Acquisitions | 6 Months Ended |
Jun. 30, 2014 |
Business Combinations [Abstract] | ' |
Acquisitions | ' |
Acquisitions |
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The Partnership completed acquisitions during 2013 and 2014, as described below. Certain of the 2013 acquisitions increased the Partnership's portfolio of oil and natural gas properties. The acquisitions of MCE, Erick Flowback Services LLC ("EFS"), Rod's Production Services, L.L.C. ("RPS") and MidCentral Completion Services, LLC ("MCCS") help to facilitate the Partnership's goals of becoming a more fully integrated oil and natural gas partnership. With the exception of the acquisition of oil and natural gas properties from Orion Exploration Partners, LLC, all of the 2013 acquisitions were with related parties. The acquisition of MCCS was the only acquisition in 2014 with related parties. See Note 11 "Related Party Transactions." |
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The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs under the fair value hierarchy as described in Note 7 "Fair Value Measurements." Fair value may be estimated using comparable market data, a discounted cash flow method, or another method as discussed below. In the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future and include estimates of applicable sales estimates, operational costs and a risk-adjusted discount rate. The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties included estimates of: (i) reserves, including risk adjustments for probable and possible reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; (v) future cash flows; and (vi) a market-based weighted average cost of capital rate. Fair value of MCCS' inventory acquired was determined based on a comparative sales approach. Fair value for intangible assets acquired was primarily determined using a discounted cash flow model or multi-period excess earnings model under the income approach, which factors in discount rates, probability factors and forecasts. The fair values of property, plant and equipment acquired were primarily based on a cost approach using an indirect cost methodology to determine replacement cost. The inputs, as noted above, used to determine fair value required significant judgments and estimates by the Partnership’s management at the time of the valuation and are the most sensitive and subject to change. Carrying value for current assets and liabilities acquired is typically representative of fair value due to their short term nature. |
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2013 Acquisitions |
March Acquired Properties. In March 2013, we acquired certain oil and natural gas properties located in the Golden Lane and Luther fields in Oklahoma from New Source, Scintilla, and W.K. Chernicky, LLC, for an aggregate adjusted purchase price of $28.0 million (the "March Acquired Properties"). As consideration, the Partnership issued 1,378,500 common units valued at $20.30 per unit. |
The total purchase price allocated to the assets acquired and liabilities assumed based upon fair value on the date of acquisition is as follows (in thousands): |
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Fair value of assets acquired and liabilities assumed: | | | | | |
Proved oil and natural gas properties | $ | 29,049 | | | | | |
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Other assets | 754 | | | | | |
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Asset retirement obligations | (1,333 | ) | | | | |
Other liabilities | (488 | ) | | | | |
Total net assets | $ | 27,982 | | | | | |
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May Acquired Properties. In May 2013, the Partnership completed an acquisition of certain oil and natural gas properties located in Oklahoma from New Source Energy for $7.9 million, net of purchase price adjustments (the "May Acquired Properties"). |
The total purchase price allocated to the assets acquired and liabilities assumed based upon fair value on the date of acquisition is as follows (in thousands): |
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Fair value of assets acquired and liabilities assumed: | | | | | |
Proved oil and natural gas properties | $ | 8,165 | | | | | |
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Asset retirement obligations | (19 | ) | | | | |
Other liabilities | (254 | ) | | | | |
Total net assets | $ | 7,892 | | | | | |
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The amounts of revenues and excess of revenues over direct operating expenses included in the accompanying unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2013 generated by the March Acquired Properties and the May Acquired Properties are shown in the table below. Direct operating expenses include lease operating expenses and production taxes. |
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| Three Months Ended June 30, 2013 | | Six Months Ended June 30, 2013 |
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Revenue | $ | 2,692 | | | $ | 2,777 | |
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Excess of revenues over direct operating expenses | $ | 1,286 | | | $ | 1,333 | |
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Acquisition expense related to the March Acquired Properties and the May Acquired Properties of $0.5 million was included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations for both the three and six months ended June 30, 2013. |
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July Scintilla Acquired Properties. In July 2013, the Partnership completed an acquisition of a 10% working interest in certain oil and natural gas properties located in Oklahoma from Scintilla for $4.9 million, net of purchase price adjustments. |
The total purchase price allocated to the assets acquired and liabilities assumed based upon fair value on the date of acquisition is as follows (in thousands): |
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Fair value of assets acquired and liabilities assumed: | | | | | |
Proved oil and natural gas properties | $ | 4,888 | | | | | |
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Asset retirement obligations | (4 | ) | | | | |
Other liabilities | (18 | ) | | | | |
Total net assets | $ | 4,866 | | | | | |
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Orion Acquired Properties. In July 2013, the Partnership acquired certain oil and natural gas properties located in Oklahoma from Orion Exploration Partners, LLC for $3.2 million, net of purchase price adjustments. |
The total purchase price allocated to the assets acquired and liabilities assumed based upon fair value on the date of acquisition is as follows (in thousands): |
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Fair value of assets acquired and liabilities assumed: | | | | | |
Proved oil and natural gas properties | $ | 3,274 | | | | | |
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Asset retirement obligations | (24 | ) | | | | |
Other liabilities | (20 | ) | | | | |
Total net assets | $ | 3,230 | | | | | |
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Southern Dome Acquired Properties. In October 2013, the Partnership completed the acquisition of working interests in 25 producing wells and related undeveloped leasehold rights in the Southern Dome field in Oklahoma County, Oklahoma (the "Southern Dome Acquired Properties") from Scintilla for total consideration of $14.5 million, net of purchase price adjustments. |
The total purchase price allocated to the assets acquired and liabilities assumed based upon fair value on the date of acquisition is as follows (in thousands): |
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Consideration: | | | | | |
Cash | $ | 4,260 | | | | | |
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Fair value of common units granted (1) | 8,608 | | | | | |
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Contingent consideration (2) | 1,600 | | | | | |
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Total fair value of consideration | $ | 14,468 | | | | | |
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Fair value of assets acquired and liabilities assumed: | | | | | |
Proved oil and natural gas properties | $ | 15,190 | | | | | |
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Asset retirement obligations | (170 | ) | | | | |
Other liabilities | (552 | ) | | | | |
Total net assets | $ | 14,468 | | | | | |
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__________ |
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-1 | The fair value of the unit consideration was based upon 414,045 common units valued at $20.79 per unit (closing price on the date of the acquisition). | | | | | | |
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-2 | The Partnership agreed to provide additional consideration to Scintilla if average daily production attributable to the acquired working interests exceeds a specified average daily production during the specified period (the "Southern Dome Contingent Consideration"). See Note 3 "Contingent Consideration" for additional discussion of the Southern Dome Contingent Consideration. | | | | | | |
MCE Acquisition. In November 2013, the Partnership acquired 100% of the equity interests in MCE, other than Class B Units that were retained by certain of the sellers as discussed further below (the "MCE Acquisition"). MidCentral Energy Services, LLC ("MCES"), a wholly owned subsidiary of MCE, operates an oilfield services business that offers full service blowout prevention installation and pressure testing services throughout the Mid-Continent region and in South Texas and West Texas, along with the rental of certain ancillary equipment necessary to perform such services. |
Total consideration for the MCE Acquisition is as follows (in thousands): |
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Consideration: | | | | | |
Cash | $ | 3,781 | | | | | |
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Fair value of common units granted (1) | 41,822 | | | | | |
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Common units granted to MCE employees (2) | 2,259 | | | | | |
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Contingent consideration (3) | 6,320 | | | | | |
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MCE Class B units granted (4) | 13,988 | | | | | |
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Total fair value of consideration | $ | 68,170 | | | | | |
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__________ |
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-1 | The fair value of the unit consideration was based upon 1,847,265 common units valued at $22.64 per unit (closing price on the date of the acquisition). | | | | | | |
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-2 | The fair value of the unit consideration was based upon 99,768 common units valued at $22.64 per unit (closing price on the date of the acquisition). These common units were issued to certain employees of MCE under the Partnership’s long-term incentive plan, primarily for service prior to the acquisition. Any forfeited common units do not revert to the Partnership, but would be distributed to the former owners of MCE. | | | | | | |
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-3 | The owners of MCE are entitled to receive additional common units in the second quarter of 2015 based on a specified multiple of the annualized EBITDA of MCES for the trailing nine month period ending March 31, 2015, less certain adjustments, subject to a $120.0 million cap ("MCE Contingent Consideration"). The MCE Contingent Consideration was valued at $6.3 million at the acquisition date through the use of a Monte Carlo simulation. See Note 3 "Contingent Consideration" for additional discussion of the MCE Contingent Consideration. | | | | | | |
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-4 | Certain owners of MCE retained Class B Units, which entitle the holders to receive incentive distributions of cash distributed by MCE above specified thresholds in increasing amounts. See Note 9 "Equity" for additional discussion of these incentive distributions. The Class B units were valued at $14.0 million at the acquisition date through the use of a Monte Carlo simulation. | | | | | | |
The total purchase price allocated to the assets acquired and liabilities assumed based upon fair value on the date of acquisition is as follows (in thousands): |
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Fair value of assets acquired and liabilities assumed: | | | | | |
Cash | $ | 1,522 | | | | | |
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Accounts receivable | 3,365 | | | | | |
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Other current assets | 954 | | | | | |
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Property and equipment | 7,923 | | | | | |
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Intangible asset (1) | 36,772 | | | | | |
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Goodwill (2) | 23,974 | | | | | |
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Other assets | 19 | | | | | |
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Total assets acquired | 74,529 | | | | | |
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Accounts payable and accrued liabilities | (2,345 | ) | | | | |
Factoring payable | (1,679 | ) | | | | |
Long-term debt | (2,335 | ) | | | | |
Total liabilities assumed | (6,359 | ) | | | | |
Net assets acquired | $ | 68,170 | | | | | |
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__________ |
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-1 | Customer relationships, an identifiable intangible asset, were valued based on the estimated free cash flows the customer relationships are expected to provide and are amortized using an accelerated method over seven years. | | | | | | |
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-2 | Goodwill is calculated as the excess of the consideration transferred over the fair value of net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Such goodwill is not deductible for tax purposes. Specifically, the goodwill recorded as part of the acquisition of MCE includes any intangible assets that do not qualify for separate recognition, such as the MCE trained, skilled and assembled workforce, along with the expected synergies from leveraging the customer relationships and integrating new product offerings into MCE's business. Goodwill has been allocated to the oilfield services segment. | | | | | | |
Since the President and Chief Executive Officer of the Partnership's general partner, Kristian B. Kos, through his control over the Partnership’s general partner, controls the Partnership and also owned 36% of the equity interest in MCE, the MCE Acquisition was accounted for as a business combination achieved in stages. The Partnership initially recorded the 36% equity interest in MCE acquired from Mr. Kos at his equity method carrying basis, which was $1.8 million as of November 12, 2013. The Partnership remeasured the 36% interest to determine the acquisition-date fair value and recognized a corresponding gain of $22.7 million on investment in acquired business. |
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2014 Acquisitions |
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CEU Acquisition. On January 31, 2014, we completed the acquisition of working interests in 23 producing wells and related undeveloped leasehold rights in the Southern Dome field in Oklahoma County, Oklahoma, from CEU Paradigm, LLC ("CEU") for $17.1 million, net of purchase price adjustments (the "CEU Acquisition"). |
The total purchase price allocated to the assets acquired and liabilities assumed based upon fair value on the date of acquisition, net of purchase price adjustments, is as follows (in thousands): |
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Consideration: | | | | | |
Cash | $ | 5,503 | | | | | |
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Fair value of common units granted (1) | 11,621 | | | | | |
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Contingent consideration (2) | — | | | | | |
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Total fair value of consideration | $ | 17,124 | | | | | |
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Fair value of assets acquired and liabilities assumed: | | | | | |
Proved oil and natural gas properties | $ | 17,306 | | | | | |
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Asset retirement obligations | (182 | ) | | | | |
Total net assets | $ | 17,124 | | | | | |
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__________ |
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-1 | The fair value of the unit consideration was based upon 488,667 common units valued at $23.78 per unit (closing price on the date of the acquisition). | | | | | | |
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-2 | The Partnership agreed to provide additional consideration to CEU if average daily production attributable to the acquired working interests exceeds a specified average daily production during a specified period (the "CEU Contingent Consideration"). See Note 3 "Contingent Consideration" for additional discussion of the CEU Contingent Consideration. | | | | | | |
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MCCS Acquisition. On June 26, 2014, we exercised the option granted in connection with the MCE Acquisition to acquire 100% of the equity interest in MCCS, an oilfield services company that specializes in providing services, primarily installation and pressure testing, to oil and natural gas exploration and production companies (the "MCCS Acquisition"). |
Total consideration for the MCCS Acquisition is as follows (in thousands): |
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Consideration: | | | | | |
Fair value of common units granted (1) | $ | 789 | | | | | |
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Contingent consideration (2) | 4,057 | | | | | |
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Noncontrolling interest (3) | 1,509 | | | | | |
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Total fair value of consideration | $ | 6,355 | | | | | |
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__________ |
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-1 | The fair value of the unit consideration was based upon 33,646 common units valued at $23.45 per unit (closing price on the date of the acquisition). | | | | | | |
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-2 | The owners of MCCS are entitled to receive additional common units in the second quarter of 2015 based on a specified multiple of the annualized EBITDA of MCCS for the trailing nine month period ending March 31, 2015, less certain adjustments, subject to a $4.5 million cap ("MCCS Contingent Consideration"). The MCCS Contingent Consideration was valued at $4.1 million at the acquisition date through the use of a Monte Carlo simulation. See Note 3 "Contingent Consideration" for additional discussion of the MCCS Contingent Consideration. | | | | | | |
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-3 | As a condition of the acquisition agreement, MCCS was contributed to MCE by the Partnership, which increased the value of the noncontrolling interest held by MCE's Class B unitholders. The increase in the value of the noncontrolling interest that resulted from this is part of the total consideration paid for the MCCS Acquisition and was valued at the acquisition date through the use of a Monte Carlo simulation. | | | | | | |
The following table summarizes the assets acquired and the liabilities assumed as of the acquisition date at estimated fair value (in thousands): |
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Fair value of assets acquired and liabilities assumed: | | | | | |
Cash | $ | 109 | | | | | |
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Accounts receivable | 524 | | | | | |
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Inventory | 2,035 | | | | | |
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Other current assets | 14 | | | | | |
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Property and equipment | 107 | | | | | |
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Intangible asset (1) | 1,700 | | | | | |
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Goodwill (2) | 4,060 | | | | | |
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Other assets | 28 | | | | | |
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Total assets acquired | 8,577 | | | | | |
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Accounts payable and accrued liabilities | (1,431 | ) | | | | |
Long-term debt | (791 | ) | | | | |
Total liabilities assumed | (2,222 | ) | | | | |
Net assets acquired | $ | 6,355 | | | | | |
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__________ |
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-1 | Customer relationships, an identifiable intangible asset, were valued based on the estimated free cash flows the customer relationships are expected to provide and are amortized using an accelerated method over seven years. | | | | | | |
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-2 | Goodwill is calculated as the excess of the consideration transferred over the fair value of net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Such goodwill is not deductible for tax purposes. Specifically, the goodwill recorded as part of the acquisition of MCCS includes any intangible assets that do not qualify for separate recognition, such as the MCCS trained, skilled and assembled workforce, along with the expected synergies from leveraging the customer relationships and integrating new product offerings into MCCS's business. Goodwill has been allocated to the oilfield services segment. | | | | | | |
Since the President and Chief Executive Officer of the Partnership's general partner, Kristian B. Kos, through his control over the Partnership’s general partner, controls the Partnership and also owned 50% of the equity interest in MCCS, the MCCS Acquisition was accounted for as a business combination achieved in stages. The Partnership initially recorded the 50% equity interest in MCCS acquired from Mr. Kos at his equity method carrying basis, which was $0.1 million as of June 26, 2014. The Partnership remeasured the 50% interest to determine the acquisition-date fair value and recognized a corresponding gain of $2.3 million on investment in acquired business. |
Services Acquisition. On June 26, 2014, the Partnership acquired 100% of the outstanding membership interests in EFS and 100% of the outstanding membership interests in RPS for total consideration of approximately $108.3 million (the "Services Acquisition"). EFS and RPS are oilfield services companies that specialize in providing well testing and flowback services to the oil and natural gas industry. |
Total consideration for the Services Acquisition is as follows (in thousands): |
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Consideration: | | | | | |
Cash | $ | 57,348 | | | | | |
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Fair value of common units granted (1) | 33,106 | | | | | |
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Common units granted for the benefit of EFS/RPS employees (2) | 724 | | | | | |
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Contingent consideration (3) | 17,144 | | | | | |
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Total fair value of consideration | $ | 108,322 | | | | | |
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__________ |
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-1 | The fair value of the unit consideration was based upon 1,411,777 common units valued at $23.45 per unit (closing price on the date of the acquisition). | | | | | | |
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-2 | The fair value of the unit consideration was based upon 30,867 common units valued at $23.45 per unit (closing price on the date of the transaction). These units were issued to satisfy the settlement of phantom units granted to EFS employees with no service requirement. An additional 401,171 common units were issued and are held in escrow to satisfy the future settlement of phantom units granted to EFS and RPS employees in conjunction with the Services Acquisition are excluded from consideration based on the future service requirement for vesting. See Note 9 "Equity" for additional discussion of phantom units. | | | | | | |
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-3 | The former owners of EFS and RPS are entitled to receive additional consideration in the second quarter of 2015 based on a specified multiple of the annualized EBITDA of EFS and RPS for the year ending December 31, 2014, less certain adjustments ("EFS/RPS Contingent Consideration"). The EFS/RPS Contingent Consideration was valued at $17.1 million at the acquisition date through the use of a probability analysis. See Note 3 "Contingent Consideration" for additional discussion of the EFS/RPS Contingent Consideration. | | | | | | |
The following table summarizes the assets acquired and the liabilities assumed as of the acquisition date at estimated fair value (in thousands): |
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Fair value of assets acquired and liabilities assumed: | | | | | |
Cash | $ | 1,668 | | | | | |
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Accounts receivable | 21,611 | | | | | |
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Other current assets | 247 | | | | | |
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Property and equipment | 43,151 | | | | | |
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Goodwill (1) | 11,665 | | | | | |
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Intangible assets (2) | 68,700 | | | | | |
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Total assets acquired | 147,042 | | | | | |
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Accounts payable and accrued liabilities | (6,080 | ) | | | | |
Factoring payable | (15,840 | ) | | | | |
Long-term debt | (16,800 | ) | | | | |
Total liabilities assumed | (38,720 | ) | | | | |
Net assets acquired | $ | 108,322 | | | | | |
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__________ |
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-1 | Goodwill is calculated as the excess of the consideration transferred over the fair value of net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Such goodwill is not deductible for tax purposes. Specifically, the goodwill recorded as part of the Services Acquisition includes any intangible assets that do not qualify for separate recognition, such as the EFS and RPS trained, skilled and assembled workforce, along with the expected synergies from leveraging the customer relationships. Goodwill has been allocated to the oilfield services segment. | | | | | | |
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-2 | Identifiable intangible assets include $64.2 million for customer relationships and $4.5 million for non-compete agreements. Customer relationships were valued based on the estimated free cash flows the customer relationships are expected to provide and are amortized using an accelerated method over seven years. Non-compete agreements were valued based on an income approach and are amortized over the agreement period. | | | | | | |
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Pro forma financial information. The following unaudited pro forma combined results of operations are presented for the three and six months ended June 30, 2014 as though the Partnership completed the CEU Acquisition and the Services Acquisition (collectively, the "2014 Material Acquisitions") as of January 1, 2013. The pro forma combined results of operations for the three and six months ended June 30, 2014 have been prepared by adjusting the historical results of the Partnership to include the historical results of the 2014 Material Acquisitions through the dates of acquisition and estimates of the effect of these transactions on the combined results. In addition, pro forma adjustments have been made assuming the units issued as consideration for these acquisitions and a portion of the units issued in the April 2014 equity offering, the proceeds from which were used to fund an acquisition, had been outstanding since January 1, 2013. Future results may vary significantly from the results reflected in this pro forma financial information because of future events and transactions, as well as other factors. |
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| Three Months Ended June 30, 2014 | | Six Months Ended June 30, 2014 |
| (in thousands) |
Revenue | $ | 55,881 | | | $ | 116,166 | |
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Net income (1) | $ | 4,079 | | | $ | 6,186 | |
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Net income per common unit (1): | | | |
Basic | $ | 0.24 | | | $ | 0.37 | |
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Diluted | $ | 0.24 | | | $ | 0.37 | |
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-1 | Excludes $23.9 million of acquisition costs and transaction bonuses paid to EFS and RPS employees that were included in the historical results of the Partnership, EFS or RPS. | | | | | | |
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The amounts of revenues and operating income included in the accompanying unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2014 generated by the 2014 Material Acquisitions are shown in the table below. The operating income attributable to the CEU Acquisition represents the excess of revenue over direct operating expenses and does not reflect certain expenses, such as general and administrative; therefore, this information is not intended to report results as if these operations were managed on a stand-alone basis. Direct operating expenses include lease operating expenses and production and other taxes for the CEU Acquisition. |
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| Three Months Ended June 30, 2014 | | Six Months Ended June 30, 2014 |
| (in thousands) |
Revenue | $ | 3,054 | | | $ | 4,937 | |
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Operating income | $ | 1,077 | | | $ | 2,196 | |
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Acquisition expense for the 2014 Material Acquisitions of $1.3 million was included in general and administrative expenses in the accompanying unaudited statements of operations for both the three and six months ended June 30, 2014. |
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The following unaudited pro forma combined results of operations are presented for the three and six months ended June 30, 2013 as though the Partnership completed the acquisitions of the March Acquired Properties, the Southern Dome Acquired Properties and the MCE Acquisition (collectively, the "2013 Material Acquisitions") as of January 1, 2012, which was the beginning of the earliest period presented at the time of the acquisition, and the 2014 Material Acquisitions, as of January 1, 2013. The pro forma combined results of operations for the three and six months ended June 30, 2013 have been prepared by adjusting the historical results of the Partnership to include the historical results of these acquisitions through the date of acquisition and estimates of the effect of the 2013 Material Acquisitions and the 2014 Material Acquisitions on the combined results. In addition, pro forma adjustments have been made for the interest that would have been incurred for financing the cash portion of the consideration of the 2013 Material Acquisitions with the Partnership's senior secured revolving credit facility and assume the units issued as consideration for the 2013 Material Acquisitions had been outstanding since January 1, 2012 and the units issued as consideration for the 2014 Material Acquisitions and a portion of the units issued in the April 2014 equity offering, the proceeds from which were used to fund an acquisition, had been outstanding since January 1, 2013. |
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| Three Months Ended June 30, 2013 | | Six Months Ended June 30, 2013 |
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| (in thousands) |
Revenue | $ | 48,942 | | | $ | 102,993 | |
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Net income (loss) (1) | $ | 1,776 | | | $ | (3,628 | ) |
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Net income (loss) per common unit (1): | | | |
Basic | $ | 0.11 | | | $ | (0.41 | ) |
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Diluted | $ | 0.11 | | | $ | (0.41 | ) |
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(1) Includes $1.4 million of the Partnership's acquisition costs related to the 2014 Material Acquisitions in the six months ended June 30, 2013. |