Exhibit 99.1

 

KAISER-WHITING, LLC

FINANCIAL STATEMENTS

DECEMBER 31, 2015, 2014 and 2013

and

SEPTEMBER 30, 2016 and 2015 (unaudited)

WITH

INDEPENDENT AUDITOR’S REPORT

CONTENTS

Independent Auditor’s Report	1
Balance Sheets	3
Statements of Income (Loss)	4
Statements of Members’ Equity	5
Statements of Cash Flows	6
Notes to Financial Statements	7

INDEPENDENT AUDITOR’S REPORT

To the Members

Kaiser-Whiting, LLC

Report on the Financial Statements

We have audited the accompanying financial statements of Kaiser-Whiting, LLC which comprise the balance sheets as of December 31, 2015, 2014 and 2013, and the related statements of income (loss), members’ equity, and cash flows for each of the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.  The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.  In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.  Accordingly, we express no such opinion.  An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kaiser-Whiting, LLC as of December 31, 2015, 2014 and 2013, and the results of its

operations and its cash flows for each of the years then ended in accordance with accounting principles generally accepted in the United States of America.

Other Matter

Our audit was conducted for the purpose of forming an opinion on the basic financial statements as a whole.  The supplemental oil and gas information in Note 6 is presented for purposes of additional analysis and is not a required part of the financial statements.  Such information has not been subjected to the auditing procedures applied in the audit of the financial statements, and accordingly, we do not express an opinion or provide any assurance on it.

May 25, 2016

KAISER-WHITING, LLC

BALANCE SHEETS

(Amounts in thousands)

 

 

See notes to financial statements.

 

KAISER-WHITING, LLC

STATEMENTS OF INCOME (LOSS)

(Amounts in thousands)

 

See notes to financial statements.

KAISER-WHITING, LLC

STATEMENTS OF MEMBERS’ EQUITY

Years ended December 31, 2015, 2014 and 2013

 (Amounts in thousands)

 

 

KAISER-WHITING, LLC

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

 

 

KAISER-WHITING, LLC

NOTES TO FINANCIAL STATEMENTS

Nine months ended September 30, 2016 and 2015 (unaudited) and

Years ended December 31, 2015, 2014 and 2013

Note 1 – Business and Basis of Presentation

Kaiser-Whiting, LLC (the Company) is a limited liability company created on June 4, 2009, for the purpose of drilling and producing oil, gas and natural gas liquids.  The Company is primarily owned by George B. Kaiser (Kaiser), and entities which he controls provide management and administrative services to the Company.  The Company has no employees.

On June 4, 2009, the Company, through its manager, entered into a Participation Agreement (Agreement) with Whiting Oil and Gas Corporation (Whiting) under which the Company agreed to acquire and participate in the drilling of 12,784.9 net mineral acres in Mountrail County, North Dakota.  Under the terms of the Agreement, Whiting operates the wells and the Company pays 65% of the working interest costs and expenses associated with drilling and completing the first and second wells on 51 unit locations and 50% on all subsequent wells to earn 50% of Whiting’s revenue interest in the wells.  Whiting also reserves an overriding royalty interest equal to the difference between the total lease burden and 20% on most unit locations.

Effective June 1, 2014, Kaiser and other affiliated individuals contributed property interests in four 1,280 acre units in Mountrail County, North Dakota to the Company for Class B interests.  The wells on these properties are operated by Whiting.  The properties were contributed at the cost basis of affiliated individuals, less applicable depletion and asset retirement obligations assumed, which was $40.7 million.

On October 5, 2014, the members of the Company entered into an agreement with Natural Resource Partners LP through its subsidiary, NRP Oil and Gas LLC (NRP), to sell 40% of the Company’s equity interests for a purchase price of $340.0 million in cash, subject to customary purchase price adjustments.  Immediately after the close of this transaction, NRP withdrew as a member of the Company and was distributed 40% of the producing and nonproducing oil and gas properties the Company owns in Mountrail County, North Dakota.  The property distributed was recorded at its fair value, estimated at the $340.0 million purchase price for the membership units exchanged.  The Company recognized a gain of $196.2 million on this transaction.

On September 15, 2015, the members of the Company (Sellers) entered into an agreement with Energy 11, L.P. through its subsidiary, Energy 11 Operating Company LLC (E11), to sell 50% of the Company’s then-existing membership interests for $162.0 million in cash plus deferred purchase payments, if future oil prices exceed defined levels, subject to customary purchase price adjustments.  In connection with the closing of the sale on December 18, 2015, the parties entered into the First Amendment to the Purchase Agreement, which reduced the purchase price by approximately $2.5 million cash flow from the effective date of the agreement to closing.  The purchase price terms, as modified, were $60.0 million in cash paid at closing plus two additional guaranteed annual payments of $1.0 million each, a note in the amount of $97.5 million payable to the Sellers and the deferred purchase consideration, if applicable.  Additionally, the First Amendment gave E11 a one-time right in June 2016, as long as note payments were current, to

satisfy the contingent payment obligation by either a cash payment or increase of the note by $5.0 million.  Immediately after the close of this transaction, E11 withdrew as a member of the Company and was distributed 50% of the producing and nonproducing oil and gas properties the company owns in Mountrail County, North Dakota.  The property distributed was recorded at its fair value, estimated at the $160 million adjusted purchase price for member units exchanged reduced for anticipated additional purchase adjustments.  The Company recognized a gain of $46.7 million on this transaction.

On November 3, 2016, the members of the Company entered into an Exclusive Option Agreement with E11 for the exclusive right and option to purchase all issued and outstanding limited liability company interests of the Company.  E11 made a cash payment of $1 million at time of option and, to exercise, must make an additional $9 million payment on or before December 30, 2016.  Should E11 exercise the option and make the exercise payment, the parties would enter into a Purchase Agreement, with an anticipated closing on or before January 11, 2017.  Under the Purchase Agreement, sales price is $130 million less the exercise payment and closing adjustments, if any.  The Purchase Agreement requires a minimum cash payment of $40 million, net of exercise payment, to be made at close date, and the remainder of the purchase price to be financed through a promissory note bearing interest at 5% per annum and due by April 30, 2017.  Subject to terms and conditions of the note, E11 will have the right to extend the note up to October 31, 2017.

The accompanying financial statements include only the accounts, results of operations and cash flows of the Company.  No affiliates were combined in this financial statement presentation.

Revenues in the accompanying statements of income are recognized on the sales method.  Direct operating expenses are recognized on the accrual method and consist of monthly operator overhead and other direct costs of operating the Company’s properties.  Included in lease operating costs are costs associated with field operating expenses, workovers and monthly operator overhead.

Members of the LLC are generally not liable for any debts, liabilities or obligations of the Company beyond their equity accounts.

Note 2 – Unaudited Interim Financial Information

The accompanying interim financial statements for the nine months ended September 30, 2016 and 2015, are unaudited.  The unaudited interim financial statements were prepared on the same basis as the audited financial statements for the years ended December 31, 2015, 2014 and 2013.  In the opinion of management, the unaudited interim financial statements reflect all adjustments necessary to state fairly the interim financial statements for the nine-month periods ended September 30, 2016 and 2015.  The financial statements for the interim periods ended September 30, 2016 and 2015, are not necessarily indicative of results that may be expected for the year ended December 31, 2016, or any future periods.

Note 3 – Summary of Significant Accounting Policies

Accrued revenues represent the estimated amounts of sales, net of production taxes, which have been earned but not received.

Revenues associated with the sale of crude oil, natural gas and natural gas liquids are recorded when title passes to the purchaser.  Under the terms of the Agreement, the Company pays only its proportionate working-interest share of production taxes and gathering costs associated with operations.

The Company has an arrangement with Kaiser-Francis Management Company (KFMC), primarily owned by Kaiser, under which KFMC provides all treasury functions, including the payments of bills and collection of revenues from Whiting.  Additionally, KFMC distributes or bills members of the Company for the monthly net cash flow from operations.  The advance to affiliate balances represent the timing difference between activity processed through KFMC and the billing or distribution, which generally occurs two months later.

KFMC provides management and administrative services at an estimated value of $100,000 per year to the Company.  The cost is recorded as additional member contributions.  Other reported general and administrative costs are primarily for legal expenses and bank fees.

As a limited liability company, the Company’s taxable income or loss is allocated to its members.  Therefore, no provision or liability for income taxes has been included in the financial statements.

The Company accrues for uncertain tax positions that management has evaluated as probable of resulting in tax obligations if the tax positions were examined by tax authorities.  No tax obligations are accrued at December 31, 2015, 2014 or 2013, or September 30, 2016 or 2015.

The Company recognizes liabilities for retirement obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction and development of the assets.  The Company recognizes the fair value of a liability for a retirement obligation in the period in which the liability is incurred.  For oil and gas properties, this is the period in which an oil or gas well is acquired or drilled.  The liability is then accreted each period until the liability is settled or the well is sold, at which time the liability is removed.  The related asset retirement cost is capitalized as part of the carrying amount of oil and gas properties (see Note 5).

The preparation of 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 disclosed contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Management has evaluated subsequent events through January 5, 2017, the date the financial statements were available to be issued.

Note 4 – Oil and Gas Properties and Equipment

The Company follows the full-cost method under which all costs associated with the exploration and development of crude oil and natural gas properties are capitalized into a single cost center (the full-cost pool).  These costs include land acquisition and costs of drilling and equipping wells.  The Company does not capitalize general and administrative costs.  Costs associated with production and general corporate activities are expensed in the period incurred.  The Company’s leasehold interests are all in North Dakota.

Proceeds from property sales are generally credited to the full-cost pool, with no gain or loss recognized, unless such a sale would involve a sale of 25% or more of the proved reserves related to a single full-cost pool.  In the years ended December 31, 2015, 2014 and 2013, as well as the nine months ended September 30, 2016, there were no sales credited to the Company’s full-cost pool.  See Note 1 for a description of the transactions that resulted in a distribution of oil and gas properties from the Company.

Capitalized costs of proved property are amortized on the unit of production method using estimates of proved reserves.  From January 1, 2013 through September 30, 2016, all capitalized costs related to the proved reserves.

The Company performs a ceiling test calculation at each year-end in which it assesses the recoverable value of proved reserves and compares it to the capitalized cost, net of accumulated depletion and depreciation, plus the estimated future development costs and asset retirement costs.  At December 31, 2015, 2014 and 2013, there were no costs within properties and equipment that were excluded from the ceiling test calculation.  For the year ended December 31, 2015, the Company recognized an impairment adjustment of its properties of approximately $36.3 million.  There were no impairment adjustments in 2016, 2014 or 2013.

Note 5 – Asset Retirement Obligations

The Company’s future asset retirement obligations were estimated based on the Company’s working interest share of estimated costs to abandon and reclaim its wells, and the estimated timing of the costs to be incurred in future periods.  The estimated future obligation, using a credit adjusted risk-free interest rate of 6% and an inflation rate of 2%, is computed at the date each additional obligation is incurred and accreted thereafter.  The capitalized cost associated with the liability is included in the full-cost pool.  The Company has no assets that are legally restricted for purposes of settling asset retirement obligations.  No settlements of asset retirement obligations have occurred during the years presented.

The following table summarizes changes in the Company’s asset retirement obligation (amounts in thousands):

Note 6 – Supplemental Oil and Gas Information (Unaudited)

The following reserve estimates present the Company’s estimate of the proven natural gas and oil reserves and net cash flow of the Company’s properties in accordance with the guidelines established by the Securities and Exchange Commission.  These reserve estimates were prepared by KFMC personnel.  The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing natural gas and oil properties.  Accordingly, the estimates are expected to change as future information becomes available.  All the oil and gas reserves are in North Dakota.

(a)	Reserve Quantity Information

Below are the net quantities of net proved developed and undeveloped reserves and proved developed reserves of the Company.

The standardized measure of discounted cash flows relating to oil and natural gas reserves and associated changes in standard measure amounts were prepared in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification 932-235, Extractive Activities – Oil and Gas.  Future cash inflows were computed by applying average prices of crude oil and natural gas for the last 12 months to estimated future production.  Future production and development costs were computed by estimating the expenditures to be incurred in developing the crude oil and natural gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions.  Future net cash flows are discounted at the rate of 10% annually to derive the standardized measure of discounted cash flows.  Actual future cash inflows may vary considerably, and the standardized measure

does not necessarily represent the fair value of the Company’s crude oil and natural gas reserves.  Standard measure amounts are:

The 12-month average prices were adjusted to reflect applicable transportation and quality differentials on a well-by-well basis to arrive at realized sales prices used to estimate the Company’s reserves.  The price of other liquids is included in natural gas.  The prices for the Company’s reserves were as follows:

Changes in the Standardized Measure of Discounted Future Net Cash Flows at 10% per annum are as follows:

Estimates of economically recoverable natural gas and oil reserves and of future net revenues are based upon a number of variable factors and assumptions, all of which are to some degree subjective and may vary considerably from actual results.  Therefore, actual production, revenues, development and operating expenditures may not occur as estimated.  The reserve data are estimates only, are subject to many uncertainties and are based on data gained from production histories and on assumptions as to geologic formations and other matters.  Actual quantities of natural gas and oil may differ materially from the amounts estimated.