Exhibit 99.7
KOSMOS ENERGY LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2018 and the Unaudited Pro Forma Condensed Combined Statements of Operations for the six months ended June 30, 2018 and for the year ended December 31, 2017 have been derived from the historical consolidated financial statements of Kosmos Energy Ltd. (together with its subsidiaries, “Kosmos” or “the Company”) and Deep Gulf Energy LP, DGE II Management, LLC, and DGE III Management, LLC (collectively “Deep Gulf Energy”), as adjusted to give effect to the acquisition of Deep Gulf Energy by the Company (the “Acquisition”) through the incurrence of additional debt under Kosmos’ existing credit facilities, the issuance of Kosmos’ common stock (collectively, the “Transactions”), and the use of cash on hand and are intended to reflect the impact of the Transactions on the Company on a pro forma basis as of and for the periods indicated. The Unaudited Pro Forma Condensed Combined Financial Information does not give effect to any potential additional permanent financing of the Transactions.
The Unaudited Pro forma Condensed Combined Financial Information has been prepared by the Company using the asset acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Subtopic 805-50-25. The relative fair value of identifiable assets acquired and liabilities assumed from the Acquisition are based on an allocation of the purchase price utilizing a preliminary estimate of the relative fair values using assumptions described in the accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information that the Company believes are reasonable.
The final purchase price allocation for the Transactions will be performed prior to the Company’s issuance of its financial statements as of and for the three and nine month period ended September 30, 2018. These final valuations will be based on the actual net assets that exist as of the closing of the Acquisition. Any final adjustments may change the allocations of the purchase price, which could affect the purchase price allocated to the assets acquired and liabilities assumed and could result in a change to the Unaudited Pro Forma Condensed Combined Financial Information. Therefore, the result of the final purchase price allocation could be materially different from the preliminary allocation set forth herein.
The following Unaudited Pro Forma Condensed Combined Financial Information is based on, and should be read in conjunction with:
| • | The historical audited consolidated financial statements of the Company and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the Securities and Exchange Commission (“SEC”) on February 26, 2018; |
| • | The historical unaudited condensed consolidated interim financial statements of the Company and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in its quarterly report on Form 10-Q for the six months ended June 30, 2018, as filed with the SEC on August 6, 2018; |
| • | The historical audited financial statements of Deep Gulf Energy LP as of and for the year ended December 31, 2017 (included as Exhibit 99.1 to the Current Report on Form 8-K of which this financial information forms an exhibit); and, |
| • | The historical audited consolidated financial statements of DGE II Management, LLC and subsidiary, and DGE III Management, LLC and subsidiaries as of and for the year ended December 31, 2017 (included as Exhibits 99.2 and 99.3, respectively, to the Current Report on Form 8-K of which this financial information forms an exhibit); and, |
| • | The historical unaudited interim financial statements as of June 30, 2018 and December 31, 2017 and for the six months ended June 30, 2018 and 2017 of Deep Gulf Energy LP (included as Exhibit 99.4 to the Current Report on Form 8-K of which this financial information forms an exhibit). |
| • | The historical unaudited condensed interim financial statements as of June 30, 2018 and December 31, 2017 and for the six months ended June 30, 2018 and 2017 of DGE II Management, LLC and subsidiary and DGE III Management, LLC and subsidiaries (included as Exhibits 99.5 and 99.6, respectively, to the Current Report on Form 8-K of which this financial information forms an exhibit). |
The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the Transactions as if they had been consummated on June 30, 2018 and includes pro forma adjustments for the allocation of purchase price based on preliminary allocations by management of certain assets and liabilities.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2017 combines the Company’s historical results for the year ended December 31, 2017 with Deep Gulf Energy LP’s, DGE II Management, LLC’s, and DGE III Management, LLC’s historical results for the year ended December 31, 2017 and the Unaudited Pro Forma Condensed Combined Statement of Operations for the six months ended June 30, 2018 combines the Company’s historical results for the six
months ended June 30, 2018 with Deep Gulf Energy LP’s, DGE II Management, LLC’s, and DGE III Management, LLC’s historical results for the six months ended June 30, 2018. The Unaudited Pro Forma Condensed Combined Statements of Operations gives effect to the Transactions as if they had been consummated on January 1, 2017.
The Unaudited Pro Forma Condensed Combined Financial Information has been prepared to reflect adjustments to the Company’s historical consolidated financial information that are (i) directly attributable to the Transactions, (ii) factually supportable and (iii) with respect to the Unaudited Pro Forma Condensed Combined Statement of Operations, expected to have a continuing impact on the combined results. The differences between the actual valuations reflected in the Company’s future balance sheets and the current estimated valuations used in preparing the Unaudited Pro Forma Condensed Combined Financial Information may be material and may affect amounts, including depletion, depreciation and amortization expense, which the Company will recognize in its statement of operations following the Acquisition.
The Unaudited Pro Forma Condensed Combined Financial Information is presented for informational purposes only and is not necessarily indicative of the operating results or financial position that actually would have been achieved if the Transactions had occurred on the dates indicated or that may be achieved in future periods. The Unaudited Pro Forma Condensed Combined Financial Information should be read in conjunction with the financial statements of the Company and Deep Gulf Energy LP, DGE II Management, LLC, and DGE III Management, LLC. It also does not reflect any cost savings, operating synergies or revenue enhancements that the Company may achieve with respect to combining the companies or costs to integrate the business or the impact of any non-recurring activity and one-time transaction related costs. Synergies and integration costs have been excluded from consideration because they do not meet the criteria for unaudited pro forma adjustments.
KOSMOS ENERGY LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
AS OF JUNE 30, 2018
(In thousands, except per share data)
| | Kosmos Historical | | Deep Gulf Energy LP | | DGE II Management, LLC and Subsidiary | | DGE III Management, LLC and Subsidiaries | | Pro Forma Adjustments | | Pro Forma Combined Company |
| Assets | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | |
| Cash and cash equivalents | $ | 116,941 | | | $ | 9,879 | | | $ | 85,989 | | | $ | 84,067 | | | $ | (245,429 | ) | (A) | $ | 51,447 | |
| Restricted cash | 20,377 | | | — | | | — | | | — | | | — | | | 20,377 | |
| Receivables: | | | | | | | | | | | |
| Joint interest billings, net | 68,006 | | | 256 | | | 1,267 | | | 18,078 | | | 10,529 | | (J) | 98,136 | |
| Oil and gas sales | 73,700 | | | 1,429 | | | 17,641 | | | 31,636 | | | 23,631 | | (J) | 148,037 | |
| Related party | 2,610 | | | — | | | 6 | | | 6,127 | | | (6,134 | ) | (B) | 2,609 | |
| Other | 13,501 | | | 36 | | | — | | | 1,109 | | | (1,145 | ) | (J) | 13,501 | |
| Inventories | 71,085 | | | — | | | 1,816 | | | 15,879 | | | (589 | ) | (J) | 88,191 | |
| Prepaid expenses and other | 33,638 | | | 278 | | | 3,570 | | | 7,732 | | | (195 | ) | (J) | 45,023 | |
| Derivatives | 18,053 | | | — | | | 49 | | | — | | | (49 | ) | (J) | 18,053 | |
| Total current assets | 417,911 | | | 11,878 | | | 110,338 | | | 164,628 | | | (219,381 | ) | | 485,374 | |
| | | | | | | | | | | | |
| Property and equipment: | | | | | | | | | | | |
| Oil and gas properties, net | 2,253,815 | | | 10,080 | | | 216,393 | | | 286,103 | | | 857,845 | | (D), (I) | 3,624,236 | |
| Other property, net | 9,249 | | | — | | | 216 | | | 1,686 | | | 26 | | (J) | 11,177 | |
| Property and equipment, net | 2,263,064 | | | 10,080 | | | 216,609 | | | 287,789 | | | 857,871 | | | 3,635,413 | |
| | | | | | | | | | | | |
| Other assets: | | | | | | | | | | | |
| Equity method investment | 151,310 | | | — | | | — | | | — | | | — | | | 151,310 | |
| Investments | — | | | — | | | 3,819 | | | — | | | (3,819 | ) | (J) | — | |
| Restricted cash | 9,168 | | | — | | | — | | | 140 | | | — | | | 9,308 | |
| Long-term receivables - joint interest billings | 28,981 | | | — | | | — | | | — | | | — | | | 28,981 | |
| Long-term receivable - related party | — | | | — | | | — | | | 3,048 | | | (3,048 | ) | (B) | — | |
| Interest receivable - related party | — | | | — | | | 1,688 | | | 398 | | | (2,086 | ) | (B) | — | |
| Deferred financing costs, net of accumulated amortization | 1,141 | | | — | | | — | | | 513 | | | (513 | ) | (C) | 1,141 | |
| Long-term deferred tax assets | 20,763 | | | — | | | — | | | — | | | — | | | 20,763 | |
| Derivative asset | 10,421 | | | — | | | — | | | — | | | — | | | 10,421 | |
| Other | 684 | | | 875 | | | 800 | | | 11,983 | | | (11,932 | ) | (J) | 2,410 | |
| Total assets | $ | 2,903,443 | | | $ | 22,833 | | | $ | 333,254 | | | $ | 468,499 | | | $ | 617,092 | | | $ | 4,345,121 | |
| | | | | | | | | | | | |
| Liabilities and shareholders’ equity | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | |
| Accounts payable | $ | 128,471 | | | $ | 267 | | | $ | 987 | | | $ | 8,659 | | | $ | (4,504 | ) | (J) | $ | 133,880 | |
| Accounts payable - Related Party | — | | | 65 | | | 6,069 | | | — | | | (6,134 | ) | (B) | — | |
| Accrued liabilities | 145,600 | | | 6,031 | | | 28,733 | | | 59,981 | | | 18,673 | | (J) | 259,018 | |
| Interest payable | — | | | — | | | 357 | | | — | | | (357 | ) | (E) | — | |
| Current portion of asset retirement obligations | — | | | 3,003 | | | 777 | | | — | | | — | | | 3,780 | |
| Derivative short-term liability | 162,329 | | | — | | | 12,890 | | | 27,611 | | | (4,874 | ) | (J) | 197,956 | |
| Total current liabilities | 436,400 | | | 9,366 | | | 49,813 | | | 96,251 | | | 2,804 | | | 594,634 | |
| | | | | | | | | | | | |
| Long-term liabilities: | | | | | | | | | | | |
| Long-term debt, net | 1,167,775 | | | — | | | 290,874 | | | — | | | 609,126 | | (E) | 2,067,775 | |
| Long-term accounts payable - related party | — | | | — | | | 3,048 | | | — | | | (3,048 | ) | (B) | — | |
| Long-term notes payable - related party | — | | | — | | | 4,661 | | | 4,857 | | | (9,518 | ) | (B) | — | |
| Long-term interest payable | — | | | — | | | 20,310 | | | — | | | (20,310 | ) | (E) | — | |
| Derivative long-term liability | 83,733 | | | — | | | 1,918 | | | 4,014 | | | (1,294 | ) | (J) | 88,371 | |
| Asset retirement obligations | 70,122 | | | 10,377 | | | 13,015 | | | 18,537 | | | 28,933 | | (F) | 140,984 | |
| Deferred tax liabilities | 392,918 | | | — | | | — | | | — | | | — | | | 392,918 | |
| Other long-term liabilities | 8,364 | | | — | | | — | | | — | | | — | | | 8,364 | |
| Total long-term liabilities | 1,722,912 | | | 10,377 | | | 333,826 | | | 27,408 | | | 603,889 | | | 2,698,412 | |
| | | | | | | | | | | | |
| Members' equity (deficit) | — | | | 3,090 | | (50,385) | | 344,840 | | (297,545) | (G) | — | |
| | | | | | | | | | | | |
| Shareholders’ equity: | | | | | | | | | | | |
| Preference shares, $0.01 par value; 200,000,000 authorized shares; zero issued at June 30, 2018 | — | | | — | | | — | | | — | | | — | | | — | |
| Common shares, $0.01 par value; 2,000,000,000 authorized shares; 407,557,090 issued at June 30, 2018 | 4,076 | | | — | | | — | | | — | | | 350 | | (H) | 4,426 | |
| Additional paid-in capital | 2,015,463 | | | — | | | — | | | — | | | 307,594 | | (H) | 2,323,057 | |
| Accumulated deficit | (1,226,701 | ) | | — | | | — | | | — | | | — | | | (1,226,701 | ) |
| Treasury stock, at cost, 9,263,269 at June 30, 2018 | (48,707 | ) | | — | | | — | | | — | | | — | | | (48,707 | ) |
| Total shareholders’ equity | 744,131 | | | — | | | — | | | — | | | 307,944 | | | 1,052,075 | |
| Total liabilities and shareholders’ equity | $ | 2,903,443 | | | $ | 22,833 | | | $ | 333,254 | | | $ | 468,499 | | | $ | 617,092 | | | $ | 4,345,121 | |
See accompanying notes.
KOSMOS ENERGY LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2017
(In thousands, except per share data)
| | Kosmos Historical | | Deep Gulf Energy LP | | DGE II Management, LLC and Subsidiary | | DGE III Management, LLC and Subsidiaries | | Pro Forma Adjustments | | Pro Forma Combined Company |
| Revenues and other income: | | | | | | | | | | | | |
| Oil and gas revenue | $ | 578,139 | | | $ | 8,342 | | | $ | 137,956 | | | $ | 155,458 | | | $ | — | | | $ | 879,895 | |
| Other income, net | 58,697 | | | — | | | — | | | — | | | — | | | 58,697 | |
| | | | | | | | | | | | | |
| Total revenues and other income | 636,836 | | | 8,342 | | | 137,956 | | | 155,458 | | | — | | | 938,592 | |
| | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | |
| Oil and gas production | 126,850 | | | 6,182 | | | 50,390 | | | 39,754 | | | (1,885 | ) | (C) | 221,291 | |
| Facilities insurance modifications, net | (820 | ) | | — | | | — | | | — | | | — | | | (820 | ) |
| Exploration expenses | 216,050 | | | 18 | | | 52 | | | 36,346 | | | — | | | 252,466 | |
| General and administrative | 68,302 | | | 326 | | | 3,632 | | | 12,332 | | | (2,782 | ) | (C) | 81,810 | |
| Depletion and depreciation | 255,203 | | | 2,692 | | | 57,433 | | | 57,080 | | | 70,007 | | (A) | 442,415 | |
| Interest and other financing costs, net | 77,595 | | | 1 | | | 58,074 | | | 1,006 | | | (21,407 | ) | (B) | 115,269 | |
| Derivatives, net | 59,968 | | | — | | | 2,320 | | | 12,503 | | | — | | | 74,791 | |
| Loss on equity method investments, net | 6,252 | | | — | | | — | | | — | | | — | | | 6,252 | |
| Other expenses, net | 5,291 | | | 3,350 | | | 2,199 | | | 4,408 | | | 7,019 | | (C) | 22,267 | |
| | | | | | | | | | | | | |
| Total costs and expenses | 814,691 | | | 12,569 | | | 174,100 | | | 163,429 | | | 50,952 | | | 1,215,741 | |
| | | | | | | | | | | | | |
| Income (loss) before income taxes | (177,855 | ) | | (4,227 | ) | | (36,144 | ) | | (7,971 | ) | | (50,952 | ) | | (277,149 | ) |
| Income tax expense (benefit) | 44,937 | | | — | | | — | | | — | | | (11,568 | ) | (D) | 33,369 | |
| | | | | | | | | | | | | |
| Net loss | $ | (222,792 | ) | | $ | (4,227 | ) | | $ | (36,144 | ) | | $ | (7,971 | ) | | $ | (39,384 | ) | | $ | (310,518 | ) |
| Net loss per share: | | | | | | | | | | | | |
| Basic | $ | (0.57 | ) | | | | | | | | | | | $ | (0.73 | ) |
| Diluted | $ | (0.57 | ) | | | | | | | | | | | $ | (0.73 | ) |
| Weighted average number of shares used to compute net loss per share: | | | | | | | | | | | | |
| Basic | 388,375 | | | | | | | | | | 34,994 | | (E) | 423,369 | |
| Diluted | 388,375 | | | | | | | | | | 34,994 | | (E) | 423,369 | |
See accompanying notes.
KOSMOS ENERGY LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(In thousands, except per share data)
| | Kosmos Historical | | Deep Gulf Energy LP | | DGE II Management, LLC and Subsidiary | | DGE III Management, LLC and Subsidiaries | | Pro Forma Adjustments | | Pro Forma Combined Company |
| Revenues and other income: | | | | | | | | | | | |
| Oil and gas revenue | $ | 342,387 | | | $ | 6,170 | | | $ | 88,752 | | | $ | 139,285 | | | $ | — | | | $ | 576,594 | |
| Other income, net | 263 | | | — | | | — | | | — | | | — | | | 263 | |
| | | | | | | | | | | | |
| Total revenues and other income | 342,650 | | | 6,170 | | | 88,752 | | | 139,285 | | | — | | | 576,857 | |
| | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | |
| Oil and gas production | 96,583 | | | 2,680 | | | 25,067 | | | 30,865 | | | (1,156 | ) | (C) | 154,039 | |
| Facilities insurance modifications, net | 9,478 | | | — | | | — | | | — | | | — | | | 9,478 | |
| Exploration expenses | 98,674 | | | — | | | 45 | | | 48,756 | | | — | | | 147,475 | |
| General and administrative | 39,380 | | | 11 | | | 665 | | | 8,247 | | | (2,182 | ) | (C) | 46,121 | |
| Depletion and depreciation | 128,566 | | | 1,421 | | | 31,136 | | | 39,822 | | | 68,202 | | (A) | 269,147 | |
| Interest and other financing costs, net | 44,564 | | | — | | | 29,885 | | | 502 | | | (9,747 | ) | (B) | 65,204 | |
| Derivatives, net | 178,750 | | | — | | | 15,378 | | | 29,389 | | | — | | | 223,517 | |
| Loss on equity method investments, net | (34,796 | ) | | — | | | — | | | — | | | — | | | (34,796 | ) |
| Other expenses, net | 4,643 | | | (38 | ) | | 440 | | | (1,247 | ) | | 4,911 | | (C) | 8,709 | |
| | | | | | | | | | | | |
| Total costs and expenses | 565,842 | | | 4,074 | | | 102,616 | | | 156,334 | | | 60,028 | | | 888,894 | |
| | | | | | | | | | | | |
| Income (loss) before income taxes | (223,192 | ) | | 2,096 | | | (13,864 | ) | | (17,049 | ) | | (60,028 | ) | | (312,037 | ) |
| Income tax expense (benefit) | (69,693 | ) | | — | | | — | | | — | | | (3,615 | ) | (D) | (73,308 | ) |
| | | | | | | | | | | | |
| Net loss | $ | (153,499 | ) | | $ | 2,096 | | | $ | (13,864 | ) | | $ | (17,049 | ) | | $ | (56,413 | ) | | $ | (238,729 | ) |
| Net loss per share: | | | | | | | | | | | |
| Basic | $ | (0.39 | ) | | | | | | | | | | $ | (0.55 | ) |
| Diluted | $ | (0.39 | ) | | | | | | | | | | $ | (0.55 | ) |
| Weighted average number of shares used to compute net loss per share: | | | | | | | | | | | |
| Basic | 396,218 | | | | | | | | | 34,994 | | (E) | 431,212 | |
| Diluted | 396,218 | | | | | | | | | 34,994 | | (E) | 431,212 | |
See accompanying notes.
KOSMOS ENERGY LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1. Description of Transaction
On August 3, 2018, Kosmos Energy Gulf of Mexico, LLC (“Purchaser”), a wholly owned subsidiary of Kosmos Energy Ltd. (“Kosmos” or “the Company”), entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain affiliates of First Reserve Corporation (the sellers under the Purchase Agreement, the “Seller” or "First Reserve") to acquire (the “Acquisition”) 100% of the outstanding equity interests in Deep Gulf Energy LP, DGE II Management, LLC, and DGE III Management, LLC (collectively, “Deep Gulf Energy” or “DGE”). The Acquisition closed on September 14, 2018. In consideration for the Acquisition, Kosmos paid $953 million in cash and 34,993,585 shares of Kosmos’ common stock, subject to post-closing adjustments. Kosmos funded the cash portion of the purchase price using cash on hand and drawings under its existing credit agreements.
On September 14, 2018, Kosmos acquired 100% of the outstanding equity interests in DGE from First Reserve and other shareholders. Deep Gulf Energy is a deepwater company operating in the Gulf of Mexico.
Note 2. Basis of Presentation
The Unaudited Pro Forma Condensed Combined Financial Information reflects the consolidated historical results of the Company and DGE, on a pro forma basis to give effect to the Acquisition, the equity issuance to First Reserve, and borrowings under our existing credit facilities (the “Transactions”), as if they had occurred on June 30, 2018 in the Unaudited Pro Forma Condensed Combined Balance Sheet, and on January 1, 2017 in the Unaudited Pro Forma Condensed Combined Statements of Operations.
The Unaudited Pro Forma Condensed Combined Balance Sheet and Statement of Operations as of and for the six months ended June 30, 2018, respectively, were derived from Kosmos’ unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2018 and from Deep Gulf Energy, LP’s unaudited condensed financial statements as of and for the six months ended June 30, 2018 and DGE II Management, LLC’s and DGE III Management, LLC’s unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2018.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2017 was derived from Kosmos’ audited consolidated statement of operations for the year ended December 31, 2017 and from Deep Gulf Energy, LP’s audited financial statements as of and for the year ended December 31, 2017 and DGE II Management, LLC’s and DGE III Management, LLC’s audited consolidated statement of operations for the year ended December 31, 2017.
The Unaudited Pro Forma Condensed Combined Financial Information has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations; however, management believes that the disclosures are adequate to make the information presented not misleading.
The Unaudited Pro forma Condensed Combined Financial Information has been prepared by the Company by accounting for the transaction as an asset acquisition under Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Subtopic 805-50, by allocating the cost of the acquisition to the assets acquired and liabilities assumed based on their relative fair values. The fair value of identifiable assets acquired and liabilities assumed from the Acquisition are based on a preliminary estimate of fair value using assumptions described in the accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information that the Company believes are reasonable.
The final purchase price allocation for the Transactions will be performed prior to the Company’s issuance of its financial statements as of and for the three and nine month periods ended September 30, 2018. These final valuations will be based on the actual net assets that exist as of the closing of the Acquisition. Any final adjustments may change the allocations of the purchase price, which could affect the fair value assigned to the assets acquired and liabilities assumed and could result in a change to the Unaudited Pro Forma Condensed Combined Financial Information. Therefore, the result of the final purchase price allocation could be materially different from the preliminary allocation set forth herein.
The Unaudited Pro Forma Condensed Combined Financial Information reflects events directly attributable to the described transactions and certain assumptions that the Company believes are reasonable. The Unaudited Pro Forma Condensed Combined Financial Information are not necessarily indicative of financial results that would have been attained had the described transactions occurred on the dates indicated above because they necessarily exclude various operating expenses, such as incremental general and administrative expenses that may be necessary to run the Company following the Transactions. The adjustments are based on currently available information and certain estimates and assumptions. Management believes that the assumptions provide a reasonable basis for presenting the significant effects of the described transactions as contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma consolidated and combined financial statements.
The Unaudited Pro Forma Condensed Combined Financial Information are provided for illustrative purposes only and are not intended to represent or be indicative of the results of operations or financial position of the combined company that would have been recorded had the Transactions been completed as of the dates presented and should not be taken as representative of future results of operations or financial position of the combined company. The Unaudited Pro Forma Condensed Combined Financial Information do not reflect the impacts of any potential operational efficiencies, asset dispositions, cost savings or economies of scale that the combined company may achieve with respect to the combined operations.
The Unaudited Pro Forma Condensed Combined Financial Information should be read in conjunction with the Company’s financial statements and related notes included on Form 10-K and Form 10-Q filed on February 26, 2018 and August 6, 2018, respectively, and DGE’s historical financial statements and accompanying notes included as Exhibits 99.1 through 99.6 to the Current Report on Form 8-K of which this financial information forms an exhibit.
Note 3. Reclassification of DGE
Financial information presented in the Deep Gulf Energy, LP, DGE II Management, LLC and DGE III Management, LLC columns in the Unaudited Pro Forma Condensed Combined Balance Sheet and Statement of Operations represents the historical balance sheets of those entities as of June 30, 2018 and the historical statements of operations of those entities for the year ended December 31, 2017 and for the six months ended June 30, 2018, respectively. Certain financial information has been reclassified to conform to the historical presentation in the Company’s consolidated financial statements as set forth below. Unless otherwise indicated, defined line items included in the footnotes have the meanings given to them in the historical financial statements of Deep Gulf Energy, LP, DGE II Management, LLC and DGE III Management, LLC.
Reclassification of Deep Gulf Energy LP
| | | Before Reclassification | | Reclassification Amount | | # | | After Reclassification |
| | | (in thousands) | | (in thousands) | | | | (in thousands) |
| Balance Sheet - As of June 30, 2018 | | | | | | | | |
| Accounts receivable | | $ | 1,721 | | | $ | (1,721 | ) | | (1 | ) | | $ | — | |
| Joint interest billings, net | | — | | | 256 | | | (1 | ) | | 256 | |
| Oil and gas sales | | — | | | 1,429 | | | (1 | ) | | 1,429 | |
| Other | | — | | | 36 | | | (1 | ) | | 36 | |
| Prepaid expenditures | | 278 | | | (278 | ) | | (2 | ) | | — | |
| Prepaid expenses and other | | — | | | 278 | | | (2 | ) | | 278 | |
| Oil and gas properties, successful efforts method, net of accumulated depletion | | 10,080 | | | (10,080 | ) | | (3 | ) | | - |
| Oil and gas properties, net | | — | | | 10,080 | | | (3 | ) | | 10,080 | |
| | | | | | | | | |
| Statement of Operations - For the Year Ended December 31, 2017 | | | | | | | | |
| Gas Revenue | | 1,105 | | | (1,105 | ) | | (4 | ) | | — | |
| NGL Revenue | | 262 | | | (262 | ) | | (4 | ) | | — | |
| Oil Revenue | | 6,975 | | | (6,975 | ) | | (4 | ) | | — | |
| Oil and gas revenue | | — | | | 8,342 | | | (4 | ) | | 8,342 | |
| Transportation expenses | | 248 | | | (248 | ) | | (5 | ) | | — | |
| Workover expense | | 1,471 | | | (1,471 | ) | | (5 | ) | | — | |
| Lease operating expenses | | 4,463 | | | (4,463 | ) | | (5 | ) | | — | |
| Oil and gas production | | — | | | 6,182 | | | (5 | ) | | 6,182 | |
| Accretion expense | | 786 | | | (786 | ) | | (6 | ) | | - |
| Depletion and depreciation | | — | | | 786 | | | (6 | ) | | 786 | |
| Interest expense | | 1 | | | (1 | ) | | (7 | ) | | — | |
| Interest and other financing costs, net | | — | | | 1 | | | (7 | ) | | 1 | |
| Other operating income | | (16 | ) | | 16 | | | (8 | ) | | — | |
| Impairment | | 4,537 | | | (4,537 | ) | | (8 | ) | | — | |
| Gain on sale of inventory | | (1,171 | ) | | 1,171 | | | (8 | ) | | — | |
| Other expenses, net | | — | | | 3,350 | | | (8 | ) | | 3,350 | |
| | | | | | | | | |
| Statement of Operations - For the Six Months Ended June 30, 2018 | | | | | | | | |
| Gas Revenue | | 603 | | | (603 | ) | | (9 | ) | | — | |
| NGL Revenue | | 177 | | | (177 | ) | | (9 | ) | | — | |
| Oil Revenue | | 5,390 | | | (5,390 | ) | | (9 | ) | | — | |
| Oil and gas revenue | | — | | | 6,170 | | | (9 | ) | | 6,170 | |
| Transportation expenses | | 149 | | | (149 | ) | | (10 | ) | | — | |
| Workover expense | | 70 | | | (70 | ) | | (10 | ) | | — | |
| Lease operating expenses | | 2,461 | | | (2,461 | ) | | (10 | ) | | — | |
| Oil and gas production | | — | | | 2,680 | | | (10 | ) | | 2,680 | |
| General and administrative expense | | (21 | ) | | 21 | | | (11 | ) | | — | |
| Other operating income | | 59 | | | (59 | ) | | (11 | ) | | — | |
| Other expenses, net | | — | | | (38 | ) | | (11 | ) | | (38 | ) |
| Accretion expense | | 876 | | | (876 | ) | | (12 | ) | | — | |
| Depletion and depreciation | | — | | | 876 | | | (12 | ) | | 876 | |
Reclassification and classification of the Unaudited Pro Forma Deep Gulf Energy LP Balance Sheet as of June 30, 2018 (in thousands):
| (1) | Represents disaggregation and reclassification of “Accounts receivable” of $1,721 into “Joint interest billings, net” of $256, “Oil and gas sales” of $1,429 and “Other” of $36. |
| (2) | Represents reclassification of “Prepaid expenditures” of $278 to “Prepaid expenses and other.” |
| (3) | Represents reclassification of “Oil and gas properties, successful efforts method, net of accumulated depletion” of $10,080 to “Oil and gas properties, net.” |
Reclassification and classification of the Unaudited Pro Forma Deep Gulf Energy LP Statement of Operations for the year ended December 31, 2017 (in thousands):
| (4) | Represents reclassification of “Gas revenue” of $1,105, reclassification of “NGLs revenue” of $262 and reclassification of “Oil revenue” of $6,975 to “Oil and gas revenue.” |
| (5) | Represents reclassification of “Transportation expenses” of $248, reclassification of “Workover expense” of $1,471 and reclassification of “Lease operating expenses” of $4,463 to “Oil and gas production.” |
| (6) | Represents reclassification of “Accretion expense” of $786 to “Depletion and depreciation.” |
| (7) | Represents reclassification of “Interest expense” of $1 to “Interest and other financing costs, net.” |
| (8) | Represents reclassification of “Other operating income” of $16, reclassification of “Impairment” of $4,537 and reclassification of “Gain on sale of inventory” of $1,171 to “Other expenses, net.” |
Reclassification and classification of the Unaudited Pro Forma Deep Gulf Energy LP Statement of Operations for the six months ended June 30, 2018 (in thousands):
| (9) | Represents reclassification of “Gas revenue” of $603, reclassification of “NGLs revenue” of $177 and reclassification of “Oil revenue” of $5,390 to “Oil and gas revenue.” |
| (10) | Represents reclassification of “Transportation expenses” of $149, reclassification of “Workover expense” of $70 and reclassification of “Lease operating expenses” of $2,461 to “Oil and gas production.” |
| (11) | Represents reclassification of “General and administrative expense” of $21 and reclassification of “Other operating income” of $59 to “Other expenses, net.” |
| (12) | Represents reclassification of “Accretion expense” of $876 to “Depletion and depreciation.” |
Reclassification of DGE II Management, LLC
| | | Before Reclassification | | Reclassification Amount | | # | | After Reclassification |
| | | (in thousands) | | (in thousands) | | | | (in thousands) |
| Balance Sheet - As of June 30, 2018 | | | | | | | | |
| Accounts receivable | | $ | 18,855 | | | $ | (18,855 | ) | | (1 | ) | | $ | — | |
| Joint interest billings, net | | — | | | 1,267 | | | (1 | ) | | 1,267 | |
| Oil and gas sales | | — | | | 17,641 | | | (1 | ) | | 17,641 | |
| Accrued liabilities | | — | | | (53 | ) | | (1 | ) | | (53 | ) |
| Current asset from price risk management activities | | 49 | | | (49 | ) | | (2 | ) | | — | |
| Derivatives | | — | | | 49 | | | (2 | ) | | 49 | |
| Prepaid expenditures | | 3,570 | | | (3,570 | ) | | (3 | ) | | — | |
| Prepaid expenses and other | | — | | | 3,570 | | | (3 | ) | | 3,570 | |
| Other property, plant, and equipment, net of accumulated depreciation | | 216 | | | (216 | ) | | (4 | ) | | — | |
| Other property, net | | — | | | 216 | | | (4 | ) | | 216 | |
| Oil and gas properties, successful efforts method, net of accumulated depletion | | 216,393 | | | (216,393 | ) | | (5 | ) | | — | |
| Oil and gas properties, net | | — | | | 216,393 | | | (5 | ) | | 216,393 | |
| Current liability from price risk management activities | | 12,890 | | | (12,890 | ) | | (6 | ) | | — | |
| Derivative short-term liability | | — | | | 12,890 | | | (6 | ) | | 12,890 | |
| Liability from price risk management activities | | 1,918 | | | (1,918 | ) | | (7 | ) | | — | |
| Derivative long-term liability | | — | | | 1,918 | | | (7 | ) | | 1,918 | |
| | | Before Reclassification | | Reclassification Amount | | # | | After Reclassification |
| | | (in thousands) | | (in thousands) | | | | (in thousands) |
| Statement of Operations - For the Year Ended December 31, 2017 | | | | | | | | |
| Gas Revenue | | $ | 9,013 | | | $ | (9,013 | ) | | (8 | ) | | $ | — | |
| NGL Revenue | | 6,451 | | | (6,451 | ) | | (8 | ) | | — | |
| Oil Revenue | | 122,492 | | | (122,492 | ) | | (8 | ) | | — | |
| Oil and gas revenue | | — | | | 137,956 | | | (8 | ) | | 137,956 | |
| Income (loss) from price risk management activities | | 2,320 | | | (2,320 | ) | | (9 | ) | | — | |
| Derivatives, net | | — | | | 2,320 | | | (9 | ) | | 2,320 | |
| Transportation expenses | | 7,703 | | | (7,703 | ) | | (10 | ) | | — | |
| Workover expense | | 11,792 | | | (11,792 | ) | | (10 | ) | | — | |
| Lease operating expenses | | 30,895 | | | (30,895 | ) | | (10 | ) | | — | |
| Oil and gas production | | — | | | 50,390 | | | (10 | ) | | 50,390 | |
| Accretion expense | | 1,559 | | | (1,559 | ) | | (11 | ) | | — | |
| Depreciation, depletion, and amortization | | 55,874 | | | (55,874 | ) | | (11 | ) | | — | |
| Depletion and depreciation | | — | | | 57,433 | | | (11 | ) | | 57,433 | |
| Interest expense | | 58,074 | | | (58,074 | ) | | (12 | ) | | — | |
| Interest and other financing costs, net | | — | | | 58,074 | | | (12 | ) | | 58,074 | |
| Inventory write-off | | 1,316 | | | (1,316 | ) | | (13 | ) | | — | |
| Other operating income | | (2,799 | ) | | 2,799 | | | (13 | ) | | — | |
| Loss on settlement of asset retirement obligations | | 138 | | | (138 | ) | | (13 | ) | | — | |
| Impairment | | 1,778 | | | (1,778 | ) | | (13 | ) | | — | |
| Other expenses, net | | — | | | 433 | | | (13 | ) | | 433 | |
| | | | | | | | | |
| Statement of Operations - For the Six Months Ended June 30, 2018 | | | | | | | | |
| Gas Revenue | | 3,430 | | | (3,430 | ) | | (14 | ) | | — | |
| NGL Revenue | | 3,429 | | | (3,429 | ) | | (14 | ) | | — | |
| Oil Revenue | | 81,893 | | | (81,893 | ) | | (14 | ) | | — | |
| Oil and gas revenue | | — | | | 88,752 | | | (14 | ) | | 88,752 | |
| Other operating income | | (71 | ) | | 71 | | | (15 | ) | | — | |
| Inventory write-off | | 511 | | | (511 | ) | | (15 | ) | | — | |
| Other expenses, net | | — | | | 440 | | | (15 | ) | | 440 | |
| Transportation expenses | | 1,730 | | | (1,730 | ) | | (16 | ) | | — | |
| Workover expense | | 7,904 | | | (7,904 | ) | | (16 | ) | | — | |
| Lease operating expenses | | 15,433 | | | (15,433 | ) | | (16 | ) | | — | |
| Oil and gas production | | — | | | 25,067 | | | (16 | ) | | 25,067 | |
| Accretion expense | | 1,114 | | | (1,114 | ) | | (17 | ) | | — | |
| Depreciation, depletion, and amortization | | 30,022 | | | (30,022 | ) | | (17 | ) | | — | |
| Depletion and depreciation | | — | | | 31,136 | | | (17 | ) | | 31,136 | |
| Income (loss) from price risk management activities | | 15,378 | | | (15,378 | ) | | (18 | ) | | — | |
| Derivatives, net | | — | | | 15,378 | | | (18 | ) | | 15,378 | |
| Interest expense | | 29,885 | | | (29,885 | ) | | (19 | ) | | — | |
| Interest and other financing costs, net | | — | | | 29,885 | | | (19 | ) | | 29,885 | |
Reclassification and classification of the Unaudited Pro Forma DGE II Management, LLC Balance Sheet as of June 30, 2018 (in thousands):
| (1) | Represents disaggregation and reclassification of “Accounts receivable” of $18,855 into “Joint interest billings, net” of $1,267, “Oil and gas sales” of $17,641 and “Accrued liabilities” of ($53). |
| (2) | Represents reclassification of “Current asset from price risk management activities” of $49 to “Derivative asset.” |
| (3) | Represents reclassification of “Prepaid expenditures” of $3,570 to “Prepaid expenses and other.” |
| (4) | Represents reclassification of “Other property, plant, and equipment, net of accumulated depreciation” of $216 to “Other property, net.” |
| (5) | Represents reclassification of “Oil and gas properties, successful efforts method, net of accumulated depletion” of $216,393 to “Oil and gas properties, net.” |
| (6) | Represents reclassification of “Current liability from price risk management activities” of $12,890 to “Derivative short-term liability.” |
| (7) | Represents reclassification of “Liability from price risk management activities” of $1,918 to “Derivative long-term liability.” |
Reclassification and classification of the Unaudited Pro Forma DGE II Management, LLC Statement of Operations for the year ended December 31, 2017 (in thousands):
| (8) | Represents reclassification of “Gas revenue” of $9,013, reclassification of “NGLs revenue” of $6,451 and reclassification of “Oil revenue” of $122,492 to “Oil and gas revenue.” |
| (9) | Represents reclassification of “Income (loss) from price risk management activities” of $2,320 to “Derivatives, net.” |
| (10) | Represents reclassification of “Transportation expenses” of $7,703, reclassification of “Workover expense” of $11,792 and reclassification of “Lease operating expenses” of $30,895 to “Oil and gas production.” |
| (11) | Represents reclassification of “Accretion expense” of $1,559 and reclassification of “Depreciation, depletion, and amortization” of $55,874 to “Depletion and depreciation.” |
| (12) | Represents reclassification of “Interest expense” of $58,074 to “Interest and other financing costs, net.” |
| (13) | Represents reclassification of “Inventory write-off” of $1,316, reclassification of “Other operating income” of $2,799, reclassification of “Loss on settlement of asset retirement obligations” of $138 and reclassification of “Impairment” of $1,778 to “Other expenses, net.” |
Reclassification and classification of the Unaudited Pro Forma DGE II Management, LLC Statement of Operations for the six months ended June 30, 2018 (in thousands):
| (14) | Represents reclassification of “Gas revenue” of $3,430, reclassification of “NGLs revenue” of $3,429 and reclassification of “Oil revenue” of $81,893 and to “Oil and gas revenue.” |
| (15) | Represents reclassification of “Other operating income” of $71 and reclassification of “Inventory write-off” of $511 to “Other expenses, net.” |
| (16) | Represents reclassification of “Transportation expenses” of $1,730, reclassification of “Workover expenses” of $7,904 and reclassification of “Lease operating expenses” of $15,433 to “Oil and gas production.” |
| (17) | Represents reclassification of “Accretion expense” of $1,114 and reclassification of “Depreciation, depletion, and amortization” of $30,022 to “Depletion and depreciation.” |
| (18) | Represents reclassification of “Income (loss) from price risk management activities” of $15,378 to “Derivatives, net.” |
| (19) | Represents reclassification of “Interest expense” of $29,885 to “Interest and other financing costs, net.” |
Reclassification of DGE III Management, LLC
| | | Before Reclassification | | Reclassification Amount | | # | | After Reclassification |
| | | (in thousands) | | (in thousands) | | | | (in thousands) |
| Balance Sheet - As of June 30, 2018 | | | | | | | | |
| Accounts receivable | | $ | 50,823 | | | $ | (50,823 | ) | | (1 | ) | | $ | — | |
| Joint interest billings, net | | — | | | 18,078 | | | (1 | ) | | 18,078 | |
| Oil and gas sales | | — | | | 31,636 | | | (1 | ) | | 31,636 | |
| Other | | — | | | 1,109 | | | (1 | ) | | 1,109 | |
| Prepaid expenditures | | 7,732 | | | (7,732 | ) | | (2 | ) | | — | |
| Prepaid expenses and other | | — | | | 7,732 | | | (2 | ) | | 7,732 | |
| Other | | 140 | | | (140 | ) | | (3 | ) | | — | |
| Restricted cash | | — | | | 140 | | | (3 | ) | | 140 | |
| Other property, plant, and equipment, net of accumulated depreciation | | 1,686 | | | (1,686 | ) | | (4 | ) | | — | |
| Other property, net | | — | | | 1,686 | | | (4 | ) | | 1,686 | |
| Oil and gas properties, successful efforts method, net of accumulated depletion | | 286,103 | | | (286,103 | ) | | (5 | ) | | — | |
| Oil and gas properties, net | | — | | | 286,103 | | | (5 | ) | | 286,103 | |
| Accounts payable - related-party | | 1,052 | | | (1,052 | ) | | (6 | ) | | — | |
| Accounts payable | | — | | | 1,052 | | | (6 | ) | | 1,052 | |
| Current liability from price risk management activities | | 27,611 | | | (27,611 | ) | | (7 | ) | | — | |
| Derivative short-term liability | | — | | | 27,611 | | | (7 | ) | | 27,611 | |
| Liability from price risk management activities | | 4,014 | | | (4,014 | ) | | (8 | ) | | — | |
| Derivative long-term liability | | — | | | 4,014 | | | (8 | ) | | 4,014 | |
| | | Before Reclassification | | Reclassification Amount | | # | | After Reclassification |
| | | (in thousands) | | (in thousands) | | | | (in thousands) |
| Statement of Operations - For the Year Ended December 31, 2017 | | | | | | | | |
| Gas Revenue | | $ | 8,009 | | | $ | (8,009 | ) | | (9 | ) | | $ | — | |
| NGL Revenue | | 6,647 | | | (6,647 | ) | | (9 | ) | | — | |
| Oil Revenue | | 140,802 | | | (140,802 | ) | | (9 | ) | | — | |
| Oil and gas revenue | | — | | | 155,458 | | | (9 | ) | | 155,458 | |
| Transportation expenses | | 6,945 | | | (6,945 | ) | | (10 | ) | | — | |
| Workover expense | | 4,482 | | | (4,482 | ) | | (10 | ) | | — | |
| Lease operating expenses | | 28,327 | | | (28,327 | ) | | (10 | ) | | — | |
| Oil and gas production | | — | | | 39,754 | | | (10 | ) | | 39,754 | |
| Income (loss) from price risk management activities | | 12,503 | | | (12,503 | ) | | (11 | ) | | — | |
| Derivatives, net | | — | | | 12,503 | | | (11 | ) | | 12,503 | |
| Accretion expense | | 380 | | | (380 | ) | | (12 | ) | | — | |
| Depreciation, depletion, and amortization | | 56,700 | | | (56,700 | ) | | (12 | ) | | — | |
| Depletion and depreciation | | — | | | 57,080 | | | (12 | ) | | 57,080 | |
| Interest expense | | 1,006 | | | (1,006 | ) | | (13 | ) | | — | |
| Interest and other financing costs, net | | — | | | 1,006 | | | (13 | ) | | 1,006 | |
| Inventory write-off | | 5,787 | | | (5,787 | ) | | (14 | ) | | — | |
| Other operating income | | (4,205 | ) | | 4,205 | | | (14 | ) | | — | |
| Gain on sale of property | | (44 | ) | | 44 | | | (14 | ) | | | — | |
| Impairment | | 2,870 | | | (2,870 | ) | | (14 | ) | | — | |
| Other expenses, net | | — | | | 4,408 | | | (14 | ) | | 4,408 | |
| | | | | | | | | |
| Statement of Operations - For the Six Months Ended June 30, 2018 | | | | | | | | |
| Gas Revenue | | 5,150 | | | (5,150 | ) | | (15 | ) | | — | |
| NGL Revenue | | 4,688 | | | (4,688 | ) | | (15 | ) | | — | |
| Oil Revenue | | 129,447 | | | (129,447 | ) | | (15 | ) | | — | |
| Oil and gas revenue | | — | | | 139,285 | | | (15 | ) | | 139,285 | |
| Income (loss) from price risk management activities | | 29,389 | | | (29,389 | ) | | (16 | ) | | — | |
| Derivatives, net | | — | | | 29,389 | | | (16 | ) | | 29,389 | |
| Transportation expenses | | 4,006 | | | (4,006 | ) | | (17 | ) | | — | |
| Workover expense | | 4,076 | | | (4,076 | ) | | (17 | ) | | — | |
| Lease operating expenses | | 22,783 | | | (22,783 | ) | | (17 | ) | | — | |
| Oil and gas production | | — | | | 30,865 | | | (17 | ) | | 30,865 | |
| Accretion expense | | 794 | | | (794 | ) | | (18 | ) | | — | |
| Depreciation, depletion, and amortization | | 39,028 | | | (39,028 | ) | | (18 | ) | | — | |
| Depletion and depreciation | | | | 39,822 | | | (18 | ) | | 39,822 | |
| Inventory write-off | | 2,490 | | | (2,490 | ) | | (19 | ) | | — | |
| Other operating income | | (4,781 | ) | | 4,781 | | | (19 | ) | | — | |
| Impairment | | 1,044 | | | (1,044 | ) | | (19 | ) | | — | |
| Other expenses, net | | — | | | (1,247 | ) | | (19 | ) | | (1,247 | ) |
| Interest and other expense, net | | 502 | | | (502 | ) | | (20 | ) | | — | |
| Interest and other financing costs, net | | — | | | 498 | | | (20 | ) | | 498 | |
| Other expenses, net | | — | | | 3 | | | (20 | ) | | 3 | |
Reclassification and classification of the Unaudited Pro Forma DGE III Management, LLC Balance Sheet as of June 30, 2018 (in thousands):
| (1) | Represents disaggregation and reclassification of “Accounts receivable” of $50,823 into “Joint interest billings, net” of $18,078, “Oil and gas sales” of $31,636 and “Other” of $1,109. |
| (2) | Represents reclassification of “Prepaid expenditures” of $7,732 to “Prepaid expenses and other.” |
| (3) | Represents reclassification of “Other” of $140 to “Restricted cash.” |
| (4) | Represents reclassification of “Other property, plant, and equipment, net of accumulated depreciation” of $1,686 to “Other property, net.” |
| (5) | Represents reclassification of “Oil and gas properties, successful efforts method, net of accumulated depletion” of $286,103 to “Oil and gas properties, net.” |
| (6) | Represents reclassification of “Accounts payable – related-party” of $1,052 to “Accounts payable”. DGE historically disclosed a $1.05 million, third party revenue payable related to its joint venture with Houston Energy Deepwater Venture, as a related party payable. |
| (7) | Represents reclassification of “Current liability from price risk management activities” of $27,611 to “Derivative short-term liability.” |
| (8) | Represents reclassification of “Liability from price risk management activities” of $4,014 to “Derivative long-term liability.” |
Reclassification and classification of the Unaudited Pro Forma DGE III Management, LLC Statement of Operations for the year ended December 31, 2017 (in thousands):
| (9) | Represents reclassification of “Gas revenue” of $8,009, reclassification of “NGLs revenue” of $6,647 and reclassification of “Oil revenue” of $140,802 to “Oil and gas revenue.” |
| (10) | Represents reclassification of “Transportation expenses” of $6,945, reclassification of “Workover expense” of $4,482 and reclassification of “Lease operating expenses” of $28,327 to “Oil and gas production.” |
| (11) | Represents reclassification of “Income (loss) from price risk management activities” of $12,503 to “Derivatives, net.” |
| (12) | Represents reclassification of “Accretion expense” of $380 and reclassification of “Depreciation, depletion, and amortization” of $56,700 to “Depletion and depreciation.” |
| (13) | Represents reclassification of “Interest and other expense, net” of $1,006 to “Interest and other financing costs, net.” |
| (14) | Represents reclassification of “Inventory write-off” of $5,787, reclassification of “Other operating income” of $4,205, reclassification of "Gain on sale of property" of $44, and reclassification of “Impairment” of $2,870 to “Other expenses, net.” |
Reclassification and classification of the Unaudited Pro Forma DGE III Management, LLC Statement of Operations for the six months ended June 30, 2018 (in thousands):
| (15) | Represents reclassification of “Gas revenue” of $5,150, reclassification of “NGLs revenue” of $4,688 and reclassification of “Oil revenue” of $129,447 to “Oil and gas revenue.” |
| (16) | Represents reclassification of “Income (loss) from price risk management activities” of $29,389 to “Derivatives, net.” |
| (17) | Represents reclassification of “Transportation expenses” of $4,006, reclassification of “Workover expense” of $4,076 and reclassification of “Lease operating expenses” of $22,783 to “Oil and gas production.” |
| (18) | Represents reclassification of “Accretion expense” of $794 and reclassification of “Depreciation, depletion, and amortization” of $39,028 to “Depletion and depreciation.” |
| (19) | Represents reclassification of “Inventory write-off” of $2,490, reclassification of “Other operating income” of $4,781, and reclassification of "Impairment" of $1,044 to “Other expenses, net.” |
| (20) | Represents reclassification of “Interest and other expense, net” of $502 to “Interest and other financing costs, net” of $498 and "Other expenses, net" of $3. |
Note 4. Preliminary Purchase Price Allocation
The aggregate purchase price for the DGE acquisition consisted of $953 million in cash and 34,993,585 shares of Kosmos common stock. Additionally, we incurred $14.1 million of acquisition related costs which have been capitalized as part of the purchase price.
The preliminary purchase price allocation of the Acquisition under the asset acquisition method of accounting is shown below. The final purchase price allocation will be determined when the Company has completed the valuations and necessary calculations subsequent to the Acquisition. The final purchase price allocation will likely differ from these estimates and could differ materially from the preliminary allocation used in the pro forma adjustments.
The fair value measurements of oil and gas assets acquired and asset retirement obligations liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair value of oil and gas properties and asset retirement obligations were measured using the discounted cash flow technique of valuation.
Significant inputs to the valuation of oil and gas properties include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices, (iv) future plugging and abandonment costs, (v) estimated future cash flows, and (vi) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates and are the most sensitive and subject to change.
| | | Preliminary Purchase Price Allocation (in thousands) |
| Fair value of assets acquired: | | |
| Proved oil and gas properties | | $ | 1,096,337 | |
| Unproved oil and gas properties | | 274,084 | |
| Accounts receivable and other | | 137,951 | |
| | | |
| Total assets acquired | | $ | 1,508,372 | |
| | | |
| Fair value of liabilities assumed: | | |
| Asset retirement obligations | | $ | 74,642 | |
| Accrued liabilities and other | | 118,827 | |
| Derivative liabilities | | 40,265 | |
| | | |
| Total liabilities assumed | | $ 233,734 | |
| | | |
| | | |
| Cash consideration paid | | $ 952,586 | |
| Fair value of common stock(1) | | 307,944 | |
| Transaction related costs | | 14,108 | |
| Total purchase price | | $ | 1,274,638 | |
| (1) | Based on 34,993,585 common shares issued at a price of $8.80, which is the opening Kosmos common stock price on September 14, 2018, the closing date of the Acquisition. |
Note 5. Pro Forma Balance Sheet Adjustments
| A. | Adjustment to reduce DGE cash by $178.7 million to cash acquired of $1.2 million. Additional $66.7 million decrease reflects the use of $66.7 million from cash on the Company's balance sheet to fund a portion of the cash purchase price, as shown in the following table: |
| | | (in thousands) |
| Sources of funds: | | |
| Borrowing under secured credit facility | | $ | 900,000 | |
| Cash on hand | | 66,694 | |
| Total Sources of funds | | $ | 966,694 | |
| Uses of funds: | | |
| Cash paid to seller at closing | | $ | 952,586 | |
| Transaction related costs | | 14,108 | |
| Total uses of funds | | $ | 966,694 | |
| B. | Adjustment to eliminate related party balances owed among DGE that will eliminate upon consolidation into Kosmos. |
| C. | Write-off of deferred financing costs in connection with the application of asset acquisition accounting for $0.5 million. |
| D. | Represents the impact of the preliminary purchase price allocation on proved and unproved properties. |
| E. | Represents an increase of $900 million attributable to the draw on existing credit facilities to finance the acquisition, net of the pay down of $290.8 million of DGE debt and $20.7 million of accrued interest. |
| F. | Represents an adjustment to the DGE asset retirement obligation attributable to the preliminary purchase price adjustment. |
| G. | Represents an adjustment to eliminate the historical equity of DGE. |
| H. | Represents an increase to Common shares and Additional paid in capital to reflect the issuance of 34,993,585 Kosmos common shares as part of the purchase price based on the opening share price of $8.80 as of close date September 14, 2018. |
| I. | DGE records the recovery of the Council of Petroleum Accountants Societies, Inc. ("COPAS") overhead from the partners as Other Income; whereas, Kosmos records it as a reduction to the actual expenditures incurred. The pro forma adjustment reflects the reclassification of such COPAS overhead recovery from other income to general and administrative and oil and gas production on the statement of operations and oil and gas properties on the balance sheet. |
| J. | Represents preliminary adjustment to acquired working capital as of the acquisition date. |
Note 6. Pro Forma Statement of Operations Adjustments
| A. | Reflects an increase in depletion and depreciation of $68.6 million and $68.9 million for the year ended December 31, 2017 and six months ended June 30, 2018, respectively, attributable to the relative fair value allocation to oil and gas properties and an increase and decrease to accretion expense of $1.4 million and $0.7 million for the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, attributable to the preliminary purchase price adjustment and application of Kosmos’ credit adjusted discount rate to DGE’s asset retirement obligations. |
| B. | Kosmos borrowed an additional $600 million under its Reserve Based Loan Facility, which will bear interest at LIBOR plus 3.25%, and $300 million under its Corporate Revolver, which will bear interest of LIBOR plus 5%. The adjustment reflects the following: i) the removal of $59.1 million and $30.3 million of DGE interest expense for the year ended December 31, 2017 and six months ended June 30, 2018, respectively, related to DGE debt that was paid off at closing, ii) an increase in interest expense of $50.9 million and $26.3 million for the year ended December 31, 2017 and six months ended June 30, 2018, respectively, for the borrowings used to finance the Acquisition and iii) a decrease in interest expense of $13.3 million and $5.6 million for the year ended December 31, 2017 and six months ended June 30, 2018, respectively, for the reduction in commitment fees under existing credit facilities due to the increase in actual borrowings. A hypothetical 0.125% increase or decrease in the expected weighted average interest rate would result in an increase or decrease in interest expense of $2.1 million and $1.0 million for the year ended December 31, 2017 and six months ended June 30, 2018, respectively. |
| C. | DGE records the recovery of COPAS overhead from the partners as Other Income; whereas, Kosmos records it as a reduction to the actual expenditures incurred. The pro forma adjustment reflects the reclassification of such COPAS overhead recovery from other income to general and administrative and oil and gas production on the statement of operations and oil and gas properties on the balance sheet. |
| D. | Reflects the impact of applying a 35% statutory tax rate for the year ended December 31, 2017 and a 21% statutory tax rate for the six months ended June 30, 2018 to DGE Income (loss) before income taxes and to the pro forma adjustments. The DGE entities had not historically been subject to income tax expense but will be subject to income tax after the Acquisition. |
| E. | Pro forma basic and diluted net loss per share was calculated by dividing pro forma net loss by the weighted average shares of Kosmos common stock, adjusted for the issuance of 34,993,585 Kosmos common shares in connection with the Acquisition, as if such shares were issued and outstanding on January 1, 2017. |
Note 7. Pro Forma Supplemental Oil and Natural Gas Reserve Information
The following tables set forth certain unaudited pro forma information concerning the Company’s proved oil and natural gas, including both dry gas and natural gas liquids (“NGLs”), reserves for the year ended December 31, 2017, giving effect to the DGE acquisition as if it had occurred on January 1, 2017. There are numerous uncertainties inherent in estimating the quantities of proved reserves and projecting future rates of production and timing of development costs. Further, the volumes considered to be commercially recoverable fluctuate with changes in prices and operating costs. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and natural gas properties. Accordingly, these estimates are expected to change as additional information becomes available in the future. The estimates of reserves, and the standardized measure of future net cash flow, shown below, reflects DGE’s development plan for the properties acquired by the Company pursuant to the DGE acquisition, rather than the Company’s development plan for such properties. The Company’s estimate of proved oil and natural gas may be materially different than the estimates determined by DGE’s management team. The following reserve data represent estimates only and should not be construed as being precise.
| | | Kosmos Historical | | DGE Acquisition(1) | | Pro Forma Combined Company |
| | | Oil | | Natural Gas | | Total | | Oil | | Natural Gas | | Total | | Total |
| | | (MMBbl) | | (Bcf) | | (MMBoe) | | (MMBbl) | | (Bcf) | | (MMBoe) | | (MMBoe) |
| Net proved developed and undeveloped reserves at December 31, 2016 | | | 74 | | | | 15 | | | | 77 | | | | 40 | | | | 67 | | | | 51 | | | | 128 | |
| Extensions and discoveries | | | 1 | | | | - | | | | 1 | | | | 3 | | | | 4 | | | | 3 | | | | 4 | |
| Production | | | (11 | ) | | | (1 | ) | | | (12 | ) | | | (5 | ) | | | (9 | ) | | | (7 | ) | | | (19 | ) |
| Revision in estimate | | | 18 | | | | 35 | | | | 24 | | | | 5 | | | | 27 | | | | 9 | | | | 33 | |
| Purchases of minerals-in-place | | | 20 | | | | 13 | | | | 21 | | | | - | | | | - | | | | - | | | | 21 | |
| Net proved developed and undeveloped reserves at December 31, 2017 | | | 101 | | | | 62 | | | | 110 | | | | 42 | | | | 88 | | | | 57 | | | | 168 | |
| Proved developed reserves | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | 77 | | | | 51 | | | | 85 | | | | 26 | | | | 50 | | | | 34 | | | | 119 | |
| Proved undeveloped reserves | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | 24 | | | | 11 | | | | 25 | | | | 16 | | | | 38 | | | | 23 | | | | 48 | |
| (1) | Includes Deep Gulf Energy LP, DGE II Management, LLC and subsidiary, and DGE III Management, LLC and subsidiaries reserves. The individual reserve disclosures for Deep Gulf Energy LP, DGE II Management, LLC and subsidiary, and DGE III Management, LLC and subsidiaries can be found in their respective audited financial statements as filed as an exhibit to this 8-K. Totals may not add as a result of rounding. |
Standardized Measure of Discounted Future Net Cash Flows
Summarized in the following table is information for the standardized measure of discounted cash flows relating to proved reserves as of December 31, 2017, giving effect to the DGE acquisition. The standardized measure of discounted future net cash flows does not purport to be, nor should it be interpreted to present, the fair value of the oil and natural gas reserves of the property. An estimate of fair value would take into account, among other things, the recovery of reserves not presently classified as proved, the value of unproved properties, and consideration of expected future economic and operating conditions.
The estimates of future cash flows and future production and development costs as of December 31, 2017 are based on the unweighted arithmetic average first-day-of-the-month price for the preceding 12-month period.
Estimated future production of proved reserves and estimated future production and development costs of proved reserves are based on current costs and economic conditions. All wellhead prices are held flat over the forecast period for all reserve categories. The estimated future net cash flows are then discounted at a rate of 10%.
| | | Kosmos Historical | | DGE Acquisition(1) | | Pro Forma Combined |
| At December 31, 2017 | | | | (in millions) | | |
| Future cash inflows | | $ | 5,476 | | | $ | 2,273 | | | $ | 7,749 | |
| Future production costs | | (2,398 | ) | | (587 | ) | | (2,985 | ) |
| Future development costs | | (1,355 | ) | | (430 | ) | | (1,785 | ) |
| Future tax expenses(2) | | (428 | ) | | — | | | (428 | ) |
| Future net cash flows | | 1,295 | | | 1,256 | | | 2,551 | |
| 10% annual discount for estimating timing of cash flows | | (194 | ) | | (358 | ) | | (552 | ) |
| Standardized measure of discounted future net cash flows | | $ | 1,101 | | | $ | 898 | | | $ | 1,999 | |
| (1) | Includes Deep Gulf Energy LP, DGE II Management, LLC and subsidiary, and DGE III Management, LLC and subsidiaries reserves. The individual reserve disclosures for Deep Gulf Energy LP, DGE II Management, LLC and subsidiary, and DGE III Management, LLC and subsidiaries can be found in their respective audited financial statements as filed as an exhibit to this 8-K. |
| (2) | The Company is a tax exempt company incorporated pursuant to the laws of Bermuda. The Company has not been and does not expect to be subject to future income tax expense related to its proved oil and gas reserves levied at a corporate parent level. Accordingly, the Company’s Standardized Measure for the years ended December 31, 2017 only reflects the effects of future tax expense levied at an asset level. Future net cash flows for the assets acquired from DGE do not include |
the effects of income taxes on future revenues because DGE were limited liability companies not subject to entity-level income taxation. Accordingly, no provision for federal income taxes has been provided because taxable income was passed through to their equity holders.
In the foregoing determination of future cash inflows, sales prices used for gas and oil for December 31, 2017 were estimated using the average price during the 12-month period, determined as the unweighted arithmetic average of the first-day-of-the-month price for each month. Prices were adjusted by lease for quality, transportation fees and regional price differentials. Future costs of developing and producing the proved gas and oil reserves reported at the end of each year shown were based on costs determined at each such year-end, assuming the continuation of existing economic conditions.
It is not intended that the standardized measure of discounted future net cash flows represents the fair market value of the Company’s proved reserves. The Company cautions that the disclosures shown are based on estimates of proved reserve quantities and future production schedules which are inherently imprecise and subject to revision, and the 10% discount rate is arbitrary. In addition, costs and prices as of the measurement date are used in the determinations, and no value may be assigned to probable or possible reserves.
Changes in the standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves are as follows:
| | | Kosmos Historical | | DGE Acquisition(1) | | Pro Forma Combined |
| | | (in millions) |
| Balance at December 31, 2016 | | $ | 846 | | | $ | 615 | | | $ | 1,461 | |
| Purchase of minerals in place | | 146 | | | — | | | 146 | |
| Sales and transfers 2017 | | (467 | ) | | (205 | ) | | (672 | ) |
| Extensions and discoveries | | 21 | | | 29 | | | 50 | |
| Net changes in prices and costs | | 485 | | | 190 | | | 675 | |
| Previously estimated development costs incurred during the period | | 6 | | | 58 | | | 64 | |
| Net changes in development costs | | (388 | ) | | (59 | ) | | (447 | ) |
| Revisions of previous quantity estimates | | 415 | | | 192 | | | 607 | |
| Net changes in tax expenses(2) | | (8 | ) | | — | | | (8 | ) |
| Accretion of discount | | 98 | | | 61 | | | 159 | |
| Changes in timing and other | | (53 | ) | | 17 | | | (36 | ) |
| Balance at December 31, 2017 | | $ | 1,101 | | | $ | 898 | | | $ | 1,999 | |
| (1) | Includes Deep Gulf Energy LP, DGE II Management LLC and subsidiary, and DGE III Management LLC and subsidiaries reserves. The individual reserve disclosures for Deep Gulf Energy LP, DGE II Management LLC and subsidiary, and DGE III Management LLC and subsidiaries can be found in their respective audited financial statements as filed as an exhibit to this 8-K. |
| (2) | The Company is a tax exempt company incorporated pursuant to the laws of Bermuda. The Company has not been and does not expect to be subject to future income tax expense related to its proved oil and gas reserves levied at a corporate parent level. Accordingly, the Company’s Standardized Measure for the years ended December 31, 2017 only reflects the effects of future tax expense levied at an asset level. Future net cash flows for the assets acquired from DGE do not include the effects of income taxes on future revenues because DGE is a limited liability company not subject to entity-level income taxation. Accordingly, no provision for federal income taxes has been provided because taxable income was passed through to their equity holders. Although the DGE entities were not historically subject to income tax expense, they will be subject to U.S. federal and certain state income taxes after the Acquisition. |
Estimates of economically recoverable oil and natural gas reserves and of future net revenues are based upon a number of variable factors and assumptions, all of which are to some degree subjective and may vary considerably from actual results. Therefore, actual production, revenues, development and operating expenditures may not occur as estimated. The reserve data are estimates only, are subject to many uncertainties and are based on data gained from production histories and on assumptions as to geologic formations and other matters. Actual quantities of oil and natural gas may differ materially from the amounts estimated.
