Attached files
| file | filename |
|---|---|
| 8-K/A - Vanguard Natural Resources, Inc. | form8-ka.htm |
| EX-23.1 - Vanguard Natural Resources, Inc. | exhibit23-1.htm |
| EX-99.2 - Vanguard Natural Resources, Inc. | exhibit99-2.htm |
| EX-99.1 - Vanguard Natural Resources, Inc. | exhibit99-1.htm |
| EX-99.3 - Vanguard Natural Resources, Inc. | exhibit99-3.htm |
Exhibit 99.4
Vanguard Natural Resources, LLC and Subsidiaries
Unaudited Pro Forma Combined Financial Information
On December 31, 2010, Vanguard completed an acquisition pursuant to a purchase agreement with Denbury Resources Inc. ("Denbury"), Encore Partners GP Holdings LLC, Encore Partners LP Holdings LLC and Encore Operating, L.P. (collectively, the "Selling Parties" and, together with Denbury, the "Selling Parties") to acquire all of the member interests in Encore GP and 20,924,055 common units representing limited partner interests in Encore, representing, with the general partner interest owned by Encore GP consisting of 504,851 general partner units, a 46.7% aggregate equity interest in Encore (the "Encore Sponsor Interest Acquisition"). As consideration for the purchase, Vanguard paid $300.0 million in cash and issued 3,137,255 Vanguard common units, valued at approximately $93 million.
On July 11, 2011, Vanguard and Encore announced the execution of a definitive agreement that would result in a merger whereby Encore would become a wholly-owned subsidiary of VNG, through a unit-for-unit exchange (the "Merger"). Under the terms of the definitive merger agreement, Encore's public unitholders received 0.75 Vanguard common units in exchange for each Encore common unit they owned at closing. The transaction resulted in 18,420,606 additional common units being issued by Vanguard. The terms of the definitive merger agreement were unanimously approved by the members of the Encore Conflicts Committee, who negotiated the terms on behalf of Encore and was comprised solely of independent directors. The members of the Vanguard Conflicts Committee, which is also comprised solely of independent directors, negotiated the terms on behalf of Vanguard and also voted unanimously in favor of the Merger. The completion of the Merger was subject to approval by a majority of the outstanding Encore common units. As of July 11, 2011,Vanguard's operating company, VNG, owned Encore's general partner and approximately 46.0% of the Encore outstanding common units and executed the definitive merger agreement between Vanguard and Encore. The completion of the Merger was also subject to the approval of the issuance of additional Vanguard common units in connection with the Merger by the affirmative vote of a majority of the votes cast by Vanguard unitholders. On October 31, 2011, Vanguard and ENP submitted the definitive proxy statement to their respective unitholders. The special meeting of unitholders for each of Vanguard and ENP took place on November 30, 2011 and the unitholders of each of Vanguard and ENP approved the Merger. Based on 24,560,808 ENP common units outstanding on November 30, 2011, Vanguard issued 18,420,606 common units to ENP common unitholders at the closing of the merger, December 1, 2011.
On June 22, 2011, Vanguard and Encore entered into two Purchase and Sale Agreements to acquire producing oil and natural gas assets in the Permian Basin in West Texas (the "Purchased Assets") from a private seller. Vanguard and Encore agreed to purchase 50% of the Purchased Assets for an aggregate of $85.0 million and each paid the seller a non-refundable deposit of $4.25 million. We refer to this acquisition as the “Permian Basin Acquisition I.” This acquisition was completed on July 29, 2011 for an aggregate adjusted purchase price of $81.4 million, subject to customary post-closing adjustments to be determined. The effective date of this acquisition was May 1, 2011. The purchase price was funded with borrowings under Vanguard's reserve-based credit facility and ENP's credit facility.
The following unaudited pro forma combined financial information is based on the historical consolidated financial statements of Vanguard and Encore, adjusted to reflect the Merger of Vanguard and Encore and the Encore Sponsor Interest Acquisition, which includes the Vanguard common unit offering completed in October 2010, the issuance of Vanguard's common units to Denbury, and other financing transactions. Vanguard's historical consolidated statement of operations for the year ended December 31, 2010 and the nine months ended September 30, 2011 have also been adjusted to give pro forma effect to the Parker Creek Acquisition completed during May 2010 and the Permian Basin Acquisition I completed during July 2011 as presented in Notes 3 and 5 to the unaudited pro forma combined financial information.
The unaudited pro forma combined financial statements give effect to the events set forth below:
|
•
|
The December 2010 Encore Sponsor Interest Acquisition.
|
|
|
•
|
The issuance of 18,420,606 Vanguard common units to Encore's public unitholders in exchange for each Encore common unit they owned at the closing of the Merger.
|
|
|
•
|
The elimination of transaction costs incurred in the Encore Sponsor Interest Acquisition.
|
|
|
•
|
The elimination of certain general and administrative expenses resulting from Encore not being a separate public company after the completion of the Merger.
|
|
|
•
|
Adjustments to conform the classification of revenues and expenses in Encore's historical statements of operations to Vanguard's classification of similar revenues and expenses.
|
|
|
•
|
Adjustments to conform Encore's historical accounting policies related to oil and natural gas properties from successful efforts to full cost accounting.
|
|
|
•
|
Adjustments to interest expense related to borrowings under Vanguard's term loan and reserve-based credit facility to fund the Encore Sponsor Interest Acquisition.
|
|
|
•
|
Adjustments for the Vanguard common units issued in the October 2010 equity offering and issued to Denbury in connection with the Encore Sponsor Interest Acquisition.
|
|
|
•
|
Vanguard's Parker Creek Acquisition completed during May 2010 and the effect of the related equity offering.
|
|
|
•
|
Vanguard's and Encore’s Permian Basin Acquisition I completed during July 2011 and the increase in interest expense related to borrowings under Vanguard's reserve-based credit facility and Encore’s credit agreement to fund the acquisition.
|
|
|
•
|
The elimination of nonrecurring losses related to the Parker Creek Acquisition completed by Vanguard during May 2010 and the Permian Basin Acquisition I completed during July 2011.
|
The unaudited pro forma combined balance sheet gives effect to the Merger as if it had occurred on September 30, 2011. The unaudited pro forma combined statements of operations combine the results of operations of Vanguard and Encore for the year ended December 31, 2010 and the nine months ended September 30, 2011, as if the Merger, the Encore Sponsor Interest Acquisition, the Permian Basin Acquisition I completed during July 2011 and the Parker Creek Acquisition completed during May 2010 (see Note 5) had occurred on January 1, 2010.
The unaudited pro forma combined financial information should be read in conjunction with Encore's and Vanguard's Forms 10-K for the year ended December 31, 2010 and Encore's and Vanguard's Forms 10-Q for the quarter ended September 30, 2011.
The unaudited pro forma combined financial information is for informational purposes only and is not intended to represent or to be indicative of the combined results of operations or financial position that Vanguard would have reported had the Merger, the Encore Sponsor Interest Acquisition, Permian Basin Acquisition I and the Parker Creek Acquisition been completed as of the dates set forth in this unaudited pro forma combined financial information and should not be taken as indicative of Vanguard's future combined results of operations or financial position. The actual results may differ significantly from that reflected in the unaudited pro forma combined financial information for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the unaudited pro forma combined financial information and actual results.
Unaudited Pro Forma Combined
Balance Sheet as of September 30, 2011
(In thousands)
|
Vanguard
historical
|
Pro forma
adjustments
Encore
merger
(Note 2)
|
Vanguard
pro forma
combined
|
||||||||||
|
Current assets
|
||||||||||||
|
Cash and cash equivalents
|
$
|
3,346
|
$
|
3,346
|
||||||||
|
Trade accounts receivables, net
|
45,311
|
—
|
45,311
|
|||||||||
|
Derivative assets
|
27,919
|
—
|
27,919
|
|||||||||
|
Other current assets
|
4,287
|
—
|
4,287
|
|||||||||
|
Total current assets
|
80,863
|
80,863
|
||||||||||
|
Oil and natural gas properties, at cost
|
1,518,536
|
—
|
1,518,536
|
|||||||||
|
Accumulated depletion, amortization and accretion
|
(310,229
|
)
|
—
|
(310,229
|
)
|
|||||||
|
Oil and natural gas properties evaluated, net (see Note 1)
|
1,208,307
|
—
|
1,208,307
|
|||||||||
|
Other assets
|
||||||||||||
|
Goodwill
|
420,955
|
—
|
420,955
|
|||||||||
|
Other intangible assets, net
|
8,882
|
—
|
8,882
|
|||||||||
|
Derivative assets
|
19,246
|
19,246
|
||||||||||
|
Deferred financing costs
|
2,868
|
—
|
2,868
|
|||||||||
|
Other assets
|
2,982
|
—
|
2,982
|
|||||||||
|
Total assets
|
$
|
1,744,103
|
$
|
—
|
$
|
1,744,103
|
||||||
|
Liabilities and members' equity
|
||||||||||||
|
Current liabilities
|
||||||||||||
|
Accounts payable:
|
||||||||||||
|
Trade
|
$
|
2,878
|
$
|
—
|
$
|
2,878
|
||||||
|
Affiliate
|
1,461
|
—
|
1,461
|
|||||||||
|
Accrued liabilities:
|
|
|
|
|||||||||
|
Lease operating
|
6,227
|
—
|
6,227
|
|||||||||
|
Developmental capital
|
2,899
|
—
|
2,899
|
|||||||||
|
Interest
|
591
|
—
|
591
|
|||||||||
|
Production taxes and marketing
|
16,908
|
—
|
16,908
|
|||||||||
|
Derivative liabilities
|
1,813
|
—
|
1,813
|
|||||||||
|
Deferred swap premium liability
|
432
|
—
|
432
|
|||||||||
|
Oil and natural gas revenue payable
|
3,767
|
—
|
3,767
|
|||||||||
|
Other
|
5,083
|
—
|
5,083
|
|||||||||
|
Current portion, long-term debt
|
531,000
|
—
|
531,000
|
|||||||||
|
Total current liabilities
|
573,059
|
—
|
573,059
|
|||||||||
|
Long-term debt
|
218,500
|
—
|
218,500
|
|||||||||
|
Derivative liabilities
|
4,423
|
—
|
4,423
|
|||||||||
|
Asset retirement obligations
|
34,364
|
—
|
34,364
|
|||||||||
|
Other long-term liabilities
|
63
|
—
|
63
|
|||||||||
|
Total liabilities
|
830,409
|
—
|
830,409
|
|||||||||
|
Members' equity
|
||||||||||||
|
Members' capital
|
346,612
|
563,396
|
(a)
|
910,008
|
||||||||
|
Class B units
|
4,450
|
—
|
4,450
|
|||||||||
|
Accumulated other comprehensive loss
|
(764
|
)
|
—
|
(764
|
)
|
|||||||
|
Total Vanguard members' equity
|
350,298
|
563,396
|
913,694
|
|||||||||
|
Non-controlling interest
|
563,396
|
(563,396
|
) (a)
|
—
|
||||||||
|
Total members' equity
|
913,694
|
—
|
913,694
|
|||||||||
|
Total liabilities and members' equity
|
$
|
1,744,103
|
$
|
—
|
$
|
1,744,103
|
||||||
Unaudited Pro Forma Combined
Statement of Operations
for the Nine Months Ended September 30, 2011
|
Vanguard
historical
|
Pro forma
adjustments
Permian Basin
Acquisition I
(Note 3)
|
Vanguard
pro forma
|
Pro forma
adjustments
Encore
merger
(Note 3)
|
Vanguard
pro forma
combined
|
||||||||||||||||
|
(In thousands, except per unit amounts)
|
||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Oil, natural gas and natural gas liquids sales
|
$
|
226,838
|
$
|
10,848
|
(a)
|
$
|
237,686
|
$
|
—
|
$
|
237,686
|
|||||||||
|
Loss on commodity cash flow hedges
|
(2,307
|
)
|
—
|
(2,307
|
)
|
—
|
(2,307
|
)
|
||||||||||||
|
Realized gain on other commodity derivative contracts
|
4,474
|
—
|
4,474
|
—
|
4,474
|
|||||||||||||||
|
Unrealized gain on other commodity derivative contracts
|
68,625
|
—
|
68,625
|
—
|
68,625
|
|||||||||||||||
|
Total revenues
|
297,630
|
10,848
|
308,478
|
—
|
308,478
|
|||||||||||||||
|
Costs and Expenses
|
|
|
|
|
||||||||||||||||
|
Production:
|
|
|
|
|
||||||||||||||||
|
Lease operating expenses
|
43,960
|
3,528
|
(b)
|
47,488
|
—
|
47,488
|
||||||||||||||
|
Production and other taxes
|
21,319
|
—
|
21,319
|
—
|
21,319
|
|||||||||||||||
|
Depreciation, depletion, amortization and accretion
|
62,797
|
3,346
|
(c)
|
66,143
|
—
|
66,143
|
||||||||||||||
|
Selling, general and administrative expenses
|
16,436
|
—
|
16,436
|
(2,178
|
)(f)
|
14,258
|
||||||||||||||
|
Total costs and expenses
|
144,512
|
6,874
|
151,386
|
(2,178
|
)
|
149,208
|
||||||||||||||
|
Income from operations
|
153,118
|
3,974
|
157,092
|
2,178
|
159,270
|
|||||||||||||||
|
Other income and (expense)
|
||||||||||||||||||||
|
Interest expense
|
(21,137
|
)
|
(1,098
|
)(d)
|
(22,235
|
)
|
—
|
(22,235
|
)
|
|||||||||||
|
Realized loss on interest rate derivative contracts
|
(2,208
|
)
|
—
|
(2,208
|
)
|
—
|
(2,208
|
)
|
||||||||||||
|
Gain on interest rate cash flow hedges
|
39
|
—
|
39
|
—
|
39
|
|||||||||||||||
|
Unrealized loss on interest rate derivative contracts
|
(1,641
|
)
|
—
|
(1,641
|
)
|
—
|
(1,641
|
)
|
||||||||||||
|
Net loss on acquisition of oil and natural gas properties
|
(383
|
)
|
657
|
(e)
|
274
|
—
|
274
|
|||||||||||||
|
Other income
|
76
|
—
|
76
|
—
|
76
|
|||||||||||||||
|
Total other expense
|
(25,254
|
)
|
(441
|
)
|
(25,695
|
)
|
—
|
(25,695
|
)
|
|||||||||||
|
Net income
|
127,864
|
3,533
|
131,397
|
2,178
|
133,575
|
|||||||||||||||
|
Net income attributable to non-controlling interest
|
50,593
|
943
|
51,536
|
(51,536
|
)(g)
|
—
|
||||||||||||||
|
Net income attributable to Vanguard unitholders
|
$
|
77,271
|
$
|
2,590
|
$
|
79,861
|
$
|
53,714
|
$
|
133,575
|
||||||||||
|
Net income per Common and Class B unit
|
|
|
|
|
||||||||||||||||
|
Basic
|
$
|
2.56
|
$
|
2.64
|
$
|
2.75
|
||||||||||||||
|
Diluted
|
$
|
2.55
|
$
|
2.64
|
$
|
2.74
|
||||||||||||||
|
Weighted average units outstanding
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Common units – basic
|
29,792
|
—
|
29,792
|
18,421
|
(h)
|
48,213
|
||||||||||||||
|
Common units – diluted
|
29,855
|
—
|
29,855
|
18,421
|
(h)
|
48,276
|
||||||||||||||
|
Class B units – basic & diluted
|
420
|
—
|
420
|
—
|
420
|
|||||||||||||||
Statement of Operations
for the Year Ended December 31, 2010
|
Vanguard
pro forma
(Note 5)
|
Encore
historical
|
Pro forma
reclassification
adjustments
(Note 4)
|
Pro forma
adjustments
(Note 4)
|
Vanguard
pro forma
combined
|
||||||||||||||||
|
|
(In thousands, except per unit amounts)
|
|||||||||||||||||||
|
Revenues:
|
|
|
|
|
|
|||||||||||||||
|
Oil, natural gas and natural gas liquids sales
|
$
|
109,356
|
$
|
—
|
$
|
183,476
|
(a)
|
$
|
—
|
|
||||||||||
|
|
|
|
269
|
(b)
|
—
|
$
|
293,101
|
|||||||||||||
|
Loss on commodity cash flow hedges
|
(2,832
|
)
|
—
|
—
|
—
|
(2,832
|
)
|
|||||||||||||
|
Realized gain on other commodity derivative contracts
|
24,774
|
—
|
11,946
|
(g)
|
—
|
|
||||||||||||||
|
|
|
|
(9,816
|
)(k)
|
—
|
26,904
|
||||||||||||||
|
Unrealized loss on other commodity derivative contracts
|
(14,145
|
)
|
—
|
(26,087
|
)(g)
|
—
|
|
|||||||||||||
|
|
|
|
9,816
|
(k)
|
—
|
(30,416
|
)
|
|||||||||||||
|
Oil revenue
|
—
|
155,367
|
(155,367
|
)(a)
|
—
|
—
|
||||||||||||||
|
Natural gas revenue
|
—
|
28,109
|
(28,109
|
)(a)
|
—
|
—
|
||||||||||||||
|
Marketing revenue
|
—
|
269
|
(269
|
)(b)
|
—
|
—
|
||||||||||||||
|
Total revenues
|
117,153
|
183,745
|
(14,141
|
)
|
—
|
286,757
|
||||||||||||||
|
Costs and Expenses
|
|
|
|
|
|
|||||||||||||||
|
Lease operating expenses
|
25,099
|
43,021
|
1,336
|
(e)
|
—
|
|
||||||||||||||
|
|
|
|
(2,036
|
)(d)
|
—
|
|
||||||||||||||
|
|
|
|
124
|
(b)
|
—
|
67,544
|
||||||||||||||
|
Depreciation, depletion, amortization and accretion
|
29,344
|
50,580
|
—
|
11,086
|
(m)
|
91,010
|
||||||||||||||
|
Production, ad valorem and severance taxes
|
—
|
18,221
|
(16,761
|
)(c)
|
—
|
|
||||||||||||||
|
|
|
|
(1,336
|
)(e)
|
—
|
|
||||||||||||||
|
|
|
|
(124
|
)(b)
|
—
|
—
|
||||||||||||||
|
Selling, general and administrative expenses
|
10,134
|
12,398
|
(13
|
)(f)
|
(934
|
)(o)
|
||||||||||||||
|
|
|
|
|
(3,853
|
)(p)
|
17,732
|
||||||||||||||
|
Production and other taxes
|
6,840
|
—
|
16,761
|
(c)
|
—
|
|
||||||||||||||
|
|
|
|
2,036
|
(d)
|
—
|
|
||||||||||||||
|
|
|
|
13
|
(f)
|
—
|
|
||||||||||||||
|
|
|
|
(70
|
)(i)
|
—
|
|
||||||||||||||
|
|
|
|
70
|
(i)
|
—
|
25,650
|
||||||||||||||
|
Derivative fair value loss
|
—
|
14,146
|
(14,146
|
)(g)
|
—
|
—
|
||||||||||||||
|
Exploration
|
—
|
194
|
—
|
(194
|
)(l)
|
—
|
||||||||||||||
|
Total costs and expenses
|
71,417
|
138,560
|
(14,146
|
)
|
6,105
|
201,936
|
||||||||||||||
|
Income from operations
|
45,736
|
45,185
|
5
|
(6,105
|
)
|
84,821
|
||||||||||||||
|
Other income and (expense)
|
|
|
|
|
|
|||||||||||||||
|
Interest income
|
1
|
|
12
|
(h)
|
—
|
13
|
||||||||||||||
|
Interest expense
|
(8,069
|
)
|
(13,171
|
)
|
3,918
|
(j)
|
(12,850
|
)(n)
|
(30,172
|
)
|
||||||||||
|
Realized loss on interest rate derivative contracts
|
(1,799
|
)
|
—
|
(3,918
|
)(j)
|
—
|
(5,717
|
)
|
||||||||||||
|
Unrealized gain on interest rate derivative contracts
|
(349
|
)
|
—
|
(5
|
)(g)
|
—
|
(354
|
)
|
||||||||||||
|
Other income
|
—
|
56
|
(12
|
)(h)
|
—
|
44
|
||||||||||||||
|
Total other income (expense)
|
(10,216
|
)
|
(13,115
|
)
|
(5
|
)
|
(12,850
|
)
|
(36,186
|
)
|
||||||||||
|
Current income tax benefit (provision)
|
—
|
(70
|
)
|
70
|
(i)
|
—
|
—
|
|||||||||||||
|
Deferred income tax benefit (provision)
|
—
|
70
|
(70
|
)(i)
|
—
|
—
|
||||||||||||||
|
Total income taxes
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Net income
|
$
|
35,520
|
$
|
32,070
|
$
|
—
|
$
|
(18,955
|
)
|
$
|
48,635
|
|||||||||
|
Net income per Common and Class B unit
|
|
|
|
|
|
|||||||||||||||
|
Basic
|
$
|
1.54
|
$
|
1.01
|
||||||||||||||||
|
Diluted
|
$
|
1.53
|
$
|
1.01
|
||||||||||||||||
|
Weighted average units outstanding
|
|
|
|
|
|
|||||||||||||||
|
Common units – basic
|
22,720
|
25,155
|
(q)
|
47,875
|
||||||||||||||||
|
Common units – diluted
|
22,758
|
25,155
|
(q)
|
47,913
|
||||||||||||||||
|
Class B units – basic & diluted
|
420
|
420
|
||||||||||||||||||
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
Note 1 Basis of Presentation
On December 31, 2010, Vanguard completed the Encore Sponsor Interest Acquisition, whereby Vanguard acquired all of the member interest in Encore GP (which owns 504,851 general partner units in Encore) and 20,924,055 common units representing limited partner interests in Encore, representing, together with the general partner units, a 46.7% aggregate equity interest in Encore. As consideration for the purchase, Vanguard paid $300.0 million in cash and issued 3,137,255 Vanguard common units, valued at approximately $93 million.
On July 11, 2011, Vanguard and Encore announced the execution of a definitive merger agreement that would result in a merger whereby Encore would become a wholly-owned subsidiary of VNG, through a unit-for-unit exchange (the “Merger”). Under the terms of the definitive merger agreement, Encore's public unitholders received 0.75 Vanguard common units in exchange for each Encore common unit they owned at closing. The transaction resulted in 18,420,606 additional common units being issued by Vanguard. The terms of the definitive merger agreement were unanimously approved by the members of the Encore Conflicts Committee, who negotiated the terms on behalf of Encore and was comprised solely of independent directors. The members of the Vanguard Conflicts Committee, which is also comprised solely of independent directors, negotiated the terms on behalf of Vanguard and also voted unanimously in favor of the Merger. The completion of the Merger was subject to approval by a majority of the outstanding Encore common units. As of July 11, 2011, Vanguard's operating company, Vanguard Natural Gas, LLC, owned Encore's general partner and approximately 46% of the Encore outstanding common units and executed the definitive merger agreement between Vanguard and Encore. The completion of the Merger was also subject to the approval of the issuance of additional Vanguard common units in connection with the Merger by the affirmative vote of a majority of the votes cast by Vanguard unitholders. On October 31, 2011, Vanguard and ENP submitted the definitive proxy statement to their respective unitholders. The special meeting of unitholders for each of Vanguard and ENP took place on November 30, 2011 and the unitholders of each of Vanguard and ENP approved the Merger. Based on 24,560,808 ENP common units outstanding on November 30, 2011, Vanguard issued 18,420,606 common units to ENP common unitholders at the closing of the merger, December 1, 2011.
The Merger will be accounted for in accordance with Financial Accounting Standards Board Accounting Standards Codification 810, Consolidations — Overall — Changes in Parent's Ownership Interest in a Subsidiary, which is referred to as FASB ASC 810. Since Encore is a consolidated subsidiary of Vanguard, the changes in Vanguard's ownership interest in Encore will be accounted for as an equity transaction and no gain or loss will be recognized as a result of the Merger.
The accompanying unaudited pro forma combined balance sheet at September 30, 2011 has been prepared to give effect to the Merger as if it had occurred on September 30, 2011 and the unaudited pro forma combined statements of operations have been prepared to give effect to the Merger and the Encore Sponsor Interest Acquisition, including the Vanguard common unit offering completed in October 2010, the issuance of Vanguard's common units to Denbury, and other financing transactions, as if they had occurred on January 1, 2010. Vanguard's unaudited pro forma statements of operations, which are included in the unaudited pro forma combined statements of operations, also include the pro forma effects of the Permian Basin Acquisition I completed during July 2011 and the Parker Creek Acquisition completed during May 2010 and the and the related equity financings as if they had occurred on January 1, 2010. The Permian Basin Acquisition I and the Parker Creek Acquisition are unrelated to the Merger.
The pro forma effects of the Permian Basin Acquisition I and the Parker Creek Acquisition are presented in Notes 3 and 5 to the unaudited pro forma combined financial information.
The unaudited pro forma combined financial information includes adjustments to conform Encore's accounting for oil and natural gas properties to the full cost method. Vanguard follows the full cost method of accounting for oil and natural gas properties while Encore follows the successful efforts method of accounting for oil and natural gas properties. Certain costs that are capitalized under the full cost method are expensed under the successful efforts method. These costs consist primarily of unsuccessful exploration drilling costs, geological and geophysical costs, delay rental on leases, abandonment costs and general and administrative expenses directly related to exploration and development activities. Under the successful efforts method of accounting, proved property acquisition costs are amortized on a unit-of-production basis over total proved reserves and costs of wells, related equipment and facilities are depreciated over the life of the proved developed reserves that will utilize those capitalized assets on a field-by-field basis. Under the full cost method of accounting, property acquisition costs, costs of wells, related equipment and facilities and future development costs are included in a single full cost pool, which is amortized on a unit-of-production basis over total proved reserves.
The unaudited pro forma combined financial statements and underlying pro forma adjustments are based upon currently available information and certain estimates and assumptions made by the management of Vanguard and Encore; therefore, actual results could differ materially from the pro forma information. However, management believes the assumptions provide a reasonable basis for presenting the significant effects of the Merger. Vanguard and Encore believe the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the pro forma information.
Note 2 Unaudited Pro forma Combined Balance Sheet
Pro Forma Adjustment to the Unaudited Pro Forma Combined Balance Sheet
Adjustment (a) eliminates the non-controlling interests in Encore. As provided for in FASB ASC 810, the Merger is treated as an equity transaction, with no resulting gain or loss. Each Encore public unitholder was issued 0.75 Vanguard common units for each Encore common unit held at closing. The number of Vanguard common units issued to effect the Merger is calculated as follows:
|
|
|
||
|
Encore common units held by public unitholders at November 30, 2011
|
24,560,808
|
||
|
Exchange ratio(1)
|
0.75
|
||
|
Vanguard common units issued to Encore public unitholders
|
18,420,606
|
||
|
(1)
|
Established in the Agreement and Plan of Merger dated July 10, 2011.
|
Note 3 Unaudited Pro Forma Combined Statements of Operations for the Nine Months Ended September 30, 2011
The unaudited pro forma combined statement of operations for the nine month period ended September 30, 2011 includes adjustments to reflect the following:
(a) Represents the increase in oil, natural gas and natural gas liquids sales resulting from the Permian Basin Acquisition I completed during 2011.
(b) Represents the increase in lease operating expenses resulting from the Permian Basin Acquisition I completed during 2011.
(c) Represents the increase in depreciation, depletion, amortization and accretion resulting from the Permian Basin Acquisition I completed during 2011.
(d) Represents the pro forma interest expense related to borrowings under Vanguard's reserve-based credit facility and Encore’s credit agreement to fund the Permian Basin Acquisition I completed during 2011.
(e) Represents the nonrecurring loss on acquisition of natural gas and oil properties related to the Permian Basin Acquisition I completed during 2011.
(f) Elimination of certain general and administrative expenses resulting from Encore not being a separate public company after the completion of the Merger, including director-related expenses, directors' and officers' liability insurance premiums, NYSE listing fees, SEC filing fees and costs incurred related to the Merger.
(g) Elimination of the allocation of net income to non-controlling interest as a result of the Merger.
(h) Adjustment for the weighted average number of units from the issuance of 18,420,606 Vanguard common units under the terms of the Merger, whereby Encore's public unitholders received 0.75 Vanguard common units for each Encore common unit held at closing.
Note 4 Unaudited Pro Forma Combined Statements of Operations for the Year Ended December 31, 2010
The Encore Sponsor Interest Acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805 relating to "Business Combinations". The acquisition method requires the assets and liabilities acquired to be recorded at their fair values at the date of acquisition. The estimate of fair values as of December 31, 2010 is as follows (in thousands):
|
Consideration and non-controlling interest
|
|
|||
|
Cash payment to acquire Encore Interests
|
$
|
300,000
|
||
|
Market value of Vanguard's common units issued to Denbury(1)
|
93,020
|
|||
|
Market value of non-controlling interest of Encore(2)
|
548,662
|
|||
|
Consideration and non-controlling interest of Encore
|
$
|
941,682
|
||
|
Add: fair value of liabilities assumed
|
|
|||
|
Accounts payable and accrued liabilities
|
$
|
18,048
|
||
|
Oil and natural gas payable
|
1,730
|
|||
|
Current derivative liabilities
|
11,122
|
|||
|
Other current liabilities
|
1,228
|
|||
|
Long-term debt
|
234,000
|
|||
|
Asset retirement obligations
|
24,385
|
|||
|
Long-term derivative liabilities
|
25,331
|
|||
|
Long-term deferred tax liability
|
11
|
|||
|
Amount attributable to liabilities assumed
|
$
|
315,855
|
||
|
Less: fair value of assets acquired
|
|
|||
|
Cash
|
$
|
1,380
|
||
|
Trade and other receivables
|
22,795
|
|||
|
Current derivative assets
|
10,196
|
|||
|
Other current assets
|
470
|
|||
|
Oil and natural gas properties – proved
|
786,524
|
|||
|
Long-term derivative assets
|
5,486
|
|||
|
Other long-term assets
|
9,731
|
|||
|
Amount attributable to assets acquired
|
$
|
836,582
|
||
|
Goodwill
|
$
|
420,955
|
||
|
(1)
|
Approximately 3.1 million Vanguard common units at $29.65 per unit were issued to Denbury in the Encore Sponsor Interest Acquisition. The per unit price is the closing price of Vanguard's common units at December 31, 2010.
|
|
|
(2)
|
Represents approximate market value of the non-controlling interest of Encore (based on 24.4 million Encore common units outstanding as of December 31, 2010) at $22.47 per Encore common unit (closing price as of December 31, 2010).
|
Adjustments (a) – (k) to the unaudited pro forma combined statement of operations for the year ended December 31, 2010 include reclassifications required to conform Encore's revenue and expense items to Vanguard's presentation as follows:
(a) Represents the reclassification of Encore's oil and natural gas product sales to conform to Vanguard's presentation.
(b) Represents the reclassification of marketing revenue and marketing expenses to conform to Vanguard's presentation.
(c) Represents the reclassification of production and severance taxes to "Production and other taxes" to conform to Vanguard's presentation.
(d) Represents the reclassification of ad valorem taxes to "Production and other taxes" to conform to Vanguard's presentation.
(e) Represents the reclassification of transportation costs to "Lease operating expenses" to conform to Vanguard's presentation.
(f) Represents the reclassification of annual income taxes to "Production and other taxes" to conform to Vanguard's presentation.
(g) Represents the reclassification of (1) settlements of oil and natural gas derivatives to "Realized gain on other commodity derivative contracts," (2) the change in fair value of oil and natural gas derivatives to "Unrealized loss on other commodity derivative contracts" and (3) the change in fair value of interest rate derivatives to "Unrealized loss on interest rate derivative contracts" to conform to Vanguard's presentation.
(h) Represents the reclassification of interest income to "Interest income" to conform to Vanguard's presentation.
(i) Represents the reclassification of current and deferred income tax benefit (provision) to "Production and other taxes" to conform to Vanguard's presentation.
(j) Represents the reclassification of settlements of interest rate derivatives to "Realized loss on interest rate derivative contracts" to conform to Vanguard's presentation.
(k) Represents the reclassification of amortization of premiums paid on derivative contracts to "Realized gain on other commodity derivative contracts" to conform to Vanguard's presentation.
Adjustments (l) – (q) to the unaudited pro forma combined statements of operations for the year ended December 31, 2010 are to reflect the Encore Sponsor Interest Acquisition and the conversion of Encore's method of accounting for oil and natural gas properties from the successful efforts method of accounting to the full cost method of accounting.
(l) Represents the capitalization of unsuccessful exploration costs, geological and geophysical costs and delay rentals attributable to the development of oil and natural gas properties in accordance with the full cost method of accounting for oil and natural gas properties.
(m) Represents the change in depreciation, depletion and amortization primarily resulting from the pro forma calculation of the combined entity's depletion expense under the full cost method of accounting for oil and natural gas properties.
(n) Represents the adjustment to interest expense arising from the related borrowings under Vanguard's Term Loan and reserve-based credit facility to fund the Encore Sponsor Interest Acquisition.
(o) Represents the elimination of certain general and administrative expenses resulting from Encore not being a separate public company after the completion of the Merger, including director-related expenses, directors' and officers' liability insurance premiums, NYSE listing fees and SEC filing fees.
(p) Represents the elimination of transaction costs incurred in the Encore Sponsor Interest Acquisition.
(q) Represents the adjustment for the weighted average number of units from the issuance of 18,420,606 Vanguard common units under the terms of the Merger, whereby Encore's public unitholders received 0.75 Vanguard common units for each Encore common unit held at closing. The adjustment also includes the weighted average number of units from the issuance of 3.1 million Vanguard common units to Denbury in connection with Encore Sponsor Interest Acquisition in December 31, 2010 and the 4.6 million Vanguard common units issued in the October 2010 offering.
Note 5 Vanguard's Unaudited Pro Forma Consolidated Statement of Operations
On April 30, 2010, Vanguard entered into a definitive agreement with a private seller for the acquisition of certain oil and natural gas properties located in Mississippi, Texas and New Mexico. We refer to this acquisition as the "Parker Creek Acquisition." The purchase price for said assets was $113.1 million with an effective date of May 1, 2010. We completed this acquisition on May 20, 2010. The adjusted purchase price of $114.3 million considered final purchase price adjustments of approximately $1.2 million. The purchase price was funded from the approximate $71.5 million in net proceeds from Vanguard's May 2010 equity offering and with borrowings under Vanguard's existing reserve-based credit facility.
On June 22, 2011, Vanguard and Encore entered into two Purchase and Sale Agreements to acquire producing oil and natural gas assets in the Permian Basin in West Texas (the "Purchased Assets") from a private seller. Vanguard and Encore agreed to purchase 50% of the Purchased Assets for an aggregate of $85.0 million and each paid the seller a non-refundable deposit of $4.25 million. We refer to this acquisition as the “Permian Basin Acquisition I.” This acquisition was completed on July 29, 2011 for an aggregate adjusted purchase price of $81.4 million, subject to customary post-closing adjustments to be determined. The effective date of this acquisition was May 1, 2011. The purchase price was funded with borrowings under Vanguard's reserve-based credit facility and ENP's credit facility.
Vanguard's unaudited pro forma consolidated statement of operations included in the unaudited pro forma combined statement of operations give effect to the Parker Creek Acquisition completed during May 2010 and the Permian Basin Acquisition I completed during July 2011 as if they had occurred on January 1, 2010.
Note 5 Vanguard's Unaudited Pro Forma Consolidated Statement of Operations- (continued)
Vanguard Unaudited Pro Forma
Consolidated Statement of Operations
for the Year Ended December 31, 2010
|
Vanguard
historical
|
Pro forma
Adjustments
|
Vanguard
pro forma
|
||||||||||
|
|
(In thousands, except per unit amounts)
|
|||||||||||
|
Revenues:
|
|
|
|
|||||||||
|
Oil, natural gas and natural gas liquids sales
|
$
|
85,357
|
$
|
6,478
|
(a)
|
|||||||
|
17,521
|
(b)
|
$
|
109,356
|
|||||||||
|
Loss on commodity cash flow hedges
|
(2,832
|
)
|
—
|
(2,832
|
)
|
|||||||
|
Realized gain on other commodity derivative contracts
|
24,774
|
—
|
24,774
|
|||||||||
|
Unrealized loss on other commodity derivative contracts
|
(14,145
|
)
|
—
|
(14,145
|
)
|
|||||||
|
Total revenues
|
93,154
|
23,999
|
117,153
|
|||||||||
|
Costs and Expenses
|
|
|
|
|||||||||
|
Lease operating expenses
|
18,471
|
845
|
(c)
|
|||||||||
|
5,783
|
(d)
|
25,099
|
||||||||||
|
Depreciation, depletion, amortization and accretion
|
22,231
|
1,180
|
(e)
|
|||||||||
|
5,933
|
(f)
|
29,344
|
||||||||||
|
Selling, general and administrative expenses
|
10,134
|
—
|
10,134
|
|||||||||
|
Production and other taxes
|
6,840
|
—
|
6,840
|
|||||||||
|
Total costs and expenses
|
57,676
|
13,741
|
71,417
|
|||||||||
|
Income from operations
|
35,478
|
10,258
|
45,736
|
|||||||||
|
Other expense
|
|
|
||||||||||
|
Interest income
|
1
|
—
|
1
|
|||||||||
|
Interest expense
|
(5,766
|
)
|
(448
|
)(g)
|
||||||||
|
(1,855
|
)(h)
|
(8,069
|
)
|
|||||||||
|
Realized loss on interest rate derivative contracts
|
(1,799
|
)
|
—
|
(1,799
|
)
|
|||||||
|
Unrealized loss on interest rate derivative contracts
|
(349
|
)
|
—
|
(349
|
)
|
|||||||
|
Loss on acquisition of oil and natural gas properties
|
(5,680
|
)
|
5,680
|
(i)
|
—
|
|||||||
|
Total other expense
|
(13,593
|
)
|
3,377
|
(10,216
|
)
|
|||||||
|
Net income
|
$
|
21,885
|
$
|
13,635
|
$
|
35,520
|
||||||
|
Net income per Common and Class B unit – basic
|
$
|
1.00
|
$
|
1.54
|
||||||||
|
Net income per Common and Class B unit – diluted
|
$
|
1.00
|
$
|
1.53
|
||||||||
|
Weighted average units outstanding
|
|
|
|
|||||||||
|
Common units – basic
|
21,500
|
1,220
|
(j)
|
22,720
|
||||||||
|
Common units – diluted
|
21,538
|
1,220
|
(j)
|
22,758
|
||||||||
|
Class B units – basic & diluted
|
420
|
420
|
||||||||||
Vanguard's unaudited pro forma consolidated statements of operations include the following adjustments:
|
(a)
|
Represents the increase in oil, natural gas and natural gas liquids sales resulting from the Parker Creek Acquisition completed during 2010.
|
|
|
(b)
|
Represents the increase in oil, natural gas and natural gas liquids sales resulting from the Permian Basin Acquisition I completed during 2011.
|
|
|
(c)
|
Represents the increase in lease operating expenses resulting from the Parker Creek Acquisition completed during 2010.
|
|
|
(d)
|
Represents the increase in lease operating expenses resulting from the Permian Basin Acquisition I completed during 2011.
|
|
|
(e)
|
Represents the increase in depreciation, depletion, amortization and accretion resulting from the Parker Creek Acquisition completed during 2010.
|
|
|
(f)
|
Represents the increase in depreciation, depletion, amortization and accretion resulting from the Permian Basin Acquisition I completed during 2011.
|
|
|
(g)
|
Represents the pro forma interest expense related to borrowings under Vanguard's reserve-based credit facility to fund the Parker Creek Acquisition completed during 2010.
|
|
|
(h)
|
Represents the pro forma interest expense related to borrowings under Vanguard's reserve-based credit facility and Encore’s credit agreement to fund the Permian Basin Acquisition I completed during 2011.
|
|
|
(i)
|
Represents the nonrecurring loss on acquisition of natural gas and oil properties related to the Parker Creek acquisition completed during 2010.
|
|
|
(j)
|
Represents the pro forma adjustment for the Vanguard common units sold in connection with the funding of the Parker Creek Acquisition completed during 2010.
|
Summary Pro Forma Combined
Oil, Natural Gas and Natural Gas Liquids
Reserve Data
The following tables set forth summary pro forma information with respect to Vanguard's, Encore's, Parker Creek’s and the Permian Basin Acquisition I’s pro forma combined estimated net proved and proved developed oil, natural gas and natural gas liquids reserves as of December 31, 2010. This pro forma information gives effect to the Encore Sponsor Interest Acquisition, Parker Creek Acquisition and Permian Basin Acquisition I as if they had occurred on January 1, 2010. Future exploration, exploitation and development expenditures, as well as future commodity prices and service costs, will affect the reserve volumes attributable to the acquired properties and the standardized measure of discounted future net cash flows.
Estimated quantities of oil, natural gas and natural gas liquids reserves as of December 31, 2010
|
Gas (MMcf)
|
|||||||||||||||||||
|
Vanguard historical (a)
|
Encore historical
|
Parker Creek
|
Permian Basin Acquisition I
|
Proforma Adjustments
|
Vanguard pro forma combined (b)
|
||||||||||||||
|
Net proved reserves
|
|||||||||||||||||||
|
January 1, 2010
|
83,149
|
84,699
|
1,385
|
26,434
|
–
|
195,667
|
|||||||||||||
|
Revisions of previous estimates
|
(7
|
)
|
(4,484
|
)
|
–
|
5,583
|
–
|
1,092
|
|||||||||||
|
Extensions, discoveries and other
|
76
|
–
|
–
|
–
|
–
|
76
|
|||||||||||||
|
Purchases of reserves in place
|
75,715
|
148
|
–
|
–
|
(75,384
|
)
|
479
|
||||||||||||
|
Production
|
(4,990
|
)
|
(5,836
|
)
|
(528
|
)
|
(1,593
|
)
|
(12,947
|
)
|
|||||||||
|
December 31, 2010
|
153,943
|
74,527
|
857
|
30,424
|
(75,384
|
)
|
184,367
|
||||||||||||
|
Oil and Natural Gas Liquids (MBls)
|
|||||||||||||||||||
|
Vanguard historical (a)
|
Encore historical
|
Parker Creek
|
Permian Basin Acquisition I
|
Proforma Adjustments
|
Vanguard pro forma combined (b)
|
||||||||||||||
|
Net proved reserves
|
|||||||||||||||||||
|
January 1, 2010
|
9,963
|
28,930
|
5,216
|
1,473
|
–
|
45,582
|
|||||||||||||
|
Revisions of previous estimates
|
1,290
|
1,940
|
–
|
286
|
–
|
3,516
|
|||||||||||||
|
Extensions, discoveries and other
|
17
|
–
|
–
|
–
|
–
|
17
|
|||||||||||||
|
Purchases of reserves in place
|
33,251
|
10
|
–
|
–
|
(32,846
|
)
|
415
|
||||||||||||
|
Production
|
(892
|
)
|
(2,227
|
)
|
(1,023
|
)
|
(73
|
)
|
–
|
(4,215
|
)
|
||||||||
|
December 31, 2010
|
43,629
|
28,653
|
4,193
|
1,686
|
(32,846
|
)
|
45,315
|
||||||||||||
(a) Includes the non-controlling interest in the Encore reserves of approximately 53.3% at December 31, 2010.
(b) Includes Vanguard's, Encore's, Parker Creek’s and the Permian Basin Acquisition I’s estimated net proved and proved developed oil, natural gas and natural gas liquids reserves as of December 31, 2010.
|
Vanguard
historical (a)
|
Permian Basin Acquisition I
|
Vanguard pro forma combined (b)
|
||||||||||
|
Estimated proved reserves:
|
||||||||||||
|
Natural Gas (MMcf)
|
153,943 | 30,424 | 184,367 | |||||||||
|
Oil and Natural Gas Liquids (MBbls)
|
43,629 | 1,686 | 45,315 | |||||||||
|
MBOE
|
69,286 | 6,757 | 76,043 | |||||||||
|
Estimated proved developed reserves:
|
||||||||||||
|
Natural Gas (MMcf)
|
119,313 | 28,621 | 147,934 | |||||||||
|
Oil and Natural Gas Liquids (MBbls)
|
35,788 | 1,462 | 37,250 | |||||||||
|
MBOE
|
55,673 | 6,232 | 61,905 | |||||||||
(a) Includes the non-controlling interest in the Encore reserves of approximately 53.3% at December 31, 2010.
(b) Includes Vanguard's, Encore's, Parker Creek’s and the Permian Basin Acquisition I’s estimated net proved and proved developed oil, natural gas and natural gas liquids reserves as of December 31, 2010.
The standardized measure of discounted future net cash flows relating to the combined proved oil, natural gas and natural gas liquids reserves at December 31, 2010 is as follows (in thousands):
|
Vanguard
historical (a)
|
Permian
Basin Acquisition I
|
Vanguard
pro forma
combined (b)
|
||||||||||
|
Future cash inflows
|
$ | 3,670,000 | $ | 340,208 | $ | 4,010,208 | ||||||
|
Future production costs
|
(1,266,940 | ) | (139,964 | ) | (1,406,904 | ) | ||||||
|
Future development costs
|
(156,714 | ) | (7,578 | ) | (164,292 | ) | ||||||
|
Future net cash flows
|
2,246,346 | 192,666 | 2,439,012 | |||||||||
|
10% annual discount for estimated timing of cash flows
|
(1,127,898 | ) | (109,945 | ) | (1,237,843 | ) | ||||||
|
Standardized measure of discounted future net cash flows
|
$ | 1,118,448 | $ | 82,721 | $ | 1,201,169 | ||||||
(a) The standardized measure includes approximately $596.1 million attributable to the non-controlling interest of Encore.
(b) The pro forma standardized measure includes Vanguard, Encore, Parker Creek Acquisition and the Permian Basin Acquisition I.
For the December 31, 2010 calculations in the preceding table, estimated future cash inflows from estimated future production of proved reserves were computed using the average natural gas and oil price based upon the 12-month average price of $4.38 and $4.45 per MMBtu for natural gas for Vanguard historical and $79.40 and $79.43 per barrel of crude oil for Vanguard historical and Permian Basin Acquisition I, respectively, adjusted for quality, transportation fees and a regional price differential.
The following are the principal sources of change in the combined standardized measure of discounted future net cash flows (in thousands):
|
Vanguard
historical (a)
|
Encore historical
|
Parker Creek
|
Permian Basin Acquisition I
|
Proforma Adjustments
|
Vanguard
pro forma
combined (b)
|
|||||||||||||||||||
|
Sales and transfers, net of production costs
|
$ | (60,046 | ) | $ | (125,869 | ) | $ | (15,355 | ) | $ | (11,738 | ) | $ | – | $ | (213,008 | ) | |||||||
|
Net changes in prices and production costs
|
91,799 | 206,058 | – | 22,433 | – | 320,290 | ||||||||||||||||||
|
Extensions discoveries and improved recovery, less related costs
|
891 | – | – | – | – | 891 | ||||||||||||||||||
|
Changes in estimated future development costs
|
(9,476 | ) | (10,818 | ) | – | – | – | (20,294 | ) | |||||||||||||||
|
Previously estimated development costs incurred during the period
|
15,662 | 2,264 | – | 11,808 | – | 29,734 | ||||||||||||||||||
|
Revision of previous quantity estimates
|
16,728 | 42,576 | – | 16,188 | – | 75,492 | ||||||||||||||||||
|
Accretion of discount
|
17,867 | 49,450 | – | 5,359 | – | 72,676 | ||||||||||||||||||
|
Purchases of reserves in place
|
856,299 | 619 | – | – | (831,748 | ) | 25,170 | |||||||||||||||||
|
Change in production rates, timing and other
|
10,051 | 36,797 | 30,278 | (14,923 | ) | – | 62,203 | |||||||||||||||||
|
Net change in standardized measure
|
939,775 | 201,077 | 14,923 | 29,127 | (831,748 | ) | 353,154 | |||||||||||||||||
|
Standardized measure, January 1, 2010
|
178,673 | 494,501 | 121,247 | 53,594 | 848,015 | |||||||||||||||||||
|
Standardized measure, December 31, 2010
|
$ | 1,118,448 | $ | 695,578 | $ | 136,170 | $ | 82,721 | $ | (831,748 | ) | $ | 1,201,169 | |||||||||||
(a) The standardized measure includes approximately $596.1 million attributable to the non-controlling interest of Encore.
(b) The pro forma standardized measure includes Vanguard, Encore, Parker Creek Acquisition and the Permian Basin Acquisition I.