Attached files
file | filename |
---|---|
8-K/A - FORM 8-K/A - CONCHO RESOURCES INC | h78035e8vkza.htm |
EX-99.3 - EX-99.3 - CONCHO RESOURCES INC | h78035exv99w3.htm |
EX-23.2 - EX-23.2 - CONCHO RESOURCES INC | h78035exv23w2.htm |
EX-99.6 - EX-99.6 - CONCHO RESOURCES INC | h78035exv99w6.htm |
EX-99.5 - EX-99.5 - CONCHO RESOURCES INC | h78035exv99w5.htm |
EX-99.2 - EX-99.2 - CONCHO RESOURCES INC | h78035exv99w2.htm |
EX-99.4 - EX-99.4 - CONCHO RESOURCES INC | h78035exv99w4.htm |
EX-23.1 - EX-23.1 - CONCHO RESOURCES INC | h78035exv23w1.htm |
Exhibit 99.1
THE MARBOB GROUP
Special-Purpose Combined Financial Statements
and
Report of Independent Certified Public Accountants
For the Years Ended
December 31, 2009, 2008 and 2007
December 31, 2009, 2008 and 2007
and
For the Nine Months Ended
September 30, 2010 and 2009 (Unaudited)
September 30, 2010 and 2009 (Unaudited)
THE MARBOB GROUP
CONTENTS
Page | ||||
Report of Independent Certified Public Accountants |
2 | |||
Combined Financial Statements |
||||
Combined Statements of Assets and Liabilities |
3-4 | |||
Combined Statements of Revenues and Expenses |
5 | |||
Combined Statements of Net Investment |
6 | |||
Combined Statements of Cash Flows |
7-8 | |||
Notes to Combined Financial Statements |
9-18 |
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Concho Resources Inc.
We have audited the accompanying combined statements of assets and liabilities of the Marbob
Group (as defined in Note A) as of December 31, 2009 and 2008, and the related combined
statements of revenues and expenses, net investment and cash flows for each of the three years
in the period ended December 31, 2009 (collectively, the Special-Purpose Combined Financial
Statements). These Special-Purpose Combined Financial Statements are the responsibility of
the Marbob Groups management. Our responsibility is to express an opinion on these
Special-Purpose Combined Financial Statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America established by the American Institute of Certified Public Accountants. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Marbob Groups internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the Special-Purpose Combined Financial Statements referred to above present
fairly, in all material respects, the financial position of the Marbob Group as of December
31, 2009 and 2008, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note B to the Special-Purpose Combined Financial Statements, on December 31,
2009, the Marbob Group adopted the new requirements for oil and gas reserve estimation.
As discussed in Note A, the Marbob Group is a group of related assets and liabilities and not
a stand-alone entity. The Special-Purpose Combined Financial Statements reflect the assets,
liabilities, revenues and expenses directly attributable to the Marbob Group, as well as
allocations deemed reasonable by management to present the combined financial position,
results of operations, net investment and cash flows of the Marbob Group on a stand-alone
basis and do not necessarily reflect the combined financial position, results of operations,
net investment and cash flows of the Marbob Group in the future or what they would have been
had the Marbob Group been a separate, stand-alone entity during the periods presented.
/s/ GRANT THORNTON LLP
Tulsa, Oklahoma
December 1, 2010
-2-
THE MARBOB GROUP
Combined Statements of Assets and Liabilities
(in thousands)
Combined Statements of Assets and Liabilities
(in thousands)
December 31, | ||||||||||||
September 30, 2010 | 2009 | 2008 | ||||||||||
(unaudited) | ||||||||||||
ASSETS: |
||||||||||||
CURRENT ASSETS |
||||||||||||
Accounts receivable: |
||||||||||||
Oil and gas |
$ | 23,103 | $ | 23,812 | $ | 14,327 | ||||||
Joint operations and other, net |
31,567 | 9,844 | 17,010 | |||||||||
Prepaid costs and other |
248 | 288 | 152 | |||||||||
Total current assets |
54,918 | 33,944 | 31,489 | |||||||||
Property and equipment, at cost: |
||||||||||||
Oil and natural gas properties, full cost method |
896,454 | 797,467 | 701,136 | |||||||||
Accumulated depletion |
(429,632 | ) | (390,201 | ) | (342,566 | ) | ||||||
Total oil and natural gas properties, net |
466,822 | 407,266 | 358,570 | |||||||||
Other property and equipment, net |
14,884 | 15,173 | 16,224 | |||||||||
Total property and equipment, net |
481,706 | 422,439 | 374,794 | |||||||||
Inventory |
11,316 | 8,875 | 13,841 | |||||||||
Total assets |
$ | 547,940 | $ | 465,258 | $ | 420,124 | ||||||
The accompanying notes are an integral part of these combined financial statements.
(continued)
(continued)
-3-
THE MARBOB GROUP
Combined Statements of Assets and Liabilities (Continued)
(in thousands)
Combined Statements of Assets and Liabilities (Continued)
(in thousands)
December 31, | ||||||||||||
September 30, 2010 | 2009 | 2008 | ||||||||||
(unaudited) | ||||||||||||
LIABILITIES: |
||||||||||||
CURRENT LIABILITIES |
||||||||||||
Accounts payable trade |
$ | 6,938 | $ | 969 | $ | 1,855 | ||||||
Accrued expenses |
123,033 | 12,168 | 11,041 | |||||||||
Current asset retirement obligations |
1,229 | 1,723 | 1,568 | |||||||||
Total current liabilities |
131,200 | 14,860 | 14,464 | |||||||||
Asset retirement obligations |
6,543 | 7,247 | 7,429 | |||||||||
Commitments and Contingencies (Note E) |
||||||||||||
NET INVESTMENT |
410,197 | 443,151 | 398,231 | |||||||||
Total liabilities and net investment |
$ | 547,940 | $ | 465,258 | $ | 420,124 | ||||||
The accompanying notes are an integral part of these combined financial statements.
-4-
THE MARBOB GROUP
Combined Statements of Revenues and Expenses
(in thousands)
Combined Statements of Revenues and Expenses
(in thousands)
Nine Months Ended September 30, | Year Ended December 31, | |||||||||||||||||||
2010 | 2009 | 2009 | 2008 | 2007 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Operating revenues: |
||||||||||||||||||||
Oil sales |
$ | 137,880 | $ | 85,950 | $ | 129,585 | $ | 200,013 | $ | 140,571 | ||||||||||
Natural gas sales |
72,216 | 39,729 | 62,030 | 129,459 | 101,411 | |||||||||||||||
Total operating revenues |
210,096 | 125,679 | 191,615 | 329,472 | 241,982 | |||||||||||||||
Operating costs and expenses: |
||||||||||||||||||||
Oil and natural gas production |
86,752 | 17,281 | 24,347 | 32,769 | 21,694 | |||||||||||||||
Oil and natural gas taxes |
17,711 | 10,668 | 16,344 | 28,064 | 20,564 | |||||||||||||||
Depreciation and depletion |
40,556 | 31,864 | 49,144 | 87,415 | 36,529 | |||||||||||||||
Accretion of discount on asset retirement obligations |
434 | 472 | 629 | 423 | 427 | |||||||||||||||
General and administrative |
48,979 | 6,047 | 10,426 | 12,820 | 10,366 | |||||||||||||||
Loss on derivatives not designated as hedges |
| | | 420 | | |||||||||||||||
Total operating costs and expenses |
194,432 | 66,332 | 100,890 | 161,911 | 89,580 | |||||||||||||||
Revenues in excess of expenses from operations |
15,664 | 59,347 | 90,725 | 167,561 | 152,402 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest expense |
| (18 | ) | (35 | ) | | (237 | ) | ||||||||||||
Gain (loss) on sale of assets |
14 | 72 | (28 | ) | (21 | ) | 1,891 | |||||||||||||
Other, net |
762 | 372 | 596 | 783 | 362 | |||||||||||||||
Total other income |
776 | 426 | 533 | 762 | 2,016 | |||||||||||||||
Revenues in excess of expenses |
$ | 16,440 | $ | 59,773 | $ | 91,258 | $ | 168,323 | $ | 154,418 | ||||||||||
The accompanying notes are an integral part of these combined financial statements.
-5-
THE MARBOB GROUP
Combined Statements of Net Investment
(in thousands)
Combined Statements of Net Investment
(in thousands)
Balance at January 1, 2007 |
$ | 303,635 | ||
Net change in investment |
(96,335 | ) | ||
Revenues in excess of expenses |
154,418 | |||
Balance at December 31, 2007 |
361,718 | |||
Net change in investment |
(131,810 | ) | ||
Revenues in excess of expenses |
168,323 | |||
Balance at December 31, 2008 |
398,231 | |||
Net change in investment |
(46,338 | ) | ||
Revenues in excess of expenses |
91,258 | |||
Balance at December 31, 2009 |
443,151 | |||
Net change in investment (unaudited) |
(49,394 | ) | ||
Revenues in excess of expenses (unaudited) |
16,440 | |||
Balance at September 30, 2010 (unaudited) |
$ | 410,197 | ||
The accompanying notes are an integral part of these combined financial statements.
-6-
THE MARBOB GROUP
Combined Statements of Cash Flows
(in thousands)
Combined Statements of Cash Flows
(in thousands)
Nine Months Ended September 30, | Year Ended December 31, | |||||||||||||||||||
2010 | 2009 | 2009 | 2008 | 2007 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Revenues in excess of expenses |
$ | 16,440 | $ | 59,773 | $ | 91,258 | $ | 168,323 | $ | 154,418 | ||||||||||
Adjustments to
reconcile revenues in excess of
expenses to net cash provided by operating activities: |
||||||||||||||||||||
Depreciation and depletion |
40,556 | 31,864 | 49,144 | 87,415 | 36,529 | |||||||||||||||
Accretion of discount on asset
retirement obligation |
434 | 472 | 629 | 423 | 427 | |||||||||||||||
(Gain) loss on sale of assets |
(14 | ) | (72 | ) | 28 | 21 | (1,891 | ) | ||||||||||||
Loss on derivatives not designated as hedges |
| | | 420 | | |||||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||
Accounts receivable |
(21,014 | ) | 2,787 | (2,319 | ) | 7,198 | 1,422 | |||||||||||||
Inventory |
(2,440 | ) | 3,975 | 4,966 | (7,842 | ) | 50 | |||||||||||||
Other assets |
39 | (136 | ) | (136 | ) | (4 | ) | (49 | ) | |||||||||||
Accounts payable and accrued expenses |
115,130 | 1,992 | (1,292 | ) | 313 | (633 | ) | |||||||||||||
Net cash provided by operating activities |
149,131 | 100,655 | 142,278 | 256,267 | 190,273 | |||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Capital expenditures on oil and natural gas properties |
(98,915 | ) | (66,875 | ) | (95,450 | ) | (122,492 | ) | (90,513 | ) | ||||||||||
Proceeds from the sale of assets |
57 | 47 | 108 | 119 | 1,979 | |||||||||||||||
Additions to other property and equipment |
(879 | ) | (320 | ) | (598 | ) | (1,664 | ) | (1,890 | ) | ||||||||||
Settlements paid on derivatives not designated
as hedges |
| | | (420 | ) | | ||||||||||||||
Net cash used in investing activities |
(99,737 | ) | (67,148 | ) | (95,940 | ) | (124,457 | ) | (90,424 | ) | ||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Repayments on line of credit, net |
| | | | (3,514 | ) | ||||||||||||||
Net change in investment |
(49,394 | ) | (33,507 | ) | (46,338 | ) | (131,810 | ) | (96,335 | ) | ||||||||||
Net cash used in financing activities |
(49,394 | ) | (33,507 | ) | (46,338 | ) | (131,810 | ) | (99,849 | ) | ||||||||||
The accompanying notes are an integral part of these combined financial statements.
(continued)
(continued)
-7-
THE MARBOB GROUP
Combined Statements of Cash Flows (Continued)
(in thousands)
Combined Statements of Cash Flows (Continued)
(in thousands)
Nine Months Ended September 30, | Year Ended December 31, | |||||||||||||||||||
2010 | 2009 | 2009 | 2008 | 2007 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Cash and cash equivalents beginning of period |
| | | | | |||||||||||||||
Cash and cash equivalents end of period |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Supplemental cash flows: |
||||||||||||||||||||
Cash paid for interest |
$ | | $ | 18 | $ | 35 | $ | | $ | 237 |
The accompanying notes are an integral part of these combined financial statements.
-8-
THE MARBOB GROUP
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Note A. Organization and Basis of Presentation
On July 19, 2010, Concho Resources Inc., a Delaware corporation (Concho), entered into an
acquisition agreement with a group of related entities including Marbob Energy Corporation, a New
Mexico corporation (Marbob), Pitch Energy Corporation, a New Mexico corporation (Pitch),
Costaplenty Energy Corporation, a New Mexico corporation (Costaplenty) and John R. Gray, LLC, a
New Mexico limited liability company (JRG LLC) for the purpose of acquiring a group of related
assets primarily in the form of leasehold interests in certain producing and non-producing oil and
natural gas properties (the Acquired Properties) primarily in Eddy, Chaves and Lea counties in
New Mexico. The acquisition closing occurred in October 2010, and, in exchange, Concho provided
consideration of $1.1 billion in cash, an unsecured promissory note in the aggregate principal
amount of $150 million bearing an interest rate of 8% due in 2018, and 1.1 million shares of Concho
common stock for the properties acquired at the closing.
The accompanying combined financial statements include the selected accounts of Marbob, Pitch,
Costaplenty and JRG LLC (collectively the Marbob Group) being the entities which held the
interests in producing and non-producing oil and natural gas interests and other assets. Primarily
due to the exercise of preferential purchase rights by third parties, Concho did not acquire
substantially all of the oil and natural gas properties included in the combined financial
statements.
Note B. Summary of Significant Accounting Policies
Principles of Combination. The combined financial statements include selected accounts of the
Marbob Group since their formation which primarily include the operations of the Marbob Groups oil
and natural gas interests. Cash, certain investment securities, and real estate investments and
related financial results have been excluded because they were not acquired by Concho. All
material inter-company balances and transactions have been eliminated.
Use of Estimates. The preparation of the combined financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates. Estimates of oil and natural gas reserves and their values,
future production rates and future costs and expenses are inherently uncertain for numerous
reasons, including many factors beyond the Marbob Groups control. Reservoir engineering is a
subjective process of estimating underground accumulations of oil and natural gas that cannot be
measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of
data available, engineering and geological interpretation and judgment. In addition, estimates of
reserves may be revised based on actual production, results of subsequent exploration and
development activities, prevailing commodity prices, operating costs and other factors. These
revisions may be material and could materially affect the Marbob Groups future depletion expense.
Interim Financial Statements. The accompanying combined interim financial statements at September
30, 2010 and for the nine months ended September 30, 2010 and 2009 for the Marbob Group have not
been audited by the Marbob Groups independent certified public accountants. In the opinion of
management, the accompanying combined interim financial statements reflect all adjustments
necessary to present fairly the Marbob Groups financial position at September 30, 2010, and its
results of operations and its cash flows for the nine months ended September 30, 2010 and 2009.
All such adjustments are of a normal recurring nature. In preparing the accompanying combined
interim financial statements, management has made certain estimates and assumptions that affect
reported amounts in the combined interim financial statements and disclosures of contingencies.
Actual results may differ from those estimates. The results from interim periods are not
necessarily indicative of annual results.
-9-
THE MARBOB GROUP
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Note B. Summary of Significant Accounting Policies (Continued)
Accounts Receivable. The Marbob Group has receivables primarily for sales of oil and natural gas,
as well as receivables related to billing of other partners for their respective share of costs.
Receivables are considered past due if full payment is not received by the contractual due date.
Past due accounts are generally written off against the allowance for doubtful accounts only after
all collection attempts have been exhausted. The Marbob Group had an allowance for doubtful
accounts of approximately $31,000 at September 30, 2010 (unaudited) and December 31, 2009 and 2008,
and the Marbob Group did not write off any receivables against the allowance for doubtful accounts
in 2010, 2009 or 2008.
Inventory. Inventory consists of oil field equipment and supplies and is stated at the lower of
cost or market. Inventory is presented as non-current assets as they are intended to be used in
oil and natural gas producing activities.
Environmental. The Marbob Group is subject to extensive federal, state and local environmental
laws and regulations. These laws, which are often changing, regulate the discharge of materials
into the environment and may require the Marbob Group to remove or mitigate the environmental
effects of the disposal or release of petroleum or chemical substances at various sites.
Expenditures that relate to an existing condition caused by past operations and that have no future
economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded
when environmental assessment and/or remediation is probable, and the costs can be reasonably
estimated. Such liabilities are generally undiscounted unless the timing of cash payments is fixed
and readily determinable. Management believes no liabilities of this nature existed at September
30, 2010 and December 31, 2009 and 2008.
Oil and Natural Gas Properties. The Marbob Group utilizes the full cost method to account for its
oil and natural gas properties. Under full cost accounting, all costs directly associated with the
acquisition, exploration and development of oil and natural gas reserves are capitalized into a
full cost pool (FCP). These capitalized costs include costs of all unproved properties, internal
costs directly related to the Marbob Groups acquisition, exploration and development activities.
Capitalized costs are depleted using the gross revenues method. Under this method, the provision
for depletion is computed at the end of each period by multiplying total revenues for the period by
a depletion rate. The depletion rate is determined by dividing the total unamortized cost base plus
future development costs by net estimated future revenues at the beginning of the period.
Costs associated with unproved properties are excluded from the depletion base until a
determination has been made as to the existence of proved reserves. Unproved properties are
reviewed at the end of each period to determine whether the costs incurred should be reclassified
to the FCP and, thereby, subjected to depletion. Sales and abandonments of oil and natural gas
properties being depleted are accounted for as adjustments to the FCP, with no gain or loss
recognized, unless the adjustments would significantly alter the relationship between capitalized
costs and proved oil and natural gas reserves.
-10-
THE MARBOB GROUP
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Note B. Summary of Significant Accounting Policies (Continued)
Oil and Natural Gas Properties (Continued). Under the full cost method of accounting, total
capitalized costs of oil and natural gas properties, net of accumulated depletion, less related
deferred income taxes, if any, may not exceed an amount equal to the present value of future net
revenues from proved reserves, discounted at 10% per annum, plus the lower of cost or fair value of
unevaluated properties, plus estimated salvage value, less the related tax effects, if any, (the
ceiling limitation). A ceiling limitation calculation is performed at the end of each period. If
total capitalized costs, net of accumulated depletion, less related deferred taxes, if any, are
greater than the ceiling limitation, a write-down or impairment of the FCP is required. A
write-down of the carrying value of the FCP is a non-cash charge that reduces earnings and impacts
net investment in the period of occurrence and typically results in lower depletion expense in
future periods. Once incurred, a write-down is not reversible at a later date. There were no
impairments of the FCP for the nine months ended September 30, 2010 and the years ended December
31, 2009, 2008 and 2007.
For the year ended December 31, 2009 and future periods, the ceiling limitation calculation used a
previous 12-month oil and natural gas average price, as adjusted for basis or location differential
using a 12-month average, and held constant over the life of the reserves. For prior periods, the
ceiling limitation calculation used oil and natural gas prices in effect as of the balance sheet
date, as adjusted for basis or location differentials as of the balance sheet date, and held
constant over the life of the reserves. If applicable, these net wellhead prices would be further
adjusted to include the effects of any fixed price arrangements for the sale of oil and natural
gas. The future cash outflows associated with future development or abandonment of wells are
included in the computation of the discounted present value of future net revenues for purposes of
the ceiling limitation calculation.
The costs associated with unproved properties, initially excluded from the depletion base, relate
to unproved leasehold acreage, wells and production facilities in progress and wells pending
determination of the existence of proved reserves. Costs associated with unproved properties at
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007 of $42 million, $37.3 million,
$36.1 million and $33.4 million, respectively, were excluded from amounts subject to depletion.
Unproved leasehold costs are transferred to the depletion base with the costs of drilling the
related well once a determination of the existence of proved reserves has been made or upon
impairment of a lease. Costs of seismic data are allocated to various unproved leaseholds and
transferred to the depletion base with the associated leasehold costs on a specific project basis.
Costs associated with wells in progress and completed wells that have yet to be evaluated are
transferred to the depletion base once a determination is made whether or not proved reserves can
be assigned to the property. Costs of uneconomic wells are transferred to the depletion base
immediately upon determination that the well is unsuccessful.
All items classified as unproved property are assessed on an annual basis for possible impairment
or reduction in value. Properties are assessed on an individual basis or as a group if properties
are individually insignificant. The assessment includes consideration of various factors,
including, but not limited to, the following: intent to drill; remaining lease term; geological and
geophysical evaluations; drilling results and activity; assignment of proved reserves; and economic
viability of development if proved reserves are assigned. During any period in which these factors
indicate an impairment, the cumulative drilling costs incurred to date for such property and all or
a portion of the associated leasehold costs are transferred to the full cost pool and become
subject to depletion.
Other Property and Equipment, Net. Other property and equipment are carried at cost. Renewals and
improvements are capitalized while repairs and maintenance are expensed. Depreciation of such
property and equipment is computed using the straight-line method over the estimated useful lives
of the assets ranging from 3 to 39 years.
-11-
THE MARBOB GROUP
Notes to Special-Purpose Combined Financial Statements
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Note B. Summary of Significant Accounting Policies (Continued)
Other Property and Equipment, Net (Continued). When other property and equipment components are
disposed of, the cost and the related accumulated depreciation are removed and any resulting gain
or loss is reflected in the combined statements of revenues and expenses.
Asset Retirement Obligations. The Marbob Group owns oil and natural gas properties that require
expenditures to plug and abandon the wells when the oil and natural gas reserves in the wells are
depleted. These expenditures are recorded in the period in which the liability is incurred (at the
time the wells are drilled or acquired). Asset retirement obligations are recorded as a liability
at their estimated present value at the assets inception, with the offsetting increase to property
cost. Periodic accretion expense of the estimated liability is recorded in the combined statements
of revenues and expenses.
Asset retirement obligations primarily represent the Marbob Groups estimate of fair value to plug,
abandon and remediate the oil and natural gas properties at the end of their productive lives, in
accordance with applicable state laws. The Marbob Group determines its asset retirement obligations
by calculating the present value of estimated expenses related to the liability. Estimating the
future asset retirement obligations requires management to make estimates and judgments regarding
timing, existence of a liability and what constitutes adequate restoration. Inherent in the present
value calculation rates are the timing of settlement and changes in the legal, regulatory,
environmental and political environments. The following shows the activity of the asset retirement
obligation (in thousands):
Nine | ||||||||||||||||
Months Ended | Year Ended December 31, | |||||||||||||||
September 30, 2010 | 2009 | 2008 | 2007 | |||||||||||||
(unaudited) | ||||||||||||||||
Asset retirement
obligations, beginning
of period |
$ | 8,970 | $ | 8,997 | $ | 5,553 | $ | 5,574 | ||||||||
Liabilities incurred upon
acquiring and drilling
wells |
122 | 865 | 806 | 601 | ||||||||||||
Revisions of estimates |
(1,754 | ) | (1,476 | ) | 2,248 | (1,037 | ) | |||||||||
Liabilities settled in current
period |
| (45 | ) | (33 | ) | (12 | ) | |||||||||
Accretion expense |
434 | 629 | 423 | 427 | ||||||||||||
Asset retirement
obligations, end of
period |
7,772 | 8,970 | 8,997 | 5,553 | ||||||||||||
Less: current portion |
(1,229 | ) | (1,723 | ) | (1,568 | ) | (399 | ) | ||||||||
Long-term asset
retirement
obligations |
$ | 6,543 | $ | 7,247 | $ | 7,429 | $ | 5,154 | ||||||||
-12-
THE MARBOB GROUP
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Note B. Summary of Significant Accounting Policies (Continued)
Concentration of Risk. The purchasers of the Marbob Groups oil and natural gas production consist
primarily of independent marketers, major oil and natural gas companies and gas pipeline companies.
The Marbob Group has not experienced any significant losses from uncollectible accounts.
Oil and Natural Gas Sales and Imbalances. Oil and natural gas revenues are recorded at the time of
delivery of such products to pipelines for the account of the purchaser or at the time of physical
transfer of such products to the purchaser. The Marbob Group follows the sales method of
accounting for oil and natural gas sales, recognizing revenues based on the Marbob Groups share of
actual proceeds from the oil and natural gas sold to purchasers in-kind and, in doing so, take
more or less than their respective entitled percentage. Imbalances are tracked by well, but the
Marbob Group does not record any receivable from or payable to the other owners unless the
imbalance has reached a level at which it exceeds the remaining reserves in the respective well.
If reserves are insufficient to offset the imbalance and the Marbob Group is in an overtake
position, a liability is recorded for the amount of shortfall in reserves valued at a contract
price or the market price in effect at the time the imbalance is generated. If the Marbob Group is
in an undertake position, a receivable is recorded for an amount that is reasonably expected to be
received, not to exceed the current market value of such imbalance. The Marbob Group had no
significant imbalances in any of the periods presented.
Derivative Financial Instruments. The Marbob Group occasionally uses derivative financial
instruments (swaps, floors, collars and forward sales) to reduce the impact of oil and natural gas
price fluctuations. Every derivative instrument (including certain derivative instruments embedded
in other contracts) is recorded in the combined statements of assets and liabilities as either an
asset or liability measured at its fair value. Changes in the derivatives fair value are
recognized currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivatives gains and losses to offset related results
on the hedged item in the combined statements of revenues and expenses. Companies must formally
document, designate and assess the effectiveness of transactions that receive hedge accounting
treatment. The Marbob Group had no derivatives designated as hedges at September 30, 2010 and
December 31, 2009 and 2008, nor during the years ended December 31, 2009, 2008 and 2007 and nine
months ended September 30, 2010 and 2009.
Changes in the fair value of derivative financial instruments that do not qualify for accounting
treatment as hedges are recognized currently in the combined statements of revenues and expenses.
The cash flows from such agreements are included in investing activities in the combined statements
of cash flows. Premiums paid or received related to derivative instruments are included in
financing activities in the combined statements of cash flows.
Income Taxes. Income and expenses from the Marbob Group is reported in the individual
shareholders federal and state income tax returns. The Marbob Group is not a taxpaying entity for
purposes of federal or state income taxes, and as such, no provision for income taxes have been
recorded in the combined financial statements.
Recently Adopted Accounting Pronouncements.
Various topics. In February 2010, the Financial Accounting Standards Board (the FASB) issued an
update to various topics, which eliminated outdated provisions and inconsistencies in the
Accounting Standards Codification (the Codification), and clarified certain guidance to reflect
the FASBs original intent. The update is effective for the first reporting period, including
interim periods, beginning after issuance of the update, except for the amendments affecting
embedded derivatives and reorganization. In addition to amending the Codification, the FASB made
corresponding changes to the legacy accounting literature to facilitate historical research. These
changes are included in an appendix to the update. The Marbob Group adopted the update effective
January 1, 2010, and the adoption did not have a significant impact on the Marbob Groups combined
financial statements.
-13-
THE MARBOB GROUP
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Note B. Summary of Significant Accounting Policies (Continued)
Recently Adopted Accounting Pronouncements (Continued).
Accounting for extractive activities. In April 2010, the FASB issued an amendment to a paragraph
in the accounting standard for oil and natural gas extractive activities accounting. The standard
added to the Codification the United States Securities and Exchange Commissions (SEC),
Modernization of Oil and Gas Reporting release. The Marbob Group adopted the update effective
December 31, 2009, and the adoption did not have a significant impact on the Marbob Groups combined
financial statements.
Note C. Property and Equipment
Property and equipment consists of the following (in thousands):
December 31, | ||||||||||||
September 30, 2010 | 2009 | 2008 | ||||||||||
(unaudited) | ||||||||||||
Oil and natural gas properties: |
||||||||||||
Proved |
$ | 854,434 | $ | 760,203 | $ | 665,072 | ||||||
Unproved |
42,020 | 37,264 | 36,064 | |||||||||
Total oil and natural gas properties |
896,454 | 797,467 | 701,136 | |||||||||
Less: accumulated depletion |
(429,632 | ) | (390,201 | ) | (342,566 | ) | ||||||
Net oil and natural gas properties
capitalized costs |
466,822 | 407,266 | 358,570 | |||||||||
Other property and equipment: |
||||||||||||
Land |
5,514 | 5,314 | 5,314 | |||||||||
Equipment |
10,638 | 10,458 | 10,299 | |||||||||
Buildings and structures |
6,477 | 6,344 | 6,358 | |||||||||
Total other property and equipment |
22,629 | 22,116 | 21,971 | |||||||||
Less: accumulated depreciation |
(7,745 | ) | (6,943 | ) | (5,747 | ) | ||||||
Net other property and equipment |
14,884 | 15,173 | 16,224 | |||||||||
Total net property and equipment |
$ | 481,706 | $ | 422,439 | $ | 374,794 | ||||||
The
average rates used for depletion of oil and natural gas properties
were $0.19 and $0.23 per
dollar of gross oil and natural gas revenue for the nine months ended September 30, 2010 and 2009,
respectively, and $0.23, $0.25 and $0.12 per dollar of gross oil and natural gas revenue in 2009, 2008
and 2007, respectively.
Note D. Related Party Transactions
The Marbob Group had not entered into any transactions with affiliates or related parties that are
not included in the combined financial statements. At September 30, 2010, the Marbob Group had
accrued $107.4 million in employee bonus expenses.
-14-
THE MARBOB GROUP
Notes to Special-Purpose Combined Financial Statements
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Note E. Contingencies
Legal actions. The Marbob Group is a party to proceedings and claims incidental to its business.
While many of these matters involve inherent uncertainty, the Marbob Group believes that the amount
of the liability, if any, ultimately incurred with respect to any such proceedings or claims will
not have a material adverse effect on the Marbob Groups combined financial position as a whole or
on its liquidity, capital resources or future results of operations. The Marbob Group will
continue to evaluate proceedings and claims involving the Marbob Group on a quarter-by-quarter
basis and will establish and adjust any reserves as appropriate to reflect its assessment of the
then current status of the matters.
Preferential rights. Certain of the Marbob Groups interest in properties contained contractual
preferential rights to purchase by third parties if the Marbob Group were to sell them. The Marbob
Group received a notice from BP America Production Company (BP) electing to exercise its
contractual preferential purchase right to purchase interest in certain of the Marbob Groups
properties as a result of the Marbob Groups sale. On July 20, 2010, BP announced it was selling
all its assets in the Permian Basin to a subsidiary of Apache Corporation (Apache). BP and
Apache contested the Marbob Groups ability to exercise its contractual preferential rights in this
situation. As a result, the Marbob Group and Concho filed suit against BP and Apache seeking
declaratory judgment and injunctive relief to protect the Marbob Groups contractual right to have
the option to purchase these interests in these common properties. On October 15, 2010, the Marbob
Group and Concho resolved the litigation with BP and Apache related to the disputed contractual
preferential rights. As a result of the settlement, Concho acquired a non-operated interest in
substantially all of the oil and natural gas assets subject to the litigation for approximately
$286 million.
Note F. Supplementary Information on Oil and Gas Producing Activities
Capitalized Costs
December 31 | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Oil and natural gas properties: |
||||||||
Proved |
$ | 760,203 | $ | 665,072 | ||||
Unproved |
37,264 | 36,064 | ||||||
Less: accumulated depletion |
(390,201 | ) | (342,566 | ) | ||||
Net capitalized costs for oil and natural gas properties |
$ | 407,266 | $ | 358,570 | ||||
-15-
THE MARBOB GROUP
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Note F. Supplementary Information on Oil and Gas Producing Activities (Continued)
Costs Incurred for Oil and Natural Gas Producing Activities (a)
Year Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Property acquisition costs: |
||||||||||||
Proved |
$ | 1,888 | $ | 1,719 | $ | | ||||||
Unproved |
1,201 | 2,621 | 4,312 | |||||||||
Exploration |
79,138 | 114,189 | 90,410 | |||||||||
Development |
14,104 | 3,069 | | |||||||||
Total costs incurred for oil and natural gas properties |
$ | 96,331 | $ | 121,598 | $ | 94,722 | ||||||
(a) | The costs incurred for oil and natural gas producing activities included the following amounts of asset retirement obligations: |
Year Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Property acquisition costs |
$ | 111 | $ | 33 | $ | | ||||||
Exploration costs |
750 | 534 | 464 | |||||||||
Development costs |
(1,472 | ) | 2,487 | (900 | ) | |||||||
Total |
$ | (611 | ) | $ | 3,054 | $ | (436 | ) | ||||
Oil and Natural Gas Reserve Quantities (Unaudited)
Proved oil and natural gas reserves are those quantities of oil and natural gas, which, by analysis
of geosciences and engineering data, can be estimated with reasonable certainty to be economically
producible, based on prices used to estimate reserves, from a given date forward from known
reservoirs, and under existing economic conditions, operating methods, and government regulation
before the time of which contracts providing the right to operate expire, unless evidence indicates
that renewal is reasonably certain. Proved developed reserves are proved reserves expected to be
recovered through existing wells with existing equipment and operating methods or in which the cost
of the required equipment is relatively minor compared with the cost of a new well. Proved
undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively large major expenditure is required for
recompletion.
The table below represents the Marbob Groups estimate of proved oil and natural gas reserves
attributable to the Marbob Groups net interest in oil and natural gas properties, all of which are
located in the United States, based upon the evaluation by the Marbob Group and its independent
petroleum engineers of pertinent geosciences and engineering data in accordance with the SECs
regulations.
Cawley, Gillespie & Associates, Inc., independent oil and gas consultants, prepared the estimates
of proved oil and natural gas reserves attributable to substantially all of the Marbob Groups net
interest in oil and natural gas properties at December 31, 2009, 2008, 2007 and 2006. Cawley,
Gillespie & Associates, Inc. are independent petroleum engineers, geologists, geophysicists and
petro-physicists and do not own an interest in the Marbob Group or its properties and are not
employed on a contingent basis.
-16-
THE MARBOB GROUP
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Note F. Supplementary Information on Oil and Gas Producing Activities (Continued)
Oil and Natural Gas Reserve Quantities (Unaudited) (Continued)
The Marbob Group believes the geosciences and engineering data examined provides reasonable
assurance that the proved reserves are economically producible in future years from known
reservoirs and under existing economic conditions, operating methods and governmental regulations.
Estimates of proved reserves are subject to change, either positively or negatively, as additional
information is available and contractual and economic conditions change.
The summary below presents changes in the Marbob Groups estimated proved reserves:
Oil (MBbls) | Natural Gas (MMcf) | Total (MBOE) | ||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||
Total proved reserves: |
||||||||||||||||||||||||||||||||||||
Balance, January 1, |
34,748 | 36,910 | 35,642 | 147,301 | 161,224 | 149,756 | 59,298 | 63,781 | 60,602 | |||||||||||||||||||||||||||
Revisions of previous
estimates |
2,593 | (2,338 | ) | 1,258 | 10,870 | (8,899 | ) | 11,870 | 4,405 | (3,821 | ) | 3,236 | ||||||||||||||||||||||||
Purchases of
minerals-in-place |
| 2 | | 116 | | | 19 | 2 | | |||||||||||||||||||||||||||
Extensions and
discoveries |
3,303 | 2,310 | 2,137 | 13,943 | 8,942 | 12,950 | 5,627 | 3,800 | 4,295 | |||||||||||||||||||||||||||
Production |
(2,251 | ) | (2,136 | ) | (2,127 | ) | (12,923 | ) | (13,966 | ) | (13,352 | ) | (4,405 | ) | (4,464 | ) | (4,352 | ) | ||||||||||||||||||
Balance, December 31, |
38,393 | 34,748 | 36,910 | 159,307 | 147,301 | 161,224 | 64,944 | 59,298 | 63,781 | |||||||||||||||||||||||||||
Proved developed reserves: |
||||||||||||||||||||||||||||||||||||
Balance, January 1, |
20,946 | 22,725 | 21,821 | 113,303 | 123,518 | 112,768 | 39,830 | 43,311 | 40,616 | |||||||||||||||||||||||||||
Balance, December 31, |
23,597 | 20,946 | 22,725 | 122,507 | 113,303 | 123,518 | 44,015 | 39,830 | 43,311 | |||||||||||||||||||||||||||
Proved undeveloped reserves: |
||||||||||||||||||||||||||||||||||||
Balance, January 1, |
13,802 | 14,185 | 13,821 | 33,998 | 37,706 | 36,988 | 19,468 | 20,470 | 19,986 | |||||||||||||||||||||||||||
Balance, December 31, |
14,796 | 13,802 | 14,185 | 36,800 | 33,998 | 37,706 | 20,929 | 19,468 | 20,470 | |||||||||||||||||||||||||||
Standardized Measures of Discounted Future Net Cash Flows (Unaudited)
The standardized measure of discounted future net cash flows and summary of the changes in the
standardized measure computation from year to year are prepared in accordance with SEC guidelines.
The assumptions that underlie the computation of the standardized measure of discounted future net
cash flows may be summarized as follows:
| The standardized measure includes the Marbob Groups estimate of proved oil and natural gas reserves and projected future production volumes based upon economic conditions; | ||
| Pricing is applied based upon previous 12-month average market prices using the first day of the month at December 31, 2009 and year end prices for December 31, 2008 and December 31, 2007. The calculated weighted average per unit prices for the Marbob Groups proved reserves and future net revenues were as follows: |
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Oil (per barrel) |
$ | 57.65 | $ | 41.00 | $ | 92.50 | ||||||
Natural gas (per Mcf) |
$ | 3.87 | $ | 5.71 | $ | 6.80 |
-17-
THE MARBOB GROUP
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Notes to Special-Purpose Combined Financial Statements
September 30, 2010 (unaudited) and December 31, 2009, 2008 and 2007
Note F. Supplementary Information on Oil and Gas Producing Activities (Continued)
Standardized Measures of Discounted Future Net Cash Flows (Unaudited) (Continued)
| Future development and production costs are determined based upon actual cost at year-end; | ||
| The standardized measure includes projections of future abandonment costs based upon actual costs at year-end; and | ||
| A discount factor of 10% per year is applied annually to the future net cash flows. |
The summary below provides the Marbob Groups standardized measure of discounted future net cash
flows (in thousands):
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Future cash inflows |
$ | 2,786,575 | $ | 2,456,660 | $ | 4,442,514 | ||||||
Future production costs |
(823,169 | ) | (849,600 | ) | (1,040,389 | ) | ||||||
Future development and abandonment costs |
(266,422 | ) | (287,694 | ) | (269,002 | ) | ||||||
10% annual discount |
(939,434 | ) | (715,315 | ) | (1,806,556 | ) | ||||||
Standardized measure of discounted future net cash flows |
$ | 757,550 | $ | 604,051 | $ | 1,326,567 | ||||||
The following table represents the Marbob Groups changes in the standardized measure of discounted
future net cash flows (in thousands):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Balance, beginning of year |
$ | 604,051 | $ | 1,326,567 | $ | 720,137 | ||||||
Changes during the year: |
||||||||||||
Revenues less production and other costs |
(150,924 | ) | (268,639 | ) | (199,724 | ) | ||||||
Net changes in prices, production and other costs |
102,378 | (633,487 | ) | 544,123 | ||||||||
Net changes in future development costs |
16,799 | 4,280 | (1,755 | ) | ||||||||
Extensions and discoveries |
60,998 | 37,017 | 92,429 | |||||||||
Revisions of previous quantity estimates |
61,766 | (44,404 | ) | 73,635 | ||||||||
Accretion of discount |
60,405 | 132,657 | 72,014 | |||||||||
Purchases of reserves in-place |
160 | 37 | | |||||||||
Timing differences and other |
1,917 | 50,023 | 25,708 | |||||||||
Net change for the year |
153,499 | (722,516 | ) | 606,430 | ||||||||
Balance, end of year |
$ | 757,550 | $ | 604,051 | $ | 1,326,567 | ||||||
Note G. Subsequent Events
Management
has evaluated subsequent events through December 1, 2010, the date the combined
financial statements were available to be issued. No subsequent events were identified requiring
additional recognition or disclosure in the accompanying combined financial statements.
-18-