinion of the members of the special committee, supported the special committee’s recommendation and the substantive fairness of the transaction to the minority stockholders, including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

573,209 of those shares between September 13 and September 30, 2005 for an average price of $6.73 per share when our stock price had temporarily spiked possibly due to speculation regarding the Petrokazakhstan transaction, and (5) the most recent Form 4 filed by Allen Holding Company reports that between November 11, 2005 and November 14, 2005 (after Nelson had agreed to be acquired by LUKOIL), Allen & Company sold an aggregate of 124,496 shares at prices between $3.78 and $4.68 per share, more than $1.00 per share below the merger consideration;

 

 

 

 

 

 

 

 

 

Each of these factors favored the special committee’s determination that the merger and related transactions were fair to, and in the best interests of, the public stockholders.

 

     Negative Factors

 

The special committee also considered a variety of risks and other potentially negative factors concerning the merger. The material risks and potentially negative factors considered by the special committee were as follows:

 

 

 

 

 

 

 

The special committee concluded, however, that these risks and potentially negative factors could be managed or mitigated by Chaparral or were unlikely to have a material impact on the merger, and that, overall, the potentially negative factors associated with the merger were outweighed by the potential benefits of the merger.

 

  Procedural Fairness

 

The special committee also determined that the merger is procedurally fair because, among other things:

 

 

In light of the foregoing factors, the special committee determined that the merger is procedurally fair despite the fact that the terms of the merger agreement do not require the approval of at least a majority of our unaffiliated stockholders.

 

  Other Considerations

 

Although the special committee considered our net book value and going concern value in determining the fairness of the merger to our unaffiliated stockholders, the special committee noted the following:

 

 

 

 

 

 

The special committee did not consider liquidation a viable option and did not perform a liquidation analysis of Chaparral because LUKOIL, the controlling stockholder, indicated to the special committee that it was not interested in liquidating Chaparral, and LUKOIL’s consent would have been necessary for any liquidation plan. LUKOIL’s position notwithstanding, the special committee believed the stockholder value to be obtained by execution of a liquidation strategy would have been below the value ranges in Petrie Parkman’s discounted cash flow analysis cases due to the likely perception by potential buyers of Chaparral’s assets that Chaparral was not a viable going concern.

 

There were no firm offers of which we or our affiliates are aware during the past two years for (1) the merger or consolidation of Chaparral with or into another company or the sale or other transfer of all or any substantial part of our assets or (2) the purchase of our securities that would enable the holder to exercise control over us (other than LUKOIL’s acquisition of a controlling interest in us indirectly through its acquisition of Nelson).

 

The special committee and our board of directors were fully aware of and considered possible conflicts of interest of our directors and officers set forth below under “— Interests of Directors and Officers in the Merger”. The special committee, which consists solely of directors who are not officers, directors or employees of LUKOIL or our employees, and who have no financial interest in the proposed merger different from our stockholders generally, was aware of these interests and considered them in making its determination.

 

The special committee, which consists of the two independent members of our board of directors, negotiated the merger agreement and the transactions contemplated thereby on behalf of the public stockholders. Neither our board of directors nor the special committee retained an unaffiliated representative to act solely on behalf of the public stockholders for purposes of negotiating the merger agreement and the transactions contemplated thereby. None of our directors are employees of Chaparral.

 

  Conclusion

 

After considering these factors, the special committee concluded that the positive factors relating to the merger outweighed the negative factors. Because of the variety of factors considered, the special committee did not find it practicable to quantify or otherwise assign relative weights to, and did not make specific assessments of, the specific factors considered in reaching its determination. In addition, individual members of the special committee may have assigned different weights to various factors. The determination of the special committee was made after consideration of all of the factors together.

 

Our board of directors consists of five directors, two of whom serve on the special committee. Following the special committee’s meetings with its legal and financial advisors, on March 13, 2006, our board of directors, acting solely upon the recommendation of the special committee, unanimously approved the merger agreement and the transactions contemplated thereby, including the merger. In considering the determination of the special committee, our board of directors believed that the analysis of the special committee was reasonable and adopted the special committee’s conclusion and the analysis underlying the conclusion.

 

Our board of directors believes that the merger agreement and the merger are substantively and procedurally fair to, and in the best interests of, our unaffiliated stockholders, for all of the reasons set forth above under “— Reasons for the Special Committee’s Determination; Fairness of the Merger.”

 

Our board of directors determined that the merger is procedurally fair despite the fact that the terms of the merger agreement do not require the approval of at least a majority of our unaffiliated stockholders.

 

Other than the recommendations of the special committee and our board of directors that the stockholders vote in favor of the adoption and approval of the merger agreement, no other person filing the Schedule 13E-3 with the Securities and Exchange Commission has made any recommendation with respect to the merger.

 

Under the rules of the Securities and Exchange Commission, LUKOIL and NRL Acquisition are required to express their belief as to the fairness of the proposed merger to our unaffiliated stockholders. LUKOIL and NRL Acquisition did not participate in the deliberations of the special committee regarding the fairness to the stockholders of the merger or receive advice from Petrie Parkman as to the fairness, from a financial point of view, of the merger consideration. However, LUKOIL and NRL Acquisition have considered the factors examined by the special committee described in the section of this proxy statement entitled “— Reasons for the Special Committee’s Determination; Fairness of the Merger” and expressly adopt the analysis and conclusions of the special committee. LUKOIL controls 60% of our outstanding common stock and has committed to vote its shares in favor of the merger agreement and the merger. The affirmative vote of the shares controlled by LUKOIL is sufficient under Delaware law to adopt the merger agreement and approve the merger.

 

The special committee, which consists of the two independent members of our board of directors, negotiated the merger agreement and the transactions contemplated thereby on behalf of the public stockholders. Neither our board of directors nor the special committee retained an unaffiliated representative to act solely on behalf of the public stockholders for purposes of negotiating the merger agreement and the transactions contemplated thereby. None of our directors are employees of Chaparral.

 

The determination of fairness made by LUKOIL and NRL Acquisition relates to all the unaffiliated stockholders of Chaparral. Their views as to the fairness of the merger to our unaffiliated stockholders should not be construed as a recommendation to any stockholder as to whether such stockholder should vote in favor of the merger agreement and the merger.

 

On March 10, 2006 Petrie Parkman rendered its oral opinion, subsequently confirmed in writing, that, as of March 10, 2006, and based upon and subject to the matters set forth therein, the merger consideration to be received by the holders of shares of common stock, other than LUKOIL and its affiliates, in the merger was fair, from a financial point of view, to those holders.

 

The full text of the Petrie Parkman opinion, dated March 10, 2006, which sets forth, among other things, the assumptions made, procedures followed, matters considered, and qualifications and limitations of the review undertaken by Petrie Parkman in rendering its opinion is attached as Exhibit C to this Proxy Statement and is incorporated in this document by reference. The summary of the Petrie Parkman opinion set forth in this document is qualified in its entirety by reference to the full text of the opinion. We urge you to read the Petrie Parkman opinion carefully and in its entirety. Petrie Parkman provided its opinion for the information and assistance of the special committee in connection with its consideration of the merger agreement and the merger. The Petrie Parkman opinion does not constitute a recommendation to any holder of shares of our common stock as to how such holder should vote on the merger. The opinion does not address the relative merits of the merger as compared to any alternative business transaction or strategic alternative that might be available to us, nor does it address our underlying business decision to engage in the merger. Petrie Parkman’s opinion and its presentation to the special committee were among many factors taken into consideration by the special committee in approving the merger agreement and making its recommendation regarding the merger.

 

In connection with Petrie Parkman’s role as financial advisor and preparation of its valuation report, the special committee instructed Petrie Parkman to be available to:

 

 

In arriving at its opinion, Petrie Parkman has, among other things:

 

1. reviewed certain publicly available business and financial information relating to Chaparral, including (i) the Annual Reports on Form 10-K and related audited financial statements for the fiscal years ended December 31, 2002, December 31, 2003 and December 31, 2004 and (ii) the Quarterly Report on Form 10-Q and related unaudited financial statements for the fiscal quarter ended September 30, 2005;

 

2. reviewed non-publicly available business and financial information relating to Chaparral contained within its draft Annual Report on Form 10-K and related audited financial statements for the fiscal year ended December 31, 2005;

 

3. reviewed certain estimates of Chaparral’s oil and gas reserves, including estimates of proved and non-proved reserves located in the Republic of Kazakhstan prepared by the independent engineering firm of McDaniel & Associates Consultants Ltd. (“McDaniel”) as of December 31, 2005;

 

4. analyzed certain historical and projected financial and operating data of Chaparral prepared by the management and staff of Chaparral, including the projections described below under “— Selected Financial Projections;”

5. discussed the current operations and prospects of Chaparral with the management and staff of Chaparral;

 

6. reviewed the historical market price and trading history of the Chaparral Common Stock;

 

7. compared recent stock market capitalization indicators for Chaparral with recent stock market capitalization indicators for certain other publicly-traded independent energy companies;

 

8. compared the financial terms of the merger with the financial terms of other transactions that we deemed to be relevant;

 

9. reviewed a draft dated March 9, 2006 of the merger agreement; and

 

10. reviewed such other financial studies and analyses and performed such other investigations and taken into account such other matters it deemed necessary or appropriate.

 

In connection with its opinion, Petrie Parkman has assumed and relied upon, without assuming any responsibility for, or independently verifying, the accuracy and completeness of all information supplied or otherwise made available by Chaparral. Petrie Parkman has further relied upon the assurances of representatives of the management of Chaparral that they are unaware of any facts that would make the information provided to Petrie Parkman incomplete or misleading in any material respect. With respect to projected financial and operating data, Petrie Parkman has assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of our management and staff relating to our future financial and operational performance. With respect to the estimates of oil and gas reserves, Petrie Parkman has assumed that they have been reasonably prepared on bases reflecting the best available estimates and judgments of the management and staff of Chaparral, and their engineering consultants, relating to the oil and gas properties of Chaparral. Petrie Parkman has not made an independent evaluation or appraisal of the assets or liabilities of Chaparral, nor, except for the estimates of oil and gas reserves referred to above, has Petrie Parkman been furnished with any such evaluations or appraisals. In addition, Petrie Parkman has not assumed any obligation to conduct, nor has Petrie Parkman conducted, any physical inspection of the properties or facilities of Chaparral. Petrie Parkman also assumed that the final form of the merger agreement would be substantially similar to the last draft reviewed, and that the merger will be consummated in accordance with the terms of the merger agreement without waiver of any of the conditions precedent to the merger contained in the merger agreement. In connection with Petrie Parkman’s engagement, Petrie Parkman was not requested to, and did not, solicit third party indications of interest in the acquisition of all or a part of Chaparral.

 

Petrie Parkman’s opinion relates solely to the fairness from a financial point of view of the consideration to the holders of the Shares. Petrie Parkman’s opinion was provided for the information and assistance of the special committee in connection with its consideration of the merger agreement and the merger, and does not constitute a recommendation to any holder of Chaparral Common Stock as to how such stockholder should vote on the merger. Petrie Parkman’s opinion does not address the relative merits of the merger as compared to any alternative business transaction or strategic alternative that might be available to Chaparral, nor does it address the underlying business decision of Chaparral to engage in the merger. Petrie Parkman has not been asked to consider, and its opinion does not address, the prices at which the Chaparral Common Stock will actually trade at any time. Petrie Parkman is not rendering any legal or accounting advice and understands Chaparral is relying on its legal counsel and accounting advisors as to legal and accounting matters in connection with the merger.

 

Petrie Parkman’s opinion was rendered on the basis of conditions in the securities markets and the oil and gas markets as they existed and could be evaluated on the date of Petrie Parkman’s opinion and the conditions and prospects, financial and otherwise, of Chaparral as they were represented to Petrie Parkman as of the date of Petrie Parkman’s opinion or as they were reflected in the materials and discussions described above.

 

Summary of Petrie Parkman’s Analyses

 

The following is a summary of the presentation made by Petrie Parkman to the special committee on March 10, 2006 in connection with the delivery of its opinion.

The summary includes information presented in tabular format. In order to fully understand the financial analyses performed by Petrie Parkman, the tables must be read together with the text accompanying each summary. The tables alone do not constitute a complete description of such financial analyses. Considering the data set forth in the tables without considering the full narrative description in the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Petrie Parkman.

 

Implied Premium Analysis

 

Petrie Parkman calculated the premiums implied by comparing the $5.80 per share Consideration to the historical trading prices of the Chaparral Common Stock for specified periods between March 4, 2005 to March 6, 2006, the last trading day examined before Petrie Parkman’s presentation to the special committee and calculated the following results:

 

 

Discounted Cash Flow Analysis

 

Petrie Parkman conducted a discounted cash flow analysis for the purpose of determining equity reference value ranges per share of the Chaparral Common Stock. Petrie Parkman calculated the net present value of estimates of future after-tax cash flows of our oil and gas reserve assets based on the proved and non-proved reserve estimates referred to above and for non-reserve assets utilizing information we provided.

 

Petrie Parkman evaluated four scenarios in which the principal variables were oil and gas prices. The four pricing scenarios — Pricing Case I, Pricing Case II, Pricing Case III, and Strip Pricing Case Flat — were based on benchmarks for spot sales of West Texas Intermediate crude oil. The Strip Pricing Cases were based upon the average of oil and gas futures contract prices quoted on the New York Mercantile Exchange. Benchmark prices for cases I, II, and III were projected to be $45.00, $55.00 and $65.00/Bbl. for oil. All pricing cases for the fiscal year ended 2006 reflect actual prices from January 1, 2006 through March 6, 2006 blended with current strip prices through the end of the year. Petrie Parkman applied appropriate quality and transportation adjustments to these benchmarks based on our historical realized netback prices.

 

Applying various after-tax discount rates, ranging from 12.5% to 45.0% depending on reserve category, to the after-tax cash flows, assuming a carry-over of existing tax positions, adjusting for other assets and liabilities, long-term debt, net working capital and minority interest, Petrie Parkman calculated the following equity reference value ranges of the Shares for each pricing case:

 

 

Petrie Parkman noted that the Consideration was within or above each of its Equity Reference Value Ranges.

 

Property Transactions Analysis

 

Petrie Parkman reviewed selected publicly available information for 14 oil and gas property transactions between January 2003 and March 2006 in Kazakhstan to determine the transaction parameters relevant for an analysis of Chaparral. Based on a review of the purchase price multiples of proved reserves for the acquired

assets in each transaction, Petrie Parkman determined benchmark ranges of purchase prices to our corresponding proved reserve figures in order to yield enterprise reference value ranges for our proved reserves. The maximum, mean, median and minimum implied multiples for these transactions are set forth in the following tables together with certain benchmark multiples chosen by Petrie Parkman based on a review of these implied multiples.

 

References to oil and gas “equivalents” are for purposes of comparing quantities of oil with quantities of gas or to express these different commodities in a common unit. The term “BOE” means barrel of oil equivalent. In calculating Mcf and Bbl equivalents, Petrie Parkman used a generally recognized standard in which one Bbl is equal to six Mcf.

 

 

Following adjustments for our reserves, Petrie Parkman determined an enterprise reference value range of $316 million to $449 million. After deducting long-term debt, net working capital, and minority interest from the enterprise reference value range and dividing by the diluted number of shares of common stock outstanding, the resulting equity reference value range for the Shares was $4.63 to $6.60.

 

Petrie Parkman noted that the Consideration was within its Equity Reference Value Range.

 

Company Transaction Analysis

 

Petrie Parkman reviewed selected publicly available information on 12 North American and 13 Former Soviet Union (“FSU”) and European company acquisition transactions and offers for control in the oil and gas exploration and production industry that were announced between January 1997 and March 2006.

 

 

Using publicly available information, with respect to North American company transactions, Petrie Parkman calculated purchase price of equity multiples of latest twelve months (“LTM”), current year’s and next year’s estimated discretionary cash flow and total investment, which Petrie Parkman defined for the purposes of this analysis as purchase price of equity plus net obligations assumed, multiples of LTM, current year’s and next year’s estimated earnings before interest, taxes, depreciation, depletion and amortization expense (“EBITDA”) and proved reserves for the target company in each transaction. In each case, estimated discretionary cash flow and EBITDA was based on First Call consensus projections and research analyst projections. Using publicly available information with respect to FSU/Europe company transactions, Petrie Parkman calculated purchase price of equity multiples of LTM discretionary cash flow and total investment multiples of LTM EBITDA and reserves for the target company in each transaction.

The maximum, mean, median and minimum implied multiples in these transactions are set forth below. The table below also includes benchmark multiple ranges selected by Petrie Parkman based on a review of the implied multiples in the selected transactions.

 

 

Petrie Parkman applied the benchmark multiples to our estimated September 30, 2005 LTM, current year’s and next year’s estimated discretionary cash flow and EBITDA and proved reserves and adjusted for long-term debt, net working capital and minority interest, where appropriate, to determine enterprise reference value ranges for Chaparral.

 

Petrie Parkman also performed a premium analysis for the North American energy sector company acquisition transactions and offers for control, and for company acquisition transactions in which the acquiror owned greater than 50% of the target company at the time of the offer which compared the offer price per target company share with the target company’s share price measured one day, 30 days and 60 days before the public announcement of the respective transaction. The maximum, mean, median and minimum premiums (which Petrie Parkman defined for the purposes of this analysis as excess of offer price over target company’s stock price stated as a percentage above the target company’s stock price), together with benchmark premium ranges selected by Petrie Parkman based on a review of the implied premiums, for these periods were as follows:

 

Summary of Precedent Minority Close-outs

 

All Cash Proposals Where the Acquirer’s Ownership Equaled 50.1% to 80.0% at Time of Offer

 

 

All Stock or Combination Stock/Cash Proposals Where the Acquirer’s Ownership Equaled 50.1% to 80.0% at Time of Offer

 

 

All Cash Proposals Where the Acquirer’s Ownership Equaled 80.1+% at Time of Offer

 

 

All Stock or Combination Stock/Cash Proposals Where the Acquirer’s Ownership Equaled 80.1+% at Time of Offer

 

 

Benchmark Ranges

 

 

Petrie Parkman applied the range of benchmark premiums to our corresponding stock prices for the periods of one day, 30 days and 60 days before March 6, 2006 and adjusted for long-term debt, net working capital, and minority interest to determine enterprise reference value ranges for Chaparral.

 

Petrie Parkman determined from the enterprise reference value ranges implied by these multiples a composite enterprise reference value range of $350 million to $450 million. After deducting long-term debt, net working capital, and minority interest from the enterprise reference value range and dividing by the diluted number of shares of common stock outstanding, the resulting equity reference value range for the Shares was $5.14 to $6.62.

 

Petrie Parkman noted that the Consideration was within its Equity Reference Value Range.

Capital Market Comparison

 

Using publicly available information, Petrie Parkman calculated market capitalization multiples of historical and projected discretionary cash flow for selected publicly traded companies with operating and financial characteristics Petrie Parkman believed to be comparable to us. Petrie Parkman also calculated enterprise value multiples of historical operating cash flow, historical and projected EBITDA and proved reserves for those companies. In each case, multiples of projected discretionary cash flow and EBITDA were based upon projected discretionary cash flow and EBITDA published by equity research analysts. Petrie Parkman defined market capitalization for purposes of this analysis as market value of common equity as of March 6, 2006. Petrie Parkman determined the enterprise value of each company by adding the sum of its long-term and short-term debt to the sum of the market value of its common equity, the market value of its preferred stock (or, if not publicly traded, liquidation or book value) and the book value of its minority interest in other companies and subtracting net working capital.

 

Petrie Parkman determined that the following companies were relevant to an evaluation based on Petrie Parkman’s view of the comparability of the operating and financial characteristics of these companies to those of Chaparral:

 

• Dragon Oil		• Premier Oil plc
• Harvest Natural Resources		• Vaalco Energy, Inc.
• JKX Oil & Gas plc		• Tullow Oil plc
• Medico Energi International

 

The maximum, mean, median and minimum multiples for the seven companies are set forth below. The table also includes benchmark multiple ranges selected by Petrie Parkman based on a review of the comparable company multiples.

 

 

From the enterprise reference value ranges implied by these multiples, Petrie Parkman determined a composite enterprise reference value range under this method of $350 million to $450 million. After deducting long-term debt, net working capital, and minority interest from the enterprise reference value range and dividing by the diluted number of shares of common stock outstanding, the resulting equity reference value range for the Shares was $5.01 to $6.49.

 

Petrie Parkman noted that the Consideration was within its Equity Reference Value Range.

 

The description set forth above constitutes a summary of the analyses employed and factors considered by Petrie Parkman in rendering its opinion to the special committee. Petrie Parkman believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering all analyses and factors, could create an incomplete view of the process underlying its opinion. The preparation of a fairness opinion is a complex, analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and is not necessarily susceptible to partial analysis or summary description. In arriving at its opinion, Petrie Parkman did not attribute any particular weight to any analysis considered by it, but rather made qualitative

judgments as to the significance and relevance of each analysis. Any estimates resulting from the analyses are not necessarily indicative of actual values, which may be significantly more or less favorable than as described above. In addition, analyses based on forecasts of future results are not necessarily indicative of future results, which may be significantly more or less favorable than suggested by these analyses. Estimates of reference values of companies do not purport to be appraisals or necessarily reflect the prices at which companies may actually be sold. Because the estimates are inherently subject to uncertainty and based upon numerous factors or events beyond the control of the parties and Petrie Parkman, Petrie Parkman cannot assure you that the estimates will prove to be accurate.

 

No company used in the analysis of other publicly traded companies nor any transaction used in the analyses of comparable transactions summarized above is identical to Chaparral or the merger. Accordingly, these analyses must take into account differences in the financial and operating characteristics of the selected publicly traded companies and differences in the structure and timing of the selected transactions and other factors that would affect the public trading value and acquisition value of the companies considered.

 

Pursuant to the terms of a letter agreement dated as of January 21, 2006, we retained Petrie Parkman to act as financial advisor to the special committee. Pursuant to that engagement letter, we agreed to pay Petrie Parkman fees of $750,000 for its financial advisory services in connection with rendering its fairness opinion for the merger. In addition, we have agreed to reimburse Petrie Parkman for its reasonably incurred out-of-pocket expenses incurred in connection with the engagement, including fees and disbursements of its legal counsel. We have also agreed to indemnify Petrie Parkman and its officers, directors, agents, employees and controlling persons for liabilities related to or arising out of its rendering of services under its engagement, including liabilities under the federal securities laws. Furthermore, in the ordinary course of business, Petrie Parkman or its affiliates may trade in the debt or equity securities of Chaparral or LUKOIL for the accounts of its customers or for its own account and, accordingly, may at any time hold a long or short position in such securities.

 

Petrie Parkman, as part of its investment banking business, is continually engaged in the evaluation of energy-related businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. The special committee selected Petrie Parkman as its financial advisor because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the merger.

 

McDaniel & Associates Consultants is a leading international petroleum reservoir consultant and is familiar with the subject properties. McDaniel & Associates was selected to prepare the December 31, 2005 reserve report because of its expertise and KKM’s satisfaction with its prior services. During the past two years, McDaniel received approximately $225,000 as consideration for annual reserve reports on KKM. In addition, during the past two years, McDaniel received the following fees for preparing annual reserve reports on properties held by other Chaparral affiliates: approximately $200,000 from Nelson Petroleum Buzachi B.V.; approximately $212,000 from TOO “Kazahoil Aktobe”; and approximately $20,000 from TOO “Arman.” Except for the provision of professional services on a fee basis, McDaniel has no commercial arrangement with KKM, its abovementioned affiliates, or any other person or company involved in the interests which are the subject of this report.

 

McDaniel’s most recent reserve report on KKM is summarized in Part I, Item 2 of our Form 10-K for the fiscal year ended December 31, 2005, which is attached hereto as Exhibit E.

 

LUKOIL engaged Aton Capital Limited to act as its lead adviser with respect to a proposed transaction pursuant to which LUKOIL would directly or indirectly acquire shares of Chaparral. LUKOIL selected Aton as its financial advisor because of Aton’s position as a recognized market leader among Russian investment banks. Aton is a leader among investment banks with experience in the Caspian region and Kazakhstan and

also has extensive experience in valuation analyses for exploration and production businesses in those regions. Other than their financial consulting services regarding Chaparral, there are no material relationships for which Aton has been compensated by LUKOIL or its affiliates.

 

The scope of Aton’s engagement was to recommend to LUKOIL an offer price range for Chaparral shares. Aton’s limited scope and time valuation was conducted using only publicly available information, and Aton was not responsible for providing LUKOIL with any tax, accounting, appraisal, legal, regulatory or other specialist advice.

 

Aton prepared two valuation reports for LUKOIL during the course of its engagement: one dated January 13, 2006, and one dated March 13, 2006. In both reports, Aton applied two core valuation techniques conventionally used in investment banking: discounted cash flow analysis and precedent transactions multiples. Other alternative methodologies of valuation, such as comparable trading multiples, were used as verification of the two core valuation techniques.

 

Using the discounted cash flow approach, Aton estimated the value of equity of Chaparral at approximately $4.15 per share as of March 13, 2006.

 

Based on precedent transaction multiples, taking into account the two most relevant transactions, the acquisition of Petrokazakhstan by China National Petroleum Corporation and the acquisition of Nelson Resources Limited by LUKOIL, Aton estimated our implied share price to be $6.91 per share as of March 13, 2006. Aton, therefore, estimated the fair equity value of Chaparral as of March 13, 2006 to be $5.53 per share, an average of the two core valuation techniques.

 

Before the execution of the merger agreement, we and our representatives provided representatives of Petrie Parkman certain non-public business and financial information about Chaparral. This information included the following projections:

 

 

We do not as a matter of course make public any projections as to future performance or earnings, and the projections set forth above are included in this proxy statement only because this information was provided to Petrie Parkman in connection with its evaluation of Chaparral. The projections were not prepared with a view to public disclosure or compliance with the published guidelines of the Securities and Exchange Commission or the guidelines established by the American Institute of Certified Public Accountants regarding projections or forecasts. The projections do not purport to present operations in accordance with generally accepted accounting principles, and our independent registered public accounting firm have not examined or compiled the projections and accordingly assume no responsibility for them. Our internal financial forecasts (upon which these projections were based in part) are, in general, prepared solely for internal use and capital budgeting and other management decisions and are subjective in many respects and thus susceptible to interpretations and periodic revision based on actual experience and business developments.

The projections also reflect numerous assumptions made by our management, including assumptions with respect to development, sales of our products, general business, economic, market and financial conditions and other matters, including effective tax rates and interest rates and the anticipated amount of borrowings by Chaparral, all of which are difficult to predict and many of which are beyond our control. Accordingly, there can be no assurance that the assumptions made in preparing the projections will prove accurate. We expect that there will be differences between actual and projected results, and actual results may be materially greater or less than those contained in the projections. The inclusion of the projections in this proxy statement should not be regarded as an indication that we or our representatives (including the special committee and Petrie Parkman) considered or consider the projections to be a reliable prediction of future events, and the projections should not be relied upon as such.

 

The detailed financial projections described in this proxy statement included the following estimates and judgments made by our management:

 

 

We believe that the projections were reasonable at the time they were made; however, you should not assume that the projections continue to be accurate or reflective of our management’s current view. The projections were disclosed by the special committee to Petrie Parkman as a matter of Petrie Parkman’s due diligence, and are included in this proxy statement on that account. None of Chaparral or the special committee or any of their respective representatives has made or makes any representation to any person regarding the ultimate performance of Chaparral compared to the information contained in the projections, and none of them intends to update or otherwise revise the projections to reflect circumstances existing after the date when made or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the projections are shown to be in error.

 

Chaparral

 

Our purpose for engaging in the merger is to enable our stockholders (other than LUKOIL and its affiliates) to receive $5.80 per share in cash, without interest and less any applicable withholding taxes,

representing a premium over the market price of our common stock before we executed the merger agreement. In addition, the merger provides our unaffiliated stockholders immediate liquidity for their investment in us with reduced transaction costs and minimal risk that the contemplated transaction will not be finalized. Shares of our common stock have been trading at a relatively low trading volume. We believe that this is due to our relatively low market capitalization and share price and the fact that LUKOIL holds a large portion of our outstanding shares and we have not attracted meaningful analyst coverage. The merger will provide our unaffiliated stockholders with immediate liquidity at a specified price for their shares without the usual transaction costs associated with open market sales.

 

We are undertaking this merger now primarily because it presents the most viable alternative for us at this time, the benefits of which may not be available to our unaffiliated stockholders in the future, and for the reasons set forth in the section of this proxy statement entitled “— Background of the Merger,” “— Reasons for the Special Committee’s Determination; Fairness of the Merger,” and “— Reasons for the Determination of our Board of Directors; Fairness of the Merger.”

 

LUKOIL, NRL Acquisition and Open Joint Stock Company “Oil Company “LUKOIL”

 

The purpose of LUKOIL, NRL Acquisition and their ultimate parent, Open Joint Stock Company “Oil Company “LUKOIL,” engaging in the merger is to acquire all of the shares of our common stock that they do not currently own, terminate our status as a publicly traded company, and afford our unaffiliated stockholders the opportunity to dispose of their shares of our common stock for cash at a value that the special committee and the respective boards of directors of LUKOIL and NRL Acquisition and Chaparral have determined to be fair to our unaffiliated stockholders. As part of LUKOIL’s ongoing strategy of increasing its asset base in the Republic of Kazakhstan, LUKOIL chose to proceed with the merger shortly after completing its acquisition of Nelson in December 2005. In determining to proceed with the merger, LUKOIL and NRL Acquisition also considered the factors described in the section of the proxy statement entitled “— Position of LUKOIL and NRL Acquisition as to Fairness.”

 

Structure of the Merger

 

The transaction has been structured as a merger of NRL Acquisition with and into Chaparral in order to permit the acquisition of Chaparral in a single step and the preservation of our identity. The merger was structured as a cash transaction because that was the consideration offered by LUKOIL.

 

 

Pursuant to the merger agreement, LUKOIL will acquire Chaparral for $5.80 in cash, without interest and less any applicable withholding taxes, per share of our common stock (other than shares held by LUKOIL or its affiliates and any shares with respect to which appraisal rights have been properly perfected under Delaware law), through the merger of its wholly owned subsidiary, NRL Acquisition, with and into Chaparral. At the closing of the merger, Chaparral will be an indirect wholly owned subsidiary of LUKOIL, and NRL Acquisition will cease to exist as a separate entity. As a result, the interest of LUKOIL and its affiliates in our net book value and net earnings will increase from 60% to 100%. This will constitute an approximately $68 million increase in LUKOIL’s interest in our net book value and will entitle LUKOIL to all future income generated by our operations, if any, and any future increase in our value. Similarly, LUKOIL also will bear the risk of all losses we generate and any decrease in our value after the merger.

 

As a result of the merger, Open Joint Stock Company “Oil Company “LUKOIL” and LUKOIL will increase their indirect shareholding in, share of net assets of, and share of net income of Chaparral from 60% to 100%. NRL Acquisition will cease to exist. The merger will increase the net book value of the investments of Open Joint Stock Company “Oil Company “LUKOIL” and LUKOIL in us by approximately $68 million as of December 31, 2005. If the merger had been consummated on December 31, 2005, the effect of the merger on the net income of Open Joint Stock Company “Oil Company “LUKOIL” and LUKOIL would have been to increase the net income for the year ended December 31, 2005 generated by Chaparral by $12.4 million from $18.5 million to $30.9 million. As a result of the merger and the relevant tax legislation we expect no

additional tax benefit or expense to accrue to Open Joint Stock Company “Oil Company “LUKOIL” and LUKOIL. There will be no effect on income attributable to stockholders from the expiry of the Net Operating Losses as these have been provided against in full in prior years. A deferred taxation valuation allowance has been made against the full amount of these net operating losses. We do not anticipate any further tax consequences beyond these items.

 

As an additional consequence of the closing of the merger, our shares of common stock will no longer be quoted on the OTC Bulletin Board or publicly traded or quoted on any other securities exchange or market. Furthermore, the registration of our common stock under the Securities Exchange Act of 1934, as amended, will be terminated upon application to the Securities and Exchange Commission after the merger. Termination of the registration of our common stock under the Exchange Act will substantially reduce the information required to be furnished by us to our stockholders and would make certain provisions of the Exchange Act no longer applicable to us. These include the short-swing profit recovery provisions of Section 16(b), the requirement to furnish proxy statements in connection with stockholders’ meetings under Section 14(a) and the related requirements to furnish an annual report to stockholders.

 

The merger presents several benefits to the public stockholders. In particular, if the merger and related transactions are consummated, the public stockholders (other than stockholders who perfect their appraisal rights under Delaware law) will receive $5.80 per share in cash, which represents a premium of (1) approximately 9% over $5.30, the last trade price for the shares of our common stock on March 10, 2006, the last trading day before we announced the execution of the merger agreement, (2) approximately 12% over $5.19, the average last trade price per share during the one week period preceding the initial announcement regarding the executed merger agreement, and (3) approximately 180% over the average closing price of our common stock during the first half of 2005. The merger will provide a source of liquidity not otherwise available to the public stockholders and will eliminate the public stockholders’ future exposure to fluctuations in the market value of the shares of our common stock. In addition, LUKOIL indicated to the special committee that the business and operations of Chaparral were not a strategic focus of LUKOIL at this time, and may not be in the future, which could decrease the value and liquidity of the public shares. Furthermore, the special committee believed that it was not in the best interest of the minority shareholders to continue with LUKOIL as a majority shareholder and operator of the field. The minority stockholders have a carried interest in Chaparral, and LUKOIL did not want to continue to use its expertise and resources to operate the field for the benefit of the minority stockholders.

 

However, there are certain potential detriments to the public stockholders that are inherent in the merger. In particular, if the merger is consummated, the public stockholders will no longer have an equity interest in Chaparral and will no longer have the opportunity to participate in future earnings growth, if any, of Chaparral.

 

In contrast to the public stockholders, if the merger is consummated, LUKOIL will have a 100% interest in our net book value and the opportunity to participate in our future growth and earnings, if any. In addition, because shares of our common stock will cease to be registered under the Exchange Act, we will have increased operating efficiencies resulting from the reduction in time that our executives and other employees must devote to compliance with SEC reporting requirements, and our operations may be consolidated with LUKOIL’s other businesses.

 

 

Following completion of the merger, LUKOIL may cause Chaparral to liquidate and distribute its assets elsewhere within LUKOIL’s corporate structure. However, LUKOIL and Chaparral will continue to evaluate our business and operations after the merger and may develop new plans and proposals that LUKOIL and Chaparral consider to be in the best interests of LUKOIL.

 

If the merger is not completed because the conditions to the merger are not satisfied or waived, we expect that our current management will continue to operate our business substantially as presently operated. However, LUKOIL has informed us that, if the merger is not completed, it may re-evaluate our role within LUKOIL’s overall corporate strategy.

 

In considering the recommendation of the special committee to our board of directors and the recommendation of our board of directors, you should be aware that some of our directors and officers may have interests in the merger that may be different from, or in addition to, yours as a stockholder generally and may create potential conflicts of interests. These interests are described below and in the section of this proxy statement entitled “PRINCIPAL STOCKHOLDERS” and as set forth in Exhibit D to this proxy statement.

 

Our board of directors consists of five members, three of whom are officers or employees of LUKOIL or its affiliates: Dmitry Timoshenko, who is also Vice-President/General Counsel for LUKOIL; Oktay Movsumov, who is also Vice-President/Treasurer for LUKOIL; and Boris Zilbermints, who is also Regional Director of LUKOIL Overseas Service Limited’s branch in Kazakhstan. The other two members of our board of directors are independent directors who are not officers, directors or employees of LUKOIL or its affiliates, or employed by us. Before LUKOIL acquired Nelson and became our majority stockholder, our board of directors consisted of three Nelson appointees and two independent directors. Our board of directors appointed a special committee consisting of our two independent directors that was empowered to, among other things, evaluate, negotiate and recommend the merger agreement and to evaluate whether the merger is in the best interests of our stockholders who are unaffiliated with LUKOIL and its affiliates. Our board of directors established the special committee before LUKOIL acquired Nelson and became our majority stockholder.

 

Mr. Berlin, one of our directors and a member of the special committee, is the non-employee secretary of Chaparral and has performed legal services we required from time to time at his usual and customary billing rate. In 2005, we paid Mr. Berlin $126,500 in legal fees for services provided to us in 2005, and we have paid Mr. Berlin $31,500 in legal fees for services provided to us between January 1, 2006 and March 31, 2006.

 

The special committee was aware of the differing interests described above and considered them, among other matters, in evaluating and negotiating the merger agreement and the merger and in recommending to our board of directors that the merger agreement be adopted and the merger be approved. In addition, each of the members of our board of directors was aware of these interests and considered them, among other matters, in approving the merger agreement and the merger.

 

 

Each member of the special committee will be compensated for serving as a member of the special committee. This compensation was authorized by our board of directors in order to compensate the members of the special committee for the significant additional time commitment that was required of them in connection with fulfilling their duties and responsibilities as members of the special committee. It is payable whether or not the merger is completed. Each of Messrs. Berlin and Dilling has received or will receive a one-time fee of $25,000 to cover work by the committee members through December 31, 2005 in addition to our normal compensation for board committee participation of (1) $700 for each special committee meeting attended by teleconference, (2) $1,000 for each special committee meeting attended in person, and (3) $2,000 per day while traveling on business related to the special committee, including committee meetings. In addition, each of Messrs. Berlin and Dilling has received or will receive a one-time fee of $85,000 to cover work by the committee members for the period from January 1, 2006 through March 31, 2006, a fee of $21,500 for the month of April, and a fee of $21,500 for the month of May 2006. The members of the special committee also will be reimbursed for their reasonable out-of-pocket expenses related to his services on the special committee. In addition, Chaparral agreed to indemnify and hold harmless each member of the special committee with respect to his service on, and any matter or transaction considered by, the special committee to the fullest extent authorized or permitted by law.

 

 

Mr. Berlin, a member of our board of directors and the special committee, beneficially owns 167 shares of our common stock as of          , 2006, which is less than 1% of our outstanding shares of common stock. None of our other directors or executive officers own any shares of our common stock. Mr. Berlin will receive the same

merger consideration of $5.80 per share as our other stockholders if the merger is consummated. The merger consideration that will be paid to Mr. Berlin is $968.60, less any applicable withholding taxes.

 

As of          , 2006, there are no outstanding options to purchase shares of our common stock beneficially owned by our directors or executive officers.

 

For further information regarding the beneficial ownership of our securities by our directors, executive officers and principal stockholders, see the section of this proxy statement entitled “PRINCIPAL STOCKHOLDERS.”

 

 

In addition to the arrangements described above under the section above entitled “— Compensation of Members of the Special Committee,” all of our directors are eligible to receive standard compensation for acting as directors, including: (1) $700 in compensation to each director for each board or committee meeting attended via teleconference, (2) $1,000 in compensation to each director for each board or committee meeting attended in person, (3) $2,000 in compensation per day while traveling on Chaparral related business, including board meetings, and (4) $2,500 in quarterly compensation for serving on our board. Since January 1, 2006 Mr. Zilbermints has received a further amount of $8,000 per month, net of taxes, for acting as Chief Executive Officer. We pay Mr. Berlin a monthly retainer of $10,500 for various secretarial and legal services that he provides to us. The services of Mr. Talbot are provided via Commonwealth & British Services Limited, a subsidiary of LUKOIL, and are included in the management fee described under the section below entitled “— Certain Relationships and Related Transactions.”

 

 

We will, to the fullest extent permitted under applicable law and regardless of whether the merger becomes effective, indemnify and hold harmless each of our present and former directors and officers and their respective heirs and beneficiaries against any costs or expenses (including attorneys’ fees), judgments, fines, losses, claims, damages and liabilities incurred in connection with, and amounts paid in settlement of, any claim pertaining to (1) the transactions contemplated by the merger agreement or (2) otherwise with respect to any acts or omissions as an officer or director and occurring at or before the effective time of the merger, to the same extent as provided in our certificate of incorporation and by-laws or any applicable contract or agreement as in effect on March 13, 2006, the date of the merger agreement, in each case for a period of six years after the effective time of the merger (collectively, “claims”). In the event of any claims, we will compensate each member of our board of directors who spends time after May 30, 2006 defending any matter relating to the transactions contemplated by the merger agreement based on a rate of $300 per hour.

 

We will obtain directors’ and officers’ liability insurance covering directors and officers with terms that are comparable to the terms now applicable to directors and officers of LUKOIL, or if more favorable to our directors and officers, on a six year “trailing” basis.

 

LUKOIL has guaranteed the full payment and performance of our indemnification obligations.

 

 

Baker Botts L.L.P. Representation of LUKOIL Subsidiaries

 

Baker Botts L.L.P. is an international law firm with approximately 700 lawyers in a worldwide network of offices, including offices in Houston, London and Moscow. The special committee retained Baker Botts of Houston and London to act as its legal advisors in October 2005. The special committee is aware that Baker Botts has in the past provided legal services to LUKOIL and its affiliates in matters unrelated to Chaparral primarily out of its Moscow office and might continue to do so in the future, and that the London and Moscow offices of Baker Botts currently represent affiliates of LUKOIL in several matters. The legal services of Baker Botts to affiliates of LUKOIL were and are being provided in connection with (1) the sale of tankers by LUKOIL Finance, (2) the preparation of construction documentation for LUKOIL Uzbekistan and (3) the preparation of tender documentation for a drilling contract for LUKOIL Uzbekistan. Baker Botts has received

legal fees in the amount of $250,950.50 for legal services provided in connection with these matters between April 2005 and March 2006. The legal fees received by Baker Botts on LUKOIL matters between April 2005 and March 2006 constitute less than 0.1% of Baker Botts’s total revenues in that time frame. In addition, in February 2006, Ekaterina Akkush, the former Head of Legal Department for Project Support of LUKOIL Overseas Service Limited, joined the Moscow office of Baker Botts as a senior associate. The Baker Botts attorneys representing the special committee have not given advice to, discussed or otherwise had any interaction with LUKOIL or its affiliate in connection with these matters. Neither Ms. Akkush nor any other Baker Botts attorney giving advice to LUKOIL Finance, LUKOIL Uzbekistan or any other affiliate of LUKOIL has given advice to, discussed or otherwise had any interaction with the special committee in connection with the special committee’s negotiation, evaluation and recommendation of the merger and the merger agreement.

 

Transactions between Chaparral or its Subsidiaries and Nelson

 

We paid $137,436 to Nelson for the services of Simon K. Gill as our Chief Executive Officer for the period January to December 2005. We paid $115,500 to Nelson for the services of Mr. Gill for the period June to December 2004.

 

In April 2005, Nelson entered into a hedging agreement with BNP Paribas (Suisse) SA, for the benefit of our subsidiary ZAO Karakudukmunay, and this agreement was novated in favor of ZAO Karakudukmunay during September 2005. Under this agreement, ZAO Karakudukmunay had the option each month, from April 2005 to December 2005, to require BNP Paribas (Suisse) to pay it an amount per barrel of specified monthly amounts of crude oil equivalent to the excess of $33.00 per barrel over the monthly average for that month of dated Brent. The crude oil amounts specified were 75,000 barrels per calendar month during the second quarter of 2005, 160,000 barrels per calendar month during the third quarter of 2005 and 170,000 barrels per calendar month during the last quarter of 2005. Nelson paid BNP Paribas (Suisse) $267,300 as consideration, equivalent to $0.22 per barrel. This hedging arrangement was entered into to ensure that variable receipts from oil revenues were sufficient to meet obligations falling due under the BNP/KBC note facility. The cost of this hedge was recorded as an expense during 2005.

 

On March 24, 2005, ZAO Karakudukmunay signed a $40 million Structured Crude Oil Pre-export Credit Facility Agreement with BNP Paribas (Suisse) SA and others (the “BNP / KBC Credit Facility”). As a condition to the BNP/KBC Credit Facility, a performance and financial guarantee was issued by Nelson in support of all amounts owing by ZAO Karakudukmunay under the BNP/KBC Credit Facility. Under a separate agreement, in consideration for Nelson issuing the guarantee, ZAO Karakudukmunay will pay Nelson, annually in advance, a fee of 2.5% p.a. on the facility amount of $40 million for the first six months and on the daily principal amount of the loan outstanding during the term period. An amount of $1.0 million, which was paid in July for the estimated first year’s guarantee fee, has been accrued in June and is being amortized over twelve months.

 

In November 2004, we entered into an agreement with our majority stockholder, Nelson, which provided that in the event we, through Central Asian Petroleum (Guernsey) and/or Korporatsiya Mangistau Terra International Limited, received notice from KazMunayGaz JSC that KazMunayGaz JSC desired to sell its 40% equity interest in ZAO Karakudukmunay, then we would, if requested by Nelson, exercise our right of first refusal under the agreement to purchase such interest at the price and on the terms specified in such notice. In December 2004, under this agreement, we, through Central Asian Petroleum (Guernsey), exercised our right of first refusal to purchase from KazMunayGaz JSC the remaining 40% equity interest in ZAO Karakudukmunay. We entered into definitive sale and purchase agreements with both KazMunayGaz JSC and Nelson, which provided that upon completion of the acquisition by Central Asian Petroleum (Guernsey), ownership of the newly acquired 40% interest in ZAO Karakudukmunay would be transferred to Nelson. The transfer of the 40% interest from KazMunayGaz JSC to Central Asian Petroleum (Guernsey) occurred in December 2004, and the transfer from Central Asian Petroleum (Guernsey) to Nelson was completed in January 2005. The purchase price of $34.6 million paid by Central Asian Petroleum (Guernsey) to KazMunayGaz JSC was determined on an open tender, and the funds for this were made available to Central Asian Petroleum (Guernsey) by Nelson. In addition, Nelson paid us a fee of $1.0 million, recorded as part of other income in 2004, as well as all documentation and transaction costs relating to the acquisition.

In August 2004, we approved a two-year agreement with Nelson to provide corporate administrative services and financial advisory services to support our business activities. The service agreement is effective as of June 1, 2004 and can be terminated upon 30 days written notice by either party. In consideration for these services, Nelson or its successor will receive a fixed monthly fee of $20,000 for administrative services and $25,000 for financial advisory services. As part of the service agreement, Nelson or its successor is also required to provide personnel to cover our executive and managerial needs. The cost of executive and managerial personnel will be allocated on the basis of the cost of personnel involved and on the percentage of time actually spent by such personnel on matters related to Chaparral, as mutually agreed by the parties from time to time. In addition, Nelson or its successor will use its greater buying power to obtain more favorable rates for goods and services, including insurance coverage, for us. These expenditures will be passed to us at cost with a 10% mark-up. The total amount charged for the management fee, the executive and managerial cost, insurance coverage and the mark-up under the service agreement during the year ended December 31, 2005 was $677,000. This agreement was acquired by Caspian Investments Resources Limited upon its amalgamation with Nelson in December 2005.

 

On June 3, 2004, ZAO Karakudukmunay entered into a three year agency agreement with Nelson whereby Nelson became the duly authorized, exclusive agent for the purpose of marketing crude oil, and is empowered to represent the interests of ZAO Karakudukmunay in relations with governmental authorities and commercial organizations and also enter into contracts and agreements and any other documents necessary for and related to the marketing of crude oil. The agency agreement was effective as of June 1, 2004 and can be terminated upon 90 days written notice by either party. As consideration for the services provided under the agency agreement, ZAO Karakudukmunay pays Nelson or its successor a fixed fee of $20,000 per month and a variable fee of US$0.05 per barrel of total production in a reporting calendar month, if the amount of supplies to the local market in that month is more than 10% of the total amount of production, or US$0.08 per barrel of total production in a reporting calendar month, if the amount of supplies to the local market in that month is less than 10% of the total amount of production. In 2005 a total of $548,000 was charged under the agency agreement. This agreement was acquired by Caspian Investments Resources Limited upon its merger with Nelson in December 2005.

 

In May 2004, Nelson became our majority shareholder when it purchased 22,925,701 shares from Central Asian Industrial Holdings, N.V. (“CAIH”). In December 2004, KazMunayGaz JSC, the state-owned national petroleum and transportation company of the Republic of Kazakhstan, which owned a 40% interest in ZAO Karakudukmunay, sold its entire interest in ZAO Karakudukmunay to Nelson. From May 2004 until December 2005 when Nelson amalgamated with a subsidiary of LUKOIL and ceased to exist, Nelson owned approximately 60% of our outstanding common stock. See “— Transactions between Nelson and LUKOIL” below.

 

In May 2002, we received a total investment of $12 million from CAIH, including $8 million in exchange for 22,925,701 shares, or 60%, of our outstanding common stock, and $4 million in exchange for a three-year note bearing interest at 12% per annum. Along with the note, CAIH received a warrant to purchase 3,076,923 shares of our common stock at $1.30 per share. Additionally, Kazkommertsbank, an affiliate of CAIH, provided ZAO Karakudukmunay with a credit facility totaling $33 million. The principal balance of the note was due on May 10, 2005 and accrued interest was payable quarterly. In May 2004, the CAIH shares, the note and the warrant were purchased by Nelson. On March 24, 2005, Chaparral and Central Asian Petroleum (Guernsey) signed a Promissory Note Amendment Agreement with Nelson. This provided for a prepayment of $1 million of the $4 million due to be repaid to Nelson on May 10, 2005 under the existing $4 million loan note and the replacement of the existing loan note with a new loan note for $3 million on substantially similar terms, but with an increase in the interest rate from 12% to 14% from May 10, 2005 and an extension of the maturity date of one year to May 10, 2006. On March 31, 2005, the $1 million prepayment was made, the existing loan note was cancelled and the new loan note was signed. During the year ended December 31, 2005, we paid $430,000 in interest on this note. In addition, there was a charge for amortization of a discount on the previous loan of $222,000. The benefit of the note and the warrant passed to Caspian upon its amalgamation with Nelson in December 2005. Full details of the note are included in Note 12 to the Consolidated Financial Statements, and full details of the warrant are included in Note 13 to the Consolidated

Financial Statements, included within our Annual Report on Form 10-K for the year ended December 31, 2005, as amended, which is incorporated by reference and attached as Exhibit E to this proxy statement.

 

Transactions between Nelson and LUKOIL

 

On November 1, 2005, Caspian Investment Resources Ltd. and LUKOIL Overseas Service Ltd. entered into a services agreement for legal, geological and financial consulting services. Under the agreement Caspian provides management and other services in exchange for a fee not to exceed $2.5 million per quarter. On November 20, 2005, Caspian and LUKOIL Overseas Investholding Ltd. entered into a loan agreement under which LUKOIL loaned $100 million to Caspian. Outstanding principal and interest for such loan, which matures December 31, 2008, totaled $121,300,000 as of June 1, 2006. On March 31, 2005, we entered into a loan agreement with NRL Acquisition Corp. for $3 million. The loan was paid in full on May 10, 2006. On February 16, 2006 Nelson Petroleum Buzachi B.V. and LUKOIL Overseas Netherlands B.V. entered into a loan agreement under which LUKOIL Overseas Netherlands B.V. loaned Nelson Petroleum Buzachi B.V. $54,320,500. Repayment in full is due June 28, 2009.

 

In connection with the execution of the merger agreement, we did not make any provisions to either grant unaffiliated stockholders access to our corporate files or the corporate files of any other party to the merger agreement or to obtain counsel or appraisal services for our unaffiliated stockholders at our expense or the expense of any other party to the merger agreement.

 

Some of the statements in this proxy statement constitute “forward-looking statements.” These forward-looking statements are based on current estimates and assumptions and, as such, involve uncertainty and risk. Forward-looking statements include the information concerning our possible or assumed future results of operations, future events or future financial performance. In some cases, you can identify forward-looking statement by terminology such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “should,” “plans,” “targets,” “will,” “predicts,” “potential,” “likely,” or “continue,” or by the negative of such terms or comparable terminology.

 

The forward-looking statements are not guarantees of future performance, and actual results may differ materially from those contemplated by these forward-looking statements. In evaluating forward-looking statements you should consider various factors, including the risks discussed under “Risks of Oil and Gas Activities” and “Risks of Foreign Operations” in the copy of our Annual Report on Form 10-K for the year ended December 31, 2005, as amended, furnished to you with this proxy statement. These factors may cause our actual results to differ materially from any forward-looking statement.

 

Although we believe that these statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and you are encouraged to exercise caution in considering such forward-looking statements. Unless otherwise required by law, we are not under any duty to update any of the forward-looking statements after the date of this proxy statement to conform these statements to actual results.

 

Our selected historical financial data presented below as of and for the five fiscal years ended December 31, 2005 are derived from the audited consolidated financial statements of Chaparral and its subsidiaries. Our selected historical financial data presented below as of and for the three months ended March 31, 2006 are derived from the unaudited consolidated financial statements of Chaparral and its subsidiaries. The following selected historical financial data should be read in conjunction with our most recent Annual Report on Form 10-K for the year ended December 31, 2005, as amended, which is incorporated by reference in and attached as Exhibit E to, this proxy statement, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, as amended, which is incorporated by reference in and attached as Exhibit F to, this proxy statement.

 

 

 

 

The following table sets forth our consolidated ratio of earnings to fixed charges for the periods shown.

 

 

 

 

Our common stock is quoted on the OTC Bulletin Board under the symbol “CHAR.ob”. The table below sets forth the range of high and low sales prices for the period from January 1, 2004 to          , 2006:

 

 

The last trade price for shares of our common stock on March 10, 2006, the last trading day before we announced the merger agreement, was $5.30 per share. The average daily last trade price per share of our common stock was $5.19 during the one week preceding the initial announcement regarding the executed merger agreement. On March 10, 2006, the last full trading day before the public announcement of the signing of the merger agreement, the high sales price of our common stock was $5.35 per share and the low sales price of our common stock was $5.05 per share. On          , 2006, the last practicable trading day for which information was available before the date of the first mailing of this proxy statement, the closing price per share of our common stock was $     . We urge you to obtain a current market quotation for our common stock before making any decision with respect to the merger.

 

As of          , 2006, there were           issued and outstanding shares of our common stock and approximately           beneficial owners of our common stock. As of          , 2006, there were no outstanding options to acquire shares of our common stock. NRL Acquisition has an outstanding warrant to purchase 3,076,923 shares at an exercise price of $1.30 per share, which will be cancelled at closing.

 

We have never declared or paid cash dividends on our common stock and do not plan to pay any cash dividends in the foreseeable future. Our current policy is to retain all of our earnings to finance our future development and growth. We may reconsider this policy from time to time in light of conditions then existing, including our earnings performance, financial condition and capital requirements.

 

We are an independent oil and gas development and production company. Through intermediate holding companies, Central Asian Petroleum (Guernsey), Ltd., Korporatsiya Mangistau Terra International Limited, and Central Asian Petroleum, Inc., we own a 60% interest in ZAO Karakudukmunay, a Kazakhstani joint stock company that holds a governmental license to develop the Karakuduk Oil Field, a 16,900-acre oil field in the Republic of Kazakhstan. Currently, the Karakuduk Oil Field is our only oil field. We have no other significant subsidiaries. Since December 2005, LUKOIL has indirectly owned 60% of our outstanding common stock. LUKOIL also indirectly owns a 40% interest in the Karakuduk Oil Field.

 

Our common stock is quoted on the OTC Bulletin Board under the symbol “CHAR.ob” Our corporate headquarters are located at 2 Gannett Drive, Suite 418, White Plains, New York 10604, and our telephone number is (866) 559-3822.

 

A more detailed description of our business is contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2005, as amended, which is incorporated by reference in, and is attached to, Exhibit E to this proxy statement. See also “WHERE YOU CAN FIND MORE INFORMATION.” Information about our directors and executive officers is set forth in Exhibit D to this proxy statement. Our principal place of business is:

 

CHAPARRAL RESOURCES, INC.

2 Gannett Drive, Suite 418

White Plains, New York 10604

(866) 559-3822

 

We are soliciting your proxy in connection with the proposed merger involving Chaparral and LUKOIL.

 

LUKOIL is a subsidiary of Open Joint Stock Company “Oil Company “LUKOIL,” a Russian energy company whose shares are traded on the London Stock Exchange, and is responsible for managing its parent’s international oil and gas projects. Since December 2005, LUKOIL has owned indirectly 60% of the outstanding shares of our common stock. Information about the directors and executive officers of LUKOIL is set forth in Exhibit D to this proxy statement. LUKOIL’s principal place of business is:

 

LUKOIL OVERSEAS HOLDING LTD.

1 Bolshaya Ordynka

115035 Moscow Russia

+7 (495) 933-17-00

 

NRL Acquisition is a Delaware corporation wholly owned indirectly by LUKOIL. NRL Acquisition’s sole activity is the ownership of shares of our common stock. NRL Acquisition owns 60% of our outstanding common stock. Information about the directors and executive officers of NRL Acquisition is set forth in Exhibit D to this proxy statement. NRL Acquisition’s principal place of business is:

 

NRL ACQUISITION CORP.

1 Bolshaya Ordynka

115035 Moscow Russia

+7 (495) 933-17-00

 

This proxy statement is being furnished to our stockholders as part of the solicitation of proxies by our board of directors for use at the special meeting of stockholders to be held at           London, England on          , 2006, beginning at 10:00 a.m. local time, and at any adjournments or postponements thereof. This proxy statement is accompanied by a form of proxy for use at the special meeting.

 

At the special meeting, our stockholders will be asked to:

 

 

We do not expect a vote to be taken at the special meeting on any matter other than the proposal to adopt the merger agreement and approve the merger. However, if any other matters are properly presented at the special meeting for consideration, including the adjournment or postponement of the meeting, the holders of the proxies will have discretion to vote on these matters in accordance with their best judgment.

 

The affirmative vote of a majority of the voting power of our outstanding common stock entitled to vote at the special meeting is required to adopt the merger agreement and approve the merger. For this vote, abstentions and broker non-votes, as well as shares that are not voted, will have the same effect as a vote against adoption of the merger agreement and approval of the merger.

 

The proposed transaction does not require the approval of a majority of our unaffiliated stockholders. LUKOIL controls 60% of our outstanding common stock and has committed to vote its shares in favor of the merger agreement and the merger. The affirmative vote of the shares controlled by LUKOIL is sufficient under Delaware law to adopt the merger agreement and approve the merger. As of          , 2006, other than Mr. Berlin, none of our directors or executive officers own any shares of our common stock. Mr. Berlin beneficially owns 167 shares of our common stock, which represent less than 1% of the voting power of our common stock. We anticipate that Mr. Berlin will vote in favor of the merger.

 

It is very important to us and the special committee that your shares be represented at the special meeting, whether or not you plan to attend personally. Please read the attached proxy statement. Then, please submit a proxy as soon as possible so that your shares can be voted at the meeting in accordance with your instructions. Please sign, date and return the enclosed proxy in the enclosed postage paid envelope. You may revoke your proxy at any time before it is voted at the special meeting.

 

Our board of directors has fixed the close of business on          , 2006 as the record date for determination of the holders of our shares entitled to notice of and to vote at the special meeting. As of          , 2006, there were           shares outstanding. Each holder of record of our common stock on the record date will be entitled to one vote for each share held. A list of our stockholders will be available for review at our executive offices during regular business hours for a period of 10 days before the special meeting.

 

All votes will be tabulated by the inspector of elections appointed for the special meeting, who will separately tabulate affirmative and negative votes, abstentions and broker non-votes. Brokers who hold shares in street name for clients typically have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, absent specific instructions from the beneficial owner of the shares, brokers are not allowed to exercise their voting discretion with respect to the adoption and

approval of non-routine matters, such as the merger agreement and the merger. Proxies submitted without a vote by the brokers on these matters are referred to as “broker non-votes.” Abstentions and broker non-votes are counted for purposes of determining whether a quorum exists at the special meeting.

 

With the exception of broker non-votes, the treatment of which is discussed above, each share of our common stock represented by a proxy properly executed we receive in time to be voted at the special meeting that is not revoked before the special meeting will be voted in accordance with the instructions indicated on such proxy and, if no instructions are indicated, will be voted “FOR” the proposal to adopt the merger agreement and approve the merger. All proxies “FOR” the merger agreement and the merger, including proxies on which no instructions are indicated, other than broker non-votes, may, at the discretion of the proxy holder, be voted “FOR” a motion to adjourn or postpone the special meeting to another time and/or place for the purpose of soliciting additional proxies or otherwise. Any proxy that is voted against the adoption of the merger agreement and approval of the merger, or which specifically abstains from voting, will not be voted in favor of any such adjournment or postponement.

 

The presence, in person or by proxy, of the holders of shares having a majority of the voting power of our common stock issued and outstanding and entitled to vote at the special meeting is necessary to constitute a quorum for the transaction of business at the special meeting. The shares of our common stock controlled by LUKOIL constituted 60% of the total number of shares outstanding on the record date. The presence in person or by proxy of the shares controlled by LUKOIL is sufficient under Delaware law to constitute a quorum for the transaction of business at the special meeting.

 

Any person giving a proxy pursuant to this solicitation has the power to revoke it at any time before it is voted. It may be revoked by (1) filing with the Secretary of Chaparral at our executive offices located at 2 Gannett Drive, Suite 418, White Plains, New York 10604, a written notice of revocation or a duly executed proxy bearing a later date, or (2) attending the special meeting and voting in person. Attendance at the special meeting will not, by itself, revoke a proxy. Furthermore, if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must obtain a proxy from the record holder.

 

We have retained Georgeson Shareholder Communications to assist in the solicitation of proxies. Such solicitation will be conducted by telephone and by using the Internet. However, registered shareholders will not be permitted to submit proxies via the Internet. We will bear the entire cost of solicitation of proxies, including preparation, assembly, printing and mailing of this proxy statement, the proxy and any additional information furnished to stockholders. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holding in their names shares of common stock beneficially owned by others for forwarding to these beneficial owners. We may reimburse persons representing beneficial owners of common stock for their costs of forwarding solicitation materials to such beneficial owners. Original solicitation of proxies by mail may be supplemented by telephone, telegram or personal solicitation by directors, officers or other regular employees. Under our agreement with Georgeson, Georgeson will assist in the solicitation of proxies by telephone and over the Internet in exchange for a proxy solicitation retainer of $40,000, a success fee of $25,000 in the event the merger is approved by a majority of unaffiliated shareholders, an additional success fee of $25,000 in the event the merger is approved by 75% of unaffiliated shareholders and a per phone call fee of $6.00. No additional compensation will be paid to directors, officers or other regular employees for their services in connection with the special meeting.

 

Although it is not expected, the special meeting may be adjourned or postponed. Any adjournment or postponement of the special meeting may be made without notice, other than by an announcement made at the

special meeting, by approval of the holders of a majority of the outstanding shares of our common stock present in person or represented by proxy at the special meeting, whether or not a quorum exists.

 

Please do not send in stock certificates at this time. In the event the merger is completed, instructions regarding the procedures for exchanging your stock certificates for the $5.80 per share cash payment, without interest and less any applicable withholding taxes, will be sent to you.

 

Stockholders who do not vote in favor of adoption of the merger agreement and approval of the merger, and who otherwise comply with the applicable statutory procedures of the Delaware General Corporation Law summarized elsewhere in this proxy statement, will be entitled to seek appraisal of the value of their shares of our common stock as set forth in Section 262 of the Delaware General Corporation Law. See “THE MERGER — Appraisal Rights.”

 

The following information described the material aspects of the merger. This description is qualified in its entirety by reference to the annexes to this proxy statement, including the merger agreement itself, which is attached to this proxy statement as Exhibit A. You are encouraged to read Exhibit A in its entirety. See also the section of this proxy statement entitled “THE MERGER AGREEMENT.”

 

If all of the conditions to the merger are satisfied or, to the extent permitted, waived, the merger will be consummated and become effective at the time that a certificate of merger is filed with the Secretary of State of the State of Delaware in accordance with the Delaware General Corporation Law or at such later time as otherwise agreed by us and LUKOIL and provided in the certificate of merger. This time is referred to as the “effective time” of the merger. If all of the conditions to the merger are satisfied or, to the extent permitted, waived, we expect to complete the merger as soon as practicable after adoption and approval of the merger agreement by our stockholders at the special meeting.

 

Under the terms of the merger agreement, the executive officers and directors of NRL Acquisition immediately before the effective time will become our management as the surviving corporation.

 

Before the effective time of the merger, LUKOIL will designate a bank or trust company reasonably satisfactory to us to act as paying agent for the purpose of making cash payments provided by the merger agreement. Immediately before the effective time, LUKOIL will deposit, or cause to be deposited, with the paying agent immediately available funds in an aggregate amount necessary to pay the merger consideration to our stockholders (other than LUKOIL and its affiliates). The paying agent will deliver to you your merger consideration according to the procedure summarized below.

 

Promptly after the effective time of the merger, we will mail or cause to be mailed to you a letter of transmittal and instructions advising you of the effectiveness of the merger and the procedure for surrendering to the paying agent your stock certificates in exchange for payment of the merger consideration. Upon surrender for cancellation to the paying agent of your stock certificates, together with a letter of transmittal, duly executed and completed in accordance with its instructions, and any other items specified by the letter of transmittal, the paying agent will pay to you your merger consideration and your stock certificates will be cancelled. Payments of merger consideration also will be reduced by any applicable withholding taxes.

 

If your stock certificates have been lost, stolen or destroyed, you may be required to deliver to the paying agent an affidavit of such loss, theft or destruction and, if required by the surviving corporation, (1) an indemnity bond in a reasonable amount that the surviving corporation deems reasonably necessary as indemnity or (2) enter into an indemnity agreement reasonably satisfactory to the surviving corporation to indemnify the surviving corporation, in order to receive your merger consideration.

 

If the merger consideration, or a portion of it, is to be paid to a person other than you, it will be a condition to the payment of the merger consideration that your stock certificates be properly endorsed or otherwise in proper form for transfer and that you pay to the paying agent any transfer or other taxes required by reason of the transfer or establish to our satisfaction that the taxes have been paid or are not required to be paid.

 

Please do not forward stock certificates to us or the paying agent until you have received the letter of transmittal.

 

At the effective time of the merger: