2. Acquisitions and 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. The consideration and the purchase price allocation, as set forth in the table below, are subject to further post-closing adjustments which we expect to be finalized during 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 acquisition of the Callon Properties (in thousands):

 

Expenses associated with acquisition activities and transition activities related to the acquisition of the Callon Properties for the year ended December 31, 2013 were $0.4 million and are included in general and administrative expenses (“G&A”). 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 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):

 

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):

 

The sources of information and significant assumptions are described below:

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 $16.5 million. 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). 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 and no further adjustments are expected. A net purchase price increase of $0.2 million was recorded during the year ended December 31, 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):

 

Expenses associated with acquisition activities and transition activities related to the acquisition of the Newfield Properties for the year ended December 31, 2012 were $0.6 million and are included in G&A. 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. For the period of October 5, 2012 to December 31, 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):

 

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):

 

The sources of information and significant assumptions are described below:

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.

2011 Acquisitions

On May 11, 2011, we acquired from Opal Resources LLC and Opal Resources Operating Company LLC (collectively, “Opal”) certain oil and gas leasehold interests (the “Opal Properties”). The properties consisted of approximately 24,500 gross acres (21,900 net acres) of oil and gas leasehold interests in the West Texas Permian Basin. The effective date was January 1, 2011. The transaction included customary adjustments for the effective date, certain closing adjustments, and we assumed the related ARO along with a certain long-term liability. The consideration and the purchase price allocation are set forth in the table below. The acquisition was funded from cash on hand and borrowings under our revolving bank credit facility.

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

 

On August 10, 2011, we acquired from Shell Offshore Inc. (“Shell”) certain oil and gas leasehold and property interests (the “Fairway Properties”). The properties consisted of Shell’s 64.3% interest in the Fairway field along with a like interest in the associated Yellowhammer gas treatment plant. The effective date was September 1, 2010. 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 acquisition was funded from borrowings under our revolving bank credit facility.

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

 

Expenses associated with acquisition activities and transition activities related to the Opal Properties and Fairway Properties for the year 2011 were $1.6 million and are included in G&A. The acquisitions were 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.

2011 Acquisitions — Revenue, Net Income and Pro Forma Financial Information — Unaudited

The Opal Properties and the Fairway Properties were not included in our consolidated results until their respective close dates. For the period of May 11, 2011 to December 31, 2011 for the Opal Properties and the period of August 10, 2011 to December 31, 2011 for the Fairway Properties, these two acquisitions accounted for $64.0 million of revenue, $25.5 million of direct operating expenses, $20.5 million of DD&A and $6.3 million of income taxes, resulting in $11.7 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 Opal Properties and the Fairway Properties were 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, 2011, the unaudited pro forma financial information was computed as if the acquisition of the Opal Properties and the Fairway Properties had been completed on January 1, 2010. The historical financial information is derived from W&T’s audited historical consolidated financial statements, the Opal Properties’ audited historical financial statement for 2010, the Fairway Properties’ unaudited historical statement for 2010 and the unaudited historical statements of the sellers for the 2011 interim period.

The pro forma adjustments were based on estimates by management and information believed to be directly related to the purchase of the Opal Properties and the Fairway Properties. The pro forma financial information is not necessarily indicative of the results of operations had the respective purchases occurred on January 1, 2010. If the transactions 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 the sellers. Realized sales prices for oil, NGLs and natural gas may have been different and costs of operating the properties may have been different. The following table presents a summary of our pro forma financial information (in thousands except earnings per share):

 

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 Opal Properties and the Fairway Properties (in thousands):

 

The sources of information and significant assumptions are described below:

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