Form 8-K filed by LAREDO PETROLEUM, INC. on 2021-10-25
0001528129 false 0001528129 2021-10-20 2021-10-20 iso4217:USD xbrli:shares iso4217:USD xbrli:shares

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT PURSUANT TO

SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Date of report (Date of earliest event reported): October 20, 2021

 

LAREDO PETROLEUM, INC.

(Exact name of registrant as specified in charter)

 

Delaware  001-35380  45-3007926
(State or other jurisdiction of incorporation or
organization)
  (Commission File Number)  (I.R.S. Employer Identification No.)

 

15 W. Sixth Street, Suite 900, Tulsa, Oklahoma  74119
(Address of principal executive offices)  (Zip Code)

 

Registrant’s telephone number, including area code: (918) 513-4570

 

Not Applicable

(Former name or former address, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class  Trading Symbol  Name of each exchange on which registered
Common stock, $0.01 par value  LPI  New York Stock Exchange

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

 

 

 

 

Item 8.01Other Events.

 

As previously disclosed in its Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on May 11, 2021 (the “Sabalo Announcement 8-K”), Laredo Petroleum, Inc. (the “Company”) entered into agreements with respect to the Sabalo/Shad Acquisition and the Working Interest Sale, as those terms are defined and described in the Sabalo Announcement 8-K. On July 1, 2021, the Company consummated the Sabalo/Shad Acquisition and the Working Interest Sale.

 

The Company is filing this Current Report on Form 8-K to disclose the financial statements and information set forth in Item 9.01 hereto.

 

On October 20, 2021, in connection with the Pioneer Acquisition, as that term is defined and described in the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2021, and pursuant to the regular semi-annual redetermination, the Company’s lenders increased the borrowing base under the Fifth Amended and Restated Credit Agreement (as amended, the “Senior Secured Credit Facility”) to $1.0 billion. The aggregate elected commitment under the Senior Secured Credit Facility remained unchanged at $725 million.

 

Item 9.01Financial Statements and Exhibits.

 

(a)  Financial statements of business to be acquired.

 

The audited annual combined financial statements of Sabalo Energy, LLC and Sabalo Operating, LLC (collectively, “Sabalo”), which comprise the balance sheets as of December 31, 2020 and 2019, the related statements of operations, members’ equity, and cash flows for the years then ended, and the related notes to the combined financial statements, were previously filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 2, 2021 and are incorporated by reference herein.

  

The unaudited quarterly combined financial statements of Sabalo, which comprise the balance sheet as of June 30, 2021, the related statements of operations, members’ equity, and cash flows for each of the six-month periods ended June 30, 2021 and June 30, 2020, and the related notes to the combined financial statements, are filed as Exhibit 99.1 hereto and incorporated by reference herein.

 

The audited annual financial statements of Shad Permian, LLC (“Shad”), which comprise the balance sheets as of December 31, 2020 and 2019, the related statements of operations, members’ equity, and cash flows for the years then ended, and the related notes to the financial statements, were previously filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 2, 2021 and are incorporated by reference herein.

  

The unaudited quarterly financial statements of Shad, which comprise the balance sheet as of June 30, 2021, the related statements of income, members’ equity, and cash flows for each of the six-month periods ended June 30, 2021 and June 30, 2020, and the related notes to the financial statements, are filed as Exhibit 99.2 hereto and incorporated by reference herein.

 

(b)  Pro forma financial information.

 

The unaudited pro forma condensed combined financial information of the Company, which comprise the balance sheet as of June 30, 2021, the related statements of operations for the six-month period ended June 30, 2021 and year ended December 31, 2020, and the related notes to the pro forma condensed combined financial information, is filed as Exhibit 99.3 hereto and incorporated by reference herein.

 

(d)  Exhibits.

 

Exhibit Number   Description
23.1   Consent of Tranbarger FHK, PLLC with respect to Sabalo audited combined financial statements.
23.2   Consent of Tranbarger FHK, PLLC with respect to Shad audited financial statements.
23.3   Consent of W.D. Von Gonten & Co.
99.1   Unaudited combined financial statements of Sabalo as of June 30, 2021 and for the six-month periods ended June 30, 2021 and June 30, 2020.
99.2   Unaudited financial statements of Shad as of June 30, 2021 and for the six-month periods ended June 30, 2021 and June 30, 2020.
99.3   Unaudited pro forma condensed combined financial information of Laredo as of June 30, 2021 and for the six-month period ended June 30, 2021 and year ended December 31, 2020.
104   Cover Page Interactive Data File (formatted as Inline XBRL).

 

1 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

   

LAREDO PETROLEUM, INC.

 

Date: October 25, 2021 By: /s/ Bryan J. Lemmerman
    Bryan J. Lemmerman
    Senior Vice President and Chief Financial Officer

 

 

 

 

Exhibit 23.1

 

TRANBARGER FHK, PLLC

CERTIFIED PUBLIC ACCOUNTANTS

 

 

9501 Console Drive, Suite 200, San Antonio, TX 78229   (210) 614-2284

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in this Current Report on Form 8-K of Laredo Petroleum, Inc. of our report dated May 24, 2021, relating to the combined financial statements of Sabalo Energy, LLC and Sabalo Operating, LLC as of December 31, 2020 and 2019 and for the years then ended, which appears in Laredo’s Current Report on Form 8-K Laredo Petroleum, Inc. filed on June 2, 2021.

 

/s/ Tranbarger FHK, PLLC

 

San Antonio, Texas

October 25, 2021

 

 

 

 

Exhibit 23.2

 

TRANBARGER FHK, PLLC

CERTIFIED PUBLIC ACCOUNTANTS

 

 

9501 Console Drive, Suite 200, San Antonio, TX 78229   (210) 614-2284

  

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

We consent to the incorporation by reference in this Current Report on Form 8-K of Laredo Petroleum, Inc. of our report dated May 24, 2021, relating to the financial statements of Shad Permian, LLC as of December 31, 2020 and 2019 and for the years then ended, which appears in the Current Report on Form 8-K of Laredo Petroleum, Inc. filed on June 2, 2021.

 

/s/ Tranbarger FHK, PLLC

 

San Antonio, Texas

October 25, 2021

 

 

 

 

Exhibit 23.3

 

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS

 

We consent to the incorporation by reference in this Current Report on Form 8-K of Laredo Petroleum, Inc. of our estimates of reserves contained in our reports entitled “Sabalo Energy, LLC Interests Midland Basin Oil & Gas Assets Estimate of Reserves and Revenues SEC Pricing Case “As of” January 1, 2021,” dated May 5, 2021, and “Shad Permian, LLC Interests Midland Basin Oil & Gas Assets Estimate of Reserves and Revenues SEC Pricing Case “As of” January 1, 2021,” dated May 5, 2021.

 

  Yours truly,
   
  W.D. VON GONTEN & CO.
   
  By: /s/ William D. Von Gonten, Jr.
   

William D. Von Gonten, Jr.

October 25, 2021

 

 

 

 

 

 

Exhibit 99.1

 

 
Sabalo Energy, LLC and
 
Sabalo Operating, LLC
 
Reviewed Combined Financial Statements
 
June 30, 2021 and 2020
 
TRANBARGER FHK, PLLC
 
CERTIFIED PUBLIC ACCOUNTANTS
 

 

 

 

 

TABLE OF CONTENTS

 

Independent Accountant’s Review Report 1
 
Combined Balance Sheets 2
 
Combined Statements of Operations 3
 
Combined Statements of Members’ Equity 4
 
Combined Statements of Cash Flows 5
 
Notes to the Combined Financial Statements 6

 

 

 

 

TRANBARGER FHK, PLLC

CERTIFIED PUBLIC ACCOUNTANTS

9501 Console Drive, Suite 200, San Antonio, TX 78229 (210) 614-2284

 

Independent Accountant’s Review Report

 

To the Members

Sabalo Energy, LLC and Sabalo Operating, LLC

Corpus Christi, Texas

 

We have reviewed the accompanying combined financial statements of Sabalo Energy, LLC and Sabalo Operating, LLC (collectively the “Company”), which comprise the combined balance sheets as of June 30, 2021 and December 31, 2020, and the related combined statements of operations, members’ equity, and cash flows for the six months ended June 30, 2021 and 2020, and the related notes to the combined financial statements. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of Company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the combined financial statements as a whole. Accordingly, we do not express such an opinion.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these combined 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 combined financial statements that are free from material misstatement whether due to fraud or error.

 

Accountant’s Responsibility

 

Our responsibility is to conduct the review engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the combined financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. We believe that the results of our procedures provide a reasonable basis for our conclusion.

 

Accountant’s Conclusion

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying combined financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Tranbarger FHK, PLLC

San Antonio, Texas

October 18, 2021

 

 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC    
       
COMBINED BALANCE SHEETS      
       
June 30, 2021 and December 31, 2020      
       

 

   June 30, 2021   December 31, 2020 
ASSETS          
Current assets          
Cash and cash equivalents  $36,510,365   $19,818,849 
Time deposits   50,528    50,528 
Accounts receivable   36,448,094    26,273,725 
Other receivable   41,808    14,709 
Prepaid expenses   92,746    180,710 
Inventory   1,618,082    1,892,024 
    74,761,623    48,230,545 
Non-current assets          
Oil and gas properties – successful efforts method, net   500,544,267    459,287,254 
Property, plant, and equipment, net   1,271,668    1,297,062 
           
Total Assets  $576,577,558   $508,814,861 
           
LIABILITIES AND MEMBERS' EQUITY          
Current liabilities          
Accounts payable  $36,884,909   $12,140,217 
Accrued expenses   3,944,975    1,780,744 
Revenue payables   20,823,665    13,518,466 
Prepayments from non-operators   935,554    210,460 
Derivative liability, current   29,685,766    33,219 
Short term borrowings   50,647    203,040 
    92,325,516    27,886,146 
Non-current liabilities        
Long-term debt, less deferred loan costs   146,714,564    146,549,943 
Derivative liability, non-current   755,714    2,134,538 
Accounts payable - related party   31,751,506    26,106,929 
Asset retirement obligation   7,215,077    7,039,313 
Total liabilities   278,762,377    209,716,869 
           
Members' equity          
Total members' equity   297,815,181    299,097,992 
           
Total Liabilities and Members' Equity  $576,577,558   $508,814,861 

 

See notes to the combined financial statements.

 

2 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC    
       
COMBINED STATEMENTS OF OPERATIONS      

 

Six Months Ended June 30,  2021   2020 
REVENUES          
Oil revenue  $84,606,107   $56,214,515 
Gas revenue   2,139,151    54,996 
Natural gas liquids revenue   3,840,673    1,030,692 
Total revenues, net   90,585,931    57,300,203 
           
OPERATING EXPENSES          
Production taxes   4,313,735    2,787,101 
Lease operating expenses   19,619,266    19,500,032 
Depreciation, depletion and amortization   20,963,494    29,049,903 
Accretion of asset retirement obligation   170,005    164,105 
Selling, general and administrative   3,148,588    3,177,804 
Total operating expenses   48,215,088    54,678,945 
           
OPERATING INCOME   42,370,843    2,621,258 
           
OTHER INCOME (EXPENSE)          
Provision for uncollectible receivables   (27,736)   - 
Gain (loss) on derivative instruments, net   (40,820,247)   30,846,259 
Interest expense   (3,463,113)   (4,150,652)
Interest income   157    10,579 
Loss on sale of property and equipment   -    (3,904)
Other income   784,234    746,193 
Total other income (expense)   (43,526,705)   27,448,475 
           
INCOME (LOSS) BEFORE INCOME TAXES   (1,155,862)   30,069,733 
           
STATE INCOME TAX EXPENSE   126,949    2,101 
           
NET INCOME (LOSS)  $(1,282,811)  $30,067,632 

 

See notes to the combined financial statements.

 

3 

 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC    
     
COMBINED STATEMENTS OF MEMBERS' EQUITY    
     
Six Months Ended June 30, 2021 and 2020    
     
   Total Members'
Equity
 
Balance at January 1, 2021  $299,097,992 
      
  Loss from the period   (1,282,811)
      
Balance at June 30, 2021  $297,815,181 
      
Balance at January 1, 2020  $304,107,040 
      
  Income from the period   30,067,632 
      
Balance at June 30, 2020  $334,174,672 

 

See notes to the combined financial statements.

 

4 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC    
         
COMBINED STATEMENTS OF CASH FLOWS        
         
Six Months Ended June 30,  2021   2020 
OPERATING ACTIVITIES          
Net income (loss)  $(1,282,811)  $30,067,632 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Loss on sale of property and equipment   -    3,904 
Depreciation, depletion and amortization   20,963,494    29,049,903 
Provision for uncollectible receivables   27,736    - 
Amortization of loan costs   269,946    381,547 
Accretion of asset retirement obligation   170,005    164,105 
(Gain) loss on derivative instruments   40,820,247    (30,846,259)
Cash settled on derivative instruments   (12,546,524)   12,670,789 
Changes in:          
Receivables   (10,229,204)   26,647,560 
Prepaid expenses   87,964    38,002 
Inventory   273,942    707,440 
Accounts payable and accrued expenses   35,469,929    (43,944,998)
Accounts payable - related party   5,644,577    4,224,129 
Prepayment by non-operators   725,094    286,886 
Net cash provided by operating activities   80,394,395    29,450,640 
           
INVESTING ACTIVITIES          
Capital expenditures on oil and gas properties   (63,440,418)   (32,433,123)
Proceeds from sale of property and equipment   -    2,000 
Capital expenditures on property and equipment   (4,743)   (23,592)
Net cash used in investing activities   (63,445,161)   (32,454,715)
           
FINANCING ACTIVITIES          
Payments on long-term debt   -    (9,000,000)
Payments on short-term borrowings   (152,393)   (164,953)
Loan costs paid   (105,325)   - 
Net cash used in financing activities   (257,718)   (9,164,953)
           
Net increase (decrease) in cash and cash equivalents   16,691,516    (12,169,028)
           
Cash and cash equivalents at beginning of year   19,818,849    15,734,982 
           
Cash and cash equivalents at the end of the year  $36,510,365   $3,565,954 

 

See notes to the combined financial statements.

 

5 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

Sabalo Energy, LLC and Sabalo Operating, LLC (collectively the “Company”) were formed to focus on leasing, acquiring, drilling, operating, and developing oil and gas properties in the United States. The Company primarily operates in Texas.

 

Basis of Preparation

 

These combined financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as codified by the Financial Accounting Standards Board (“FASB”) in its Accounting Standards Codification (“ASC”). The accounting policies set out below have been applied in preparing the combined financial statements.

 

Principles of Combination

 

Sabalo Operating, LLC (“Operating”) is the operator of record on all properties owned by Sabalo Energy LLC (“Energy”) under the Joint Operating Agreement (“JOA”) between all working interest owners of each property. As operator, Operating is responsible under the JOA to drill wells, maintain production, pay for costs to drill and operate wells, collect revenues and distribute revenues as approved by the owners, including Energy and other third parties. Additionally, Energy has executed a Management Agreement whereby Operating provides services to develop the properties, pay the costs, collect revenues and distribute to owners. Due to this relationship, the combined financial statements include the financial information of Sabalo Energy, LLC, Sabalo Operating, LLC and Sabalo Energy, Inc. Sabalo Energy, Inc. is the .01% general owner of Sabalo Energy, LLC. Energy and Operating are effectively 100% owned by Sabalo Holdings, LLC. All intercompany amounts have been eliminated upon combination.

 

Use of Estimates

 

The preparation of combined financial statements in conformity with U.S. GAAP 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 those estimates. Management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of the combined financial statements. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the estimate of the fair value of the derivative asset/liability.

 

6 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Additionally, significant estimates include volumes of oil and natural gas reserves used in calculating depreciation and depletion of oil and gas properties, future net revenues, abandonment obligations, impairment of unproved evaluated properties, the collectability of outstanding accounts receivable, and contingencies. Oil and natural gas reserve estimates, which are the basis for unit-of-production depreciation and depletion, have numerous inherent uncertainties. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgement. Subsequent drilling results, testing, and production may justify revision of such estimates. Accordingly, reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered. In addition, reserve estimates are sensitive to changes in wellhead prices of crude oil and natural gas. Such prices have been volatile in the past and can be expected to be volatile in the future. The Company’s reserve estimates were determined by an independent petroleum engineering firm.

 

The significant estimates are based on current assumptions that may be materially affected by changes to future economic conditions, such as the market prices received for sales of oil and natural gas. Changes in these assumptions may materially affect these significant estimates in the near term.

 

Oil and Gas Properties

 

The carrying value of the Company’s oil and gas properties represents the cost to acquire or develop the asset, including any asset retirement obligations and capitalized interest, net of accumulated depreciation, depletion and amortization (“DD&A”) and any impairment charges. For assets acquired, the cost of oil and gas properties are based on fair values at the acquisition date. Asset retirement obligations and interest costs incurred in connection with qualifying capital expenditures are capitalized and amortized over the lives of the related assets.

 

The Company uses the successful efforts method to account for its oil and gas properties. Under this method, the Company capitalizes costs of acquiring properties, costs of drilling successful exploration wells and development costs. The costs of exploratory wells are initially capitalized pending a determination of whether proved reserves have been found. If proved reserves have been found, the costs of exploratory wells remain capitalized. Otherwise, the Company charges the costs of the related wells to expense. In some cases, a determination of proved reserves cannot be made at the completion of drilling, requiring additional testing and evaluation of the wells. The Company generally expenses the costs of such exploratory wells if a determination of proved reserves has not been made within a 12-month period after drilling is complete.

 

The Company determines depreciation and depletion of oil and gas properties by the unit-of-production method. It amortizes acquisition costs over total proved reserves, and capitalized development and successful exploration costs over proved developed reserves.

 

7 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Proved oil and gas reserves are those quantities of oil and gas which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, for known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The Company has proved oil and gas reserves for which the determination of economic productivity is subject to the completion of major additional capital expenditure as of June 30, 2021 which totaled $787 million.

 

The Company performs impairment tests with respect to its proved properties whenever events or circumstances indicate that the carrying value of property may not be recoverable. If there is an indication the carrying amount of the asset may not be recovered due to declines in current and forward prices, significant changes in reserve estimates, changes in management’s plans, or other significant events, management will evaluate the property for impairment. Under the successful efforts method, if the sum of the undiscounted cash flows is less than the carrying value of the proved property, the carrying value is reduced to estimated fair value and reported as an impairment charge in the period. Individually proved properties are grouped for impairment purposes at the lowest level for which there are identifiable cash flows, which is generally on a field by field basis. The impairment test incorporates a number of assumptions involving expectations of future cash flows which can change significantly over time. These assumptions include estimates of future product prices, contractual prices, estimates of risk-adjusted proved oil and gas reserves and estimates of future operating and development costs.

 

A portion of the carrying value of the Company’s oil and gas properties is attributable to unproved properties. The unproved amounts are not subject to DD&A until they are classified as proved properties. Capitalized costs attributable to the properties become subject to DD&A when proved reserves are assigned to the property.

 

If the exploration efforts are unsuccessful, or management decides not to pursue development of these properties as a result of lower commodity prices, higher development and operating costs, contractual conditions or other factors, the capitalized costs of the related properties would be expensed. The timing of any write-downs of these unproved properties, if warranted, depends upon management’s plans, the nature, timing and extent of future exploration and development activities and their results. The Company recorded no impairments during the six months ended June 30, 2021 and 2020.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost, less accumulated depreciation. Improvements or betterments of a permanent nature are capitalized. Expenditures for maintenance and repairs are charged to expense when incurred. The cost of assets retired or otherwise disposed of, and the related accumulated depreciation, are eliminated from the accounts in the year of disposal. Gains or losses resulting from property disposals are credited or charged to current operations.

 

8 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the assets, which range from 3 to 7 years. Such rates are calculated to reduce the cost of assets to their estimated residual values over their expected useful lives. The expected useful lives of property, plant and equipment are reviewed annually.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, deposits held with banks and other short-term highly liquid investments with original maturities of six months or less.

 

Time Deposits

 

Time deposits are certificates of deposit held for collateral for a letter of credit amounting to $50,528 as of June 30, 2021 and December 31, 2020. No balance is outstanding on the letter of credit as of June 30, 2021 and December 31, 2020.

 

Prepaid Expenses

 

Prepaid expenses represent payments for insurance, software, and deposits on well studies that will benefit future periods. Prepaid expenses totaled $92,746 and $180,710 as of June 30, 2021 and December 31, 2020, respectively.

 

Accounts Receivable

 

Accounts receivable are stated net of a provision for amounts estimated to be uncollectible. Accounts receivable primarily consist of accrued revenues from oil and gas sales and amounts due from other working interest owners. The Company routinely assesses the recoverability of all material receivables to determine their collectability. The Company creates a provision against a receivable when, based on the judgment of management, it is likely that a receivable will not be collected and the amount of such provision may be reasonably estimated. No allowance for doubtful accounts was considered necessary as of June 30, 2021 and December 31, 2020.

 

Inventory

 

Inventories are carried at the lower of cost or market and consisted of the following at:

 

   June 30,   December 31, 
   2021   2020 
Crude oil held-for-sale  $459,923   $445,142 
Materials used in oil and gas operations   865,424    1,154,147 
Water used in oil and gas operations   292,735    292,735 
           
   $1,618,082   $1,892,024 

 

9 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Derivative Financial Instruments

 

The Company uses derivative contracts to hedge the effects of fluctuations in the prices of oil and natural gas. Such derivative instruments are accounted for in accordance with ASC 815, “Derivatives and Hedging,” which establishes accounting and disclosure requirements for derivative instruments and requires them to be measured at fair value and recorded as assets or liabilities in the combined balance sheets.

 

Under ASC 815, hedge accounting is used to defer recognition of unrealized changes in the fair value of such financial instruments, for those contracts which qualify as cash flow hedges, as defined in the standard. The Company has not designated any of its derivative contracts as fair value or cash flow hedges. Accordingly, the changes in fair value of the contracts, as well as settlements received or paid, are included in the combined statement of operations.

 

Accounts Payable and Accruals

 

Liabilities are recognized for amounts to be paid in the future for goods and services received, whether billed by the supplier or not.

 

Asset Retirement Obligations

 

The initial estimated asset retirement obligation related to property, plant and equipment is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property, plant and equipment. If the fair value of the recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement cost.

 

Revisions in estimated liabilities can result from changes in estimated inflation rates, changes in service and equipment costs and changes in the estimated timing of an asset’s retirement. Asset retirement costs are depreciated using a systematic and rational method similar to that used for the associated property and equipment. Accretion of the liability is recognized over the estimated productive life of the related assets.

 

Revenue Recognition

 

Under Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” (“ASC 606”), oil, natural gas and NGL sales revenues are recognized when control of the product is transferred to the customer, the performance obligations under the terms of the contracts with customers are satisfied and collectability is reasonably assured. All of the Company’s oil, natural gas and NGL sales are made under contracts with customers. The performance obligations for the Company’s contracts with customers are satisfied at a point in time through the delivery of oil and natural gas to its customers.

 

10 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The Company typically receives payment for oil, natural gas and NGL sales within 30 days of the month of delivery. The Company’s contracts for oil, natural gas and NGL sales are standard industry contracts that include variable consideration based on the monthly index price and adjustments that may include counterparty-specific provisions related to volumes, price differentials, discounts and other adjustments and deductions.

 

The Company’s product types are as follows:

 

Oil Revenue – Under the Company’s oil sales contracts, the Company generally sells oil to the purchaser at or near the wellhead, and collects a contractually agreed upon index price, net of pricing and gathering and transportation differentials. The Company transfers control of the product to the purchaser at or near the wellhead and recognizes revenue based on the net price received.

 

Natural Gas and NGL Revenue – Under the Company’s natural gas sales contracts, the Company delivers and transfers control of natural gas to the purchaser at delivery points at or near the wellhead. The purchaser gathers and processes the natural gas and sells the resulting residue gas and NGLs. The Company receives its contractual portion of the proceeds for the sale of the residue gas and NGLs at an agreed upon index price, net of pricing differentials and applicable selling expenses including gathering, processing and fractionation costs. The Company recognizes revenue at the net price when control transfers to the purchaser.

 

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligation, as allowed under ASC 606. Under the Company’s oil, natural gas and NGL sales contracts, each unit of product delivered to the customer represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

 

Contract BalancesUnder the Company’s product sales contracts, it has the right to invoice its customers once the performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company’s product sales contracts do not give rise to contract assets or liabilities under ASC 606.

 

Prior-period Performance ObligationsThe Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain natural gas and natural gas liquids sales may not be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. The Company records the differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. The Company has existing internal controls for its revenue estimation process and related accruals, and any identified differences between its revenue estimates and actual revenue received historically have not been significant.

 

11 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Income Taxes

 

The Company is not a taxpaying entity for federal income tax purposes; accordingly, a provision for income taxes has not been recorded in the accompanying financial statements. Income or losses from disregarded entities are reflected in the member’s individual or corporate income tax returns. The Company does pay franchise taxes, which are considered income taxes under the authoritative guidance. The Company’s current year and prior three years tax returns remain open for examination by the taxing authorities.

 

The Company has adopted the provisions of FASB Accounting Standards Codification 740, “Income Taxes” (“ASC 740”), effective January 1, 2009. ASC 740 provides guidance regarding the recognition, measurement, presentation and disclosure in the financial statements of tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction.

 

Concentration of Credit Risk

 

Financial instruments which potentially subject the Company to concentrations of credit risk include cash, cash equivalents, short term loans and accounts receivable. The Company maintains its cash in bank deposit accounts; which, at times, may exceed the federally insured limits set forth by the Federal Deposit Insurance Corporation (“FDIC”). The Company monitors the financial condition of the institutions whereby these deposits are maintained and has not experienced any losses associated with its accounts. As of June 30, 2021, the Company has uninsured deposits totalling $40,811,455.

 

The Company’s financial condition, results of operations, and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond its control. These factors include the level of global demand for petroleum products, foreign supply of oil and gas, the establishment of and compliance with production quotas by oil-exporting countries, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic.

 

The Company cannot predict future oil and gas prices with any degree of certainty. Sustained weakness in oil and gas prices may adversely affect its financial condition and results of operations, and may also reduce the amount of net oil and gas reserves that the Company can produce economically. Similarly, any improvement in oil and gas prices can have a favorable impact on the Company’s financial condition, results of operations and capital resources.

 

The Company’s customer concentration may impact the Company’s overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions affecting the oil and gas industry.

 

12 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The Company manages credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

 

In the exploration, development and production business, production is normally sold to relatively few customers. Substantially all of the Company’s customers are concentrated in the oil and gas industry and revenue can be materially affected by current economic conditions, the price of certain commodities such as crude oil and natural gas and the availability of alternate purchasers. The Company believes that the loss of any of its major purchasers would not have a long-term material adverse effect on its operations.

 

Compensated Absences

 

Compensated absences for sick pay and personal time have not been accrued since they cannot be reasonably estimated. The Company’s policy is to recognize these costs when actually paid.

 

Advertising

 

The Company expenses all advertising costs as incurred, and such expenses were not significant for the six months ended June 30, 2021 and 2020.

 

Contingent Revenue from Sale

 

The Company is entitled to contingent consideration in relation to the sale detailed at Note 14 if certain conditions are met over a three year period. The Company will recognize the amount earned into gain income upon the condition being met. No revenue will be recognized if the condition is not met.

 

Deferred Financing Costs

 

Deferred financing costs are stated at cost, net of amortization, and as a direct reduction from the carrying value of long-term debt on the combined balance sheets. Amortization of deferred financing costs is computed using the straight line method over the life of the loan. Amortization of deferred financing costs of $269,946 and $381,547 was recorded for the six months ended June 30, 2021 and 2020, respectively.

 

13 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Fair Values

 

As defined in FASB ASC Topic No. 820-10,“Fair Value Measurements,” fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic No. 820-10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:

 

Level 1 – Inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

 

Level 2 – Inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3 – Inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.

 

The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, borrowings, accounts payable and accrued expenses, approximate their fair values because of the short maturity of these instruments and market rates of interest available to the Company. The valuation assumptions the Company has used to measure the fair value of its commodity derivatives were observable inputs based on market data obtained from independent sources and are considered Level 2 inputs (quoted prices for similar assets, liabilities and market-corroborated inputs).

 

Assets and liabilities measured at fair value on a recurring basis

 

Certain assets and liabilities are reported at fair value on a recurring basis in the combined balance sheets. The following methods and assumptions were used to estimate fair value:

 

Commodity derivative instruments. The fair value of commodity derivative instruments is derived using an income approach valuation model that utilizes market-corroborated inputs that are observable over the term of the derivative contract. The Company’s fair value calculations also incorporate an estimate of the counterparties’ default risk for derivative assets and an estimate of the Company’s default risk for derivative liabilities.

 

The Company believes that the majority of the inputs used to calculate the commodity derivative instruments fall within Level 2 of the fair value hierarchy based on the wide availability of quoted market prices for similar commodity derivative contracts. See Note 6 for additional information regarding the Company’s derivative instruments.

 

14 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The following table presents the Company’s assets and (liabilities) measured at fair value on a recurring basis:

 

   Level 1   Level 2   Level 3   Total Fair 
   Inputs   Inputs   Inputs   Value 
June 30, 2021                    
  Derivative instruments, net  $-   $(30,441,480)  $-   $(30,441,480)
                     
December 31, 2020                    
  Derivative instruments, net  $-   $(2,167,757)  $-   $(2,167,757)

 

Statement of Cash Flows

 

Supplemental information on cash flows for the six months ended June 30 were as follows:

 

   2021   2020 
Property additions financed (paid) through
      accounts payable and through accruals
  $1,255,807   $1,032,695 
Interest paid  $3,193,167   $3,769,105 
Asset retirement obligation net additions  $5,759   $- 
Interest received  $157   $10,579 

 

2.OIL AND GAS PROPERTIES AND PROPERTY, PLANT AND EQUIPMENT

 

Gross balances of oil and gas properties and property, plant and equipment were as follows:

 

   Unproved   Proved   Total Oil
and Gas
   Property,
Plant and
 
   Properties   Properties   Properties   Equipment 
Gross balance at June 30, 2021  $9,308,116   $700,847,707   $710,155,823   $1,638,012 
                     
Gross balance at December 31, 2020  $9,561,436   $638,404,017   $647,965,453   $1,633,269 

 

For the six months ended June 30, 2021 and 2020, $61,674,825 and $31,000,085, respectively was added to the proved properties via capital expenditure. For the six months ended June 30, 2021 and 2020, $515,545 and $233,566, respectively was added to the unevaluated properties via capital expenditure. For the six months ended June 30, 2021 and 2020, $768,865 and $4,224,362, respectively was transferred from unevaluated properties to proved properties.

 

15 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

2.OIL AND GAS PROPERTIES AND PROPERTY, PLANT AND EQUIPMENT (continued)

 

Changes in accumulated depreciation and depletion for the period ended June 30, 2021 were:

 

   Unproved   Proved   Total Oil
and Gas
   Property,
Plant and
 
   Properties   Properties   Properties   Equipment 
Balance at December 31, 2020  $424,675   $188,253,524   $188,678,199   $336,207 
Depreciation, depletion and                    
  amortization   -    20,933,357    20,933,357    30,137 
                     
Balance at June 30, 2021   424,675    209,186,881    209,611,556    366,344 
                     
Net Assets at June 30, 2021  $8,883,441   $491,660,826   $500,544,267   $1,271,668 

 

Changes in accumulated depreciation and depletion for the year ended December 31, 2020 were:

 

           Total Oil   Property, 
   Unproved   Proved   and Gas   Plant and 
   Properties   Properties   Properties   Equipment 
Balance at January 1, 2020  $3,870,070   $104,279,959   $108,150,029   $275,882 
Impairment   424,675    -    424,675    - 
Transfer to proved   (3,870,070)   3,870,070    -    - 
Depreciation, depletion and                    
  amortization   -    80,103,495    80,103,495    60,325 
                     
Balance at December 31, 2020   424,675    188,253,524    188,678,199    336,207 
                     
Net Assets at December 31, 2020  $9,136,761   $450,150,493   $459,287,254   $1,297,062 

 

For the six months ended June 30, 2021 and 2020, $20,933,357 and $29,019,740, respectively of depletion expense was incurred. For the six months ended June 30, 2021 and 2020, $30,137 and $30,163, respectively of depreciation expense was incurred.

 

16 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

3.ASSET RETIREMENT OBLIGATIONS

 

 

The change in asset retirement obligations for the six months ended June 30, was as follows:

 

   2021   2020 
January 1,  $7,039,313   $6,632,125 
Additions   5,759    - 
Accretion   170,005    164,105 
Deletions   -    - 
At June 30,  $7,215,077   $6,796,230 

 

4.ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following as of:

 

   June 30,
2021
   December 31,
2020
 
Revenue receivable  $28,864,250   $18,392,374 
Joint interest receivables   5,440,694    5,968,571 
Accrued revenue   2,143,150    1,912,780 
Total accounts receivable  $36,448,094   $26,273,725 

 

5.GENERAL AND ADMINISTRATIVE

 

General and administrative expenses consisted of the following for the six months ended June 30:

 

   2021   2020 
Staff costs  $1,996,240   $1,822,531 
Professional fees   591,154    589,016 
Insurance   806    3,792 
Communications   16,485    12,276 
Occupancy   272,134    193,354 
Travel and entertainment   34,425    40,124 
Other   237,344    516,711 
Total general and administrative  $3,148,588   $3,177,804 

 

 

17 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

6.DERIVATIVE FINANCIAL INSTRUMENTS

 

Objectives and Strategies for Using Derivative Instruments

 

The Company is exposed to fluctuations in oil and natural gas prices received for its production. Consequently, the Company believes it is prudent to manage the variability in cash flows on a portion of its oil and natural gas production. The Company utilizes a mix of collars, swaps, put and call options and similar derivative financial instruments to manage fluctuations in cash flows resulting from changes in commodity prices. The Company does not use these instruments for speculative or trading purposes.

 

Counterparty Risk and Offsetting

 

The use of derivative instruments exposes the Company to the risk that a counterparty will be unable to meet its commitments. While the Company monitors counterparty creditworthiness on an ongoing basis, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk.

 

Should one of these counterparties not perform, the Company may not realize the benefit of some of its derivative instruments under lower commodity prices while continuing to be obligated under higher commodity price contracts subject to any right of offset under the agreements. Counterparty credit risk is considered when determining the fair value of a derivative instrument; see Note 1 for additional information regarding fair value.

 

The Company executes commodity derivative contracts under master agreements with netting provisions that provide for offsetting assets against liabilities. In general, if a party to a derivative transaction incurs an event of default, as defined in the applicable agreement, the other party will have the right to demand the posting of collateral, demand a cash payment transfer or terminate the arrangement.

 

Financial Statement Presentation and Settlements

 

Settlements of the Company’s derivative instruments are based on the difference between the contract price or prices specified in the derivative instrument and a benchmark price, such as the NYMEX price. To determine the fair value of the Company’s derivative instruments, the Company utilizes present value methods that include assumptions about commodity prices based on those observed in underlying markets. See Note 1 for additional information regarding fair value.

 

Derivatives Not Designated as Hedging Instruments

 

The Company records its derivative contracts at fair value in the combined balance sheets and records changes in fair value as a gain or loss on derivative contracts in the combined statements of operations. Cash settlements are also recorded as a gain or loss on derivative contracts in the combined statements of operations.

 

18 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

6.DERIVATIVE FINANCIAL INSTRUMENTS (continued)

 

The Company entered into swaps, basis swaps and collar contracts to reduce its exposure to price risk in the spot market for oil and natural gas. A collar is a combination of two options: a sold call and a purchased put. The sold call establishes the maximum price that the Company will receive for the contracted commodity volumes. The purchased put establishes the minimum price that the Company will receive for the contracted volumes. The contracts settle monthly and are scheduled to coincide with production equivalent to barrels (Bbl) per month. Cash settlement occurs monthly. No derivative contracts have been entered into for trading purpose. None of the Company’s derivative contracts have been designated as fair value or cash flow hedges; accordingly mark-to-market accounting is used to recognize changes in the fair value of derivative contracts in the combined statements of operations at each reporting date.

 

At June 30, 2021, the Company had the following open derivative assets (liabilities):

 

   Fair Value   Strike   Volume   Expire 
Current Liability Fair Value                    
Natural Gas Collar:  $(88,636)        261,169 mmbtu    Mar 2022 
  Ceiling sold price (call)       $3.34           
  Floor purchase price (put)        2.90           
Crude Oil Collar:  $(5,281,426)        207,439 bbls     Dec 2021 
  Ceiling sold price (call)       $45.20           
  Floor purchase price (put)        40.00           
Crude Oil Collar:   (3,266,112)        143,889 bbls     June 2022 
  Ceiling sold price (call)        45.50           
  Floor purchase price (put)        40.00           
Crude Oil Swap   (1,376,227)   42.27    47,412 bbls    Sept 2021 
Crude Oil Swap   (7,944,172)   43.60    299,549 bbls    Mar 2022 
Crude Oil Swap   (9,919,596)   49.50    498,371 bbls    June 2022 
Crude Oil Swap   (977,655)   41.23    36,798 bbls    June 2022 
Crude Oil Basis Swap   (99,368)   0.18    299,549 bbls    Mar 2022 
Crude Oil Basis Swap   (61,079)   0.05    164,059 bbls    Dec 2021 
Natural Gas Swap   (214,406)   2.58    239,222 mmbtu    Oct 2021 
Natural Gas Basis Swap   (5,924)   (0.28)   153,490 mmbtu    Mar 2022 
Natural Gas Basis Swap   (451,165)   (1.16)   506,000 mmbtu    Dec 2021 
                     
Total Current Liability Fair Value  $(29,685,766)               
                     
Net Current Derivative Fair Value  $(29,685,766)               

 

19 

 

  

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

6.DERIVATIVE FINANCIAL INSTRUMENTS (continued)

  

   Fair Value   Strike   Volume   Expire 
Non-Current Liability Fair Value                    
Crude Oil Collar:  $(368,565)        20,538 bbls     Sept 2022 
  Ceiling sold price (call)        47.50           
  Floor purchase price (put)        40.00           
Crude Oil Collar:   (278,960)        19,441 bbls     Dec 2022 
  Ceiling sold price (call)        50.20           
  Floor purchase price (put)        45.00           
Crude Oil Basis Swap   (108,189)   0.40    809,829 bbls    Dec 2022 
                     
Total Non-Current Liability Fair Value  $(755,714)               
                     
Net Non-Current Derivative Fair Value  $(755,714)               

 

The fair values of these financial instruments at June 30, 2021 were a loss of $30,441,480 and were included in derivative liabilities on the combined balance sheets.

 

7.SHORT TERM BORROWINGS

 

In October 2020, the Company entered into a note payable for $298,754 with a premium finance company to finance its annual insurance premiums. The note matures in August 2021 and is non-interest bearing. The balance as of June 30, 2021 was $50,647. Imputing interest expense on the short-term borrowings is immaterial for the year ended June 30, 2021.

 

In October 2019, the Company entered into a note payable for $351,732 with a premium finance company to finance its annual insurance premiums. The note matured in August 2020 and was non-interest bearing. The balance as of December 31, 2020 was $203,040. Imputing interest expense on the short-term borrowings is immaterial for the year ended December 31, 2020.

 

8.LONG-TERM DEBT

 

The Company’s long-term debt consisted of the following as of:

 

   June 30,
2021
      December 31,
2020
 
Line of credit  $147,000,000   $147,000,000 
Unamortized deferred financing costs    (285,436)   (450,057)
           
Total carrying value of long-term debt  $146,714,564   $146,549,943 

  

20 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

8.LONG-TERM DEBT (continued)

  

The Company entered into a reserve based lending facility with certain financial institutions with aggregate commitments from the lenders totalling $150 million; collateralized by oil and gas properties located in the Howard County, Texas area. The interest rate is variable at LIBOR plus the applicable margin in effect, 4.25% at June 30, 2021. Interest is due monthly and principal is due at maturity, February 2022. The Company is subject to certain restrictive covenants, of which these include a current ratio and funded debt ratio. As of June 30, 2021, the Company is in compliance with all such covenants.

 

9.RELATED PARTY TRANSACTIONS

 

Accounts Payable

 

Sabalo Operating, LLC provides operation services which include recordkeeping, management and accounting services for MB Minerals, LP, a related party due to common control. MB Minerals does not have a bank account so all funds earned are held by Sabalo Operating, LLC. The amounts due to MB Minerals, LP as of June 30, 2021 and December 31, 2020 were $31,751,506 and $26,106,929, respectively.

 

10.MEMBERS’ EQUITY

 

Sabalo Energy, LLC (“Energy”) and Sabalo Operating, LLC (“Operating”) are effectively owned 100% by Sabalo Holdings, LLC (“Holdings”). Holdings has provided $40 million and $255 million in funding to Operating and Energy, respectively. No contributions or distributions were received by or made to Holdings for the six months ended June 30, 2021 and 2020.

 

11.COMMITMENTS AND CONTINGENCIES

 

Litigation – From time-to-time, the Company is subject to various legal proceedings arising in the ordinary course of business, including proceedings for which the Company may not have insurance coverage. While many of these matters involve inherent uncertainty, as of the report date, the Company does not currently have any claims or proceedings.

 

Drilling Rig Contract – The Company enters into drilling rig contracts to ensure availability of desired rigs to facilitate drilling plans. The Company has a short term operating lease for five wells which contains an early termination clause that requires the Company to potentially pay penalties to the third party should the Company cease drilling efforts. These penalties would negatively impact the Company’s financial statements upon early contract termination. The contract runs for approximately six months and can be extended if desired.

 

21 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

11.COMMITMENTS AND CONTINGENCIES (continued)

  

Firm Sale and Transportation Commitments – The Company has committed to deliver, for sale or transportation, volumes of product under certain contractual arrangements that specify the delivery of substantially 100% of the production under a seven year acreage dedication effective October 5, 2017.

 

Federal and State Regulations – Oil and natural gas exploration, production and related operations are subject to extensive federal and state laws, rules and regulations. Failure to comply with these laws, rules and regulations can result in substantial penalties. The regulatory burden on the oil and natural gas industry increases the cost of doing business and affects profitability. The Company believes that it is in compliance with currently applicable federal and state regulations related to oil and natural gas exploration and production, and that compliance with the current regulations will not have a material adverse impact on the financial position or results of operations of the Company. These rules and regulations are frequently amended or reinterpreted; therefore, the Company is unable to predict the future cost or impact of complying with these regulations.

 

Environmental – The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, among other things, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed in the period incurred. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment 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 materially significant liabilities of this nature existed as of June 30, 2021.

 

As of June 30, 2021, the Company had no accrued commitments.

 

12.OPERATING LEASES

 

The Company had one lease related to its office space in Corpus Christi, Texas, which expires in 2022. During the six months ended June 30, 2021 and 2020, the Company incurred $175,379 and $179,025, respectively of rent expense related to this lease.

 

Minimum future lease payments on non-cancellable operating leases are as follows:

 

Year ending June 30,     
 2022   $172,084 
 2023   $43,021 

 

22 

 

  

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

13.    EMPLOYEE BENEFIT PLAN

    

The Company provides post-retirement benefits to employees in the form of a 401(k) retirement plan. As of June 30, 2021, the Company offered a matching contribution equal to 100% of salary deferrals that do not exceed 3% of a participant’s compensation plus 50% of salary deferrals between 3% and 5%. The Company’s contributions to the plan for the six months ended June 30, 2021 and 2020 were $44,523 and $45,039, respectively.

 

14.  SALE OF OIL AND GAS PROPERTY

           

In August 2019, the Company sold a large portion of their salt water disposal facilities located in Howard County, Texas. Costs associated with the properties sold were $29,549,047. The proceeds from the sale of these properties was $51,829,446. The sale resulted in a gain of $22,280,399. The Company now purchases their salt water disposal services from the new buyer. No revenue was generated by the salt water disposal facilities in the six months ended June 30, 2021 or 2020.

 

As part of the sales contract, the Company will receive contingency payments if they are able to gather specific amounts of water as follows for the twelve months ending June 30:

 

2022      Cumulative water gathered is greater than 65 million barrels      $      3,500,000

 

15.DRILLING DEVELOPMENT AGREEMENT

 

On November 21, 2017, the Company entered into a Farmout and Development Agreement with Shad Permian, LLC (“Shad”). Based on the agreement, Shad agreed to fund 75% of the required capital expenditures the Company incurred on the participating wells in exchange for 55% of the net revenue for a specific period of time. Shad’s total commitment was approximately $228.8 million from inception to June 30, 2021. Shad participates in 27 wells operated by the Company and 29 wells operated by others owned by the Company in Howard County, Texas. All wells are developed and producing as of December 31, 2018. The Company maintains a drill company statement for Shad’s share of capital expenditures and net revenue on the participating wells.

 

The amount owed to the Company from Shad included in accounts receivable totaled $756,464 and $2,362,860 as of June 30, 2021 and December 31, 2020, respectively. The amount owed by the Company to Shad included in revenues payable totaled $2,835,579 and $2,545,478 as of June 30, 2021 and December 31, 2020, respectively.

 

23 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

16.COVID-19 RISKS AND UNCERTAINTIES

  

On January 31, 2020, the Secretary of Health and Human Services declared a public health emergency in response to the spread of coronavirus disease 2019 (“COVID-19”). The COVID-19 pandemic and subsequent global recession are having significant effects on global markets, supply chains, businesses, and communities. Going forward, there may be additional negative impacts, including but not limited to losses of revenue, costs for emergency preparedness, or potential shortage of personnel. Management believes the Company is taking appropriate actions to mitigate the negative impacts of the COVID-19 pandemic. However, the full impact of COVID-19 is unknown.

 

17. SUBSEQUENT EVENTS

 

Effective July 1, 2021, Laredo Petroleum, Inc. purchased all oil and gas properties owned by Sabalo Energy, LLC and Sabalo Operating, LLC located in Howard County for a profit.

 

The Company has performed a review of subsequent events through October 18, 2021, which is the date the combined financial statements were available for issuance, and concludes there were no other events or transactions occurring during this period that required recognition or disclosure in the financial statements except above. Any events occurring after this date have not been factored into the combined financial statements being presented.

 

18.   RECENTLY ISSUED AUTHORITATIVE GUIDANCE

 

ASU 2016-02, “Leases (Topic 842).” In February 2016, the FASB amended existing guidance that requires lessees recognize the following for all leases (with the exception of short term leases) at the commencement date (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary: lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact this change will have on the Company’s combined financial statements. Management believes it will have little impact on operating results but will create additional assets and debt obligations, primarily related to leased premises and equipment treated as operating leases under current GAAP.

 

24 

 

 

SABALO ENERGY, LLC AND SABALO OPERATING, LLC

 

NOTES TO THE COMBINED FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

 

18.  RECENTLY ISSUED AUTHORITATIVE GUIDANCE (continued)

 

ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. In August 2017, the FASB provided guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments also simplify the application of the hedge accounting guidance. The amendments in this Update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments will be effective for annual periods beginning after December 15, 2020 and are not expected to have a significant impact on the Company’s combined financial statements.

 

25 

 

 

Exhibit 99.2

 

 

Shad Permian, LLC

 

Reviewed Financial Statements

 

June 30, 2021 and 2020

 

Tranbarger FHK, pllc

CERTIFIED PUBLIC ACCOUNTANTS

 

 

 

 

 

 

TABLE OF CONTENTS

 

Independent Accountant’s Review Report  1 
     
Balance Sheets  2 
     
Statements of Operations  3 
     
Statements of Members’ Equity  4 
     
Statements of Cash Flows  5 
     
Notes to the Financial Statements  6 

 

 

 

 

Tranbarger FHK, pllc

CERTIFIED PUBLIC ACCOUNTANTS

9501 Console Drive, Suite 200, San Antonio, TX 78229       (210) 614-2284

 

 

Independent Accountant’s Review Report

 

To the Members

Shad Permian, LLC

Houston, Texas

 

We have reviewed the accompanying financial statements of Shad Permian, LLC (the “Company”), which comprise the balance sheets as of June 30, 2021 and December 31, 2020, and the related statements of operations, members’ equity, and cash flows for the six months then ended June 30, 2021 and 2020, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of Company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion.

 

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.

 

Accountant’s Responsibility

 

Our responsibility is to conduct the review engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. We believe that the results of our procedures provide a reasonable basis for our conclusion.

 

Accountant’s Conclusion

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Tranbarger FHK, PLLC

San Antonio, Texas

 

October 18, 2021

 

 

 

 

 

SHAD PERMIAN, LLC
 
BALANCE SHEETS
 
June 30, 2021 and December 31, 2020

 

   June 30, 2021   December 31,
2020
 
ASSETS          
Current assets          
Accounts receivable - Sabalo Energy, LLC  $2,835,579   $2,545,478 
Inventory   173,787    123,795 
    3,009,366    2,669,273 
Non-current assets          
Oil and gas properties – successful efforts method, net   72,358,665    77,344,651 
           
Total Assets  $75,368,031   $80,013,924 
           
LIABILITIES AND MEMBERS' EQUITY          
Current liabilities          
Accounts payable - Sabalo Energy, LLC  $756,464   $2,362,860 
    756,464    2,362,860 
Non-current liabilities          
Asset retirement obligation   146,661    142,886 
Total liabilities   903,125    2,505,746 
           
Members' equity   74,464,906    77,508,178 
           
Total Liabilities and Members' Equity  $75,368,031   $80,013,924 

 

See notes to the financial statements.

 

2

 

 

SHAD PERMIAN, LLC
 
STATEMENTS OF OPERATIONS

 

Six Months Ended June 30,  2021   2020 
REVENUES          
Oil revenue   14,021,720   $12,145,407 
Gas revenue   369,910    (66,244)
Natural gas liquids revenue   691,188    312,344 
Total revenues, net   15,082,818    12,391,507 
           
OPERATING EXPENSES          
Production taxes   733,375    609,230 
Lease operating expenses   3,805,912    5,282,557 
Depreciation, depletion and amortization   4,989,188    7,384,529 
Impairment of oil and gas properties   -    - 
Accretion of asset retirement obligation   3,775    3,669 
Selling, general and administrative   -    - 
Total operating expenses   9,532,250    13,279,985 
           
INCOME (LOSS) BEFORE INCOME TAXES   5,550,568    (888,478)
           
STATE INCOME TAX EXPENSE   87,457    - 
           
NET INCOME (LOSS)  $5,463,111   $(888,478)

 

See notes to the financial statements.

 

3

 

 

 

SHAD PERMIAN, LLC    
     
STATEMENTS OF MEMBERS' EQUITY    
     
Six Months Ended June 30, 2021 and 2020    
     
   Total Members'
Equity
 
Balance at January 1, 2021  $77,508,178 
      
  Capital contributions   5,469,445 
      
  Member distributions   (13,975,828)
      
  Income from the period   5,463,111 
      
Balance at June 30, 2021  $74,464,906 
      
Balance at January 1, 2020  $97,530,959 
      
  Capital contributions   5,576,683 
      
  Member distributions   (13,840,669)
      
  Loss from the period   (888,478)
      
Balance at June 30, 2020  $88,378,495 

 

See notes to the financial statements.

 

 4 

 

 

SHAD PERMIAN, LLC        
         
STATEMENTS OF CASH FLOWS        
         
Six Months Ended June 30,  2021   2020 
OPERATING ACTIVITIES          
  Net income (loss)  $5,463,111   $(888,478)
  Adjustments to reconcile net income (loss) to net cash provided by operating activities          
Depreciation, depletion and amortization   4,989,188    7,384,529 
Accretion of asset retirement obligation   3,775    3,669 
Changes in:          
  Receivables   (290,101)   2,058,391 
  Inventory   (49,992)   76,469 
  Accounts payable and accrued expenses   (1,606,396)   582,420 
Net cash provided by operating activities   8,509,585    9,217,000 
           
INVESTING ACTIVITIES          
  Capital expenditures on oil and gas properties   (3,202)   (953,014)
Net cash used by investing activities   (3,202)   (953,014)
           
FINANCING ACTIVITIES          
  Contributions by members   5,469,445    5,576,683 
  Distributions to members   (13,975,828)   (13,840,669)
Net cash used by financing activities   (8,506,383)   (8,263,986)
           
Net change in cash and cash equivalents   -    - 
           
Cash and cash equivalents at beginning of year   -    - 
           
Cash and cash equivalents at the end of the year  $-   $- 
           
Supplementary disclosures:          
Interest paid   -    - 
Taxes paid   87,457    - 

 

See notes to the financial statements.

 

 5 

 

 

 

SHAD PERMIAN, LLC

 

NOTES TO THE FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

Shad Permian, LLC (the “Company”) was formed in 2017 solely to enter into a Farmout and Development Agreement with Sabalo Energy, LLC and affiliates (“Sabalo”) to become a non-operating partner in the drilling of 27 wells operated by Sabalo and 29 wells operated by others owned by Sabalo in Howard County, Texas. Based on the agreement, the Company agreed to fund 75% of the required capital expenditures Sabalo incurred on the participating wells in exchange for 55% of the net revenue for a specific period of time. All wells are developed and producing as of December 31, 2018. Sabalo Energy, LLC or their affiliates maintain a drill company statement for the Company’s share of capital expenditures and net revenue on the participating wells.

 

Basis of Preparation

 

These financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as codified by the Financial Accounting Standards Board (“FASB”) in its Accounting Standards Codification (“ASC”). The accounting policies set out below have been applied in preparing the financial statements.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of the financial statements.

 

Additionally, significant estimates include volumes of oil and natural gas reserves used in calculating depreciation and depletion of oil and gas properties, future net revenues, abandonment obligations, impairment of unproved evaluated properties, the collectability of outstanding accounts receivable, and contingencies. Oil and natural gas reserve estimates, which are the basis for unit-of-production depreciation and depletion, have numerous inherent uncertainties. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgement. Subsequent drilling results, testing, and production may justify revision of such estimates. Accordingly, reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered.

 

6 

 

 

SHAD PERMIAN, LLC

 

NOTES TO THE FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

In addition, reserve estimates are sensitive to changes in wellhead prices of crude oil and natural gas. Such prices have been volatile in the past and can be expected to be volatile in the future. The Company’s reserve estimates were determined by an independent petroleum engineering firm. The significant estimates are based on current assumptions that may be materially affected by changes to future economic conditions, such as the market prices received for sales of oil and natural gas. Changes in these assumptions may materially affect these significant estimates in the near term.

 

Oil and Gas Properties

 

The carrying value of the Company’s oil and gas properties represents the cost to acquire or develop the asset, including any asset retirement obligations and capitalized interest, net of accumulated depreciation, depletion and amortization (“DD&A”) and any impairment charges. For assets acquired, the cost of oil and gas properties are based on fair values at the acquisition date. Asset retirement obligations and interest costs incurred in connection with qualifying capital expenditures are capitalized and amortized over the lives of the related assets.

 

The Company uses the successful efforts method to account for its oil and gas properties. Under this method, the Company capitalizes costs of acquiring properties, costs of drilling successful exploration wells and development costs. The costs of exploratory wells are initially capitalized pending a determination of whether proved reserves have been found. If proved reserves have been found, the costs of exploratory wells remain capitalized. Otherwise, the Company charges the costs of the related wells to expense. In some cases, a determination of proved reserves cannot be made at the completion of drilling, requiring additional testing and evaluation of the wells. The Company generally expenses the costs of such exploratory wells if a determination of proved reserves has not been made within a 12-month period after drilling is complete.

 

The Company determines depreciation and depletion of oil and gas properties by the unit-of-production method. It amortizes acquisition costs over total proved reserves, and capitalized development and successful exploration costs over proved developed reserves. Proved oil and gas reserves are those quantities of oil and gas which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, for known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The Company does not have any proved oil and gas reserves for which the determination of economic productivity is subject to the completion of major additional capital expenditure as of June 30, 2021.

 

7 

 

 

SHAD PERMIAN, LLC

 

NOTES TO THE FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The Company performs impairment tests with respect to its proved properties whenever events or circumstances indicate that the carrying value of property may not be recoverable. If there is an indication the carrying amount of the asset may not be recovered due to declines in current and forward prices, significant changes in reserve estimates, changes in management’s plans, or other significant events, management will evaluate the property for impairment. Under the successful efforts method, if the sum of the undiscounted cash flows is less than the carrying value of the proved property, the carrying value is reduced to estimated fair value and reported as an impairment charge in the period. Individually proved properties are grouped for impairment purposes at the lowest level for which there are identifiable cash flows, which is generally on a field by field basis. The impairment test incorporates a number of assumptions involving expectations of future cash flows which can change significantly over time. These assumptions include estimates of future product prices, contractual prices, estimates of risk-adjusted proved oil and gas reserves and estimates of future operating and development costs. The Company recorded no impairments during the six months ended June 30, 2021 and 2020.

 

The Company has no oil and gas properties attributable to unproved properties.

 

Accounts Receivable

 

Accounts receivable are stated net of a provision for amounts estimated to be uncollectible. Accounts receivable primarily consist of the Company’s share of accrued revenues from oil and gas sales and amounts due from other working interest owners. The Company routinely assesses the recoverability of all material receivables to determine their collectability. The Company creates a provision against a receivable when, based on the judgment of management, it is likely that a receivable will not be collected and the amount of such provision may be reasonably estimated. No allowance for doubtful accounts was necessary as of June 30, 2021 and December 31, 2020.

 

Accounts Payable and Accruals

 

Liabilities are recognized for amounts to be paid in the future for goods and services received, whether billed by the supplier or not.

 

Asset Retirement Obligations

 

The initial estimated asset retirement obligation related to property, plant and equipment is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property, plant and equipment. If the fair value of the recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement cost. Revisions in estimated liabilities can result from changes in estimated inflation rates, changes in service and equipment costs and changes in the estimated timing of an asset’s retirement. Asset retirement costs are depreciated using a systematic and rational method similar to that used for the associated property and equipment. Accretion of the liability is recognized over the estimated productive life of the related assets.

 

8 

 

 

SHAD PERMIAN, LLC

 

NOTES TO THE FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Revenue Recognition

 

Under Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, (“ASC 606”), oil, natural gas and natural gas liquid (“NGL”) sales revenues are recognized when control of the product is transferred to the customer, the performance obligations under the terms of the contracts with customers are satisfied and collectability is reasonably assured. All of the Company’s oil, natural gas and NGL sales are made under contracts with customers. The performance obligations for the Company’s contracts with customers are satisfied at a point in time through the delivery of oil and natural gas to its customers.

 

The Company typically receives payment for oil, natural gas and NGL sales within 30 days of the month of delivery. The Company’s contracts for oil, natural gas and NGL sales are standard industry contracts that include variable consideration based on the monthly index price and adjustments that may include counterparty-specific provisions related to volumes, price differentials, discounts and other adjustments and deductions.

 

The Company’s product types are as follows:

 

Oil Revenue – Under the Company’s oil sales contracts operated by Sabalo, the Company generally sells oil to the purchaser at or near the wellhead, and collects a contractually agreed upon index price, net of pricing and gathering and transportation differentials. The Company transfers control of the product to the purchaser at or near the wellhead and recognizes revenue based on the net price received.

 

Natural Gas and NGL Revenue – Under the Company’s natural gas sales contracts operated by Sabalo, the Company delivers and transfers control of natural gas to the purchaser at delivery points at or near the wellhead. The purchaser gathers and processes the natural gas and sells the resulting residue gas and NGLs. The Company receives its contractual portion of the proceeds for the sale of the residue gas and NGLs at an agreed upon index price, net of pricing differentials and applicable selling expenses including gathering, processing and fractionation costs. The Company recognizes revenue at the net price when control transfers to the purchaser.

 

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligation, as allowed under ASC 606. Under the Company’s oil, natural gas and NGL sales contracts operated by Sabalo, each unit of product delivered to the customer represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

 

9 

 

 

SHAD PERMIAN, LLC

 

NOTES TO THE FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Contract BalancesUnder the Company’s product sales contracts operated by Sabalo, it has the right to invoice its customers once the performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company’s product sales contracts do not give rise to contract assets or liabilities under ASC 606.

 

Prior-period Performance ObligationsThe Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain natural gas and natural gas liquids sales may not be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. The Company records the differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. The Company has existing internal controls for its revenue estimation process and related accruals, and any identified differences between its revenue estimates and actual revenue received historically have not been significant.

 

Income Taxes

 

The Company has elected to be taxed as a general partnership for federal tax purposes, even though its legal form is a limited liability company. Under the partnership provisions of the Internal Revenue Code, the Company’s income, deductions, losses and credits flow directly to the partners. Therefore, these statements do not include any provisions for corporate income tax. The Company does pay franchise taxes, which are considered income taxes under the authoritative guidance. The Company’s current year and prior three years tax returns remain open for examination by the taxing authorities.

 

The Company has adopted the provisions of FASB Accounting Standards Codification 740, Income Taxes (“ASC 740”), effective January 1, 2009. ASC 740 provides guidance regarding the recognition, measurement, presentation and disclosure in the financial statements of tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction.

 

Concentration of Credit Risk

 

The Company’s financial condition, results of operations, and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond its control. These factors include the level of global demand for petroleum products, foreign supply of oil and gas, the establishment of and compliance with production quotas by oil-exporting countries, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic.

 

10 

 

 

SHAD PERMIAN, LLC

 

NOTES TO THE FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The Company cannot predict future oil and gas prices with any degree of certainty. Sustained weakness in oil and gas prices may adversely affect its financial condition and results of operations, and may also reduce the amount of net oil and gas reserves that the Company can produce economically. Similarly, any improvement in oil and gas prices can have a favorable impact on the Company’s financial condition, results of operations and capital resources.

 

The Company’s customer concentration may impact the Company’s overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions affecting the oil and gas industry. The Company, through Sabalo, manages credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

 

In the exploration, development and production business, production is normally sold to relatively few customers. Substantially all of Sabalo’s customers are concentrated in the oil and gas industry and revenue can be materially affected by current economic conditions, the price of certain commodities such as crude oil and natural gas and the availability of alternate purchasers. Sabalo believes that the loss of any of its major purchasers would not have a long-term material adverse effect on the Company’s operations.

 

2.OIL AND GAS PROPERTIES

 

Gross balances of oil and gas properties were as follows:

 

           Total Oil 
   Unproved   Proved   and Gas 
   Properties   Properties   Properties 
Gross balance at June 30, 2021  $-   $180,443,633   $180,443,633 
                
Gross balance at December 31, 2020  $-   $180,440,431   $180,440,431 

 

For the six months ended June 30, 2021 and 2020, $3,202 and $953,014, respectively was added to the proved properties via capital expenditure. For the six months ended June 30, 2021 and 2020, $4,989,188 and $7,384,529, respectively, of depletion expense was incurred.

 

11 

 

 

 

SHAD PERMIAN, LLC

 

NOTES TO THE FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

2.OIL AND GAS PROPERTIES (continued)

 

Changes in accumulated depreciation, depletion and amortization for the period ended June 30, 2021 were as follows:

 

           Total Oil 
   Unproved   Proved   and Gas 
   Properties   Properties   Properties 
Balance at December 31, 2020  $-   $103,095,780   $103,095,780 
               
Depreciation, depletion and amortization   -    4,989,188    4,989,188 
                
Balance at June 30, 2021   -    108,084,968    108,084,968 
                
Net Assets at June 30, 2021  $-   $72,358,665   $72,358,665 

 

Changes in accumulated depreciation, depletion and amortization for the year ended December 31, 2020 were as follows:

 

           Total Oil 
   Unproved   Proved   and Gas 
   Properties   Properties   Properties 
Balance at January 1, 2020  $-   $83,099,318   $83,099,318 
               
Depreciation, depletion and amortization   -    19,996,462    19,996,462 
                
Balance at December 31, 2020   -    103,095,780    103,095,780 
                
Net Assets at December 31, 2020  $-   $77,344,651   $77,344,651 

 

3.ASSET RETIREMENT OBLIGATIONS

 

The change in asset retirement obligations for the six months ended June 30, was as follows:

 

   2021   2020 
January 1,  $142,886   $135,548 
           
Additions   -    - 
           
Accretion   3,775    3,669 
           
At June 30,  $146,661   $139,217 

 

12

 

 

SHAD PERMIAN, LLC

 

NOTES TO THE FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

4.ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following as of:

 

   June 30,   December 31, 
   2021   2020 
Revenue receivable from Sabalo customers  $2,652,686   $2,372,667 
Accrued revenue from Sabalo customers   182,893    172,811 
           
Total accounts receivable from Sabalo  $2,835,579   $2,545,478 

 

5.INVENTORY

 

Inventories are carried at the lower of cost or market and consisted of the following at:

 

   June 30,   December 31, 
   2021   2020 
Crude oil held-for-sale  $173,787   $123,795 

 

6.MEMBERS’ EQUITY

 

Shad Permian, LLC is funded by Benefit Street Partners, LLC (“BSP”) in order to provide funding for their cash requirements to Sabalo in accordance with the Farmout and Development Agreement. BSP has contributed approximately $230.7 million in cash for their portion of the capital expenditures and lease operating costs incurred from inception to June 30, 2021. Benefit Street Partners, LLC has been paid by Shad Permian, LLC as of June 30, 2021 approximately $146.2 million in revenue, net of taxes from inception to June 30, 2021. The total contributions received from BSP for the six months ended June 30, 2021 and 2020 were $5,469,445 and $5,576,683, respectively. The total distributions made to BSP for the six months ended June 30, 2021 and 2020 were $13,975,828 and $13,840,669, respectively.

 

7.COMMITMENTS AND CONTINGENCIES

 

Legal – The Company regularly reviews current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of matters. In the opinion of management, as of June 30, 2021, there were no threatened or pending legal matters that would have a material impact on the Company’s financial statements.

 

13

 

 

SHAD PERMIAN, LLC

 

NOTES TO THE FINANCIAL STATEMENTS

 

June 30, 2021 and December 31, 2020

 

7.COMMITMENTS AND CONTINGENCIES (continued)

 

Environmental – The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, among other things, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed in the period incurred. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment 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 materially significant liabilities of this nature existed as of June 30, 2021 or December 31, 2020.

 

As of June 30, 2021, the Company had no accrued commitments.

 

8.COVID-19 RISKS AND UNCERTAINTIES

 

On January 31, 2020, the Secretary of Health and Human Services declared a public health emergency in response to the spread of coronavirus disease 2019 (“COVID-19”). The COVID-19 pandemic and subsequent global recession are having significant effects on global markets, supply chains, businesses, and communities. Going forward, there may be additional negative impacts, including but not limited to losses of revenue or additional costs incurred. Management believes the Company is taking appropriate actions to mitigate the negative impacts of the COVID-19 pandemic. However, the full impact of COVID-19 is unknown.

 

9.SUBSEQUENT EVENTS

 

Effective July 1, 2021, Laredo Petroleum, Inc. purchased all oil and gas properties owned by Sabalo Energy, LLC in Howard County including the ownership interest owned by Shad Permian, LLC for a profit.

 

The Company has performed a review of subsequent events through October 18, 2021, which is the date the financial statements were available for issuance, and concludes there were no other events or transactions occurring during this period that required recognition or disclosure in the financial statements except as disclosed above. Any events occurring after this date have not been factored into the financial statements being presented.

 

14

 

 

Exhibit 99.3

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

The following unaudited pro forma condensed combined financial information is derived from the historical consolidated financial statements of Laredo Petroleum, Inc. (“Laredo” or the “Company”), Sabalo Energy, LLC (“Sabalo Energy”), Sabalo Operating, LLC (“Sabalo Operating” and together with Sabalo Energy, “Sabalo”) and Shad Permian, LLC (“Shad”) and has been adjusted to reflect the following:

 

  Laredo’s acquisition of substantially all of Sabalo’s key operating assets consisting of wellbore interests (the “Sabalo Acquisition”) for aggregate consideration of approximately $755.4 million, based on the closing price of a share of the Company’s common stock on July 1, 2021 (the acquisition close date), consisting of (i) $542.3 million of cash, net of closing adjustments, (the “Sabalo Adjusted Cash Purchase Price”) and (ii) 2,225,930 unregistered shares of the Company’s common stock (the “Sabalo Equity Consideration”).

 

  Laredo’s acquisition of substantially all of Shad’s key operating assets consisting of wellbore interests (the “Shad Acquisition” and, together with the Sabalo Acquisition, the “Acquisitions”) for aggregate consideration of approximately $90.8 million, based on the closing price of a share of the Company’s common stock on July 1, 2021 (the acquisition close date), consisting of (i) $63.9 million of cash, net of closing adjustments, (the “Shad Adjusted Cash Purchase Price”) and (ii) 281,034 unregistered shares of the Company’s common stock (the “Shad Equity Consideration”).
     
  Laredo’s sale of 37.5% of its working interest in certain oil and gas properties in Glasscock and Reagan Counties, Texas, to an unrelated third party for aggregate gross proceeds of $405.0 million plus potential cash-flow based earn-out payments over six years (the “Disposition”). The Disposition is effective at closing which occurred on July 1, 2021. Proceeds from the Disposition were used to fund the Acquisitions and related transaction costs.
     
 

Borrowings of approximately $220.0 million under Laredo’s Senior Secured Credit Facility which were used to fund the Acquisitions and related transaction costs (the “Borrowing”). The Borrowing is reflected in the Laredo historical balance sheet as of June 30, 2021.

 

Certain of Sabalo’s and Shad’s historical amounts have been reclassified to conform to the financial statement presentation of Laredo. Additionally, adjustments have been made to Sabalo’s and Shad’s historical financial information to remove certain assets and liabilities retained by Sabalo and Shad, respectively. The unaudited pro forma condensed combined balance sheet as of June 30, 2021 gives effect to the Acquisitions, Disposition and Borrowing as if they had occurred on June 30, 2021. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2020 and the six months ended June 30, 2021 both give effect to the Acquisitions, Disposition and Borrowing as if they had occurred on January 1, 2020.

 

The unaudited pro forma condensed combined financial information is presented for illustrative purposes only to reflect the Acquisitions, Disposition and Borrowing and do not represent what Laredo’s results of operations or financial position would actually have been had the transactions occurred on the dates noted above, or project its results of operations or financial position for any future periods. The unaudited pro forma condensed combined financial information is intended to provide information about the continuing impact of the Acquisitions, Disposition and Borrowing as if they had been consummated earlier. In the opinion of management, all adjustments necessary to present fairly the unaudited pro forma condensed combined financial information have been made.

 

The following unaudited pro forma condensed combined financial information should be read in conjunction with Laredo’s consolidated financial statements and the related notes thereto, which are included in Laredo’s Annual Report on Form 10-K for the year ended December 31, 2020 and its Quarterly Report on Form 10-Q for the six months ended June 30, 2021, and Sabalo’s and Shad’s consolidated financial statements and the related notes thereto, which are included elsewhere in this filing.

 

 

 

 

Laredo Petroleum, Inc.

Pro Forma Condensed Combined Balance Sheet

As of June 30, 2021

(unaudited)

 

 Historical   Transaction Accounting Adjustments     
   Laredo - As
Reported
   Sabalo - As
Reported
   Shad - As
Reported
   Reclassification &
Elimination Adjustments
     Disposition   Acquisitions &
Borrowing
   Pro Forma Combined 
(in thousands)                                     
Current assets:                                     
Cash and cash equivalents  $193,543   $36,510   $-   $(36,510)(a)    $393,356(e)  $(606,126)(j)  $(37,496)
                               (18,269)(n)     
Accounts receivable, net   90,609    36,490    -    (36,490)(a)     -    -    90,609 
Accounts receivable - Sabalo Energy, LLC   -    -    2,836    (2,836)(a)     -    -    - 
Derivatives   -    -    -    -      2,062(h)   -    2,062 
Other current assets   18,665    1,762    173    (144)(a)     -    -    20,456 
                                      
Total current assets   302,817    74,762    3,009    (75,980)     395,418    (624,395)   75,631 
                                      
Property and equipment:                                     
Oil and natural gas properties, full cost method:                                     
Evaluated properties   8,053,975    -    -    881,292(b)     (2,498,268)(f)   296,081(j)   6,415,809 
                               (317,271)(k)     
Unevaluated properties not being depleted   62,248    -    -    9,308(b)     -    1,074(j)   72,205 
                               (425)(k)     
Less accumulated depletion and impairment   (6,889,399)   -    -    (317,697)(c)     2,149,809(f)   317,697(k)   (4,739,590)
                                      
Oil and natural gas properties, net   1,226,824    -    -    572,903      (348,459)   297,156    1,748,424 
Midstream service assets, net   109,681    -    -                     109,681 
Other fixed assets, net   31,548    -    -    1,272(d)     -    -    32,820 
                                      
Property and equipment, net   1,368,053    -    -    574,175      (348,459)   297,156    1,890,925 
Oil and gas properties - successful efforts method, net   -    500,544    72,359    (572,903)(b),(c)     -    -    - 
Property, plant and equipment, net   -    1,272    -    (1,272)(d)     -    -    - 
Operating lease right-of-use assets   19,231    -    -    -      -    -    19,231 
Derivatives   423    -    -    -      31,770(h)   -    32,193 
Other noncurrent assets, net   96,282    -    -    -      -    1,449(n)   97,731 
                                      
Total assets  $1,786,806   $576,578   $75,368   $(75,980)    $78,729   $(325,790)  $2,115,711 
                                      
Current liabilities:                                     
Accounts payable and accrued liabilities  $49,783   $40,829   $-   $(40,829)(a)    $-   $-   $49,783 
Accrued capital expenditures   32,641    -    -    -      -    -    32,641 
Accounts payable - Sabalo Energy, LLC   -    -    756    (756)(a)     -    -    - 
Undistributed revenue and royalties   46,285    20,824    -    (16,814)(a)     -    -    50,295 
Derivatives   256,460    29,686    -    (29,686)(a)     (31,689)(i)   -    224,771 
Operating lease liabilities   15,143    -    -    -      -    -    15,143 
Other current liabilities   89,363    987    -    (987)(a)     -    -    89,363 
                                      
Total current liabilities   489,675    92,326    756    (89,072)     (31,689)   -    461,996 
                                      
Long-term debt, net   1,306,112    146,715    -    (146,715)(a)     -         1,306,112 
Derivatives   61,514    756    -    (756)(a)     (18,537)(i)   -    42,977 
Asset retirement obligations   67,587    7,215    147    -      (14,753)(f)   (1,163)(j)   59,033 
Operating lease liabilities   6,573    -    -    -      -    -    6,573 
Other noncurrent liabilities   9,627    -    -    -      -    -    9,627 
Accounts payable - related party   -    31,751    -    (31,751)(a)     -    -    - 
                                      
Total liabilities   1,941,088    278,763    903    (268,294)     (64,979)   (1,163)   1,886,318 
                                      
Stockholders’ equity:                                     
Preferred Stock   -    -    -    -      -    -    - 
Common stock   136    -    -    -      -    25(l)   161 
Additional paid-in capital   2,473,709    -    -    -      -    239,942(l)   2,713,651 
Accumulated deficit   (2,628,127)   -    -    -      93,482(g)   -    (2,484,419)
                          50,226(i)   -      
Members' equity   -    297,815    74,465    192,314(a)     -    (564,594)(m)   - 
                                      
Total stockholders’ equity   (154,282)   297,815    74,465    192,314      143,708    (324,627)   229,393 
                                      
                                      
Total liabilities and equity  $1,786,806   $576,578   $75,368   $(75,980)    $78,729   $(325,790)  $2,115,711 

 

 

 

Laredo Petroleum, Inc.

Pro Forma Condensed Combined Statement of Operations

For the Six Months Ended June 30, 2021

(unaudited)

 

   Historical   Transaction Accounting Adjustments       
   Laredo - As
Reported
   Sabalo - As
Reported
   Shad - As
Reported
   Elimination
Adjustments
   Disposition   Acquisitions & Borrowing     Pro Forma
Combined
 
(in thousands)              (a)   (b)           
Revenues:                                     
Oil sales  $285,423   $84,606   $14,022   $-   $(62,786)  $-     $321,265 
NGL sales   85,172    3,841    691    -    (29,676)   -      60,028 
Natural gas sales   64,188    2,139    370    -    (22,681)   -      44,016 
Midstream service revenues   2,553    -    -    -    -    -      2,553 
Sales of purchased oil   107,265    -    -    -    -    -      107,265 
Total revenues   544,601    90,586    15,083    -    (115,143)   -      535,127 
                                      
Costs and expenses:                                     
Lease operating expenses   38,689    19,619    3,806    -    (11,098)   -      51,016 
Production and ad valorem taxes   28,020    4,314    733    -    (8,221)   -      24,846 
Transportation and marketing expenses   22,817    -    -    -    -    -      22,817 
Midstream service expenses   1,558    -    -    -    -    -      1,558 
Costs of purchased oil   114,653    -    -    -    -    -      114,653 
Organizational restructuring expenses   9,800    -    -    -    -    -      9,800 
General and administrative   34,174    3,149    -    -    -    -      37,323 
Transaction expense   1,741    -    -    -    (1,741)   -      - 
Depletion, depreciation and amortization   78,085    20,963    4,989    -    (17,081)   21,054  (c)   108,010 
Impairment expense   1,613    -    -    -    -    -      1,613 
Other operating expenses   2,301    170    4    -    (496)   (29 )(c)   1,950 
Total costs and expenses   333,451    48,215    9,532    -    (38,637)   21,025      373,586 
                                      
Operating income (loss)   211,150    42,371    5,551    -    (76,506)   (21,025 )   161,541 
                                      
Non-operating income (expense):                                     
Provision for uncollectible receivables   -    (28)   -    28    -    -      - 
Gain (loss) on derivatives, net   (371,307)   (40,821)   -    -    50,226    -      (361,902)
Interest expense   (51,816)   (3,463)   -    3,463    -    (3,145 )(d)   (54,961)
Loss on disposal of assets, net   (6)   -    -    -    -    -      (6)
Other income, net   1,795    785    -    (785)   -    -      1,795 
Total non-operating income (expense), net   (421,334)   (43,527)   -    2,706    50,226    (3,145 )   (415,074)
Income (loss) before income taxes   (210,184)   (1,156)   5,551    2,706    (26,280)   (24,170 )   (253,533)
                                      
Income tax benefit (expense):                                     
Current   -    (127)   (88)   -    -    -      (215)
Deferred   2,084    -    -    -    -    -      2,084 
Total income tax benefit   2,084    (127)   (88)   -    -    -      1,869 
Net income (loss)  $(208,100)  $(1,283)  $5,463   $2,706   $(26,280)  $(24,170 )  $(251,664)
                                      
Net income (loss) per common share:                                     
Basic  $(16.92)                             $(17.00)
Diluted  $(16.92)                             $(17.00)
                                      
Weighted average common shares outstanding:                                     
Basic   12,298                        2,507  (e)   14,805 
Diluted   12,298                        2,507  (e)   14,805 

 

 

 

 

Laredo Petroleum, Inc.

Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2020

(unaudited)

 

     Historical     Transaction Accounting Adjustments      
    Laredo - As
Reported
    Sabalo - As
Reported
    Shad - As
Reported
    Elimination
Adjustments
    Disposition     Acquisitions & Borrowing     Pro Forma
Combined
 
(in thousands)                     (a)     (b)              
Revenues:                                                        
Oil sales   $ 367,792     $ 110,063     $ 24,752     $ -     $ (119,060 )   $ -     $ 383,547  
NGL sales     78,246       2,177       644       -       (28,268 )     -       52,799  
Natural gas sales     50,317       1,013       90       -       (18,679 )     -       32,741  
Midstream service revenues     8,249       -       -       -       -       -       8,249  
Sales of purchased oil     172,588       -       -       -       -       -       172,588  
Total revenues     677,192       113,253       25,486       -       (166,007 )     -       649,924  
                                                         
Costs and expenses:                                                        
Lease operating expenses     82,020       40,110       11,261       -       (23,367 )     -       110,024  
Production and ad valorem taxes     33,050       5,393       1,231       -       (12,058 )     -       27,616  
Transportation and marketing expenses     49,927       -       -       -       -       -       49,927  
Midstream service expenses     3,762       -       -       -       -       -       3,762  
Costs of purchased oil     194,862       -       -       -       -       -       194,862  
General and administrative     50,534       5,367       -       -               -       55,901  
Organizational restructuring expenses     4,200       -       -       -       -       -       4,200  
Depletion, depreciation and amortization     217,101       80,164       19,997       -       (63,569 )     508  (c)     254,201  
Impairment expense     899,039       425       -       -       (280,771 )     (443,079 )(d)     175,614  
Other operating expenses     4,430       328       7       -       (957 )     (83 )(c)     3,725  
Total costs and expenses     1,538,925       131,787       32,496       -       (380,722 )     (442,654 )     879,832  
                                                         
Gain on sale of oil and natural gas properties     -       -       -       -       93,482       -       93,482  
Operating income (loss)     (861,733 )     (18,534 )     (7,010 )     -       308,197       442,654       (136,426 )
Non-operating income (expense):                                                        
Provision for uncollectible receivables     -       (11 )     -       11       -       -       -  
Gain on derivatives, net     80,114       20,932       -       -       -       -       101,046  
Interest expense     (105,009 )     (7,381 )     -       7,381       -       (6,325 )(e)     (111,334 )
Interest income     -       10       -       (10 )     -       -       -  
Gain on extinguishment of debt, net     8,989       -       -       -       -       -       8,989  
Loss on disposal of assets, net     (963 )     (4 )     -       4       -       -       (963 )
Write-off of debt issuance costs     (1,103 )     -       -       -       -       -       (1,103 )
Other income, net     1,586       (19 )     -       19       -       -       1,586  
Total non-operating income (expense), net     (16,386 )     13,527       -       7,405       -       (6,325 )     (1,779 )
Income (loss) before income taxes     (878,119 )     (5,007 )     (7,010 )     7,405       308,197       436,329       (138,205 )
Income tax benefit (expense):                                                        
Current     -       (2 )     (265 )     -       -       -       (267 )
Deferred     3,946       -       -       -       -       -       3,946  
Total income tax benefit (expense)     3,946       (2 )     (265 )     -       -       -       3,679  
Net income (loss)   $ (874,173 )   $ (5,009 )   $ (7,275 )   $ 7,405     $ 308,197     $ 436,329     $ (134,526 )