Annual report pursuant to Section 13 and 15(d)

Acquisitions and Divestitures

v2.4.1.9
Acquisitions and Divestitures
12 Months Ended
Dec. 31, 2014
Business Combinations [Abstract]  
Acquisitions and Divestitures

2. Acquisitions and Divestitures

2014 Acquisitions

Fairway

On September 15, 2014, the Parent Company entered into an asset purchase agreement with a third party to increase its ownership interest from 64.3% to 100% in the Mobile Bay blocks 113 and 132 located offshore Alabama (the “Fairway Field”) and the associated Yellowhammer gas processing plant (collectively, “Fairway”).  The Fairway Field is located in the state waters of Alabama and the Yellowhammer gas processing plant is located in the state of Alabama.  The effective date of the transaction was July 1, 2014.  The transaction included customary adjustments for the effective date, certain closing adjustments and our assumption of the related ARO.  The purchase price was finalized during the fourth quarter of 2014.  The acquisition was funded from borrowings under our revolving bank credit facility and cash on hand.

 

The following table presents the preliminary purchase price allocation, including estimated adjustments, for the increased ownership interest in Fairway (in thousands):  

Cash consideration:

 

 

 

Evaluated properties including equipment

$

17,407

 

Non-cash consideration:

 

 

 

Asset retirement obligations - non-current

 

6,124

 

Total consideration

$

23,531

 

The acquisition was recorded at fair value, which was determined using both the market and income approaches, and Level 3 inputs were used to determine fair value.  See Note 1 for a description of the Level 3 inputs.  No goodwill was recorded in connection with the acquisition of this additional working interest in Fairway.

Woodside Properties  

    On May 20, 2014, Energy VI entered into a purchase and sale agreement to acquire certain oil and natural gas property interests from Woodside Energy (USA) Inc. (“Woodside”).  The properties acquired from Woodside (the “Woodside Properties”) consisted of a 20% non-operated working interest in the producing Neptune field (deepwater Atwater Valley blocks 574, 575 and 618), along with an interest in the Neptune tension-leg platform, associated production facilities and various interests in 24 other deepwater lease blocks.  All of the Woodside Properties are located in the Gulf of Mexico.  The effective date of the transaction was November 1, 2013.  The transaction included customary adjustments for the effective date, certain closing adjustments and our assumption of the related ARO.  The acquisition was funded from borrowings under our revolving bank credit facility and cash on hand.

The following table presents the purchase price allocation, including estimated adjustments, for the acquisition of the Woodside Properties (in thousands):  

Cash consideration:

 

 

 

Evaluated properties including equipment

$

52,167

 

Unevaluated properties

 

2,660

 

Sub-total cash consideration

 

54,827

 

Non-cash consideration:

 

 

 

Asset retirement obligations - current

 

782

 

Asset retirement obligations - non-current

 

10,543

 

Sub-total non-cash consideration

 

11,325

 

Total consideration

$

66,152

 

 

The acquisition was recorded at fair value, which was determined using both the market and income approaches, and Level 3 inputs were used to determine fair value.  See Note 1 for a description of the Level 3 inputs.  No goodwill was recorded in connection with the Woodside Properties acquisition.

2014 Acquisitions — Revenues, Net Income and Pro Forma Financial Information - Unaudited  

The increase in working interest ownership for Fairway was not included in our consolidated results until the property transfer date, which occurred in September 2014 and the incremental revenue and operating expenses were immaterial for 2014.  Unaudited pro forma information is not presented as the pro forma information is not materially different from the reported results for 2014 and 2013.  

The Woodside Properties were not included in our consolidated results until the property transfer date, which occurred on May 20 2014.  For the period of May 20, 2014 to December 31, 2014, the Woodside Properties accounted for $28.4 million of revenues, $5.5 million of direct operating expenses, $11.0 million of DD&A and $4.2 million of income taxes, resulting in $7.7 million of net income.  The net income attributable to the Woodside Properties does not reflect certain expenses, such as general and administrative expenses (“G&A”) and interest expense; therefore, this information is not intended to report results as if these operations were managed on a stand-alone basis.  In addition, the Woodside Properties are not recorded in a separate entity for tax purposes; therefore, income tax was estimated using the federal statutory tax rate.    

In accordance with the applicable accounting guidance, the unaudited pro forma financial information was computed as if the acquisition of the Woodside Properties had been completed on January 1, 2013.  The financial information was derived from W&T’s audited historical consolidated financial statements for annual periods, W&T’s unaudited historical condensed consolidated financial statements for interim periods, and the Woodside Properties’ unaudited historical financial statements for the annual and interim periods.

The pro forma adjustments were based on estimates by management and information believed to be directly related to the purchase of the Woodside Properties.  The pro forma financial information is not necessarily indicative of the results of operations had the purchase occurred on January 1, 2013.  Had we owned the Woodside Properties during the periods indicated, the results may have been substantially different.  For example, we may have operated the assets differently than Woodside; the realized sales prices for oil, natural gas liquids (“NGLs”) and natural gas may have been different; and the costs of operating the Woodside Properties may have been different.

The following table presents a summary of our pro forma financial information (in thousands, except earnings per share):

 

 

(unaudited)

 

 

 

Year Ended December 31,

 

 

 

2014

 

 

2013

 

Revenue

 

$

971,595

 

 

$

1,047,037

 

Net income (loss)

 

 

(5,495

)

 

 

71,432

 

Basic and diluted earnings (loss) per common share

 

 

(0.08

)

 

 

0.94

 

 

For the pro forma financial information, certain information was derived from our financial records, Woodside’s financial records and certain information was estimated.  

The following table presents incremental items included in the pro forma information reported above for the Woodside Properties (in thousands):

 

 

(unaudited)

 

 

 

Year Ended December 31,

 

 

 

2014 (a)

 

 

2013

 

Revenues (b)

 

$

22,887

 

 

$

62,949

 

Direct operating expenses (b)

 

 

4,417

 

 

 

9,583

 

DD&A (c)

 

 

8,374

 

 

 

20,476

 

G&A (d)

 

 

300

 

 

 

800

 

Interest expense (e)

 

 

329

 

 

 

987

 

Capitalized interest (f)

 

 

(19

)

 

 

164

 

Income tax expense (g)

 

 

3,320

 

 

 

10,829

 

 

The sources of information and significant assumptions are described below:

 

(a)

The adjustments for 2014 are for the period from January 1, 2014 to May 20, 2014.

(b)

Revenues and direct operating expenses for the Woodside Properties were derived from the historical financial records of Woodside.

(c)

DD&A was estimated using the full-cost method and determined as the incremental DD&A expense due to adding the Woodside Properties’ costs, reserves and production into our full cost pool in order to compute such amounts.  The purchase price allocated to unevaluated properties for oil and natural gas interests was excluded from the DD&A expense estimation.  ARO was estimated by W&T management.

(d)

Estimated insurance costs related to the Woodside Properties.

(e)

The acquisition was assumed to be funded entirely with borrowed funds.  Interest expense was computed using assumed borrowings of $54.8 million, which equates to the cash component of the acquisition purchase price, and an interest rate of 1.8%, which equates to the rates applied to incremental borrowings on the revolving bank credit facility.

(f)

The change to capitalized interest was computed for the addition to the pool of unevaluated properties and the capitalization interest rate was adjusted for the assumed borrowings.  The negative amount represents a decrease to net expenses.

(g)

Income tax expense was computed using the 35% federal statutory rate.

The pro forma adjustments do not include adjustments related to any other acquisitions or divestitures.

 

2013 Acquisition

On October 17, 2013, W&T Offshore, Inc. entered into a purchase and sale agreement to acquire certain oil and natural gas property interests from Callon Petroleum Operating Company (“Callon”).  Pursuant to the purchase and sale agreement, transfers of certain properties that had no preferential rights were consummated on November 5, 2013 and transfers of certain properties subject to preferential rights, of which third-parties declined to exercise their preferential rights, were consummated on December 4, 2013.  The properties acquired from Callon (the “Callon Properties”) consist of a 15% working interest in the Medusa field (deepwater Mississippi Canyon blocks 582 and 583), interest in associated production facilities and various interests in other non-operated fields.  All of the Callon Properties are located in the Gulf of Mexico.  The effective date of the transaction was July 1, 2013.  The transaction included customary adjustments for the effective date, certain closing adjustments and we assumed the related ARO.  An upward net purchase price adjustment of $0.6 million was recorded during 2014.  The acquisition was funded from borrowings under our revolving bank credit facility and cash on hand.

The following table presents the purchase price allocation, including estimated adjustments, for the acquisition of the Callon Properties (in thousands):

 

Cash consideration:

 

 

 

Evaluated properties including equipment

$

73,752

 

Unevaluated properties

 

9,248

 

Sub-total cash consideration

 

83,000

 

Non-cash consideration:

 

 

 

Asset retirement obligations - current

 

90

 

Asset retirement obligations - non-current

 

4,143

 

Sub-total non-cash consideration

 

4,233

 

Total consideration

$

87,233

 

 

The acquisition was recorded at fair value, which was determined using both the market and income approaches, and Level 3 inputs were used to determine fair value.  See Note 1 for a description of the Level 3 inputs.  No goodwill was recorded in connection with the acquisition of the Callon Properties.

2013 Acquisition — Revenues, Net Income and Pro Forma Financial Information — Unaudited

The Callon Properties were not included in our consolidated results until the respective property transfer dates, which occurred during the fourth quarter of 2013.  In 2014, the Callon Properties accounted for $32.5 million of revenue, $6.6 million of direct operating expenses, $16.4 million of DD&A and $3.3 million of income taxes, resulting in $6.2 million of net income.  In the fourth quarter of 2013, the Callon Properties accounted for $5.8 million of revenues, $1.3 million of direct operating expenses, $2.4 million of DD&A and $0.7 million of income taxes, resulting in $1.4 million of net income.  The net income attributable to these properties does not reflect certain expenses, such as G&A and interest expense; therefore, this information is not intended to report results as if these operations were managed on a stand-alone basis.  In addition, the Callon Properties are not recorded in a separate entity for tax purposes; therefore, income tax was estimated using the federal statutory tax rate.

The unaudited pro forma financial information presented below was computed as if the acquisition of the Callon Properties had been completed on January 1, 2012.  The financial information was derived from W&T’s audited historical consolidated financial statements, the Callon Properties’ audited historical financial statement, and the Callon Properties’ unaudited historical financial statement for the periods presented.

The pro forma adjustments were based on estimates by management and information believed to be directly related to the purchase of the Callon Properties.  The pro forma financial information is not necessarily indicative of the results of operations had the purchase occurred on January 1, 2012.  If the transaction had been in effect for the periods indicated, the results may have been substantially different.  For example, we may have operated the assets differently than Callon; the realized sales prices for oil, NGLs and natural gas may have been different; and the costs of operating the Callon Properties may have been different.    

The following table presents a summary of our pro forma financial information (in thousands except earnings per share):

 

(unaudited)

 

 

Year Ended December 31,

 

 

2013

 

 

2012

 

Revenue

$

1,018,118

 

 

$

923,050

 

Net income

 

59,015

 

 

 

85,310

 

Basic and diluted earnings per common share

 

0.78

 

 

 

1.12

 

 

 

For the pro forma financial information, certain information was derived from financial records and certain information was estimated.  The following table presents incremental items included in the pro forma information reported above for the Callon Properties (in thousands):

 

(unaudited)

 

 

Year Ended December 31,

 

 

2013 (a)

 

 

2012

 

Revenues (b)

$

34,030

 

 

$

48,559

 

Direct operating expenses (b)

 

6,405

 

 

 

8,525

 

DD&A (c)

 

14,931

 

 

 

17,578

 

G&A (d)

 

(361

)

 

 

 

Interest expense (e)

 

1,383

 

 

 

1,660

 

Capitalized interest (f)

 

(164

)

 

 

295

 

Income tax expense (g)

 

4,143

 

 

 

7,175

 

The sources of information and significant assumptions are described below:

(a)

The adjustments for 2013 are for the period from January 1, 2013 to the respective property transfer date, all of which occurred in the fourth quarter of 2013.

(b)

Revenues and direct operating expenses for the Callon Properties were derived from the historical financial records of Callon.

(c)

DD&A was estimated using the full-cost method and determined as the incremental DD&A expense due to adding the Callon Properties’ costs, reserves and production into our currently existing full cost pool in order to compute such amounts.  The purchase price allocated to unevaluated properties for oil and natural gas interests was excluded from the DD&A expense estimation.  ARO was estimated by W&T management.

(d)

G&A adjustments related to incremental transaction expenses, which were assumed to be funded from cash on hand, and were adjusted from the 2013 results.

(e)

The acquisition was assumed to be funded entirely with borrowed funds.  Interest expense was computed using assumed borrowings of $83.0 million, which equates to the cash component of the transaction, and an interest rate of 2.0%, which equates to the rates applied to incremental borrowings on the revolving bank credit facility.

(f)

The change to capitalized interest was computed for the addition to the pool of unevaluated properties and the capitalization interest rate was adjusted for the assumed borrowings.  A positive amount represents an increase to net expenses and a negative amount represents a decrease to net expenses.

(g)

Income tax expense was computed using the 35% federal statutory rate.

The pro forma adjustments do not include adjustments related to any other acquisitions or divestitures.

2013 Divestitures

On July 11, 2013, we sold our non-operated working interest in two offshore fields located in the Gulf of Mexico; the Green Canyon 60 field and the Green Canyon 19 field.  The effective date was October 1, 2011 and we retained the deep rights in both fields.  Due to the length of time from the effective date, we paid $4.3 million to sell the properties as revenues exceeded operating expenses and the purchase price for the period between the effective date and the close date.  In connection with the sale, we reversed $15.6 million of our ARO.

On September 26, 2013, we sold our working interests in the West Delta area block 29 with an effective date of January 1, 2013.  The property is located in the Gulf of Mexico.  Including adjustments for the effective date, the net proceeds were $14.7 million, which includes a $1.7 million post-effective-date repayment that occurred during 2014.  The transaction was structured as a like-kind exchange under the Internal Revenue Service Code (“IRC”) Section 1031 and other applicable regulations, with funds held by a qualified intermediary until replacement purchases are made.  Replacement purchases were made in 2013, which were within the replacement periods as defined under the IRC.  In connection with this sale, we reversed $3.9 million of ARO.

2012 Acquisitions

On October 5, 2012, we acquired from Newfield Exploration Company and its subsidiary, Newfield Exploration Gulf Coast LLC (together, “Newfield”) certain oil and gas leasehold interests in the Gulf of Mexico (the “Newfield Properties”).  The Newfield Properties consist of leases covering 78 offshore blocks on approximately 416,000 gross acres (268,000 net acres) predominantly in the deepwater.  The effective date was July 1, 2012.  The transaction included customary adjustments for the effective date, certain closing adjustments and we assumed the related ARO.  The consideration and the purchase price allocation are set forth in the table below.  The purchase price was finalized during 2013.  A net purchase price increase of $0.2 million was recorded during 2013.  The acquisition was initially funded from borrowings under our revolving bank credit facility and cash on hand.  Subsequently in the same month, the amounts borrowed under our revolving bank credit facility were paid down with funds provided from the issuance of long-term debt in October 2012.  See Note 7 for information on long-term debt.

The following table presents the purchase price allocation, including adjustments, for the acquisition of the Newfield Properties (in thousands):

Cash consideration:

 

 

 

Evaluated properties including equipment

$

192,723

 

Unevaluated properties

 

13,065

 

Sub-total cash consideration

 

205,788

 

Non-cash consideration:

 

 

 

Asset retirement obligations – current

 

7,250

 

Asset retirement obligations - non-current

 

24,414

 

Sub-total non-cash consideration

 

31,664

 

Total consideration

$

237,452

 

 

The acquisition was recorded at fair value, which was determined using both the market and income approaches, and Level 3 inputs were used to determine fair value.  See Note 1 for a description of the Level 3 inputs.  No goodwill was recorded for the Newfield Properties.

2012 Acquisitions — Revenue, Net Income and Pro Forma Financial Information — Unaudited

The Newfield Properties were not included in our consolidated results until the closing date of October 5, 2012.  In 2014, the Newfield Properties accounted for $121.1 million of revenue, $23.5 million of direct operating expenses, $60.5 million of DD&A and $13.0 million of income taxes, resulting in $24.1 million of net income.  In 2013, the Newfield Properties accounted for $127.1 million of revenue, $26.7 million of direct operating expenses, $57.6 million of DD&A and $15.0 million of income taxes, resulting in $27.8 million of net income.  In the fourth quarter of 2012, the Newfield Properties accounted for $29.6 million of revenue, $5.4 million of direct operating expenses, $11.9 million of DD&A and $4.3 million of income taxes, resulting in $8.0 million of net income.  The net income attributable to these properties does not reflect certain expenses, such as G&A expense and interest expense; therefore, this information is not intended to report results as if these operations were managed on a stand-alone basis.  In addition, the Newfield Properties are not recorded in a separate entity for tax purposes; therefore, income tax was estimated using the federal statutory tax rate.

Consistent with the computation of pro forma financial information presented in Item 8, Financial Statements and Supplementary Data, in the Annual Report on Form 10-K for the year end December 31, 2012, the unaudited pro forma financial information was computed as if the acquisition of the Newfield Properties had been completed on January 1, 2011.  The financial information was derived from W&T’s audited historical consolidated financial statements, the Newfield Properties’ audited historical financial statement for 2011 and the Newfield Properties’ unaudited historical financial statements for the 2012 interim period.

The pro forma adjustments were based on estimates by management and information believed to be directly related to the purchase of the Newfield Properties.  The pro forma financial information is not necessarily indicative of the results of operations had the purchase occurred on January 1, 2011.  If the transaction had been in effect for the periods indicated, the results may have been substantially different.  For example, we may have operated the assets differently than Newfield; the realized sales prices for oil, NGLs and natural gas may have been different; and the costs of operating the Newfield Properties may have been different.

The following table presents a summary of our pro forma financial information (in thousands except earnings per share):

 

 

(unaudited)

 

 

 

Year Ended

December 31, 2012

 

Revenue

 

$

980,196

 

Net income

 

 

77,036

 

Basic and diluted earnings per common share

 

 

1.01

 

 

For the pro forma financial information, certain information was derived from financial records and certain information was estimated.  The following table presents incremental items included in the pro forma information reported above for the Newfield Properties (in thousands):

 

 

(unaudited)

 

 

 

Year Ended

December 31, 2012 (a)

 

Revenues (b)

 

$

105,705

 

Direct operating expenses (b)

 

 

33,186

 

Insurance costs (c)

 

 

475

 

DD&A (d)

 

 

53,408

 

G&A (e)

 

 

(553

)

Interest expense (f)

 

 

12,060

 

Capitalized interest (g)

 

 

(643

)

Income tax expense (h)

 

 

2,720

 

 The sources of information and significant assumptions are described below:

(a) The adjustments are for the period from January 1, 2012 to October 5, 2012.

(b)

Revenues and direct operating expenses for the Newfield Properties were derived from the historical financial records of Newfield.

(c)

Incremental costs for insurance were estimated from the incremental costs to add the Newfield Properties to W&T’s insurance programs.  The direct operating costs for the Newfield Properties described above excluded insurance costs.

(d)

DD&A was estimated using the full-cost method and determined as the incremental DD&A expense due to adding the Newfield Properties’ costs, reserves and production into our currently existing full cost pool in order to compute such amounts.  The purchase price allocated to unevaluated properties for oil and natural gas interests was excluded from the DD&A expense estimation.  ARO was estimated by W&T management.

(e)

G&A adjustments related to incremental transaction expenses, which were assumed to be funded from cash on hand, and were adjusted from 2012 results.

(f)

The acquisition was assumed to be funded entirely with borrowed funds.  Interest expense was computed using assumed borrowings of $205.8 million, which equates to the cash component of the transaction, and an interest rate of 7.7%, which equates to the effective yield on net proceeds for the additional senior notes issued shortly after the acquisition closed.

(g)

Incremental capitalized interest was computed for the addition to the pool of unevaluated properties and the capitalization interest rate was adjusted for the assumed borrowings.  The negative amount represents a decrease to net expenses.

(h)

Income tax expense was computed using the 35% federal statutory rate.

The pro forma adjustments do not included adjustments related to any other acquisitions or divestitures.

2012 Divestiture

On May 15, 2012, we sold our 40%, non-operated working interest in the South Timbalier 41 field located in the Gulf of Mexico for $30.5 million, net, with an effective date of April 1, 2012.  The transaction was structured as a like-kind exchange under the IRC Section 1031 and other applicable regulations, with funds held by a qualified intermediary until replacement purchases could be executed.  Replacement purchases were consummated during 2012, which were within the replacement periods as defined under the IRC.  In connection with this sale, we reversed $4.0 million of ARO.