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You should rely only on the information contained in this Prospectus Supplement and the Prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this Prospectus Supplement. Our business, financial condition, results of operations and prospects may have changed since that date.
There are significant risks associated with an investment in our common units. These risks are described under the caption “Risk Factors” beginning on page 20 of the Prospectus, as updated on page S-3 in this Prospectus Supplement.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus Supplement or the accompanying Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Information contained on our website is not part of this Prospectus Supplement or the Prospectus.
November 13, 2015
Certain statements within this Prospectus Supplement and the Prospectus may constitute forward-looking statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “will,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “continue,” “further,” “seek,” “plan” or “project” and variations of these words or comparable words or phrases of similar meaning.
These forward-looking statements include such things as:
| | · | investment objectives and our ability to make investments in a timely manner on acceptable terms; |
| | · | ability to complete planned acquisitions and implement its operating strategy; |
| | · | references to future success in the Partnership’s property acquisition, drilling and marketing activities; |
| | · | our use of proceeds of the offering and our business strategy; |
| | · | estimated future capital expenditures; |
| | · | sales of the Partnership’s properties and other liquidity events; |
| | · | competitive strengths and goals; and |
These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected. Such factors include, but are not limited to, those described under “Risk Factors” and the following:
| | · | that our strategy of acquiring oil and gas properties on attractive terms and developing those properties may not be successful or, even if we successfully acquire properties, that our operations on such properties may not be successful; |
| | · | general economic, market, or business conditions; |
| | · | changes in laws or regulations; |
| | · | the risk that the wells in which we acquire an interest are productive, but do not produce enough revenue to return the investment made; |
| | · | the risk that the wells we drill do not find hydrocarbons in commercial quantities or, even if commercial quantities are encountered, that actual production is lower than expected on the productive life of wells is shorter than expected; |
| | · | current credit market conditions and our ability to obtain long-term financing for our property acquisitions and drilling activities in a timely manner and on terms that are consistent with what we project when we invest in a property; |
| | · | uncertainties concerning the price of oil and natural gas, which may decrease and remain low for prolonged periods; and |
| | · | the risk that any hedging policy we employ to reduce the effects of changes in the prices of our production will not be effective. |
Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we cannot assure investors that our expectations will be attained or that any deviations will not be material. Investors are cautioned that forward-looking statements speak only as of the date they are made and that, except as required by law, we undertake no obligation to update these forward-looking statements to reflect any future events or circumstances. All subsequent written or oral forward-looking statements attributable to the Partnership or to individuals acting on its behalf are expressly qualified in their entirety by this section.
We are a Delaware limited partnership recently formed to acquire and develop oil and gas properties located onshore in the United States. We will seek to acquire working interests, leasehold interests, royalty interests, overriding royalty interests, production payments and other interests in producing and non-producing oil and gas properties. Our primary investment objectives are to (i) acquire producing and non-producing oil and gas properties with development potential, and to enhance the value of the properties through drilling and other development activities, (ii) make distributions to the holders of the common units, (iii) engage in a liquidity transaction after five to seven years, in which all properties are sold and the sales proceeds are distributed to the partners, merge with another entity, or list the common units on a national securities exchange, and (iv) permit holders of common units to invest in oil and gas properties in a tax efficient basis. The proceeds from the sale of the common units primarily will be used to acquire producing and non-producing oil and natural gas properties onshore in the United States, and to develop those properties.
Our general partner is Energy 11 GP, LLC. Our general partner has engaged with E11 Management, LLC, (which we refer to as the “Manager”) to provide us with management and operating services regarding substantially all aspects of our business. David Lerner Associates, Inc. will act as the dealer manager for the offering of the common units.
The following disclosure is hereby inserted as a new section following the section entitled “Terms of the Offering—Acceptance of Subscriptions” on page 57 of the Prospectus.
As of August 19, 2015, we completed our minimum offering of 1,315,790 common units at $19.00 per common unit. As of November 1, 2015, we had completed the sale of a total of 2,724,534 common units at $19.00 per common unit for total gross proceeds of $51.8 million and proceeds net of selling commissions and marketing expenses of $48.7 million. We are continuing the offering at $19.00 per common unit in accordance with the prospectus. As of November 1, 2015, 97,538,624 common units remained unsold. We expect to offer common units until January 22, 2017, unless the offering is extended until April 24, 2017 by our general partner, provided that the offering will be terminated if all of the common units are sold before then.
Also, upon reaching the minimum offering, the Partnership entered into the First Amended and Restated Agreement of Limited Partnership at the Initial Closing, and the Partnership also entered into the Management Services Agreement with the Manager at the Initial Closing.
The following disclosure is hereby inserted as a new section following the section entitled “Proposed Activities—Well Operations” on page 68 of the Prospectus.
On September 15, 2015, Energy 11 Operating Company, LLC, our wholly owned subsidiary, entered into an Interest Purchase Agreement (“Purchase Agreement”) by and among Kaiser-Whiting, LLC (“Seller”) and the owners of all the limited liability company interests therein, for the potential purchase of an 11.5% working interest in approximately 215 existing producing wells and approximately 262 future development locations in the Sanish field located in Mountrail County, North Dakota (the “Sanish Field Assets”). The Sanish field is part of the Greater Williston Basin where industry activity is focused on development of the prolific Bakken Shale formation. Whiting Petroleum Corporation, a publicly traded oil and gas company, operates the asset on behalf of Seller and other working interest owners. If we close on the Purchase Agreement, we will be a non-operator, with Whiting, the largest producer in this basin, acting as operator. We anticipate drilling capital expenditure requirements for the Sanish Field Assets to be an estimated $75 million through 2020.
Pursuant to the Purchase Agreement, the cash purchase price consists of (i) an initial $160 million (with the Deposit, as defined below, applied at closing) payable at closing subject to customary adjustments, (ii) a contingent payment of up to $95 million, and (iii) a deferred payment of $2 million. The contingent payment will provide for a sharing between us and Seller to the extent the NYMEX current five-year strip oil price for WTI at December 31, 2017 is above $56.61
(with a maximum of $89.00) per barrel. The contingent payment will be calculated as follows: if on December 31, 2017 the average of the monthly NYMEX:CL strip prices for future contracts during the delivery period beginning December 31, 2017 and ending December 31, 2022 (the “Measurement Date Average Price”) is greater than $56.61, then the Sellers will be entitled to a contingent payment equal to (a) (i) the lesser of (A) the Measurement Date Average Price and (B) $89.00, minus (ii) $56.61, multiplied by (b) 586,601 bbls per year for each of the five years from 2018 through 2022 represented by the contracts for the entire acquisition. The contingent consideration is capped at $95 million and is to be paid on January 1, 2018.
On September 17, 2015 we funded a deposit of $10 million (the “Deposit”) with the manager of Seller to be applied toward the purchase price at closing or to be released to the owners of Seller if the transaction does not close by the outside closing date due to our breach of the Purchase Agreement. In the event the transaction does not close due to a breach by Sellers or if the aggregate value of any title defects, environmental defects and casualty losses exceeds 10% of the unadjusted initial purchase price, the Deposit will be refunded to us. If we do not perform under the contract as a result of our diligence review or otherwise breach the Purchase Agreement, the Sellers’ sole remedy against us is release of the Deposit to the Sellers.
The closing of the Purchase Agreement is subject to the satisfaction of a number of required conditions which currently remain unsatisfied under the Purchase Agreement. Consummation of the acquisition is subject to our satisfactory completion of the review of title, environmental investigations, financial analysis and geological analysis, obtaining sufficient financing to fund the purchase price and other due diligence. Accordingly, there can be no assurance at this time that all of the conditions precedent to consummating the Purchase Agreement will be satisfied, that we will find the results of our diligence investigation acceptable, that we will be able to obtain sufficient financing on terms reasonably acceptable to us or that the transaction will be successfully completed.
The description of the Purchase Agreement set forth above is only a summary and is qualified in its entirety by reference to the Purchase Agreement, a copy of which is filed as an exhibit to the registration statement of which the Prospectus is a part. Combined Statements of Revenues and Direct Operating Expenses for the Sanish Field Assets for the three years ending December 31, 2014, and the six months ending June 30, 2015 and 2014, along with the Partnership’s pro forma financial statements reflecting the acquisition of the Sanish Field Assets for the year ending December 31, 2014, and the six months ending June 30, 2015, are included in this Prospectus Supplement beginning on Page F-19.
Principal Properties
The Bakken Shale and its close geologic cousin, the Three Forks Shale, are found in the Williston Basin, centered in North Dakota and extending into neighboring Montana and Canada. The Bakken Shale in the Williston Basin is one of the largest oil fields in the U.S., covering an area of approximately 17,500 square miles. While oil has been produced in North Dakota from the Williston Basin since the 1950s, it is only since 2007 through the application of horizontal drilling and hydraulic fracturing technologies that the Bakken has begun to realize its full potential. The success of the Bakken Shale has made North Dakota the second largest oil producing state in the U.S., trailing only Texas. Bakken oil production has risen from under 200,000 barrels per day in 2007, when it was only the seventh largest oil producer, to over 1,300,000 barrels per day currently. Further, the U.S. Department of Energy’s Energy Information Administration (“EIA”) has recently estimated that North Dakota is also second only to Texas in terms of recoverable future oil reserves with 3.8 billion estimated recoverable barrels.
The acreage and production that we are proposing to acquire in the Sanish field is in what is known in the industry as being located in the “the core of the core,” meaning the area is known to be one of the most prolific in terms of production rates, longevity and economic returns in the entire Bakken region.
The following disclosure is added to the end of the section titled “Risk Factors” on page 44 of the Prospectus.
We will incur substantial costs whether or not the transaction is completed.
We will incur substantial costs related to the pending acquisition whether or not the transaction is completed. These costs include fees for financial advisors, attorneys and accountants, filing fees and financial printing costs.
We would be required to release the Deposit to Seller as a termination fee if we were to terminate the acquisition agreement prior to completion of the transaction for lack of financing or our actions associated with our diligence review.
The financial information included herein regarding the Sanish Field Assets may not represent the financial results of the Sanish Field Assets for subsequent periods.
In accordance with the rules of the SEC, we have included herein financial information for the Sanish Field Assets for the three years ended December 31, 2014, and for the six months ended June 30, 2015 and 2014. During the three-year period ending December 31, 2014, the average price at which oil was sold from the Sanish Field Assets was approximately $95 per barrel. In addition, reserves included herein at December 31, 2012, 2013, and 2014, were determined by applying average prices of crude oil and natural gas for the last 12 months to estimated future production. At the end of 2014, oil prices began falling steeply, such that during the six months ending June 30, 2015, sales of oil from the Sanish Field Assets averaged approximately $54 per barrel. While financial information regarding the past performance of a business is not typically a guaranteed indication of future performance, given the great disparity in current oil prices between the date the Sanish Field Assets may be acquired and the time frame from which financial information regarding those assets is actually available, investors should understand that in the current pricing environment, past financial performance is less an indication of future financial performance than is usual.
We may have difficulty in financing the acquisition of the Sanish Field Assets.
The Purchase Price for the Sanish Field Assets is $160 million, plus a contingent payment of up to $95 million and deferred consideration of $2 million. We currently only have approximately $35 million in assets, including the $10 million Deposit we have posted in connection with this acquisition. In the current oil price environment, financing sources for oil and gas property acquisitions have adopted stricter guidelines for lending than those that have been available in the recent past. We initially intend to borrow enough funds to have, along with our funds on-hand plus any proceeds from the ongoing offering, if any, prior to closing of the acquisition, sufficient funding to pay the initial Purchase Price for the Sanish Field Assets. There can be no assurance that we will be able to finance the initial purchase price for the Sanish Field Assets.
We will need additional funding post-closing of the acquisition of the Sanish Field Assets in order to retain our full interest therein.
In addition to the $160 million initial purchase price for the Sanish Assets, we anticipate that we will be obligated to invest an additional $75 million in drilling capital expenditures through 2020 to retain our working interest in the Sanish Field Assets without becoming subject to non-consent penalties under the joint operating agreements governing those properties. We will depend, at least in part, on continued sales pursuant to the terms of this Offering, to fund the anticipated capital expenditures needed to retain our full interest in these assets. We anticipate paying the contingent payment, which will only arise if oil prices increase significantly over the next few years, out of the proceeds of production from the assets acquired and from additional financing that should become available if oil prices rise. None of these funding sources is guaranteed, and if we are unable to obtain all of this funding we may lose all or a portion of the assets acquired, and our results of operations will be negatively affected accordingly.
There can be no assurance that the Partnership will consummate the acquisition of the Sanish Field Assets.
The acquisition of the Sanish Field Assets is subject to a number of contingencies, including satisfactory conclusion of due diligence, our satisfactory completion of the review of title, environmental investigations, financial analysis and geological analysis and financing, and there can be no assurance that the Sanish Field Assets will ultimately be purchased.
The failure of the Partnership to obtain financing is not a permitted reason for the Partnership to fail to consummate the acquisition, and if financing is not available, the Partnership may forfeit the $10 million Deposit. In addition, if the Partnership otherwise fails to close the acquisition in accordance the terms of the purchase agreement, the Partnership may forfeit the Deposit. Forfeiture of the Deposit would materially reduce capital available for other acquisitions and for our planned distributions.
We will have limited control over the activities on properties we do not operate.
Other companies operate the properties we are seeking to acquire. We will have limited ability to influence or control the operation or future development of these non-operated properties or the amount of capital expenditures that we are required to fund with respect to them. The failure of an operator of our wells to adequately perform operations, an operator’s breach of the applicable agreements or an operator’s failure to act in ways that are in our best interest could reduce our production and revenues. Our dependence on the operator and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could materially adversely affect the realization of our targeted returns on capital in drilling or acquisition activities and lead to unexpected future costs.
The following disclosure is hereby inserted as a new section following the section entitled “Terms of the Offering— Acceptance of Subscriptions” on page 57 of the Prospectus.
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Energy 11, L.P. was formed as a Delaware limited partnership. Our general partner is Energy 11 GP, LLC. The initial capitalization of the Partnership of $1,000 occurred on July 9, 2013. We are offering common units of limited partner interest on a “best efforts” basis, with the intention of raising up to $2,000,000,000 of capital, consisting of 100,263,158 Units. Our Registration Statement on Form S-1 (File No. 333-197476) was declared effective by the SEC on January 22, 2015. As of August 19, 2015, we completed our minimum offering of 1,315,790 common units at $19.00 per common unit. Upon raising a minimum of $25,000,000, the holders of the common units were admitted and the Partnership commenced operations.
We will have no officers, directors or employees. Instead, our general partner will manage our day to day affairs. All decisions regarding the management of the Partnership made by our general partner will be made by the board of directors of the general partner and its officers. We are party to a management services agreement (the “Management Agreement”) with E11 Management, LLC (the “Manager”). The Manager provides management and other services to the Partnership under direction of the General Partner as provided in the Management Agreement.
We were formed to acquire and develop oil and gas properties located onshore in the United States. We will seek to acquire working interests, leasehold interests, royalty interests, overriding royalty interests, production payments and other interests in producing and nonproducing oil and gas properties.
Results of Operations
We closed on our minimum offering on August 19, 2015. Because we have not acquired any assets, our management is not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic and industry conditions affecting our targeted investments generally, which may be reasonably anticipated to have a material impact on the capital resources and the revenue or income to be derived from the operation of assets.
Liquidity and Capital Resources
Our principal source of liquidity will be the proceeds of this “best-efforts” offering, the cash flow generated from properties we will acquire and any short term investments. In addition, we may borrow funds to pay operating expenses, distributions, make acquisitions or for other capital needs of the Partnership.
We intend to raise capital through a “best-efforts” offering of common units by David Lerner Associates, Inc. (the “Managing Dealer”). Under the agreement with the Managing Dealer, the Managing Dealer will receive a total of 6% in selling commissions and a marketing expense allowance based on gross proceeds of the common units sold. The Managing Dealer will also be paid a contingent incentive fee which is a cash payment of up to an amount equal to 4% of gross proceeds of the common units sold as outlined in the Prospectus based on the performance of the Partnership. The general partner will receive Incentive Distribution Rights (defined below), and will be reimbursed for its documented third party out-of-pocket expenses incurred in our organization and offering of the common units.
As of August 19, 2015, we completed our minimum offering of 1,315,790 common units at $19.00 per common unit. As of November 1, 2015, we had completed the sale of a total of 2,724,534 common units at $19.00 per common unit for total gross proceeds of $51.8 million and proceeds net of selling commissions and marketing expenses of $48.7 million. We are continuing the offering at $19.00 per common unit in accordance with the prospectus. As of November 1, 2015, 97,538,624 common units remained unsold. We will offer common units until January 22, 2017, unless the offering is extended by our general partner, provided that the offering will be terminated if all of the common units are sold before then. In addition, pursuant to the Partnership Agreement, we issued 100,000 class B units to the Manager, concurrently with the initial closing.
Prior to “Payout,” which is defined below, all of the distributions we make, if any, will be paid to the holders of common units. Accordingly, we will not make any distributions with respect to the Incentive Distribution Rights or with respect to class B units and will not make the contingent, incentive payments to the Managing Dealer, unless or until Payout occurs.
The Partnership Agreement provides that Payout occurs on the day when the aggregate amount distributed with respect to each of the common units equals $20.00 plus the Payout Accrual. The Partnership Agreement defines “Payout Accrual” as 7% per annum simple interest accrued monthly until paid on the Net Investment Amount outstanding from time to time. The Partnership Agreement defines Net Investment Amount initially as $20.00 per common unit, regardless of the amount paid for the common unit. If at any time we distribute to holders of common units more than the Payout Accrual, the amount we distribute in excess of the Payout Accrual will reduce the Net Investment Amount.
All distributions we make after Payout, which may include all or a portion of the proceeds of the sale of all or substantially all of our assets, will be made as follows:
| | · | First, 35% to the holders of the Incentive Distribution Rights, 35% to the holders of the class B units and 30% to the Managing Dealer as its contingent, incentive fee until the Managing Dealer receives incentive fees equal to 4% of the gross proceeds of the offering of common units; and then |
| | · | Thereafter, 35% to the holders of the Incentive Distribution Rights, 35% to the holders of the class B units and 30% to the holders of the common units. |
All items of income, gain, loss and deduction will be allocated to each Partner’s capital account in a manner generally consistent with the distribution procedures outlined above.
Year-to-date through November 1, 2015, we have paid distributions of $0.272 per unit or $497,440.
Since distributions to date have been funded with proceeds from the offering of units, our ability to maintain our current intended rate of distribution will be based on our ability to fully invest the offering proceeds and thereby increase cash generated from operations. As there can be no assurance of our ability to acquire properties that provide income at this level, or that the properties under contract will provide income at this level, there can be no assurance as to the classification or duration of distributions at the current rate. Proceeds of the offering which are distributed are not available for investment in properties.
Potential Acquisition
On September 15, 2015, the Partnership through a wholly owned subsidiary, entered into an Interest Purchase Agreement (“Purchase Agreement”) by and among Kaiser-Whiting, LLC (“Seller”) and the owners of all the limited liability company interests therein, for the potential purchase of certain of the limited liability company interests in Seller (the “Transferred Interests”) which would result in an 11.5% working interest in approximately 215 existing producing wells and approximately 262 future development locations in the Sanish field located in Mountrail County, North Dakota (collectively, the “Sanish Field Assets”). The Sanish field is part of the Greater Williston Basin where industry activity is focused on development of the prolific Bakken Shale formation. Whiting Petroleum Corporation (“Whiting”), a publicly traded oil and gas company operates the asset on behalf of Seller and other working interest owners. If the Partnership closes on the Purchase Agreement, the Partnership will be a non-operator, with Whiting, the largest producer in this basin, acting as operator.
Pursuant to the Purchase Agreement, the cash purchase price for the Transferred Interests consists of (i) an initial $160 million (with the Deposit, as defined below, applied at closing) payable at closing subject to customary adjustments, (ii) an aggregate of $2 million, payable in equal amounts on December 31, 2016 and December 31, 2017 and (iii) a contingent payment of up to $95 million. The contingent payment provides for a sharing between the Partnership and Seller to the extent the NYMEX price for WTI is between $56.61 and $89.00 per barrel. The contingent payment will be calculated as follows: if on December 31, 2017 (the “Measurement Date”) the average of the monthly NYMEX:CL strip prices for future contracts during the delivery period beginning December 31, 2017 and ending December 31, 2022 (the “Measurement Date Average Price”) is greater than $56.61, then the Sellers will be entitled to a contingent payment equal to (a) (i) the lesser of (A) the Measurement Date Average Price and (B) $89.00, minus (ii) $56.61, multiplied by (b) 586,601 bbls per year for each of the five years from 2018 through 2022 represented by the contracts for the entire acquisition. The contingent consideration is capped at $95 million and is to be paid on January 1, 2018.
On September 17, 2015, the Partnership funded a deposit of $10 million (the “Deposit”) with the manager of Seller to be applied toward the purchase price at closing or to be released to the owners of Seller if the transaction does not close by the outside closing date due to the Partnership’s breach of the Purchase Agreement. In the event the transaction does not close due to a breach by Sellers or if the aggregate value of any title defects, environmental defects and casualty losses exceeds 10% of the unadjusted initial purchase price, the Deposit will be refunded to the Partnership. If the Partnership does not perform under the contract as a result of diligence review or otherwise breaches the Purchase Agreement, the Sellers’ sole remedy is release of the Deposit to the Sellers.
The closing of the Purchase Agreement is subject to the satisfaction of a number of required conditions which currently remain unsatisfied under the Purchase Agreement. Consummation of the acquisition is subject to the Partnership’s satisfactory completion of the review of title, environmental investigations, financial analysis and geological analysis, obtaining sufficient financing to fund the purchase price and other due diligence. Accordingly, there can be no assurance at this time that all of the conditions precedent to consummating the Purchase Agreement will be satisfied, that the Partnership will find the results of diligence investigation acceptable, that the Partnership will be able to obtain sufficient financing on terms reasonably acceptable to the Partnership or that the transaction will be successfully completed.
Transactions with Related Parties
We have, and expect to continue to engage in, significant transactions with related parties. These transactions cannot be construed to be at arm’s length and the results of our operations may be different than if conducted with non-related parties. The general partner’s Board of Directors will oversee and review our related party relationships and are required to approve any significant modifications, as well as any new significant related party transactions.
Subsequent to completing the minimum offering, we reimbursed a member of the general partner approximately $1.5 million for offering related costs that had been paid by the member of the general partnership.
Management Agreement
At the initial closing of the sale of common units, we entered into a management services agreement to provide management and operating services regarding substantially all aspects of our business. The Manager is an indirect, wholly-owned subsidiary of American Energy Partners, L.P. The Manager is not an affiliate of ours or the general partner.
Under the Management Agreement, the Manager will provide management and other services to us including the following:
| | · | Identifying producing and non-producing properties that we may consider acquiring, and assisting in evaluation, contracting for and acquiring these properties and managing the development of these properties; |
| | · | Operating, or causing one of its affiliates to operate, on our behalf, any properties in which our interest in the property is sufficient to appoint the operator; |
| | · | Overseeing the operations on properties we acquire that are operated by persons other than the Manager, including recommending whether we should participate in the development of such properties by the operators of the properties; and |
| | · | Assisting in establishing cash management and risk management programs, receiving the revenues on our behalf from the sale of production from our properties and paying operating expenses and approved capital expenses with respect to such properties. |
The Management Agreement provides that we will direct the services provided to us under the Management Agreement, and that the Manager will determine the means or method by which those directions are carried out. The Management Agreement provides that the Manager will conduct the day-to-day operations of our business as provided in budgets that the Manager will prepare and we will have the right to approve. The Management Agreement also contains a list of activities in which the Manager will not engage without our prior approval.
The Manager will be reimbursed for certain costs directly related to us and will be paid a monthly general and administrative expense compensation amount (“Monthly G&A Expense Amount”) at an annual rate that will be 1.75% of the net proceeds from the sale of common units, less commissions, marketing fee and offering and organization expense, plus the amount of outstanding indebtedness, which is referred to as the reimbursement base, for the first six months following the initial closing. Thereafter, the Monthly G&A Expense Amount will be at an annual rate of 3.5% of the reimbursement base and will reduce to an annual rate of 2% of the reimbursement base over time. In addition, pursuant to the Partnership Agreement, concurrently with the initial closing of the sale of common units pursuant to this offering, 100,000 class B units were issued to the Manager.
Subject to certain exceptions, the Management agreement will remain in effect as long as we hold any assets.
For the three and nine months ended September 30, 2015, the Partnership incurred fees of approximately $51,000 and reimbursable costs of approximately $200,000 under the management agreement.
The following disclosure is added to the end of the section titled “Relationships Between the Owners of the General Partner and the Manager and its Affiliates” on Page 61 of the Prospectus.
In 2015, entities owned by Mr. Keating and Mr. Mallick and members of their immediate families, and Mr. McKenney acquired indirect ownership interests in American Energy Minerals Holdings, LLC (“AEMN”) on the same terms as other similarly situated investors in AEMN. AEMN was formed by affiliates of the Manager in order to pursue a business plan focused on the acquisition of minerals and overriding royalty interests across targeted high-return onshore basins in the U.S.
The following disclosure is added to the end of the section of the Prospectus titled “Description of the Management Agreement” on page 76 of the Prospectus.
Recent Litigation Involving Affiliates of the Manager
On February 17, 2015, Chesapeake Energy Corporation (“CHK”) filed suit in the District Court of Oklahoma County, Oklahoma against American Energy Partners, LP (“AELP”), and certain other affiliates of the Manager. CHK alleged that Mr. McClendon misappropriated confidential information and trade secrets from CHK, which he subsequently used for the benefit of AELP and the named AELP affiliates. CHK’s claims against AELP and the AELP affiliates include violation of the Oklahoma Uniform Trade Secrets Act, aiding and abetting in Mr. McClendon’s breach of fiduciary duty and usurpation of corporate opportunities, and tortious interference with CHK’s prospective business relationships. Mr. McClendon, AELP, the named AELP affiliates and The Energy and Minerals Group, a primary equity sponsor of AELP affiliates, immediately countered the CHK filing with separate statements asserting that CHK’s claims are baseless and without merit and that they intend to defend themselves vigorously against CHK’s lawsuit and the claims therein. On April 14, 2015, American Energy — Utica (“AEU”) and the Energy & Minerals Group announced that CHK had dismissed AEU and John Doe Defendants 1 – 20 from the lawsuit filed by CHK. There are no claims asserted against the Manager and we do not believe that this matter will have a material adverse effect on our operations, financial condition or prospects. Further, in connection with the formal investigation of CHK commenced in 2012 by the U.S. Department of Justice into potential antitrust violations relating to the acquisition by CHK of certain oil and gas leases, Mr. McClendon is also being investigated.
The following disclosure is hereby inserted as a new section following the section entitled “Experts” on page 118 of the Prospectus.
The financial statements of Energy 11, L.P. as of December 31, 2013 and July 9, 2013 (initial capitalization) and for the period from July 9, 2013 (initial capitalization) through December 31, 2013 appearing in the Prospectus and the Registration Statement, have been audited by Ernst & Young, LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and is included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
On March 18, 2015, the Partnership replaced Ernst & Young LLP as the Partnership’s independent registered public accounting firm for the year ended December 31, 2014.
Ernst & Young’s audit report on the Partnership’s consolidated financial statements as of December 31, 2013 and for the period from July 9, 2013 through December 31, 2013 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.
Since the Partnership’s establishment in June 2013 and through March 18, 2015, (i) there were no disagreements between the Partnership and Ernst & Young on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Ernst & Young, would have caused Ernst & Young to make reference to the subject matter of the disagreement in its report on the Partnership’s consolidated financial statements, and (ii) there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
The Partnership has provided Ernst & Young with a copy of the foregoing statements and has requested and received from Ernst & Young a letter addressed to the SEC stating that Ernst & Young agrees with the above statements.
The Partnership has not consulted with Grant Thornton LLP during the two most recent fiscal years or during any subsequent interim period prior to its appointment regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be
rendered on our financial statements, and neither a written report was provided to the Partnership nor oral advice was provided that Grant Thornton LLP concluded was an important factor considered by the Partnership in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (within the meaning of Item 304(a)(1)(v) of Regulation S-K).
The audited financial statements of Energy 11, L.P. as of December 31, 2014 and for the year then ended included in this Prospectus and elsewhere in the Registration Statement, have been so included in reliance upon the report of Grant Thornton LLP, independent registered public accountants, upon the authority of said firm as experts in accounting and auditing.
The combined statements of revenues and direct operating expenses of the Sanish Field Assets for the years ended December 31, 2014, 2013 and 2012 appearing in the Prospectus Supplement and the Registration Statement, have been audited by HoganTaylor LLP, independent auditor, as set forth in their report thereon appearing elsewhere herein, and is included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
INDEX TO FINANCIAL STATEMENTS
| | Page |
| | |
| Energy 11, L.P. Historical Consolidated Financial Statements: | |
| F-2 |
| F-3 |
| F-4 |
| F-5 |
| F-6 |
| F-7 |
| F-8 |
| F-11 |
| F-12 |
| F-13 |
| F-14 |
| | |
| Combined Statements of Revenues and Direct Operating Expenses of Properties under Contract for Purchase by Energy 11, L.P. from Kaiser-Whiting, LLC under Agreement dated September 15, 2015: | |
| F-19 |
| F-21 |
| F-22 |
| | |
| Energy 11, L.P. Unaudited Pro Forma Condensed Combined Financial Statements: | |
| F-26 |
| F-27 |
| F-28 |
| F-29 |
| F-30 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
General Partner
Energy 11, L.P.
We have audited the accompanying balance sheet of Energy 11, L.P. (a Delaware limited partnership) (the “Partnership”) as of December 31, 2014, and the related statements of operations, partners’ equity, and cash flows for the year ended December 31, 2014. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Energy 11, L.P. as of December 31, 2014, and the results of its operations and its cash flows for the year ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
April 14, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Managing General Partner of Energy 11, L.P.
We have audited the accompanying balance sheets of Energy 11, L.P. (the “Partnership”) as of December 31, 2013 and July 9, 2013 (initial capitalization), and the related consolidated statement of operations, partners’ equity and cash flows for the period July 9, 2013 (initial capitalization) through December 31, 2013. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly, in all material respects, the financial position of Energy 11, L.P. at December 31, 2013 and July 9, 2013 (initial capitalization), and the results of its operations and its cash flows for the period July 9, 2013 (initial capitalization) through December 31, 2013, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Richmond, Virginia
April 29, 2014
(A Delaware Limited Partnership)
Balance Sheets
| | | December 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| Assets: | | | | | | |
| | $ | 94 | | | $ | 94 | |
Deferred offering costs and other assets | | | 1,449,930 | | | | 268,488 | |
| | | | | | | | | |
| | $ | 1,450,024 | | | $ | 268,582 | |
| | | | | | | | | |
Liabilities and Partners’ Equity (Deficit): | | | | | | | | |
Due to general partner member | | $ | 1,232,675 | | | $ | 271,338 | |
| | | 390,000 | | | | 6,300 | |
| | | | | | | | | |
| | | 1,622,675 | | | | 277,638 | |
| | | | | | | | | |
Limited partner’s capital | | | (170,924 | ) | | | (8,965 | ) |
General partner’s capital | | | (1,727 | ) | | | (91 | ) |
| | | | | | | | | |
Total Partners’ Equity (Deficit) | | | (172,651 | ) | | | (9,056 | ) |
| | | | | | | | | |
Total Liabilities and Partners’ Equity (Deficit) | | $ | 1,450,024 | | | $ | 268,582 | |
See accompanying notes to the financial statements.
(A Delaware Limited Partnership)
Statements of Operations
| | | | | | For the period | |
| | | | | | from July 9, 2013 | |
| | | Year Ended | | | (initial capitalization) through | |
| | | December 31, 2014 | | | December 31, 2013 | |
| | | | | | | | |
| | | | | | | | |
General and administrative expenses | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
See accompanying notes to the financial statements.
(A Delaware Limited Partnership)
Statement of Partners’ Equity (Deficit)
| | | Limited Partner | | | General Partner | | | Total Partners’ | |
| | | Ownership % | | | Amount | | | Ownership % | | | Amount | | | Equity/(Deficit) | |
| | | | | | | | | | | | | | | | |
Initial capitalization July 9, 2013 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2013 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2014 | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to the financial statements.
(A Delaware Limited Partnership)
Statements of Cash Flows
| | | | | | For the period | |
| | | | | | from July 9, 2013 | |
| | | Year Ended | | | (initial capitalization) through | |
| | | December 31, 2014 | | | December 31, 2013 | |
| | | | | | | |
| Cash flow from operating activities: | | | | | | |
| | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | |
Accrued expenses and due to general partner member | | | | | | | | |
| | | | | | | | | |
Net cash flow used in operating activities | | | | | | | | |
| | | | | | | | | |
Cash flow from investing activities | | | | | | | | |
| | | | | | | | | |
Cash flow from financing activities | | | | | | | | |
Cash paid for offering costs | | | | | | | | |
| | | | | | | | | |
Net cash used in financing operations | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Decrease in cash and cash equivalents | | | | | | | | |
Cash and cash equivalents, beginning of period | | | | | | | | |
| | | | | | | | | |
Cash and cash equivalents, end of period | | | | | | | | |
| | | | | | | | | |
Supplemental information: | | | | | | | | |
Accrued deferred offering costs and other assets | | | | | | | | |
See accompanying notes to the financial statements.
(A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 2014
(1) Partnership Organization
Energy 11, L.P. (the “Partnership”) was formed as a Delaware limited partnership. The initial capitalization of the Partnership of $1,000 occurred on July 9, 2013. The Partnership is offering common units of limited partner interest (the “Units”) on a “best efforts” basis with the intention of raising up to $2,000,000,000 of capital, consisting of 100,263,158 Units. The Company’s offering was declared effective by the Securities and Exchange Commission on January 22, 2015. Upon raising a minimum of $25,000,000, the holders of the Units will be admitted and the Partnership will commence operations.
The Partnership’s primary investment objectives are to (i) acquire producing and non-producing oil and gas properties with development potential, and to enhance the value of the properties through drilling and other development activities, (ii) make distributions to the holders of the Units, (iii) engage in a liquidity transaction after five – seven years, in which all properties are sold and the sales proceeds are distributed to the partners, merge with another entity, or list the Units on a national securities exchange, and (iv) permit holders of Units to invest in oil and gas properties in a tax efficient basis. The proceeds from the sale of the Units primarily will be used to acquire producing and non-producing oil and natural gas properties onshore in the United States, and to develop those properties.
The general partner of the Partnership is Energy 11 GP, LLC (the “General Partner”). The organizational limited partner is DMOG, LLC (wholly owned by one of the members of the General Partner). The General Partner manages and controls the business affairs of the Partnership. Pursuant to the terms of a management agreement, the Partnership plans to engage a manager, to provide management and operating services regarding substantially all aspects of the Partnership’s operations. David Lerner Associates, Inc. (the “Managing Dealer”), will act as the dealer manager for the offering of the Units.
The Partnership’s fiscal year ends on December 31.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements of the Partnership have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”).
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. The fair market value of cash and cash equivalents approximates their carrying value. Cash balances may at times exceed federal depository insurance limits.
Offering Costs
Offering costs will be deferred and recorded as deferred offering costs until the commencement of the Partnership’s offering. Upon commencement of the Partnership’s offering these costs will be recorded as a reduction to Partners’ equity.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires the Partnership to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Oil and Gas Properties
The Partnership will use the successful efforts method of accounting for oil and gas costs associated with property acquisitions and exploration and development activities. Costs to acquire leaseholds and mineral interests in crude oil and natural gas properties will be capitalized when incurred. Drilling costs of successful wells and developmental dry holes will be capitalized and amortized. The costs of exploratory wells will be initially capitalized, but expensed if and when the well is determined to be nonproducing. Geological and geophysical costs, production costs, and general company overhead will all be expensed as incurred. Capitalized costs will be amortized using the unit-of-production method based on proved oil and natural gas reserves for leasehold costs and proven developed oil and natural gas reserves for exploration and development costs. Unproven oil and natural gas leasehold costs will be assessed for impairment at the property level on a quarterly basis or when events and circumstances indicate the carrying amount may not be recoverable. Capitalized costs related to proven properties will be assessed for impairment quarterly or when events or circumstances indicate the carrying value may not be recoverable. The impairment assessment for proven properties will be based on a logical asset grouping of wells within a producing field or geological formation. These assessments will utilize estimates of future discounted net cash flows. Significant judgments and assumptions in these assessments will include estimates of future oil, natural gas liquids, and natural gas prices, projected drilling plans and expected capital costs. The value of cash flows associated with probable and possible reserves will be risk adjusted.
Income Tax
The Partnership is taxed as a partnership for federal and state income tax purposes. No provision for income taxes has been recorded since the liability for such taxes is that of each of the partners rather than the Partnership. The Partnership’s income tax returns will be subject to examination by the federal and state taxing authorities, and changes, if any, could adjust the individual income tax of the partners.
Recent Accounting Standard
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement related to revenue recognition, which amends the former guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. This standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The entity will recognize revenue to reflect the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. The Partnership is currently evaluating the impact of this pronouncement.
(3) Capital Contribution and Partners’ Equity
The General Partner and organizational limited partner have made initial capital contributions totaling $1,000 to the Partnership. Upon closing of the minimum offering the organizational limited partner will withdraw, its initial capital contribution of $990 will be returned, the General Partner will receive Incentive Distribution Rights (defined below), and will be reimbursed for its documented third party out-of-pocket expenses incurred in organizing the Partnership and offering the Units.
The Company intends to raise capital through a “best-efforts” offering of Units by the Managing Dealer. Under the agreement with the Managing Dealer, the Managing Dealer will receive a total of 6% in selling commissions and a marketing expense allowance based on gross proceeds of the Units sold. The Managing Dealer will also be paid a contingent incentive fee which is a cash payment of up to an amount equal to 4% of gross proceeds of the Units sold as outlined in the prospectus based on the performance of the Partnership. The planned fees under the Dealer Manager Agreement have changed from the December 31, 2013 financial statements.
The minimum offering must be sold before January 23, 2017 or the offering will terminate and investors’ subscription payments will be refunded to investors. Pending sale of such minimum offering amount, investors’ subscription payments will be placed in an escrow account. In addition, pursuant to the Partnership Agreement, the Partnership expects to issue to a Manager 100,000 class B units.
Prior to “Payout,” which is defined below, all of the distributions made by the Partnership, if any, will be paid to the holders of Units. Accordingly, the Partnership will not make any distributions with respect to the Incentive Distribution Rights or with respect to class B units and will not make the contingent, incentive payments to the Managing Dealer, until Payout occurs.
The Partnership Agreement provides that Payout occurs on the day when the aggregate amount distributed with respect to each of the Units equals $20.00 plus the Payout Accrual. The Partnership Agreement defines “Payout Accrual” as 7% per annum simple interest accrued monthly until paid on the Net Investment Amount outstanding from time to time. The Partnership Agreement defines Net Investment Amount initially as $20.00 per Unit, regardless of the amount paid for the Unit. If at any time the Partnership distributes to holders of Units more than the Payout Accrual, the amount the Partnership distributes in excess of the Payout Accrual will reduce the Net Investment Amount.
All distributions made by the Partnership after Payout, which may include all or a portion of the proceeds of the sale of all or substantially all of the Partnership’s assets, will be made as follows:
| · | First, 35% to the holders of the Incentive Distribution Rights, 35% to the holders of the class B units and 30% to the Managing Dealer as its contingent, incentive fee until the Managing Dealer receives incentive fees equal to 4% of the gross proceeds of the offering of common units; and then |
| · | Thereafter, 35% to the holders of the Incentive Distribution Rights, 35% to the holders of the class B units and 30% to the holders of the Units. |
The distribution structure under the Partnership Agreement has changed from the December 31, 2013 financial statements.
All items of income, gain, loss and deduction will be allocated to each Partner’s capital account in a manner generally consistent with the distribution procedures outlined above.
(4) Transactions with Related Parties
The General Partner will be reimbursed for its direct out-of-pocket costs of managing the Partnership. These costs include, but are not limited to, the General Partner’s external legal, accounting and investor relations professional fees. The amount due to a general partner member included in the Partnership’s balance sheet as of December 31, 2014 of approximately $1.2 million, consists of legal, accounting and other offering costs that have been paid by one of the members of the General Partner. These expenses will be reimbursed to the member upon closing of the initial minimum offering or upon other financing of the Partnership.
(A Delaware Limited Partnership)
Balance Sheets
(Unaudited)
| | | September 30, | | | December 31, | |
| | | 2015 | | | 2014 | |
| Assets | | | | | | |
| Cash | | $ | 24,929,913 | | | $ | 94 | |
| Deferred offering costs and other assets | | | - | | | | 1,449,930 | |
| Deposit for potential acquisition | | | 10,000,000 | | | | - | |
| | | | | | | | | |
| Total Assets | | $ | 34,929,913 | | | $ | 1,450,024 | |
| | | | | | | | | |
| Liabilities and Partners’ Equity (Deficit) | | | | | | | | |
| Due to general partner member | | $ | 29,260 | | | $ | 1,232,675 | |
| Accounts payable and accrued expenses | | | 366,430 | | | | 390,000 | |
| | | | | | | | | |
| Total Liabilities | | | 395,690 | | | | 1,622,675 | |
| | | | | | | | | |
| Limited partners' interest (2,087,389 common units and 0 units issued and outstanding at September 30, 2015 and December 31, 2014, respectively) | | | 34,537,543 | | | | (170,924 | ) |
| General partners' interest | | | (3,320 | ) | | | (1,727 | ) |
| Class B Units (100,000 units and 0 units issued and outstanding at September 30, 2015 and December 31, 2014, respectively) | | | - | | | | - | |
| | | | | | | | | |
| Total Partners’ Equity (Deficit) | | | 34,534,223 | | | | (172,651 | ) |
| | | | | | | | | |
| Total Liabilities and Partners’ Equity (Deficit) | | $ | 34,929,913 | | | $ | 1,450,024 | |
See accompanying notes to the financial statements.
(A Delaware Limited Partnership)
Statements of Operations
(Unaudited)
| | | Three Months Ended | | | Three Months Ended | | | Nine Months Ended | | | Nine Months Ended | |
| | | September 30, 2015 | | | September 30, 2014 | | | September 30, 2015 | | | September 30, 2014 | |
| Revenue | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | | | | | |
| Management fees | | | 51,095 | | | | - | | | | 51,095 | | | | - | |
| Acquisition related costs | | | 10,249 | | | | - | | | | 10,249 | | | | - | |
| General and administrative expenses | | | 414,622 | | | | 66,603 | | | | 573,973 | | | | 95,478 | |
| | | | | | | | | | | | | | | | | |
| Operating Loss | | | (475,966 | ) | | | (66,603 | ) | | | (635,317 | ) | | | (95,478 | ) |
| | | | | | | | | | | | | | | | | |
| Interest Income, Net | | | 10,323 | | | | - | | | | 10,323 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (465,643 | ) | | $ | (66,603 | ) | | $ | (624,994 | ) | | $ | (95,478 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted net loss per common unit | | $ | (0.62 | ) | | | - | | | $ | (2.47 | ) | | | - | |
| | | | | | | | | | | | | | | | | |
| Weighted average common units outstanding - basic and diluted | | | 751,688 | | | | - | | | | 253,316 | | | | - | |
See accompanying notes to the financial statements.
(A Delaware Limited Partnership)
Statements of Cash Flows
(Unaudited)
| | | Nine Months Ended | | | Nine Months Ended | |
| | | September 30, 2015 | | | September 30, 2014 | |
| | | | | | | |
| Cash flow from operating activities: | | | | | | |
| Net loss | | $ | (624,994 | ) | | $ | (95,478 | ) |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | | 300,690 | | | | - | |
| Due to general partner member | | | (158,641 | ) | | | 95,478 | |
| | | | | | | | | |
| Net cash flow used in operating activities | | | (482,945 | ) | | | - | |
| | | | | | | | | |
| Cash flow from investing activities | | | | | | | | |
| Deposit for potential acquisition | | | (10,000,000 | ) | | | - | |
| | | | | | | | | |
| Net cash flow used in investing activities | | | (10,000,000 | ) | | | - | |
| | | | | | | | | |
| Cash flow from financing activities | | | | | | | | |
| Net proceeds related to issuance of units | | | 35,629,978 | | | | - | |
| Distributions paid to Limited Partners | | | (217,214 | ) | | | - | |
| | | | | | | | | |
| Net cash flow provided by financing activities | | | 35,412,764 | | | | - | |
| | | | | | | | | |
| | | | | | | | | |
| Increase in cash and cash equivalents | | | 24,929,819 | | | | - | |
| Cash and cash equivalents, beginning of period | | | 94 | | | | 94 | |
| | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 24,929,913 | | | $ | 94 | |
| | | | | | | | | |
| Supplemental information: | | | | | | | | |
| Accrued deferred offering costs and other assets | | $ | - | | | $ | 1,270,657 | |
See accompanying notes to the financial statements.
(A Delaware Limited Partnership)
Notes to Financial Statements
September 30, 2015
(1) Partnership Organization
Energy 11, L.P. (the “Partnership”) was formed as a Delaware limited partnership. The initial capitalization of the Partnership of $1,000 occurred on July 9, 2013. The Partnership is offering common units of limited partner interest (the “units”) on a “best efforts” basis with the intention of raising up to $2,000,000,000 of capital, consisting of 100,263,158 units. The Partnership’s offering was declared effective by the Securities and Exchange Commission on January 22, 2015. As of August 19, 2015, the Partnership completed the sale of the minimum offering of 1,315,790 units. The subscribers were admitted as Limited Partners of the Partnership at the initial closing.
The Partnership’s primary investment objectives are to (i) acquire producing and non-producing oil and gas properties with development potential, and to enhance the value of the properties through drilling and other development activities, (ii) make distributions to the holders of the units, (iii) engage in a liquidity transaction after five – seven years, in which all properties are sold and the sales proceeds are distributed to the partners, merge with another entity, or list the units on a national securities exchange, and (iv) permit holders of units to invest in oil and gas properties in a tax efficient basis. The proceeds from the sale of the units primarily will be used to acquire producing and non-producing oil and natural gas properties onshore in the United States, and to develop those properties.
The general partner of the Partnership is Energy 11 GP, LLC (the “General Partner”). The General Partner manages and controls the business affairs of the Partnership. Pursuant to the terms of a management agreement, the Partnership has engaged E11 Management, LLC (the “Manager”), to provide management and operating services regarding substantially all aspects of the Partnership’s operations. David Lerner Associates, Inc. (the “Managing Dealer”), is the dealer Manager for the offering of the units.
The Partnership’s fiscal year ends on December 31.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with the instructions for Article 10 of Regulation S-X. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the Partnership’s audited December 31, 2014 financial statements. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. The fair market value of cash and cash equivalents approximates their carrying value. Cash balances may at times exceed federal depository insurance limits.
Offering Costs
The Partnership is raising capital through an on-going best-efforts offering of units by David Lerner Associates, Inc., the managing underwriter, which receives a selling commission and a marketing expense allowance based on proceeds of the units sold. Additionally, the Partnership has incurred other offering costs including legal, accounting and reporting services. These offering costs are recorded by the Partnership as a reduction of shareholders’ equity. Prior to the commencement of the Partnership’s offering, these costs were deferred and recorded as prepaid expense. As of September 30, 2015, the
Partnership had sold 2.1 million units for gross proceeds of $39.7 million and proceeds net of offering costs of $35.6 million.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the US requires the Partnership to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Earnings Per Common Unit
Basic earnings per common unit is computed as net loss divided by the weighted average number of common units outstanding during the period. Diluted earnings per unit is calculated after giving effect to all potential common units that were dilutive and outstanding for the period. There were no units with a dilutive effect for the three months and nine months ended September 30, 2015 and 2014. As a result, basic and diluted outstanding units were the same.
(3) Oil and Gas Investments
On September 15, 2015, the Partnership through a wholly owned subsidiary, entered into an Interest Purchase Agreement (“Purchase Agreement”) by and among Kaiser-Whiting, LLC (“Seller”) and the owners of all the limited liability company interests therein, for the potential purchase of certain of the limited liability company interests in Seller (the “Transferred Interests”) which would result in an 11.5% working interest in approximately 215 existing producing wells and approximately 262 future development locations in the Sanish field located in Mountrail County, North Dakota (collectively, the “Sanish Field Assets”). The Sanish field is part of the Greater Williston Basin where industry activity is focused on development of the prolific Bakken Shale formation. Whiting Petroleum Corporation (“Whiting”), a publicly traded oil and gas company operates the asset on behalf of Seller and other working interest owners. If the Partnership closes on the Purchase Agreement, the Partnership will be a non-operator, with Whiting, the largest producer in this basin, acting as operator.
Pursuant to the Purchase Agreement, the cash purchase price for the Transferred Interests consists of (i) an initial $160 million (with the Deposit, as defined below, applied at closing) payable at closing subject to customary adjustments, (ii) an aggregate of $2 million, payable in equal amounts on December 31, 2016 and December 31, 2017 and (iii) a contingent payment of up to $95 million. The contingent payment provides for a sharing between the Partnership and Seller to the extent the NYMEX price for WTI is between $56.61 and $89.00 per barrel. The contingent payment will be calculated as follows: if on December 31, 2017 (the “Measurement Date”) the average of the monthly NYMEX:CL strip prices for future contracts during the delivery period beginning December 31, 2017 and ending December 31, 2022 (the “Measurement Date Average Price”) is greater than $56.61, then the Sellers will be entitled to a contingent payment equal to (a) (i) the lesser of (A) the Measurement Date Average Price and (B) $89.00, minus (ii) $56.61, multiplied by (b) 586,601 bbls per year for each of the five years from 2018 through 2022 represented by the contracts for the entire acquisition. The contingent consideration is capped at $95 million and is to be paid on January 1, 2018.
On September 17, 2015, the Partnership funded a deposit of $10 million (the “Deposit”) with the manager of Seller to be applied toward the purchase price at closing or to be released to the owners of Seller if the transaction does not close by the outside closing date due to the Partnership’s breach of the Purchase Agreement. In the event the transaction does not close due to a breach by Sellers or if the aggregate value of any title defects, environmental defects and casualty losses exceeds 10% of the unadjusted initial purchase price, the Deposit will be refunded to the Partnership. If the Partnership does not perform under the contract as a result of diligence review or otherwise breaches the Purchase Agreement, the Sellers’ sole remedy is release of the Deposit to the Sellers.
The closing of the Purchase Agreement is subject to the satisfaction of a number of required conditions which currently remain unsatisfied under the Purchase Agreement. Consummation of the acquisition is subject to the Partnership’s satisfactory completion of the review of title, environmental investigations, financial analysis and geological analysis, obtaining sufficient financing to fund the purchase price and other due diligence. Accordingly, there can be no assurance at this time that all of the conditions precedent to consummating the Purchase Agreement will be satisfied, that the Partnership will find the results of diligence investigation acceptable, that the Partnership will be able to obtain sufficient financing on terms reasonably acceptable to the Partnership or that the transaction will be successfully completed.
(4) Capital Contribution and Partners’ Equity
At inception the General Partner and organizational limited partner made initial capital contributions totaling $1,000 to the Partnership. Upon closing of the minimum offering the organizational limited partner withdrew its initial capital contribution of $990, the General Partner received Incentive Distribution Rights (defined below), and has been and will be reimbursed for its documented third party out-of-pocket expenses incurred in organizing the Partnership and offering the units.
As of August 19, 2015, the Partnership completed its minimum offering of 1,315,790 common units at $19.00 per common unit. As of September 30, 2015, the Partnership had completed the sale of a total of 2,087,389 common units at $19.00 per common unit for total gross proceeds of $39,660,391 and proceeds net of selling commissions and marketing expenses of $37,280,768.
The Partnership intends to continue to raise capital through its “best-efforts” offering of units by the Managing Dealer at $19.00 per common unit until it raises gross proceeds of $100 million at which time the price per common unit will increase to $20.00. Under the agreement with the Managing Dealer, the Managing Dealer receives a total of 6% in selling commissions and a marketing expense allowance based on gross proceeds of the units sold. The Managing Dealer will also be paid a contingent incentive fee which is a cash payment of up to an amount equal to 4% of gross proceeds of the units sold as outlined in the prospectus based on the performance of the Partnership. Based on the units sold through September 30, 2015 the total contingent fee is approximately $1.6 million.
Upon entering into the management agreement with the Manager on August 19, 2015, the Partnership issued 100,000 class B units to the Manager. The class B units provide certain distribution rights to the Manager described below.
Prior to “Payout,” which is defined below, all of the distributions made by the Partnership, if any, will be paid to the holders of units. Accordingly, the Partnership will not make any distributions with respect to the Incentive Distribution Rights or with respect to class B units and will not make the contingent, incentive payments to the Managing Dealer, until Payout occurs.
The Partnership Agreement provides that Payout occurs on the day when the aggregate amount distributed with respect to each of the units equals $20.00 plus the Payout Accrual. The Partnership Agreement defines “Payout Accrual” as 7% per annum simple interest accrued monthly until paid on the Net Investment Amount outstanding from time to time. The Partnership Agreement defines Net Investment Amount initially as $20.00 per Unit, regardless of the amount paid for the Unit. If at any time the Partnership distributes to holders of units more than the Payout Accrual, the amount the Partnership distributes in excess of the Payout Accrual will reduce the Net Investment Amount.
All distributions made by the Partnership after Payout, which may include all or a portion of the proceeds of the sale of all or substantially all of the Partnership’s assets, will be made as follows:
| · | First, 35% to the holders of the Incentive Distribution Rights, 35% to the holders of the class B units and 30% to the Managing Dealer as its contingent, incentive fee until the Managing Dealer receives incentive fees equal to 4% of the gross proceeds of the offering of common units; and then |
| · | Thereafter, 35% to the holders of the Incentive Distribution Rights, 35% to the holders of the class B units and 30% to the holders of the units. |
All items of income, gain, loss and deduction will be allocated to each Partner’s capital account in a manner generally consistent with the distribution procedures outlined above.
During the three and nine months ended September 30, 2015, the Partnership paid distributions of $0.138082 per unit or $217,214.
(5) Transactions with Related Parties
The Partnership has, and is expected to continue to engage in, significant transactions with related parties. These transactions cannot be construed to be at arm’s length and the results of the Partnership’s operations may be different than if conducted with non-related parties. The General Partner’s Board of Directors will oversee and review the Partnership’s related party relationships and are required to approve any significant modifications, as well as any new significant related party transactions.
Subsequent to completing the minimum offering, the Partnership reimbursed a member of the General Partner approximately $1.5 million for offering related costs that had been paid by the member of the General Partnership.
(6) Management Agreement
At the initial closing of the sale of common units, the Partnership entered into a management services agreement to provide management and operating services regarding substantially all aspects of the Partnership. The Manager is an indirect, wholly-owned subsidiary of American Energy Partners, L.P. The Manager is not an affiliate of the Partnership or the General Partner.
Under the Management Agreement, the Manager will provide management and other services to the Partnership including the following:
| | · | Identifying producing and non-producing properties that the Partnership may consider acquiring, and assisting in evaluation, contracting for and acquiring these properties and managing the development of these properties; |
| | · | Operating, or causing one of its affiliates to operate, on the Partnership’s behalf, any properties in which the Partnership interest in the property is sufficient to appoint the operator; |
| | · | Overseeing the operations on properties the Partnership acquires that are operated by persons other than the Manager, including recommending whether the Partnership should participate in the development of such properties by the operators of the properties; and |
| | · | Assisting in establishing cash management and risk management programs, receiving the revenues on the Partnership’s behalf from the sale of production from the Partnership’s properties and paying operating expenses and approved capital expenses with respect to such properties. |
The Management Agreement provides that the Partnership will direct the services provided to it under the Management Agreement, and that the Manager will determine the means or method by which those directions are carried out. The Management Agreement provides that the Manager will conduct the day-to-day operations of the Partnership’s business as provided in budgets that the Manager will prepare and the Partnership will have the right to approve. The Management Agreement also contains a list of activities in which the Manager will not engage without the Partnership’s prior approval.
The Manager will be reimbursed for certain costs directly related to the Partnership and will be paid a monthly general and administrative expense compensation amount (“Monthly G&A Expense Amount”) at an annual rate that will be 1.75% of the net proceeds from the sale of common units, less commissions, marketing fee and offering and organization expense, plus the amount of outstanding indebtedness, which is referred to as the reimbursement base, for the first six months following the initial closing. Thereafter, the Monthly G&A Expense Amount will be at an annual rate of 3.5% of the reimbursement base and will reduce to an annual rate of 2% of the reimbursement base over time. In addition, pursuant to the Partnership Agreement, concurrently with the initial closing of the sale of common units pursuant to this offering, 100,000 class B were issued to the Manager.
Subject to certain exceptions, the Management agreement will remain in effect as long as the Partnership holds any assets.
For the three and nine months ended September 30, 2015, the Partnership incurred fees of approximately $51,000 and reimbursable costs of approximately $200,000 under the management agreement.
(7) Subsequent Events
In October 2015, the Partnership declared and paid $280,226, or $0.134247 per outstanding common unit, in distributions to its holders of common units.
In October 2015, the Partnership closed on the issuance of approximately 637,145 units through its ongoing best efforts offering, representing gross proceeds to the Partnership of approximately $12.1 million and proceeds net of selling and marketing costs of approximately $11.4 million.
INDEPENDENT AUDITOR’S REPORT