On March 31, 2015, SEP Holdings III, LLC (the “Seller”), a wholly owned subsidiary of the Sanchez Energy Corporation (the “Company”), completed a transaction under a Purchase and Sale Agreement (the “Purchase Agreement”) with Sanchez Production Partners LP (“SPP” or the “Partnership”) and SPP’s wholly owned subsidiary, SEP Holdings IV, LLC (the “Buyer”) pursuant to which the Seller sold to the Buyer escalating amounts of partial working interests in 59 wellbores at existing producing intervals in the non-operated Palmetto Field in the Eagle Ford with proved reserves of approximately 5.2 MMBOE (the “Palmetto Sale”).The aggregate average working interest percentage initially conveyed was 18.25% per wellbore and, upon January 1 of each subsequent year after the closing, the Buyer’s working interest will automatically increase (and the Seller’s will correspondingly decrease) in incremental amounts until January 1, 2019, at which point the Buyer will own a 47.5% working interest and the Seller will own a 2.5% working interest in each of the wellbores. In exchange for these assets, the Buyer paid to the Seller cash consideration of $83.0 million (approximately $81.4 million as adjusted) in cash and issued 1,052,632 common units of the Partnership valued at approximately $2.0 million to the Seller. Also, in anticipation of the transaction, the Company entered into certain gas and oil hedging transactions related to the production of the wellbores with the Royal Bank of Canada. As part of the closing, the Company novated these hedges to SPP and the purchase price was adjusted upward to account for amounts the Company had paid under these hedges. The effective date of the sale was January 1, 2015.
On October 14, 2015, the Company and SN Catarina, LLC, a wholly-owned subsidiary of the Company (“Midstream Seller”), completed the sale of Midstream Seller’s interests in Catarina Midstream, LLC, a wholly-owned subsidiary of Midstream Seller (“Midstream”), which as of the closing owned (i) certain midstream gathering lines and associated assets and interests located in Dimmit County and Webb County, Texas and (ii) 105,263 common units of SPP, to SPP for approximately $345.8 million in cash, after post-closing adjustments (the “Western Catarina Midstream Divestiture”).In connection with the closing of the Western Catarina Midstream Divestiture, Midstream Seller and Midstream entered into a Firm Gathering and Processing Agreement (the “Gathering Agreement”) on October 14, 2015 for an initial term of 15 years under which production from approximately 35,000 acres in Dimmit County and Webb County, Texas will be dedicated for gathering by Midstream. In addition, for the first five years of the Gathering Agreement, Midstream Seller will be required to meet a minimum quarterly volume delivery commitment of 10,200 barrels per day of crude oil and condensate and 142,000 Mcf per day of natural gas, subject to certain adjustments. Midstream Seller will be required to pay gathering and processing fees of $0.96 per barrel for crude oil and condensate and $0.74 per Mcf for natural gas that are tendered through the gathering system, in each case, subject to an annual escalation for a positive increase in the consumer price index. In addition, Midstream Seller has, under certain circumstances, a right of first refusal during the term of the agreement and afterwards with respect to dispositions by Midstream of its ownership interest in the gathering system.
On December 14, 2016, SN Cotulla Assets, LLC (“SNC”), a wholly-owned subsidiary of the Company, completed the initial closing of the sale of certain oil and gas interests and associated assets located in Dimmit County, Frio County, LaSalle County, Zavala County and McMullen County, Texas (the “Cotulla Assets”) to Carrizo (Eagle Ford) LLC (“Carrizo Eagle Ford”), and completed a second closing on an additional portion of the Cotulla Assets on January 9, 2017 (collectively, the “Cotulla Transaction”), pursuant to a Purchase and Sale Agreement dated October 24, 2016 (the “Cotulla Purchase Agreement”) between SNC and Carrizo Eagle Ford, and, for the limited purposes set forth therein, the Company and Carrizo Oil & Gas, Inc. (“Carrizo”).To date, SNC has received aggregate cash consideration of approximately $160.6 million, which remains subject to post-closing adjustments and future closings. The effective date of the Cotulla Transaction is June 1, 2016 (the “Effective Date”).
The following unaudited pro forma combined financial information is based on the historical consolidated financial statements of the Company adjusted to reflect the acquisition of the Palmetto Sale, Western Catarina Midstream Divestiture and Cotulla Transaction. The Company’s historical consolidated balance sheet as of September 30, 2016, has been adjusted to reflect the pro forma effect of the Cotulla Transaction as if it had occurred on September 30, 2016.The Company’s historical consolidated statement of operations for the year ended December 31, 2015 and for the nine months ended September 30, 2016 and 2015 has also been adjusted to give pro forma effect to the Palmetto Sale, Western Catarina Midstream Divestiture and Cotulla Transaction as if they had occurred on January 1, 2015. The unaudited pro forma combined financial information should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2015.
The unaudited pro forma combined financial information is for informational purposes only and is not intended to represent or to be indicative of the combined results of operations or financial position that the Company
Notes to the Unaudited Pro Forma Combined Balance Sheet
The unaudited pro forma combined balance sheet as of September 30, 2016, includes adjustments to reflect the following:
| (a) | | Represents the aggregate cash consideration received from Carrizo for the Cotulla Assets as of January 9, 2017. |
| (b) | | Reflects the elimination of assets and liabilities attributable to the Cotulla Transaction in 2016. These adjustments include decreases in proved and unproved properties, a decrease in oil and natural gas receivables and decreases in liabilities for accrued capital expenditures, accrued operating expenditures, and asset retirement obligations. |
| (c) | | Reflects the gain of $117 million arising from the Cotulla Transaction as of January 9, 2017. This estimated gain has not been reflected in the pro forma consolidated statement of operations as it is considered to be nonrecurring in nature. No adjustment has been made to the sale proceeds to give effect to any potential future post-closing adjustments under the terms of the Cotulla Purchase Agreement. The adjustment also reflects the changes in depletion, ceiling impairment, and accretion assumed to have occurred during the year ended December 31, 2015. |
Notes to the Unaudited Pro Forma Combined Statements of Operations
The unaudited pro forma combined statements of operations for the nine months ended September 30, 2016 and 2015 and the year ended December 31, 2015 include adjustments to reflect the following:
| (a) | | Represents the changes in oil, natural gas liquids and natural gas sales resulting from the Palmetto Sale and Cotulla Transaction completed during 2015 and 2016, respectively. |
| (b) | | Represents the changes in oil and natural gas production expenses resulting from the Palmetto Sale, Western Catarina Midstream Divestiture and Cotulla Transaction completed during 2015 and 2016. |
| (c) | | Represents the changes in production taxes resulting from the Palmetto Sale and Cotulla Transaction completed during 2015 and 2016, respectively. |
| (d) | | Represents the changes in depletion, depreciation, accretion, and amortization expense resulting from the Palmetto Sale, Western Catarina Midstream Divestiture and Cotulla Transaction completed during 2015 and 2016. |
| (e) | | Represents the change in ceiling impairment of oil and natural gas properties related to the pro forma effects of removing the Palmetto assets, Western Catarina Midstream assets and Cotulla assets divested during 2015 and 2016. |
| (f) | | Represents the change in income tax expense related to the pro forma effects of removing operations of the Palmetto assets, Western Catarina Midstream assets and Cotulla Assets divested during 2015 and 2016. |
