Exhibit 99.2
PRC WILLISTON, LLC
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm | F-2 |
Balance Sheets at December 31, 2011 and 2010 | F-3 |
Statements of Operations for the years ended December 31, 2011, 2010, and 2009 | F-4 |
Statements of Changes in Member’s Deficit for the years ended December 31, 2011, 2010, and 2009 | F-5 |
Statements of Cash Flows for the years ended December 31, 2011, 2010, and 2009 | F-6 |
Notes to Financial Statements | F-7 |
F-1
PRC WILLISTON, LLC
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Members
PRC Williston, LLC
We have audited the accompanying balance sheets of PRC Williston, LLC (the “Company”) as of December 31, 2011 and 2010, and the related statements of operations, changes in member’s deficit, and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PRC Williston, LLC as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
/s/ Hein & Associates LLP
Dallas, Texas
January 11, 2013
F-2
PRC WILLISTON, LLC
BALANCE SHEETS
(In thousands)
| | December 31, | |
| | 2011 | | 2010 | |
ASSETS | | | | | |
CURRENT ASSETS: | | | | | |
Accounts receivable | | $ | 2,188 | | $ | 1,057 | |
Total current assets | | 2,188 | | 1,057 | |
| | | | | |
PROPERTY AND EQUIPMENT: | | | | | |
Oil and natural gas properties, net, successful efforts method | | 32,607 | | 34,144 | |
Total property and equipment | | 32,607 | | 34,144 | |
| | | | | |
Total Assets | | $ | 34,795 | | $ | 35,201 | |
| | | | | |
LIABILITIES AND MEMBER’S DEFICIT | | | | | |
CURRENT LIABILITIES: | | | | | |
Accounts payable and accrued liabilities | | $ | 1,319 | | $ | 777 | |
Accounts payable to parent | | 60,173 | | 58,260 | |
Total current liabilities | | 61,492 | | 59,037 | |
| | | | | |
Asset retirement obligation | | 1,983 | | 1,827 | |
Total liabilities | | 63,475 | | 60,864 | |
| | | | | |
MEMBER’S DEFICIT: | | (28,680 | ) | (25,663 | ) |
| | | | | |
Total Liabilities and Member’s Deficit | | $ | 34,795 | | $ | 35,201 | |
The accompanying Notes to Financial Statements are an integral part of these Statements.
F-3
PRC WILLISTON, LLC
STATEMENTS OF OPERATIONS
(In thousands)
| | Year Ended December 31, | |
| | 2011 | | 2010 | | 2009 | |
REVENUE: | | | | | | | |
Oil and gas sales | | $ | 8,687 | | $ | 8,178 | | $ | 5,777 | |
Total revenue | | 8,687 | | 8,178 | | 5,777 | |
| | | | | | | |
EXPENSES: | | | | | | | |
Lease operating | | 4,518 | | 4,045 | | 3,865 | |
Severance taxes and marketing | | 603 | | 874 | | — | |
Exploration | | — | | 1 | | 87 | |
Impairment of proved oil and gas properties | | — | | 17 | | 39 | |
Depreciation, depletion and accretion | | 1,868 | | 2,315 | | 2,023 | |
General and administrative | | 2,650 | | 5,567 | | 4,023 | |
Total expenses | | 9,639 | | 12,819 | | 10,037 | |
| | | | | | | |
OPERATING LOSS | | (952 | ) | (4,641 | ) | (4,260 | ) |
| | | | | | | |
INTEREST EXPENSE | | (2,065 | ) | (2,456 | ) | (1,607 | ) |
| | | | | | | |
Net loss | | $ | (3,017 | ) | $ | (7,097 | ) | $ | (5,867 | ) |
The accompanying Notes to Financial Statements are an integral part of these Statements.
F-4
PRC WILLISTON, LLC
STATEMENT OF CHANGES IN MEMBER’S DEFICIT
(In thousands)
Balance, January 1, 2009 | | $ | (12,699 | ) |
Net loss | | (5,867 | ) |
Balance, December 31, 2009 | | $ | (18,566 | ) |
Net loss | | (7,097 | ) |
Balance, December 31, 2010 | | $ | (25,663 | ) |
Net loss | | (3,017 | ) |
Balance, December 31, 2011 | | $ | (28,680 | ) |
The accompanying Notes to Financial Statements are an integral part of these Statements.
F-5
PRC WILLISTON, LLC
STATEMENTS OF CASH FLOWS
(In thousands)
| | Year Ended December 31, | |
| | 2011 | | 2010 | | 2009 | |
Cash flows from operating activities | | | | | | | |
Net loss | | $ | (3,017 | ) | $ | (7,097 | ) | $ | (5,867 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | |
Depletion, depreciation, and accretion | | 1,868 | | 2,315 | | 2,023 | |
Asset impairment | | — | | 17 | | 39 | |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable | | (1,131 | ) | (341 | ) | (437 | ) |
Accounts payable and accrued liabilities | | 542 | | 288 | | 170 | |
Net cash used in operating activities | | (1,738 | ) | (4,818 | ) | (4,072 | ) |
| | | | | | | |
Cash flows from investing activities | | | | | | | |
Capital expenditures | | (175 | ) | (237 | ) | (3,585 | ) |
Net cash used in investing activities | | (175 | ) | (237 | ) | (3,585 | ) |
| | | | | | | |
Cash flows from financing activities | | | | | | | |
Advances from parent | | 1,913 | | 4,922 | | 6,325 | |
Net cash provided by financing activities | | 1,913 | | 4,922 | | 6,325 | |
| | | | | | | |
Net change in cash and cash equivalents | | — | | (133 | ) | (1,332 | ) |
Cash and cash equivalents, beginning of year | | — | | 133 | | 1,465 | |
Cash and cash equivalents, end of year | | $ | — | | $ | — | | $ | 133 | |
| | | | | | | |
Cash paid for interest | | $ | — | | $ | — | | $ | — | |
The accompanying Notes to Financial Statements are an integral part of these Statements.
F-6
NOTE 1—ORGANIZATION AND NATURE OF OPERATIONS
PRC Williston, LLC (the “Company or “PRC Williston”) is a subsidiary of Magnum Hunter Resources Corporation (“Magnum Hunter” or “Parent”), a Houston, Texas based independent exploration and production company engaged in the acquisition and development of producing properties, secondary enhanced oil recovery projects, and production of oil and natural gas in the United States. All of our properties are non-operated in the Williston Basin.
The Company is a limited liability company (“LLC”). As an LLC, the amount of loss at risk for each individual member is limited to the amount of capital contributed to the LLC, and unless otherwise noted, the individual member’s liability for indebtedness of an LLC is limited to the member’s actual capital contribution.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based on information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions and conditions. Significant estimates are required for proved oil and gas reserves which, as described below under Estimates of Proved Oil and Gas Reserves, may have a material impact on the carrying value of oil and gas property.
Critical accounting policies are defined as those significant accounting policies that are most critical to an understanding of a company’s financial condition and results of operation. We consider an accounting estimate or judgment to be critical if (i) it requires assumptions to be made that were uncertain at the time the estimate was made, and (ii) changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.
Financial Instruments
The carrying amounts of financial instruments including accounts receivable, accounts payable and accrued liabilities, and accounts payable to parent approximate fair value as of December 31, 2011 and 2010.
Oil and Gas Properties
Capitalized Costs
Our oil and gas properties consisted of the following:
| | December 31, | |
| | 2011 | | 2010 | |
| | (in thousands) | |
| | | | | |
Unproved properties | | $ | 10,298 | | $ | 10,232 | |
Proved properties | | 38,147 | | 37,316 | |
Total costs | | 48,445 | | 47,548 | |
Less accumulated depreciation and depletion | | (15,838 | ) | (13,404 | ) |
Net capitalized costs | | $ | 32,607 | | $ | 34,144 | |
We follow the successful efforts method of accounting for our oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties and to drill and equip development wells and related asset retirement costs are capitalized. Costs to drill exploratory wells are capitalized pending determination of whether the wells have proved reserves. If we determine that the wells do not have proved reserves, the costs are charged to expense. There were no costs capitalized for exploratory wells pending the determination of proved reserves at either December 31, 2011 or 2010. Geological and geophysical costs, including seismic studies and costs of carrying and retaining unproved properties are charged to expense as incurred. We capitalize interest on expenditures for significant exploration and development projects that last more than six months while activities are in progress to bring the assets to their intended use. No interest was capitalized during the periods presented.
F-7
On the sale or retirement of a complete unit of a proved property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income.
Capitalized amounts attributable to proved oil and gas properties are depleted by the unit-of-production method over proved reserves using the unit conversion ratio of six Mcf of gas to one Bbl of oil and the ratio of forty-two Gal of natural gas liquids to one Bbl of oil. Well costs and related equipment are depleted over proved developed reserves, and leasehold costs are depleted over total proved reserves. Depreciation and depletion expense for oil and gas producing property and related equipment was $1.9 million, $2.3 million, and $2.0 million for the years ended December 31, 2011, 2010, and 2009, respectively.
Capitalized costs related to proved oil and gas properties, including wells and related equipment and facilities, are evaluated for impairment based on an analysis of undiscounted future net cash flows. If undiscounted cash flows are insufficient to recover the net capitalized costs related to proved properties, then we recognize an impairment charge in income from operations equal to the difference between the net capitalized costs related to proved properties and their estimated fair values based on the present value of the related future net cash flows. We recorded no impairments for the year ended December 31, 2011, $17,000 in impairment charges to our proved properties for the year ended December 31, 2010, and a charge of $39,000 for the year ended December 31, 2009, based on our analyses.
Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment by providing an impairment allowance. We recorded no unproved property impairment during the years ended December 31, 2011, 2010, and 2009.
On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.
Estimates of Proved Oil and Gas Reserves
Estimates of our proved reserves included in this report are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and SEC guidelines. The accuracy of a reserve estimate is a function of:
· the quality and quantity of available data;
· the interpretation of that data;
· the accuracy of various mandated economic assumptions;
· and the judgment of the persons preparing the estimate.
Our proved reserve information included in this report was predominately based on evaluations prepared by independent petroleum engineers. Estimates prepared by other third parties may be higher or lower than those included herein. Because these estimates depend on many assumptions, all of which may substantially differ from future actual results, reserve estimates will be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify material revisions to the estimate.
We based the estimated discounted future net cash flows from proved reserves on the unweighted arithmetic average of the prior 12-month commodity prices as of the first day of each of the months constituting the period and costs on the date of the estimate. Future prices and costs may be materially higher or lower than these prices and costs which would impact the estimated value of our reserves.
The estimates of proved reserves materially impact DD&A expense. If the estimates of proved reserves decline, the rate at which we record depreciation and depletion expense will increase, reducing future net income. Such a decline may result from lower market prices, which may make it uneconomic to drill for and produce higher cost fields.
Revenue Recognition
Revenues associated with sales of crude oil, natural gas, natural gas liquids and petroleum products, and other items are recognized when title passes to the customer, which is when the risk of ownership passes to the purchaser and physical delivery of goods occurs, either immediately or within a fixed delivery schedule that is reasonable and customary in the industry.
F-8
Revenues from the production of natural gas and crude oil properties in which we have an interest with other producers are recognized based on the actual volumes we sold during the period. Any differences between volumes sold and entitlement volumes, based on our net working interest, which are deemed to be non-recoverable through remaining production, are recognized as accounts receivable or accounts payable, as appropriate. Cumulative differences between volumes sold and entitlement volumes are generally not significant.
Accounts Receivable
Accounts receivable consists of oil and gas sales, due under normal trade terms, generally requiring payment within 30 to 60 days of production. No interest is charged on past-due balances. Payments made on all accounts receivable are applied to the earliest unpaid items. We review our accounts receivable periodically and reduce the carrying amount by a valuation allowance that reflects our best estimate of the amount that may not be collectible. Based on our review, no allowance was warranted at either December 31, 2011 or 2010.
Production Costs
Production costs, including compressor rental and repair, pumpers’ salaries, saltwater disposal, ad valorem taxes, insurance, repairs and maintenance, expensed workovers and other operating expenses are expensed as incurred and included in lease operating expense on our consolidated statements of operations.
Exploration expenses include dry hole costs, delay rentals, and geological and geophysical costs.
Dependence on Major Customers
For the years ended December 31, 2011, 2010, and 2009, we sold substantially all of our oil and gas produced to one purchaser. Additionally, substantially all of our accounts receivable related to oil and gas sales were due from that one purchaser at December 31, 2011 and 2010. We believe that there are potential alternative purchasers and that it may be necessary to establish relationships with new purchasers if our production grows. However, there can be no assurance that we can establish such relationships and that those relationships will result in increased purchasers. Although we are exposed to a concentration of credit risk, we believe that our purchaser is credit worthy.
Dependence on Suppliers
Our industry is cyclical, and from time to time there is a shortage of drilling rigs, fracture stimulation services, equipment, supplies and qualified personnel. During these periods, the costs and delivery times of rigs, equipment and supplies are substantially greater. If the unavailability or high cost of drilling rigs, equipment, supplies or qualified personnel were particularly severe in the areas where we operate, we could be materially and adversely affected. We believe that there are potential alternative providers of drilling services and that it may be necessary to establish relationships with new contractors as our activity level and capital program grows. However, there can be no assurance that we can establish such relationships and that those relationships will result in increased availability of drilling rigs.
Asset Retirement Obligation
Our asset retirement obligation represents the estimated present value of the amount we will incur to plug, abandon and remediate our producing properties at the end of their productive lives, in accordance with applicable federal, state and local laws. We determine our asset retirement obligation by calculating the present value of estimated cash flows related to the liability. The retirement obligation is recorded as a liability at its estimated present value as of the asset’s inception, with an offsetting increase to proved properties. Periodic accretion of discount of the estimated liability is recorded as accretion expense in the consolidated statements of operations.
Our liability is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells and our risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. See Note 3 — “Asset Retirement Obligations” to our financial statements for more information.
Income Taxes
The Company is not subject to federal income taxes and does not have a tax sharing agreement or allocate taxes with its member. Therefore, no provision has been made for federal or state income taxes on the Company’s books. It is the responsibility of the member to report its share of taxable income or loss on its separate income tax return. Accordingly, no recognition has been given to federal or state income taxes in the accompanying financial statements.
Based on management’s analysis, the Company did not have any uncertain tax positions as of December 31, 2011 or 2010. The Company’s income tax returns for the periods subsequent to December 31, 2008 remain open for examination by taxing authorities. Interest and penalties,
F-9
and the associated tax expense related to uncertain tax positions, when applicable, will be recorded in income tax expense as the positions are recognized. At December 31, 2011, and 2010, there were no material income tax interest or penalty items recorded in the statement of operations or as a liability on the balance sheet.
NOTE 3 - ASSET RETIREMENT OBLIGATIONS
The Company accounts for asset retirement obligations based on the guidance of ASC 410 which addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. ASC 410 requires that the fair value of a liability for an asset’s retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. We have included estimated future costs of abandonment and dismantlement in our successful efforts amortization base and amortize these costs as a component of our depreciation, depletion, and accretion expense in the accompanying financial statements.
The following table summarizes the Company’s asset retirement obligation transactions during the years ended December 31:
| | (in thousands) | |
| | 2011 | | 2010 | |
Asset retirement obligation at beginning of period | | $ | 1,827 | | $ | 1,668 | |
Accretion expense | | 156 | | 159 | |
Asset retirement obligation at end of period | | $ | 1,983 | | $ | 1,827 | |
NOTE 4 — RELATED PARTY TRANSACTIONS
The Company and its parent, Magnum Hunter, have an arrangement whereby Magnum Hunter provides funding to the Company for costs of developing oil and gas properties and Magnum Hunter allocates interest expense and general and administrative expenses to the Company. The allocation of interest expense is done based on the amount funded to the Company over the period by the interest rate applicable to Magnum Hunter’s revolving credit facility. The effective interest rate due by the Company to Magnum Hunter was approximately 3.55%, 4.50% and 3.26% for the years ended December 31, 2011, 2010, and 2009, respectively. Accrued interest is included in accounts payable to parent. General and administrative expenses are allocated to the Company from Magnum Hunter based on a pro rata basis relating to the Company’s revenues in proportion to the other subsidiaries of Magnum Hunter. The accumulated charges are recorded as a current liability on the Company’s balance sheets. At December 31, 2011, the balance due to Magnum Hunter was $60.1 million, and the balance was $58.3 million as of December 31, 2010.
NOTE 5 — SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)
The following table sets forth the costs incurred in oil and gas property acquisition, exploration, and development activities.
| | (in thousands) | |
| | 2011 | | 2010 | | 2009 | |
Acquisition costs | | $ | — | | $ | — | | $ | — | |
Exploration costs | | — | | 1 | | 87 | |
Development costs | | — | | 80 | | 5,598 | |
| | $ | — | | $ | 81 | | $ | 5,685 | |
Oil and Gas Reserve Information
Proved oil and gas reserve quantities are based on estimates prepared by Magnum Hunter’s third party reservoir engineering firms. There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data only represent estimates and should not be construed as being exact.
F-10
Total Proved Reserves
| | Crude oil and Condensate | | Natural Gas | |
| | (mbbl) | | (mmcf) | |
| | | | | |
Balances January 1, 2009 | | 1,369 | | 511 | |
Extensions, discoveries and other additions | | 1,709 | | 342 | |
Production | | (106 | ) | (96 | ) |
Balances December 31, 2009 | | 2,972 | | 757 | |
Revisions of previous estimates | | (444 | ) | (94 | ) |
Production | | (112 | ) | (105 | ) |
Balances December 31, 2010 | | 2,416 | | 558 | |
Revisions of previous estimates | | (195 | ) | 119 | |
Production | | (103 | ) | (82 | ) |
Balances December 31, 2011 | | 2,118 | | 595 | |
| | | | | |
Developed reserves, included above | | | | | |
December 31, 2009 | | 1,410 | | 571 | |
December 31, 2010 | | 1,161 | | 504 | |
December 31, 2011 | | 1,209 | | 594 | |
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Reserves
Future cash inflows at December 31, 2011 and 2010 were computed by applying the unweighted, arithmetic average on the closing price on the first day of each month for the 12-month period prior to December 31, 2011, 2010, and 2009 to estimated future production. Future production and development costs are computed by estimating the expenditures to be incurred in developing and producing the proved oil and natural gas reserves at year-end, based on year-end costs and assuming continuation of existing economic conditions.
Future income tax expenses give effect to permanent differences, tax credits and loss carryforwards relating to the proved oil and natural gas reserves. Future net cash flows are discounted at a rate of 10% annually to derive the standardized measure of discounted future net cash flows. This calculation procedure does not necessarily result in an estimate of the fair market value of our oil and natural gas properties.
The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves are as follows:
| | (in thousands) | |
| | as of December 31, | |
| | 2011 | | 2010 | | 2009 | |
| | | | | | | |
Future cash inflows | | $ | 185,867 | | $ | 166,661 | | $ | 162,339 | |
Future production costs | | (79,959 | ) | (65,638 | ) | (57,583 | ) |
Future development costs | | (7,192 | ) | (8,360 | ) | (15,674 | ) |
Future income tax expense | | — | | — | | — | |
| | | | | | | |
Future net cash flows | | 98,716 | | 92,663 | | 89,082 | |
10% annual discount for estimated timing of cash flows | | (47,401 | ) | (46,099 | ) | (43,401 | ) |
| | | | | | | |
Standardized measure of discounted future net cash flows | | $ | 51,315 | | $ | 46,564 | | $ | 45,681 | |
F-11
Changes in Standardized Measure of Discounted Future Net Cash Flows
The changes in the standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves are as follows:
| | (in thousands) | |
| | Year Ended December 31, | |
| | 2011 | | 2010 | | 2009 | |
Balances, beginning of period | | 46,565 | | 45,681 | | 11,109 | |
Net change in sales and transfer prices and in production (lifting) costs related to future production | | 9,324 | | 11,320 | | 12,605 | |
Changes in estimated future development costs | | 1,074 | | 4,277 | | (13,272 | ) |
Sales and transfers of oil and gas produced during the period | | (3,566 | ) | (3,259 | ) | (1,912 | ) |
Net change due to extensions, discoveries and improved recovery | | — | | — | | 30,631 | |
Net change due to revisions in quantity estimates | | (5,846 | ) | (15,431 | ) | — | |
Previously estimated development costs incurred during the period | | — | | 80 | | 5,598 | |
Accretion of discount | | 4,656 | | 3,442 | | 1,264 | |
Other | | (892 | ) | 455 | | (342 | ) |
Standardized measure of discounted future net cash flows | | 51,315 | | 46,565 | | 45,681 | |
The commodity prices inclusive of adjustments for quality and location used in determining future net revenues related to the standardized measure calculation are as follows.
| | 2011 | | 2010 | | 2009 | |
Oil (per bbl) | | $ | 86.86 | | $ | 68.59 | | $ | 54.22 | |
Gas (per mcf) | | $ | 3.11 | | $ | 1.78 | | $ | 1.60 | |
NOTE 6 — SUBSEQUENT EVENTS
On May 16, 2012, PRC Williston was named a guarantor subsidiary to the Senior Notes issued by the Parent, which are due November 2020.
F-12
PRC WILLISTON, LLC
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Unaudited Balance Sheets at September 30, 2012 and December 31, 2011 | F-1 |
Unaudited Statements of Operations for the nine months ended September 30, 2012 and 2011 | F-2 |
Unaudited Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 | F-3 |
Notes to Unaudited Financial Statements | F-4 |
PRC WILLISTON, LLC
UNAUDITED CONDENSED BALANCE SHEETS
(In thousands)
| | September 30,
2012 | | December 31,
2011 | |
ASSETS | | | | | |
CURRENT ASSETS: | | | | | |
Accounts receivable | | $ | 954 | | $ | 2,188 | |
Total current assets | | 954 | | 2,188 | |
| | | | | |
PROPERTY AND EQUIPMENT: | | | | | |
Oil and natural gas properties, successful efforts accounting, net of accumulated depletion and depreciation of $15,565 and $13,981 as of September 30, 2012 and December 31, 2011, respectively | | 31,357 | | 32,607 | |
Total Property and equipment | | 31,357 | | 32,607 | |
| | | | | |
Total Assets | | $ | 32,311 | | $ | 34,795 | |
| | | | | |
LIABILITIES AND MEMBER’S DEFICIT | | | | | |
CURRENT LIABILITIES: | | | | | |
Accounts payable and accrued liabilities | | $ | 1,865 | | $ | 1,319 | |
Current portion of asset retirement obligation | | 871 | | — | |
Accounts payable to parent | | 58,064 | | 60,173 | |
Total current liabilities | | 60,800 | | 61,492 | |
| | | | | |
Asset retirement obligation | | 1,246 | | 1,983 | |
Total liabilities | | 62,046 | | 63,475 | |
| | | | | |
COMMITMENTS AND CONTINGENCIES (Note 4) | | | | | |
| | | | | |
MEMBER’S DEFICIT: | | (29,735 | ) | (28,680 | ) |
| | | | | |
Total Liabilities and Equity | | $ | 32,311 | | $ | 34,795 | |
The accompanying notes are an integral part of these unaudited financial statements.
1
PRC WILLISTON, LLC
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
| | Nine Months Ended
September 30, | |
| | 2012 | | 2011 | |
REVENUE: | | | | | |
Oil and gas sales | | $ | 6,065 | | $ | 6,361 | |
Total revenue | | 6,065 | | 6,361 | |
| | | | | |
EXPENSES: | | | | | |
Lease operating expenses | | 2,950 | | 3,414 | |
Severance taxes and marketing | | 308 | | 467 | |
Depreciation, depletion and accretion | | 1,432 | | 1,365 | |
General and administrative | | 903 | | 2,813 | |
Total expenses | | 5,593 | | 8,059 | |
| | | | | |
OPERATING INCOME (LOSS) | | 472 | | (1,698 | ) |
| | | | | |
INTEREST EXPENSE | | (1,527 | ) | (1,732 | ) |
| | | | | |
Net loss | | $ | (1,055 | ) | $ | (3,430 | ) |
The accompanying notes are an integral part of these unaudited financial statements.
2
PRC WILLISTON, LLC
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
| | Nine Months Ended September 30, | |
| | 2012 | | 2011 | |
Cash flows from operating activities | | | | | |
Net loss | | $ | (1,055 | ) | $ | (3,430 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | |
Depletion, depreciation, and accretion | | 1,432 | | 1,365 | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable | | 1,234 | | (769 | ) |
Accounts payable and accrued liabilities | | 546 | | 511 | |
Net cash provided by operating activities | | 2,157 | | (2,323 | ) |
| | | | | |
Cash flows from investing activities | | | | | |
Capital expenditures | | (48 | ) | (144 | ) |
Change in advances | | — | | — | |
Net cash used in investing activities | | (48 | ) | (144 | ) |
| | | | | |
Cash flows from financing activities | | | | | |
Repayments to parent | | (2,109 | ) | 2,467 | |
Net cash provided by (used in) financing activities | | (2,109 | ) | 2,467 | |
| | | | | |
Net change in cash and cash equivalents | | — | | — | |
Cash and cash equivalents, beginning of year | | — | | — | |
Cash and cash equivalents, end of year | | $ | — | | $ | — | |
| | | | | |
Cash paid for interest | | $ | — | | $ | — | |
The accompanying notes are an integral part of these unaudited financial statements.
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NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of PRC Williston, LLC (the “Company” or “PRC Williston”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2011. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosure contained in the audited financial statements have been omitted.
NOTE 2 - ASSET RETIREMENT OBLIGATIONS
The following table summarizes the Company’s asset retirement obligation transactions during the nine months ended September 30, 2012:
| | (in thousands) | |
Asset retirement obligation at beginning of period | | $ | 1,983 | |
Accretion expense | | 134 | |
Asset retirement obligation at end of period | | 2,117 | |
Less: current portion | | (871 | ) |
Asset retirement obligation at end of period | | $ | 1,246 | |
NOTE 3 — RELATED PARTY TRANSACTIONS
The Company and its parent, Magnum Hunter Resources Corporation (“Magnum Hunter”), have an arrangement whereby Magnum Hunter provides funding to the Company for costs of developing oil and gas properties and allocates interest expense and general and administrative expenses to the Company. The allocation of interest expense is done based on the amount funded to the Company over the period by the interest rate applicable to Magnum Hunter’s revolving credit facility. The effective interest rate due by the Company to Magnum Hunter was approximately 3.48% and 2.95% for the nine months periods ending September 30, 2012 and 2011, respectively. Accrued interest is included in accounts payable to parent. General and administrative expenses are allocated to the Company from Magnum Hunter on a pro rata basis relating to the Company’s revenues in proportion to the other subsidiaries of Magnum Hunter. The accumulated charges are recorded as a current liability on the Company’s balance sheets. At September 30, 2012, the balance due to Magnum Hunter was $58.1 million, and the balance was $60.2 million as of December 31, 2011.
NOTE 4 — COMMITMENT
The Company, along with certain other subsidiaries of Magnum Hunter, is a guarantor of senior notes of Magnum Hunter due November 2020. The outstanding principle balance on these notes as of September 30, 2012 was $450.0 million. The Company, along with the other guarantors on a joint and several basis, would be obligated for the full amount of the senior notes if Magnum Hunter defaulted.
NOTE 5 — SUBSEQUENT EVENTS
There were no subsequent events during the period of September 30, 2012 through the date of this report.
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