Exhibit 99.3
INTRODUCTION
The following unaudited pro forma condensed combined financial statements of Warren Resources, Inc. (“Warren”) as of June 30, 2014, for the six months ended June 30, 2014 and for the year ended December 31, 2013 are derived from the historical financial statements of Warren contained in Warren’s Annual Report for the year ended December 31, 2013 and Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, and from the historical financial statements of Citrus Energy Corporation (“Citrus”) and TLK Partners, LLC (“TLK”) included herein as Exhibits 99.1 and 99.2, respectively, and in each case are qualified in their entirety by reference to such historical financial statements and related notes contained therein. These unaudited pro forma condensed combined financial statements have been prepared to reflect Warren’s acquisition of assets in the Marcellus Shale from Citrus, TLK and one other working interest owner, which is described below.
Acquisition of Marcellus Assets
On July 7, 2014, Warren agreed to acquire essentially all of the Marcellus Shale assets of Citrus, TLK and one other working interest owner in exchange for approximately 6.7 million shares of common stock valued at $40 million and cash consideration of $312.5 million, subject to certain post-closing adjustments upon closing of the acquisition (the “Citrus Acquisition”).
The unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed combined statements of operations were derived by adjusting Warren’s historical audited and unaudited financial statements of Warren. The adjustments are based upon information available as of September 17, 2014, and certain estimates and assumptions. Actual effects of the transaction may differ from the pro forma adjustments. Management believes, however, that the assumptions provide a reasonable basis for presenting the significant effects of the transaction as contemplated and that the pro forma adjustments are factually supportable and give appropriate effect to those assumptions and are properly applied in the unaudited pro forma financial data.
The summary unaudited pro forma condensed combined financial data assumes that the Citrus Acquisition, the offering of Warren’s 9.000% Senior Notes due 2022 (the “Notes”), the issuance of approximately 6.7 million shares of Warren’s common stock as part of the consideration for the Citrus Acquisition and the closing of Warren’s amended and restated credit facility, including borrowings thereunder to fund a portion of the consideration for the Citrus Acquisition, had taken place on June 30, 2014, in the case of the unaudited pro forma combined balance sheet data, and on January 1, 2013, in the case of the unaudited pro forma combined statement of operations data for the year ended December 31, 2013, and the six months ended June 30, 2014. These data are subject and give effect to the assumptions and adjustments described in the notes accompanying these unaudited pro forma condensed combined financial statements. The summary unaudited pro forma condensed combined financial data are presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the Citrus Acquisition and the offering of the Notes been consummated on the dates indicated, and do not purport to be indicative of statements of financial position or results of operations as of any future date or for any future period.
The unaudited pro forma condensed combined financial statements should be read in conjunction with the notes accompanying these unaudited pro forma condensed combined financial statements and with the historical audited financial statements and related notes included in Warren’s Annual Report on Form 10-K for the year ended December 31, 2013 and Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, the other financial statements and related notes included in Exhibits 99.1 and 99.2 to this Current Report on Form 8-K and other information that Warren has filed with the Securities and Exchange Commission, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Warren’s Report on Form 10-K for the year ended December 31, 2013.
The unaudited pro forma condensed combined financial statements constitute forward-looking information and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements”, included in Warren’s Annual Report on Form 10-K for the year ended December 31, 2013 and Warren’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014.
Warren Resources, Inc. and Subsidiaries
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEET
As of June 30, 2014
| | Warren Resources, Inc | | Citrus Energy Corp. | | TLK PARTNERS LLC | | Pro Forma | | Warren Resources, Inc | |
| | Historical | | Historical | | Historical | | Adjustments | | Pro Forma | |
| | | | | | | | | | | |
ASSETS | | | | | | | | | | | |
Current Assets | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,754,411 | | $ | 823,648 | | $ | 1,309,615 | | $ | (2,133,263 | )(a) | $ | 1,754,411 | |
Accounts receivable - trade | | 15,106,664 | | 12,058,806 | | 1,057,639 | | (13,116,445 | )(b) | 15,106,664 | |
Restricted investments in U.S. Treasury Bonds - available for sale, at fair value | | 138,050 | | — | | — | | — | | 138,050 | |
Deferred financing costs | | — | | 961,965 | | — | | (961,965 | )(c) | — | |
Deferred gathering fees | | — | | 2,033,256 | | — | | — | | 2,033,256 | |
Other current assets | | 2,370,223 | | 1,148,150 | | 6,400 | | (1,154,550 | )(d) | 2,370,223 | |
Total current assets | | 19,369,348 | | 17,025,825 | | 2,373,654 | | (17,366,223 | ) | 21,402,604 | |
| | | | | | | | | | | |
Other Assets | | | | | | | | | | | |
| | | | | | | | | | | |
Oil and gas properties - net, based on full cost method of accounting | | 357,118,478 | | — | | — | | 347,160,278 | (e) | 704,278,756 | |
Oil and gas properties - net, based on successful efforts of accounting | | | | 197,975,843 | | 24,603,574 | | (222,579,417 | )(e) | — | |
Property and equipment - at cost, net | | 18,789,171 | | 663,176 | | | | (663,176 | )(f) | 18,789,171 | |
Restricted investments in U.S. Treasury Bonds - available for sale, at fair value | | 1,242,454 | | — | | — | | — | | 1,242,454 | |
Deferred financing costs and other assets | | — | | 2,796,306 | | 100,000 | | 13,786,694 | (g) | 16,683,000 | |
Deferred gathering fees | | — | | 9,961,076 | | — | | — | | 9,961,076 | |
Advances to stockholders and employees | | — | | 355,929 | | — | | (355,929 | )(h) | — | |
Deferred bond offering costs, | | 697,190 | | — | | — | | — | | 697,190 | |
Other assets | | 3,182,640 | | — | | — | | — | | 3,182,640 | |
Derivative financial instruments | | 14,332 | | — | | — | | — | | 14,332 | |
Total other assets | | 381,044,265 | | 211,752,330 | | 24,703,574 | | 137,348,450 | | 754,848,619 | |
| | | | | | | | | | | |
| | $ | 400,413,613 | | $ | 228,778,155 | | $ | 27,077,228 | | $ | 119,982,227 | | $ | 776,251,223 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | |
Current maturities of debentures and long term liabilities | | $ | 163,600 | | $ | — | | | | $ | — | | $ | 163,600 | |
Current maturities of other long-term liabilities | | 1,499,088 | | — | | — | | — | | 1,499,088 | |
Accounts payable and accruals | | 36,864,709 | | 22,197,524 | | 25,656,391 | | (47,853,915 | )(i) | 36,864,709 | |
Current portion of term loan credit facility | | — | | 4,143,750 | | — | | (4,143,750 | )(j) | — | |
Accrued project incentive awards | | — | | 8,280,620 | | — | | (8,280,620 | )(k) | — | |
Deferred gathering fees payable | | — | | 2,508,780 | | — | | — | | 2,508,780 | |
Advances from joint interest owners | | — | | 262,437 | | — | | (262,437 | )(l) | — | |
Derivative financial instruments | | 2,871,885 | | 2,702,556 | | — | | (2,702,556 | )(m) | 2,871,885 | |
Total current liabilities | | 41,399,282 | | 40,095,667 | | 25,656,391 | | (63,243,278 | ) | 43,908,062 | |
Long-Term Liabilities | | | | | | | | | | | |
Term loan credit facility, net of current portion | | | | 184,110,638 | | — | | (184,110,638 | )(n) | — | |
Debentures, less current portion | | 1,472,400 | | — | | — | | — | | 1,472,400 | |
Other long-term liabilities, less current portion | | 29,798,403 | | — | | 481,554 | | (481,554 | )(o) | 29,798,403 | |
Deferred gathering fees payable | | — | | 4,145,830 | | — | | — | | 4,145,830 | |
Overpayment of joint interest billings | | — | | 1,145,706 | | — | | (1,145,706 | )(p) | — | |
High Yield Debt | | | | | | | | 296,110,313 | (q) | 296,110,313 | |
Line of credit | | 81,500,000 | | 19,000,000 | | — | | 14,332,000 | (q) | 114,832,000 | |
| | 112,770,803 | | 208,402,174 | | 481,554 | | 124,704,415 | | 446,358,946 | |
| | | | | | | | | | | |
Commitments and Contingencies | | — | | — | | — | | — | | | |
Stockholders’ Equity | | | | | | | | | | | |
8% convertible preferred stock, $.0001 par value; authorized, 10,000,000 shares, issued and outstanding, 10,703 shares | | | | | | | | | | | |
(aggregate liquidation preference $128,436) | | 128,437 | | — | | — | | — | | 128,437 | |
Common Stock - $.0001 par value; authorized, 200,000,000 shares; issued and outstanding, 80,351,417 shares | | 7,368 | | 25,950 | | — | | (25,283 | )(r) | 8,035 | |
Member equity | | | | | | 939,283 | | (939,283 | )(s) | — | |
Additional paid-in capital | | 471,606,366 | | — | | — | | 39,999,333 | (r) | 511,605,699 | |
Accumulated deficit | | (225,708,419 | ) | (19,975,151 | ) | — | | 19,715,838 | (t) | (225,967,732 | ) |
Non-controlling interests | | — | | 229,515 | | — | | (229,515 | )(s) | — | |
Accumulated other comprehensive income, net of applicable income taxes | | 209,776 | | — | | — | | — | | 209,776 | |
Total stockholders’ equity | | 246,243,528 | | (19,719,686 | ) | 939,283 | | 58,521,090 | | 285,984,215 | |
| | | | | | | | | | | |
| | $ | 400,413,613 | | $ | 228,778,155 | | $ | 27,077,228 | | $ | 119,982,227 | | $ | 776,251,223 | |
(a) Reflects $2.1 million of cash not transferred in transaction
(b) Reflects $13.1 million of receivables not transferred in transaction
(c) Reflects $1 million of Citrus financing costs not transferred in transaction
(d) Reflects $1.2 million of other current assets not transferred in transaction
(e) Converting from Successful Efforts accounting method to Full Cost method.
(f) Reflects $0.7 million of other property & equipment not transferred in transaction
(g) Reflects $2.9 million of financing cots not transferred in transaction but assumes an additional $16.7 million in offering costs related to the offering
(h) Reflects $0.4 million of advances not transferred in transaction
(i) Reflects $47.9 million of payables not transferred in transaction
(j) Reflects $4.1 million of Citrus term loan credit facility not transferred in transaction
(k) Reflects $8.3 million of incentive awards not transferred in transaction
(l) Reflects $0.3 million of advances not transferred in transaction
(m) Reflects $2.7 million of derivatives not transferred in transaction
(n) Reflects $184 million of Citrus term loan not transferred in transaction
(o) Reflects $0.5 million of liabilities not transferred in transaction
(p) Reflects $1.1 million of overpayments not transferred in transaction
(q) Reflects $300 million of debt issued to fund Citrus asset acquisition net of discount, $33.3 million of additional drawdown on line of credit as well as $19 million of revolving loan credit facility not transferred in transaction
(r) Reflects 6,666,667 shares issued for Citrus asset acquisition
(s) Reflects $1.2 million of TLK equity not transferred in transaction
(t) Reflects $20.0 million of accumulated deficit not transferred in transaction
Warren Resources, Inc. and Subsidiaries
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2014
| | Warren Resources, Inc | | Citrus Energy Corp. | | TLK PARTNERS LLC | | Pro Forma | | Warren Resources, Inc | |
| | Historical | | Historical | | Historical | | Adjustments | | Pro Forma | |
| | | | | | | | | | | |
Operating Revenues | | | | | | | | | | | |
Oil and gas sales | | $ | 66,451,545 | | $ | 47,556,243 | | $ | 4,327,867 | | $ | — | | $ | 118,335,655 | |
Transportation revenue | | 2,744,849 | | — | | — | | — | | 2,744,849 | |
| | | | | | | | | | | |
Total revenues | | 69,196,394 | | 47,556,243 | | 4,327,867 | | — | | 121,080,504 | |
| | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | |
Lease operating expenses and taxes | | 18,709,690 | | 9,213,699 | | 868,701 | | — | | 28,792,090 | |
Depreciation, depletion and amortization | | 20,889,345 | | 16,440,188 | | 1,182,369 | | (4,351,965 | )(a) | 34,159,937 | |
Transportation expenses | | 1,115,865 | | 929,530 | | — | | — | | 2,045,395 | |
Deferred compensation | | — | | (3,369,903 | ) | — | | 3,369,903 | (b) | — | |
General and administrative | | 7,833,116 | | 2,760,993 | | 332,544 | | (1,126,882 | )(c) | 9,799,771 | |
| | | | | | | | | | | |
Total operating expenses | | 48,548,016 | | 25,974,507 | | 2,383,614 | | (2,108,944 | ) | 74,797,193 | |
| | | | | | | | | | | |
Income from operations | | 20,648,378 | | 21,581,736 | | 1,944,253 | | 2,108,944 | | 46,283,311 | |
| | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | |
Interest and other income | | 2,361,845 | | 214,200 | | — | | (214,200 | )(d) | 2,361,845 | |
Interest expense | | (1,399,422 | ) | (10,903,455 | ) | (643,983 | ) | (3,613,362 | )(d) | (16,560,222 | ) |
Gain (loss) on derivative financial instruments | | (2,660,625 | ) | (3,828,192 | ) | 139,072 | | 3,689,120 | (e) | (2,660,625 | ) |
| | | | | | | | | | | |
Total other income (expense) | | (1,698,202 | ) | (14,517,447 | ) | (504,911 | ) | (138,442 | ) | (16,859,002 | ) |
| | | | | | | | | | | |
Income before income taxes | | 18,950,176 | | 7,064,289 | | 1,439,342 | | 1,970,502 | | 29,424,309 | |
| | | | | | | | | | | |
Deferred income tax expense (benefit) | | (14,000 | ) | — | | — | | — | | (14,000 | ) |
| | | | | | | | | | | |
Net income | | 18,964,176 | | 7,064,289 | | 1,439,342 | | 1,970,502 | | 29,438,309 | |
| | | | | | | | | | | |
Less dividends and accretion on preferred shares | | 5,137 | | — | | — | | — | | 5,137 | |
| | | | | | | | | | | |
Net income applicable to common stockholders | | $ | 18,959,039 | | $ | 7,064,289 | | $ | 1,439,342 | | $ | 1,970,502 | | $ | 29,433,172 | |
| | | | | | | | | | | |
Earnings per share - Basic | | $ | 0.26 | | | | | | | | $ | 0.37 | |
Earnings per share - Diluted | | $ | 0.26 | | | | | | | | $ | 0.37 | |
| | | | | | | | | | | |
Weighted average common shares outstanding - Basic | | 73,379,507 | | | | | | 6,666,667 | | 80,046,174 | |
Weighted average common shares outstanding - Diluted | | 73,558,350 | | | | | | 6,666,667 | | 80,225,017 | |
(a) Reflects incremental depreciation, depletion and amortization expense of approximately $13.3 million for the period from January 1, 2014 through June 30, 2014, under full cost using the units-of-production method, related to Citrus’s gas properties acquired
(b) Reflects elimination of approximately $3.4 million of Citrus nonrecurring G&A realting to change of control provisions
(c) Reflects adjustment of approximately $1.1 million of nonrecurring G&A for Citrus and TLK as well as certain employees salaries and bonus’s that will not be assumed with the transaction
(d) Reflects the elimination of Citrus and TLKs interest income and expense of approximately $11.5 million and the additional interest incurred as a result of the debt financing relating to the asset acquisition; $14.1 million in interest expense from high yield, drawdown of credit facility , amortization of note discount and $1.2 million in amortization of deferred offering costs.
(e) Reflects adjustment of approximately $3.7 million relating to derivative activity, as no derivatives will be assumed with the transaction
WARREN RESOURCES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2013
| | Warren
Resources,
Inc. Historical | | Citrus
Energy
Corp.
Historical | | TLK
PARTNERS
LLC
Historical | | Pro Forma
Adjustments | | Warren
Resources,
Inc.
Pro Forma | |
Operating revenues | | | | | | | | | | | |
Oil and gas sales | | $ | 127,924,839 | | $ | 52,717,739 | | $ | 5,321,272 | | $ | — | | $ | 185,963,850 | |
Transportation revenue | | 919,512 | | — | | — | | — | | 919,512 | |
Total revenues | | 128,844,351 | | 52,717,739 | | 5,321,272 | | — | | 186,883,362 | |
Operating expenses | | | | | | | | | | | |
Lease operating expense and taxes | | 36,778,926 | | 8,385,303 | | 584,805 | | — | | 45,749,034 | |
Depreciation, depletion and amortization | | 44,805,611 | | 18,632,653 | | 1,570,413 | | (2,680,894 | )(a) | 62,327,783 | |
Expiration and impairment of unproved properties | | — | | 6,846,268 | | — | | (6,846,268 | )(b) | — | |
Deferred compensation | | — | | 5,766,137 | | — | | (5,766,137 | )(c) | — | |
Transportation expenses | | 311,273 | | 1,057,496 | | — | | — | | 1,368,769 | |
General and administrative | | 15,389,439 | | 4,303,053 | | 1,980,439 | | (3,794,293 | )(d) | 17,878,638 | |
Total operating expenses | | 97,285,250 | | 44,990,910 | | 4,135,657 | | (19,087,592 | ) | 127,324,224 | |
Income from operations | | 31,559,102 | | 7,726,829 | | 1,185,615 | | 19,087,592 | | 59,559,138 | |
Other income (expense) | | | | | | | | | | | |
Interest and other income | | 5,362,132 | | 1,856,528 | | 1,008,238 | | (2,864,766 | )(e) | 5,362,132 | |
Interest expense | | (2,994,724 | ) | (14,975,880 | ) | (1,447,166 | ) | (8,969,554 | )(e) | (28,387,324 | ) |
Gain (loss) on derivative financial instruments | | (3,476,982 | ) | 940,250 | | — | | (940,250 | )(f) | (3,476,982 | ) |
Total other income (expense) | | (1,109,574 | ) | (12,179,102 | ) | (438,928 | ) | (12,774,570 | ) | (26,502,174 | ) |
Income before income taxes | | 30,449,527 | | (4,452,273 | ) | 746,687 | | 6,313,022 | | 33,056,964 | |
Deferred income tax expense (benefit) | | 64,000 | | — | | — | | — | | 64,000 | |
Net income | | 30,385,527 | | (4,452,273 | ) | 746,687 | | 6,313,022 | | 32,992,964 | |
Net income attributable to non-controlling interests | | | | 907,275 | | | | (907,275 | )(g) | — | |
Less dividends and accretion on preferred shares | | 10,275 | | — | | — | | — | | 10,275 | |
Net income applicable to common stockholders | | $ | 30,375,252 | | $ | (5,359,548 | ) | $ | 746,687 | | $ | 7,220,297 | | $ | 32,982,689 | |
(a) Reflects incremental depreciation, depletion and amortization expense of approximately $2.7 million for the period from January 1, 2013 through December 31, 2013, under full cost using the units-of-production method, related to Citrus’ and TLK’s gas properties to be acquired pursuant to the Citrus Acquisition.
(b) Reflects adjustment of approximately $6.9 million as the result of conversion to full cost method of accounting.
(c) Reflects adjustment of approximately $5.8 million of nonrecurring G&A relating to change of control provisions.
(d) Reflects adjustment of approximately $3.8 million of nonrecurring G&A for Citrus and TLK for certain employees salaries and bonuses that will not be assumed by us with the Citrus Acquisition.
(e) Reflects the elimination of Citrus and TLK’s interest income and expense of approximately $13.6 million and $25.4 million of interest expense attributable to the debt financing relating to the Citrus Acquisition at an assumed rate of 7.5% per annum.
(f) Reflects adjustment of approximately $0.9 million relating to derivative activity as no derivatives will be assumed by us in connection with the Citrus Acquisition.
(g) Reflects adjustment of approximately $0.9 million of minority interest that is not being assumed by us in connection with the Citrus Acquisition.
