2. Acquisitions

2011 Acquisitions

On May 11, 2011, we completed the acquisition of approximately 24,500 gross acres (21,900 net acres) of oil and gas leasehold interests in the West Texas Permian Basin (the "Yellow Rose Properties") from Opal Resources LLC and Opal Resources Operating Company LLC (collectively, "Opal"). The cash component of the stated purchase price was $366.3 million, subject to certain adjustments, including adjustments from an effective date of January 1, 2011 until the closing date of May 11, 2011. Taking into account such adjustments, the adjusted cash component of the purchase price was $394.4 million. The increase of $28.1 million primarily reflects drilling costs in excess of cash flow from the effective date of January 1, 2011 to the closing date. The acquisition was funded from cash on hand and borrowings under our revolving bank credit facility.

The following table presents the purchase price allocation for the acquisition of the Yellow Rose Properties (in thousands):

 

On August 10, 2011, we completed the acquisition of Shell Offshore Inc.'s ("Shell") 64.3% interest in the Fairway Field along with a like interest in the associated Yellowhammer gas treatment plant (collectively, the "Fairway Properties"). The cash component of the stated purchase price was $55.0 million, subject to certain adjustments, including adjustments from an effective date of September 1, 2010 until the closing date of August 10, 2011. Taking into account such adjustments, as of December 31, 2011, the cash component of the purchase price was $42.9 million. The decrease of $12.1 million primarily reflects net production cash flow, partially offset by plugging and abandonment costs incurred, from the effective date of September 1, 2010 to the closing date. The purchase price is subject to further post-effective date adjustments and final settlement is expected to occur in the first half of 2012. We assumed the asset retirement obligations associated with the properties, which we have estimated to be $7.8 million. The acquisition was funded from borrowings under our revolving bank credit facility.

 

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

 

Oil and natural gas properties and equipment		$	50,682
Asset retirement obligations – non-current			(7,812	)
Total cash paid		$	42,870

Expenses associated with acquisition activities and transition activities related to the Yellow Rose and Fairway acquisitions for the year 2011 were $1.6 million and are included in general and administrative expenses.

Revenue, Net Income and Pro Forma Financial Information – Unaudited

For the year 2011, the Yellow Rose Properties and the Fairway Properties accounted for $64.0 million of revenue, $25.5 million of direct operating expenses, $20.5 million of depreciation, depletion, amortization and accretion ("DD&A") and $6.3 million of income taxes, resulting in $11.7 million of net income. Such amounts are for the period from each respective close date to December 31, 2011. The net income attributable to these properties does not reflect certain expenses, such as general and administrative expenses 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 Yellow Rose Properties and the Fairway Properties are not recorded in a separate entity for tax purposes; therefore, income tax was estimated using the federal statutory tax rate.

Pro forma financial information has been prepared since the Yellow Rose Properties constitute a significant acquisition. The Fairway Properties acquisition, which was not significant, was combined with the Yellow Rose Properties to disclose the effect of both acquisitions upon our results of operations. The unaudited pro forma financial information was computed as if these two acquisitions had been completed on January 1, 2010. The historical financial information is derived from the audited historical consolidated financial statements of W&T and the unaudited historical statements of the sellers.

The pro forma adjustments were based on estimates by management and information believed to be directly related to the purchase of the Yellow Rose 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 oil, NGLs and natural gas sales prices 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):

 

		(unaudited) Year Ended December 31,
		2011				2010
Revenue		$	1,023,430			$	784,964
Net income (loss)			180,779				113,783
Basic and diluted earnings (loss) per common share			2.39				1.52

The purchase price of both acquisitions may be subject to further adjustments. For the pro forma financial information, we assumed the transactions were financed with borrowings from the revolving bank credit facility because the cash and cash equivalents balances for the assumed acquisition date was less than the cash and cash equivalents on hand used on the actual closing dates of the two acquisitions. Also, we assumed that the revolving bank credit facility capacity would have been increased due to the increase in reserves.

The following adjustments were made in the preparation of the financial information:

 

(a)

Revenues and direct operating expenses for the Yellow Rose Properties and the Fairway Properties were derived from the historical records of the sellers up to the respective closing dates.

 

(b)

DD&A was estimated using the full-cost method and determined as the incremental DD&A expense due to adding the Yellow Rose Properties and Fairway Properties' costs, reserves and production into our currently existing full cost pool in order to compute such amounts. The purchase price allocation included $81.2 million that was allocated to the pool of unevaluated properties for oil and gas interests. Accordingly, no DD&A expense was estimated for the unevaluated properties.

 

(c)

Asset retirement obligations and related accretion were estimated by W&T management.

 

(d)

Incremental transaction expenses related to the acquisitions completed during 2011 were $1.6 million and were assumed to be funded from cash on hand.

 

(e)

Interest expense was computed using interest rates that were in effect during the applicable time period and we assumed that six-month London Interbank Offered Rate ("LIBOR") borrowings were made as allowed under the revolving bank credit facility. The assumed interest rates ranged from 3.1% to 3.5%. A reduction in the revolving bank credit facility commitment fee related to the assumed borrowings was netted against the computed incremental interest expense.

 

(f)

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.

 

(g)

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

2010 Acquisitions

During 2010, we closed on two acquisition transactions. The first acquisition closed on April 30, 2010. Through our wholly-owned subsidiary, W&T Energy VI, LLC ("Energy VI"), we acquired all of Total E&P USA's ("Total") interest, including production platforms and facilities, in three federal offshore lease blocks located in the Gulf of Mexico and assumed the ARO for plugging and abandonment of the acquired interests. The adjusted purchase price was $121.3 million inclusive of ARO. There were no adjustments to the purchase price in 2011. The properties acquired from Total (the "Matterhorn/Virgo Properties") are producing interests and include a 100% working interest in the Matterhorn field (Mississippi Canyon block 243) and a 64% working interest in the Virgo field (Viosca Knoll blocks 822 and 823). The second acquisition closed on November 4, 2010. Through Energy VI, we acquired all of Shell's interests, including production platforms and facilities, in three federal offshore lease blocks located in the Gulf of Mexico and assumed the ARO for plugging and abandonment of the acquired interests. The adjusted purchase price recorded in 2010 was $139.9 million inclusive of ARO. In 2011, the adjusted purchase price inclusive of ARO was subsequently reduced to $134.2 million due to settlement adjustments of $5.7 million determined and received in 2011. The properties acquired from Shell (the "Tahoe/Droshky Properties") are producing interests and include a 70% working interest in the Tahoe field (Viosca Knoll 783), 100% working interest in the Southeast Tahoe field (Viosca Knoll 784) and a 6.25% of 8/8ths overriding royalty interest in the Droshky field (Green Canyon 244).

 

The following table presents the purchase price allocation for the acquisition of the Matterhorn/Virgo Properties (in thousands):

 

Oil and natural gas properties and equipment		$	121,301
Asset retirement obligations – non-current			(6,289	)
Total cash paid		$	115,012

The following table presents the purchase price allocation for the acquisition of the Tahoe/Droshky Properties (in thousands):

 

Oil and natural gas properties and equipment		$	134,189
Asset retirement obligations – non-current			(17,956	)
Total cash paid		$	116,233